Diasys Corp - Annual Report (Small Business Issuers) (10KSB)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2007

Commission File number: 1-16285

DiaSys Corporation

(Exact name of small business issuer as specified in its charter)


Incorporated in Delaware		IRS Employer ID #
21 West Main Street		06-1339248
Waterbury, CT 06702
(203) 755-5083

Securities registered under Section 12(b) or 12(g) of the Exchange Act:


Title of each class:		Name of each exchange on which registered

Common Stock, $0.001 par value		OTC Bulletin Board

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes S No £

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. £

Registrant’s revenues for the most recent fiscal year were $1,678,154.

As of October 4, 2007, the aggregate market value of the Registrant’s voting stock held by non-affiliates was $1,028,873 based upon the closing price of $0.04 on such date.

As of October 4, 2007, the Registrant had 25,721,822 shares of common stock outstanding.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

DiaSys Corporation (“DiaSys”, “Company”) designs, develops, manufactures and distributes propriety workstation-instruments, consumables, reagents and specialized test kits to hospital, clinical and private physician laboratories worldwide. The Company’s workstation instruments standardize laboratory analysis of urine sediment, fecal concentrates, cerebral spinal fluid (CSF), fine needle aspirations (FNA), and other cell suspensions compared to traditional laboratory testing methods. The Company believes that by automating the laboratory process, its customers save labor expense in handling the separate steps of the analytic process involved; however, the Company has not conducted independent, objective studies to quantify or support such belief. The Company’s consumable products are in most cases combined with the Company’s workstation instruments to create practical, affordable system-solutions, while other consumables provide cost-effective alternatives to similar products offered by other companies. The Company is holding for future development a rapid, inexpensive method for screening Multiple Myeloma and other cancers, Monoclonal Gammopathies, Diabetes, Hypertension, and other disease states. Multiple Myeloma is America’s second most prevalent blood cancer. The Multiple Myeloma test is sold in Europe for research purposes only. The Company is also developing a version of its Parasep fecal concentrator for use in the veterinary field in conjunction with the Veterinary Laboratories Agency (VLA), an Executive Agency of the Department for Environment, Food and Rural Affairs (Defra) in the United Kingdom.

DiaSys was organized in March 1992 in the State of Connecticut and effected a statutory merger into a Delaware Corporation of the same name in December 1993. The Company completed its initial public offering (“Offering”) in January 1995. In January 2003 a complete management turnover occurred when the Chief Executive Officer, Mr. Todd DeMatteo, and the entire board of directors resigned. A new Chief Executive Officer and board of directors headed by Mr. Morris Silverman were appointed to fill the vacancies. The Company’s shares were traded on the American Stock Exchange under the symbol “DYX” from December 2000 through January 2006. Since February 2006, the Company’s shares have been quoted on the OTC Bulletin Board under the symbol “DYXC.OB”.

The Company’s wholly-owned subsidiary, DiaSys Europe Limited, is located in Wokingham, England. DiaSys Europe markets the Company’s urinalysis and parasitology workstations, the full DiaSys line of rapid test kits, consumables, immunology, oncology and virology products and manufactures reagents. DiaSys Europe’s facility is ISO 9001-2000 certified for the design and manufacture of devices for the scientific, diagnostics, medical & industrial markets. In June 2005, all manufacturing and assembly operations that had been conducted in the Company’s Waterbury facility were consolidated into its DiaSys Europe facility. DiaSys Europe products are registered with MHRA (Medicines and Healthcare Products Regulatory Agency) for CE marking under the Directive 98/79 in Vitro Diagnostics Medical Devices, and have FDA approval as well. The operating results of the subsidiary are reflected in the accompanying consolidated financial statements.

The Company sells its products in North America both directly and through strategic distribution relationships with Cardinal Heath (NYSE:CAL), and Fisher Healthcare, a division of Fisher Scientific International Inc (NYSE:FSH). It also markets its products through numerous relationships with group purchasing organizations including Broadlane Inc. and VWR International.

The Company directly sells and services its products in the United Kingdom through DiaSys Europe. Sales and service throughout Europe, Asia and South America is conducted through independent, third party distributors or strategic trading partners. All distributors and strategic partners are managed by the Company through either of its offices in the United States or United Kingdom.

The Company is currently focusing its efforts to: (i) develop, acquire and patent several new proprietary technologies such as its fecal concentrator for use in the veterinary market; (ii) market a version of Parasep that does not require the use of solvents; (iii) have a fecal sample collection device incorporated into its existing fecal concentrator design; (iv) develop urine sediment and parasitology workstations that are closed systems; (v) adapt its fecal concentrator for DNA and ELISA testing; (vi) build the infrastructure needed to support global manufacturing and distribution operations; (vii) establish market and technical acceptance of its products among the medical laboratory community; (viii) attract significant strategic selling partners in major markets; and (ix) implement a plan for long term market penetration.

Since inception, the Company has: (i) developed, acquired and patented several new proprietary technologies; (ii) erected the infrastructure needed to support global manufacturing and distribution operations; (iii) established market and technical acceptance of its initial products among the medical laboratory community; (iv) attracted significant strategic selling partners in major markets; and (v) implemented a plan for long term market penetration. Since its inception, the Company has operated at a loss.

BUSINESS STRATEGY

Since its inception, the Company has adhered to the following business strategy: (i) identify gaps in its product offerings of leading medical diagnostic manufacturers; (ii) fill the gaps with proprietary, practical and cost-effective solutions; (iii) protect its intellectual property with broad-based patents and trademarks; (iv) turn its technology into affordable products; (v) secure market acceptance of its products; (vi) create strategic sales and distribution alliances with industry and/or territorial leaders (see: STRATEGIC RELATIONSHIPS below); and (vii) proceed to global sales and distribution. The Company currently has products at each stage of its business strategy.

RECENT MANAGEMENT CHANGES

On February 23, 2007, Mr. Gregory Witchel’s services as Chief Executive Officer of the Company were terminated. Mr. Jeffrey B. Aaronson, President of the Company, assumed the responsibilities of Chief Executive Officer. On March 29, 2007, Mr. Witchel resigned as a Director of the Company. On July 2, 2007, Mr. Aaronson resigned as President, Chief Financial Officer, Chief Executive Officer and as a Director of the Company. The Board of Directors has determined that, despite the many significant contributions of Mr. Witchel and Mr. Aaronson to the long-term strategic planning of the Company, it would be in the best interests of the Company to have management focus on the day to day details necessary to realize the marketing potential of the Company’s various product lines.

On July 13, 2007, the Board of Directors appointed Fredric H. Neikrug as interim President and Chief Executive Officer. On October 1, 2007, Mr. Morris Silverman was appointed Chief Financial Officer.

PRODUCTS

The Company’s products can be broadly classified into two categories: (i) workstation-systems which increase the accuracy and reduce the cost to perform routine laboratory analysis of various body fluids; and (ii) consumable diagnostic products, reagents and test kits which facilitate accurate diagnosis of certain medical conditions. Each category can be further described as follows:

Workstation-Systems

The Company’s workstation-systems are composed of the “R/S” and “FE” series of products.

R/S Series: The “R/S” series workstations standardize, automate, and reduce the cost to perform routine microscopic analysis of urine sediment. Users of the “R/S” series workstations include: (i) large scale clinical laboratory chains performing in excess of 20,000 urine tests per night; (ii) major medical centers performing several hundred urine tests per day; and (iii) local hospital laboratories performing approximately 100 tests per week. The URIPREP centrifuge tube with its unique insert enables the system to accurately measure sediment at one milliliter of sediment to five micro liters of examined sample. The urine sediment workstation is also available with a counting grid chamber of one micro liter divided into four grids of .25 micro liters each containing 25 boxes of .01 microliters. This enables the user to standardize each test. The R/S is a fully enclosed semi-automatic system which provides safety to laboratory technicians improves patient morphology and reduces biowaste.

The Company believes that the “R/S” series workstations are a preferred practice of major laboratory networks, health maintenance organizations (HMO’s) and core medical facilities such as Quest and Kaiser Permanente.

FE Series: The “FE” series workstation-systems are composed of the FE-5, and Parasep collection tubes and fecal concentrators. These workstation-systems automate and reduce the cost of microscopic analysis of fecal concentrates; a procedure performed by thousands of hospital, public health and private commercial laboratories worldwide in order to detect the presence of ova (eggs), cysts, and parasites in the lower intestinal tract of humans and animals. The presence of such organisms is critical to the proper care of the patient. The test is non-invasive, can be performed on an outpatient basis, and quickly provides confirmatory results. The Parasep filtration tube is used in conjunction with the FE-5 workstation and the result is reduced bio-waste, increased safety to the laboratory technician from a fully enclosed system which avoids exposure to ethylacetate, increased patient morphology, and standardized sample size for examination.

Disposable Consumables, Diagnostic Test Products and Kits

Consumables: The Company manufactures and distributes numerous consumable diagnostic products, reagents and test kits. The markets for these products are hospital and commercial laboratories, biotech and pharmaceutical companies.

Point of Care Test Kits: The Company acquired an inexpensive method for the screening of Multiple Myeloma and other cancers and other disease states at or near the patient through its purchase of Intersep Limited, a privately owed company based in Wokingham, England, in 2000. Multiple Myeloma is America's most prevalent blood cancer behind leukemia, and accounts for 2% of all known cancer deaths. The Company is currently selling the test in Europe for research applications, and has announced its intention to market the product in the United States and other markets if and as regulatory approvals are secured. The regulatory requirement and review process differ widely among countries and can be very expensive to obtain. If the Company does not receive regulatory approvals on a timely basis, it will have to carry development costs for a longer period and will lose market share to its competitors. The Company has filed patent applications with the United States Patent and Trademark Office covering the Bence Jones point of care test which has been expanded to include additional disease states. At the present time it is estimated that the research and development costs necessary to commercialize this application exceed the Company’s cash flow capacity, and as such development of these products is not expected to contribute to sales or profitability until fiscal 2009 or later.

Additional Products

The Company is in the continuous process of developing new products for the global healthcare marketplace. The Company’s current product development plan extends into 2008. The Company is focusing its research and development on several projects: Parasep SF, a solvent free fecal concentrator, a fecal sample collection device incorporated into its existing fecal concentrator design, a fecal concentrator for use in the veterinary market, urine sediment and parasitology workstations that are closed systems accepting only DiaSys consumables, adaptations of the fecal concentrators for DNA and ELISA testing markets, new proprietary consumable products to be used in conjunction with the workstations, fully automated urine sediment and parasitology workstations, and a proprietary series of in-vitro immunoassays. New applications for the Company’s technology are also being pursued in the industrial market. During the 4 ^th quarter of fiscal year 2005, the Company completed its project to develop a more powerful, lightweight, smaller and more efficient workstation for both the urinalysis and parasitology markets. The Company is also in the process of evaluating the purchase, license or distribution of compatible product lines.

MARKET FOR THE COMPANY’S PROCUCTS

The Company believes that there is a substantial market for its current product lines and related applications and for the underlying proprietary technology; however, because it has lacked adequate capital and management resources, the Company has not been able to take full advantage of opportunities to develop, market and sell its products and technology.

SALES, MARKETING AND DISTRIBUTION

North America

The Company sells and services its workstation-systems and consumable products through its office headquarters in Waterbury, Connecticut. North American sales efforts are supported by the President and a Customer Service specialist, located at the Company’s headquarter office. Sales in North America are facilitated through marketing and distribution with Cardinal Health, Fisher Healthcare, Broadlane and VWR in the United States and VWR in Canada (see: Strategic Relationships below).

South and Central America

The Company has distribution operations in parts of South, Latin and Central America. Distribution is conducted by independent, third party distributors and monitored by the Company’s President and Regional Sales Manager for Latin/South America, Marketing and Service, Rest of World (ROW) based in Waterbury, Connecticut. Distributors are exclusive to their assigned territory and are required to meet certain minimum revenue commitments within the terms of the Company’s distribution plan and agreement.

In November 2004 the Company entered into an agreement with Repreclin Lab providing for exclusive distribution rights to the Company’s products in Venezuela for a period of one year . Although such agreement has expired in accordance with its terms, the Company continues to do business with Repreclin under the terms of the original agreement.

In December 2005, the Company entered into an agreement with DICIPA, a Mexican distributor providing for exclusive distribution rights to the Company’s parasitology system in Mexico for a period of three years. The agreement calls for minimum purchases by DICIPA of approximately $1,870,000 in the first year, $3,360,000 in the second year, and $7,420,000 in the third and final year. The Company’s products were issued registration in August of 2006, and systems have subsequently been delivered by DICIPA to both the private and public sector labs in Mexico. System testing has been ongoing, and full-scale distribution of systems and consumables is occurring on a daily basis; however, the minimum purchase obligations were not met and in November of 2006 DICIPA revised their estimates for scheduled deliveries of private and public sector labs. The total forecast remains similar to that previously reported, however the timing of delivery and testing of systems has been delayed due to the registration process, budget delays, and the like. Through June 30, 2007, total sales under this contract have been approximately $161,250. Because the registrations have been delayed, the Company is not in a position to enforce the original minimum purchase requirements in accordance with their terms.

In January 2006, the Company entered into agreements with Rochem Biocare Colombia S.A., Rochem Biocare del Peru S.A., Sistemas de Salud Rocarsystem S.A., and Rochem de Panama S.A. providing for exclusive distribution rights to the Company’s parasitology and urine sediment systems in Colombia, Peru, Ecuador and Panama. The agreements call for aggregate minimum purchases by Rochem Biocare Colombia of approximately $408,800 in the first year, $542,000 in the second year, and $697,200 in the third and final year. Product shipments to these countries have been nominal to date pending product registration with their respective governments. Product registrations were completed in Columbia, Peru, Ecuador and Panama in August 2006. Aggregate sales under these contracts for the fiscal year ended June 30, 2007 were approximately $30,421. The delay in product sales is attributable to the distributors waiting for product registration before commencing any marketing activities. Because the registrations have been delayed, the Company is not in a position to enforce the original minimum purchase requirements in accordance with their terms.

In March 2006 the Company entered into an agreement with Galenica providing for exclusive distribution rights to the Company’s parasitology and urine sediment systems in Chili. The agreement calls for aggregate minimum purchases by Galencia of approximately $149,000 in the first year, $314,000 in the second year, and $547,000 in the third and final year. Product shipments to Chile have been nominal to date under the contract, pending product registration with the government of Chile. The Company’s products were issued registration in August of 2006.

The Company’s products were registered in all of the above-mentioned territories as of August 2006; however product orders have not yet materialized in the amounts anticipated. Current management is scheduled to meet with all of these distributors at the Medicus Conference to be held in Germany in October 2007, and will better be able to gauge the status of these relationships at that time.

In April 2006, the Company entered into an agreement with Labymed to distribute its parasitology and urine sediment systems in Guatemala. There have been no sales to Labymed under this contract. The Company is in the process of registering its products in Guatemala.

Europe and the Middle East

The Company sells and services its workstation-systems and consumable products in Europe, the Middle East, India, and Africa through its subsidiary based in the United Kingdom. DiaSys Europe sells and services the Company’s products directly in the United Kingdom and through independent third party distributors in the balance of the territory. Distributors are generally exclusive to their assigned territory and are required to meet certain minimum revenue commitments within the terms of the Company’s distribution plan and agreement.

China and Pacific Asia

Sales and service of the Company’s products in China and Hong Kong is conducted by the Company’s strategic trading partner, Hua Sin Science Company, under the direction and guidance of the Company’s CEO. The agreement with Hua Sin expired on December 31, 2006. The Company is evaluating contract renewal or termination and is reviewing other possible distributors for this territory. In the interim, sales to Hua Sin are ongoing. (See: Strategic Relationships below).

In August 2005, the Company entered into an agreement with BioQuest Diagnostics to distribute the Company’s urine sediment system in the Philippines. This agreement terminated in August 2006. The Company is evaluating distributors for this and other Pacific Asian territories.

Australia and New Zealand

The Company entered into exclusive distribution agreements with Laboratory Diagnostics in Australia and Diagnostic Bioserve, LTD in New Zealand to promote, sell and service the Company’s product line. The contracts for both distributors have expired. The Company expects to renew its distribution agreement with Laboratory Diagnostics to include the territories of Australia, New Zealand and Papua New Guinea, and the Solomon Islands.

STRATEGIC RELATIONSHIPS

Veterinary Laboratories Agency :

The Company has entered into a contractual agreement with the Secretary of State for Environment, Food and Rural Affairs (UK) through the Veterinary Laboratories Agency (“VLA”) to develop, test and commercially market the “Veterinary Parasep”, a new helminth egg counting method. The initial test results by VLA have concluded that the Veterinary Parasep for counting eggs in ovine feces is superior to existing methods. Once all testing is concluded Diasys will commercially market the test kits throughout Europe, the U.S., and Australia to end users that currently use the VLA’s formerly-endorsed method.

Broadlane Inc:

In 2002, the Company was awarded a five-year supply contract expiring on March 31, 2007 by Broadlane Inc., one of the nations foremost group purchasing organizations (GPO). The Company has decided not to renew its relationship with Broadlane.

Hua Sin Science Co. LTD:

In 1999, the Company entered into a three year sales and service agreement with Hua Sin Science Co. LTD, located in Guangzhou China. Hua Sin manufactures and distributes instruments and reagents to China’s 67,000 hospital and medical laboratories. Hua Sin is also the exclusive distributor of Bayer’s CLINITEK series urine chemistry analyzers in China (see Bayer above). The Company officially commenced a distribution agreement with Hua Sin in April, 1999, and on May 4, 2000, announced that China’s Health Ministry, the equivalent of the United States’ Food and Drug Administration (FDA), certified the Company’s urinalysis and fecal concentrate workstations for use by all of China’s 67,000 medical laboratories. In 2002, the Company and Hua Sin expanded their relationship to include sales and service operations in Hong Kong. On September 22, 2003, the Company announced that Hua-Sin renewed its exclusive distribution agreement with DiaSys for a period of three years. Sales to Hua Sin during the 2006 fiscal year were minimal and subsequent to the end of its fiscal year the Company terminated its relationship with Hua Sin. The Company is reviewing other possible distributors for this territory; however in September of 2007 the Company agreed to resume shipping product to Hua-Sin on an interim trial basis.

COMPETITION

The “R/S” Series:

The R/S series urine sediment workstations automate and standardize routine urine sediment testing, utilizing a patented optic glass flow cell that reduces handling while providing superior image clarity. The R/S series workstations are designed to make urine sediment testing faster, safer, more standardized and less expensive than conventional methodologies. These workstations can literally pay for themselves through elimination of disposables normally associated with urine sediment testing and substantially reducing the waste disposable costs of these disposables. There are, five competing technologies for the “R/S” series: (i) traditional use of a microscope to examine a glass slide of urine sediment; (ii) traditional use of a microscope to examine urine sediments introduced into a pre-formed plastic slide assembly; (iii) imaging system which automatically “recognizes” and “counts” pre-stored images of “common shapes” found in urine sediment; (iv) a flow cytometry based system which detects “abnormal” urines thereby reducing the number which must be manually analyzed; and, (v) pre-screening using chemically treated reagents or “dip” strips.

The oldest technology is the use of a microscope to examine a glass slide of urine sediment. However, the use of microscope slides and cover slips is time consuming, prone to inconsistencies, and expensive. Pre-formed plastic slides are easier to handle than glass and provide more standardization. However, the optical quality seen through plastic slides tends to be significantly inferior to that of glass and the cost is generally higher due to the shorter product life of plastic slides. The video imaging system currently available on the market provides a “standard procedure” for urinalysis, dispenses with the need for costly consumable items such as glass or plastic slides, and, sharply reduces exposure to potentially infectious materials carried in urine. However, the video imaging systems require expensive proprietary reagents to operate and cost between $55,000 and $110,000 to acquire. The Company believes because the systems are costly, only the largest laboratories can justify the purchase and/or use of such a system. The flow cytometry -based system screens-out “normal” urines thereby reducing the number of “abnormal” urines requiring manual analysis. However, in addition to still requiring manual analysis of some samples, the flow cytometry -based systems cost approximately $110,000 and require comparatively expensive proprietary reagents to operate, making the system somewhat expensive for normal laboratory implementation. Lastly, reagent strips are very efficient for determining chemical compositions, but they do not detect the existence of many types of particulate matter otherwise having clinical significance.

The “FE” Series:

The Company knows of no other workstation-system for direct microscopic analysis, which standardizes, automates and reduces the cost to collect, process, and analyze fecal concentrates from parasites, eggs and cysts. The system integrates the FE workstation with the Parasep fecal concentrator. The centrifuged sample is aspirated simultaneously into a dual stained and unstained chamber on the microscope stage, without incidence of clogging or sample cross contamination. The Company competes with (i) traditional direct method, (ii) ELISA testing that is target specific, (iii) DNA testing that is target specific (iv) rapid test strips that are target specific and IFA testing that is target specific.

The Company, however, expects to encounter competition in the laboratory equipment industry. While the Company believes that its “R/S” and “FE” series workstations are currently the only products of their type in the market, many of the Company’s competitors and potential competitors have substantially greater resources, including capital, research and development, personnel and manufacturing and marketing capabilities, and also may offer well established, broad product lines and ancillary services. The Company’s products are not fully automated walk away systems. They do not have an image recognition system, data storage, or on-screen monitor display. Some of the Company’s competitors have long-term or preferential supply arrangements with hospitals. These arrangements may act as a barrier to market entry to the Company’s products. Competing companies may succeed in developing products that are more efficacious or less costly and these companies may also be more successful than the Company in production and marketing. Rapid technological development by others may result in the Company’s products becoming obsolete before the Company recovers a significant portion of the research, development and commercialization expenses incurred by it with respect to those products. There can be no assurance that the Company will be able to compete successfully against any newly developed or improved products.

Disposable Diagnostic Products and Test Kits:

The disposable diagnostic product and test kit market is a multi-billion dollar industry made up of a number of companies, many of whom have more financial resources, research and development, marketing, and distribution capabilities than the Company. The Company therefore believes that the commercial success of these products will depend upon their continued high quality, competitive advantages (including price, quality, service and the ability to transport product cost efficiently) and the distribution efforts of the Company’s strategic trading partners.

The Company believes that some of the disadvantages of its products are that they are not fully automated in that there is no image recognition system, no data storage, and no on-screen monitor display. These systems are not fully-automated, walk-away systems. The Company is not aware of any competitor which offers solutions to all of these problems.

MANUFACTURING AND WARRANTY OBLIGATIONS

The Company designs its workstations in Waterbury, Connecticut. The Company develops its consumable products in its United Kingdom office, but manufactures them through a network of molders, machine shops and other third party subcontractors. All sub-assemblies, parts, consumables and kits manufactured by sub-contractors are made according to Company specifications. All final assemblies and final tests are conducted by the Company in its UK facility. The Company has developed alternate qualified vendors for supply of its critical raw material and supplies that could fulfill its requirements if needed. Implementation of this manufacturing plan has resulted in higher manufacturing quality, reduced lead-time-to-delivery and reduced costs in manufacturing.

The Company provides its customers with a one year limited warranty against defects in parts or workmanship on all new or refurbished workstations from the date of delivery. In the event a unit fails due to a defect in parts and/or workmanship during the warranty period, the Company will at its option repair or replace the unit at no charge to the customer. For service after the initial year of warranty, the Company provides repair and service at an hourly rate plus parts. The Company experiences minimal additional costs associated with its warranty obligations.

PATENTS AND TRADEMARKS

The Company’s success rests in part on the uniqueness of its intellectual property. The Company, therefore, continues to build and maintain a worldwide network of patents and trademarks.

Patents:

The Company has been granted 20 patents on its R/S, FE, and Parasep technologies. Four patents have been issued both on the concept and specific architecture of the Company’s workstation-systems. The Company has also been granted similar patent protection in Australia, Brazil, Canada, China, Switzerland, Germany, Spain, France, Great Britain, Greece, Italy, Japan, Portugal, and Singapore. The patents were granted between 1992 and 2002 and will expire as follows:

The Parasep Fecal Parasite Concentrator is protected by patents through 2018;

The optical slide assembly and workstation for urine sediment analysis patents expire in 2013;

The optical slide assembly and workstation for fecal sediment analysis patents expire in 2018.

Patent applications are pending for a DiaSys device for testing for Bence Jones Protein in urine.

The Company has additional applications for patents pending, both domestic and abroad.

Trade Names :

The Company has been granted trade name protection for “DiaSys” and the following product names (both domestically and abroad): Urizyme, DiaSys, Uriprep, Parasep, and Urisep.

There can be no assurance that any future applications by the Company for patent protection will result in patents being issued, or, if issued, that such patents will provide a competitive advantage or will afford protection against competitors, with similar technology, or that competitors of the Company will not circumvent, or challenge the validity of any patents issued or licensed by the Company. Moreover, there can be no assurance that the Company’s non-disclosure agreements and other safeguards will adequately protect its proprietary information and trade secrets or provide adequate remedies for the Company in the event of unauthorized use or disclosure of such information, or that others will not be able to independently develop such information. Additionally, the Company may not be aware of any infringements on its patents or other protected intellectual property rights. There can be no assurance that if the Company becomes aware of any such infringement that it will have adequate resources to defend its patents or other rights or that it would be successful in such defense.

GOVERNMENT REGULATIONS

The Company has obtained all necessary safety certifications for its products. DiaSys Europe’s facility is ISO 9001-2000 certified for the design and manufacture of devices for the scientific, diagnostics, medical & industrial markets. All DiaSys Europe Ltd products are registered with MHRA (Medicines and Healthcare Products Regulatory Agency) for CE marking under the Directive 98/79 in Vitro Diagnostics Medical Devices.

On May 23, 1995, the Company received clearance from the Food and Drug Administration (FDA) to release the R/S 2003 and related products to market. In the same letter, the FDA stated that any of the Company’s future products, which are substantially equivalent to the new workstations, might be marketed directly without first submitting pre-market notification.

Although the “R/S” and “FE” series workstations are exempt from FDA 510(k) pre-market notification requirements, the development, testing, manufacturing and marketing of the Company’s products in the United States are regulated by the FDA, which generally requires clearance of such products before marketing. Moreover, regulatory approval, if granted, may include significant limitations on the indicated uses for which a product may be marketed. Failure to comply with applicable regulatory requirements can result in, among other things, fines, suspensions of approvals, product seizures, injunctions, recalls of products, operating restrictions and criminal prosecutions. There can be no assurance that the Company will be able to obtain the necessary regulatory clearance for the manufacturing and marketing of other products, which are currently in the development stage, either in the United States, or in foreign markets on a timely basis or at all. Certain of the Company’s future diagnostic products may require submission to the FDA of an application for Pre-market Approval. Delays in receipt of or failure to receive clearances to commence clinical studies or to market products, or loss of previously received clearances, would adversely affect the marketing of the Company’s proposed products and, as a result, the Company’s future operations.

None of the Company’s rapid tests, including the one for multiple myeloma, have been FDA approved.

The Company’s Leishmania Rapid Test product for visceral leishmania, also known as kalaazar, received FDA 510(k) clearance in the United States in 2003. Visceral leishmania is the most severe form of leishmania which, if untreated, has a mortality rate of almost 100 percent. The Company is currently selling this product in the United States.

Commercial distribution in most foreign countries is also subject to varying government regulations. In addition, federal, state and international government regulations regarding the manufacture and sale of diagnostic devices are subject to future change, and additional regulations may be adopted which may prevent the Company from obtaining, or affect the timing of, future regulatory clearances and may adversely affect the Company.

The Company’s manufacturing process is guided by its ISO 9001:2000 certification governing the use, generation, manufacture, storage, handling and disposal of certain materials and wastes, and regarding the manufacture, testing, labeling, record keeping, and storage of diagnostic devices, including current Good Manufacturing Practices regulations and similar foreign regulations. All products are manufactured in accordance to the IVD 98/97/EC 7.12.99 directive with the instruments also meeting the requirement of the EMC 89/336/EEC directive and the low voltage directive 72/23 EEC.

Although the Company believes that it and its subcontractors have complied in all material respects with such laws and regulations, there can be no assurance that the Company will not be required to incur significant costs in the future in complying with manufacturing and environmental regulations.

Product registration in Central and South America is a process that is used by various governmental agencies to control the importation of products into their country. The registration processes in each of the various countries in which our products are sold are unique to that country. The Company has relied on its local sales representatives and distributors to shepherd the applications through each process. Management has been advised by its sales representatives that such registrations in South American countries are typically ministerial and do not involve substantive review of the underlying merits, effectiveness or safety of the products themselves. The Company has now obtained registration for all products discussed. Management has determined that any future registration applications will be monitored closely for both compliance and planning purposes.

LABORATORY REGULATIONS

Regulations issued under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) became effective September 1, 1992. CLIA is intended to increase the quality of laboratory services and extends these requirements to physician office laboratories. CLIA requires laboratory licensing and written operational and quality control procedures for tests that are carried out in the laboratory. It establishes personnel standards regarding qualification and training of individuals who carry out the tests. It also mandates periodic inspection and proficiency evaluation of the performance of these procedures and individuals. CLIA requires the more complex procedures such as clinical microscopy to be performed by more skilled medical technologists. The CLIA requirements have caused more physicians offices to transfer their laboratory testing to local hospital or reference laboratories and have also resulted in consolidation of many smaller reference laboratories.

The Company believes that its workstation-systems and consumables improve the accuracy and reproducibility of laboratory procedures, and therefore believes that CLIA regulations are likely to help rather than hinder its sales efforts in the longer term.

BIOHAZARD CONTAINMENT

OSHA mandates that all necessary precautions be taken to ensure the safety of clinical laboratory personnel handling biohazardous materials including body fluids that may contain life-threatening, blood-borne infectious pathogens such as tuberculosis, hepatitis B and human immunologic viruses.

The Company believes OSHA regulations are likely to help rather than hinder sales of the Company’s products since the Company’s workstation-systems and consumables diminish or eliminate the inherent risks of handling body fluids by providing a sealed and/or quick method of analysis.

THE INDUSTRY

The health care industry has experienced fundamental changes over the past several years. Specifically, laboratories were generally considered to be cost-centers (i.e. operating profitably is not a priority). Through global health care reform, however, the “cost-center” mentality has substantially fallen out of favor in most major markets throughout the world, and laboratory managers are increasingly concerned about ways to conserve resources and increase cost-efficiency without reducing test accuracy or quality of medicine. Moreover, the quest for greater laboratory efficiency has put immense pressure on leading manufacturers to develop or find new, appropriate technologies for the market.

Laboratories world-wide have become significantly more cost-conscious, many imposing more intense reviews of capital acquisitions, particularly for new systems like the Company’s workstation-systems, which address areas traditionally not requiring significant capital investments.

However, laboratories must contend with the aforementioned OSHA and CLIA regulations. Since the Company’s products are designed to reduce the amount of labor required to perform laboratory tests and the specimen biohazard exposure, as well as to standardize and improve the analytical quality of the test procedure, the Company believes these factors could enhance its competitive position in the market.

PRODUCT LIABILITY

The Company faces potential liability in connection with the use of its products. The Company has purchased product liability insurance in the amount of $2,000,000. The Company believes that its present insurance is sufficient for its current level of business operations. There can be no assurance however that such insurance will be sufficient to cover potential claims or that the present level of coverage will be available in the future at a reasonable cost.

RESEARCH AND DEVELOPMENT

The Company conducts research and development as part of its ongoing efforts to improve existing product and development of new products. The Company is focusing its research and development on several projects: new proprietary consumable products to be used in conjunction with the workstations, Parasep fecal concentrator that does not require the use of solvents, workstations that are closed systems preventing the use of competitors consumables, a collection device incorporated into the existing Parasep design, DNA and ELISA applications for fecal concentrators,, a proprietary series of in-vitro immunoassays and a paracep fecal concentrator for use in the veterinary market. New applications for the Company’s technology are also being pursued in the industrial market. The Company primarily conducts research and development internally and typically does not utilize the services of third parties for such purposes; however, on September 15, 2005 the Company announced that it had engaged BioCheck, Inc. and its principal scientist to complete development of its proprietary Bence Jones protein technology.

BACKLOG

The Company had unshipped orders totaling $216,580 as of June 30, 2007.

EMPLOYEES

As of June 30, 2007 the Company had 10 full-time employees, 3 of whom were engaged in sales and marketing, 1 in research and development, 3 in manufacturing, and 4 in administrative, finance and other clerical support activities.

ITEM 1A. RISK FACTORS

RISKS RELATED TO THE COMPANY

The Company has a history of losses. The Company has experienced losses during each fiscal year since its initial public offering in 1995. In order to achieve profitability, the Company must increase its revenues. Although the Company believes that such increases are attainable, there can be no assurances that the Company will achieve sufficient revenues to become profitable in the current fiscal year.

The Company does have a need for additional financing, which may not be available to it on acceptable terms . The Company will need to seek additional financing from the sale of equity or debt, from private and public sources and/or from collaborative licensing and/or marketing arrangements with third parties. However, the Company has not made arrangements for any such additional external funding and additional financing may not be available to the Company on acceptable terms, if at all. If the Company’s cannot obtain such additional financing or partnering arrangements, the Company will need to modify the Company’s business objectives and reduce or even cease certain or all of the Company’s product development programs and other operations.

The laboratory equipment industry is highly competitive and many of the Company’s potential competitors have greater financial and technological resources then the Company’s have. The Company is engaged in a highly competitive industry. The Company expects to encounter competition in the laboratory equipment industry from numerous existing companies, including large international enterprises and others entering the industry. Although the Company believes that the "R/S" and "FE" series workstations are currently the only products of their type in the market, competing technologies exist such as: (i) traditional use of a microscope to examine a glass slide of human body fluids; (ii) traditional use of a microscope to examine human body fluids introduced into a pre-formed plastic slide assembly; (iii) a video imaging system which automatically "recognizes" and "counts" pre-stored images of "common shapes" found in human body fluids; (iv) a slow cypomtry based system which detects "abnormal" urines thereby reducing the number which must be manually analyzed; and, (v) pre-screening using chemically treated reagent or "dip" strips.

Many of the Company’s competitors and potential competitors have substantially greater resources, including capital, research and development, personnel and manufacturing and marketing capabilities, and also may offer well-established, broad product lines and ancillary services. Some of the Company’s competitors have long-term or preferential supply arrangements with hospitals. Such arrangements may act as a barrier to market entry to the Company’s products. Competing companies may succeed in developing products that are more efficacious or less costly, and such companies may also be more successful than us in production and marketing.

The Company’s operating results have fluctuated in the past and are likely to continue to fluctuate in the future on an annual and quarterly basis, due to numerous factors, many of which are outside of the Company’s control . Some of the factors that may cause these fluctuations include:

      - changing market demand for, and declines in the average selling prices of, the Company’s products;

      - the timing of and delays or cancellations of significant orders from major customers;

      - the loss of one or more of the Company’s major customers;

      - the cost, availability and quality of components from the Company’s suppliers;

      - the cost, availability, and quality of assemblies from contract and subcontract manufacturers;

      - delays in the introduction of new products;

      - competitive product announcements and introductions;

      - development of new technologies by the Company’s competitors;

      - changes in customer preferences;

      - changes in the regulatory environment, product health and safety concerns

- general economic conditions; and

- loss of key personnel.

The laboratory equipment market is subject to frequent and rapid changes in technology and customer preferences . The Company’s competitors may develop new products that are more useful or less costly than the Company’s products. Rapid technological development by others may result in the Company’s products becoming obsolete before it recovers a significant portion of the research, development and commercialization expenses incurred with respect to those products. If the Company cannot develop new products in response to changes in technology or customer preferences, the Company will lose market share to the Company’s competitors. Patents and intellectual property rights are important to the Company but could be challenged.

Proprietary protection for the Company’s products is of material importance to the Company’s business in the U.S. and most other countries . The Company has numerous patents and trademarks throughout the world, and many additional applications pending. The Company has sought and will continue to seek proprietary protection for the Company’s products to attempt to prevent others from commercializing equivalent products in substantially less time and at substantially lower expense. The Company’s success may depend on its ability to (1) obtain effective patent protection within the United States and internationally for its proprietary technologies and products, (2) defend patents the Company owns, (3) preserve its trade secrets, and (4) operate without infringing upon the proprietary rights of others.

While the Company has obtained numerous patents and has additional patent applications pending, the extent of effective patent protection in the United States and other countries is highly uncertain and involves complex legal and factual questions. No consistent policy addresses the breadth of claims allowed in or the degree of protection afforded under patents of medical and pharmaceutical companies. Patents the Company currently owns or may obtain might not be sufficiently broad to protect the Company against competitors with similar technology. Any of the Company’s patents could be invalidated or circumvented.

The patent application and issuance process takes years, and may be expensive. The Company might not obtain all of the United States patents the Company has applied for related to the "R/S" and "FE" series or other technology or products that the Company may develop. In addition, the Company does not have and may never obtain foreign patents equivalent to the claims in its U.S. patents.

Because a United States pending patent application is confidential, the Company cannot know the inventions claimed in pending patent applications filed by third parties. The Company may need to defend or enforce its patent and license rights or determine the scope and validity of the proprietary rights of others through litigation. Defense and enforcement of patent claims may be expensive and time-consuming, even when the outcome is in its favor. Defense and enforcement actions may use substantial resources originally allocated to other activities such as studies and continuing development of the Company’s products and technologies. While the Company believes that its patents will prevail in any potential litigation, it is possible that the holders of these competing patents will commence a lawsuit against us and that the Company will not prevail in any such lawsuit. Litigation could result in substantial cost to and diversion of effort by the Company, which may harm its business. In addition, the Company’s efforts to protect or defend its proprietary rights may not be successful or, even if successful, may result in substantial cost to the Company. In the event of an unfavorable outcome in any patent infringement suit, the Company may be required to:

- assume significant liabilities to third parties,

- obtain licenses from third parties,

- alter the Company’s products or processes, or

- cease altogether any of the Company’s related research and development activities or product sales.

The Company depends on agreements with third parties to protect its rights to certain technology . The Company may encounter disputes regarding the proprietary rights to technological information that employees, consultants, advisors or other third parties independently develop and apply to any of its proposed products. These disputes might not be resolved in the Company’s favor. The Company may also rely on trade secrets and proprietary know-how that may become known to others despite its efforts to keep them confidential. Although the Company seeks to protect the Company’s trade secrets and proprietary know-how in part by its confidentiality agreements with employees, consultants, advisors or others, these parties may breach their agreements, and the Company might not obtain adequate remedies. Similarly, competitors may discover or independently develop the Company’s trade secrets or proprietary know-how in such a manner that the Company has no legal recourse.

The Company is dependent on third party subcontractors for the production of certain components of its products. The Company relies on subcontractors to manufacture certain components of its products, based on its specifications. The risks associated with reliance on subcontractors include:

- subcontractors may fail to meet the Company’s requirements for quality, quantity, timeliness, or pricing; and

- although the Company has developed alternate qualified vendors for its critical raw materials and supplies, it

may not be able to find or obtain additional substitute vendors, if required.

The Company depends upon third parties for the sale, marketing and distribution of its products. The Company depends on third parties for the sale, marketing and distribution of its products. Such dependence requires it to spend significant funds to inform these third-party distributors of the distinctive characteristics and benefits of the Company’s products. The Company’s operating results and long term success will depend on its ability to establish and maintain successful arrangements with these third parties.

The Company expects to incur substantial marketing costs. The Company currently markets its products through regional sales management in the United Kingdom and through independent distributors in several foreign countries. The Company expects to incur substantial costs in connection with marketing and sales efforts.

Recent Management Changes . On February 23, 2007, Mr. Gregory Witchel’s services as Chief Executive Officer of the Company were terminated. Mr. Jeffrey B. Aaronson, President of the Company, assumed the responsibilities of Chief Executive Officer. On July 2, 2007, Mr. Jeffrey B. Aaronson resigned as President, Chief Financial Officer, Chief Executive Officer and Director of the Company. The Board of Directors has determined that, despite the many significant contributions of Mr. Witchel and Mr. Aaronson to the long-term strategic planning of the Company, it would be in the best interests of the Company to have management focus on the day to day details necessary to realize the marketing potential of the Company’s various product lines. On July 13, 2007, the Board of Directors appointed Fredric H. Neikrug as interim President and Chief Executive Officer. On October 1, 2007, Mr. Morris Silverman was appointed Chief Financial Officer. The Company is unable to predict what adverse effects, if any, may follow such changes in senior management.

The Company may be subject to potential product liability claims, creating risk and expense. The Company is exposed to product liability risks inherent in the development, testing, manufacturing, marketing and sale of its products. Product liability insurance for the diagnostic industry is extremely expensive, difficult to obtain and may not be available on acceptable terms, if at all. The Company currently has product liability insurance to cover claims related to its products with coverage of $2 million for any one claim and coverage of $2 million in total. A successful claim against the Company if the Company is uninsured, or which is in excess of the Company’s insurance coverage, if any, could have a material adverse effect upon the Company and on its financial condition.

Revenue growth may be delayed by lengthy sales and implementation cycles . The period between initial contact with a potential customer and the customer's purchase of the Company’s products is often long and may have delays associated with the lengthy budgeting and approval process of such potential customers. To successfully sell the Company’s products, it must educate potential customers regarding the use and benefit of such products, which can require significant time and resources.

The Company must effectively manage its growth . To date, the Company’s growth has caused a significant strain on its management, operational, financial and other resources. The Company’s ability to effectively manage growth will require it to improve its management, operational and financial processes and controls. The failure to effectively manage growth could materially and adversely affect the Company’s business and operating results.

Industry Risks

The Company’s failure to receive governmental approvals for its proposed products on a timely basis, or ever, could damage its business, financial condition and results of operations . Some of the Company’s new products may require the Company to obtain governmental clearance before marketing such products in the United States. The process of obtaining the required regulatory approvals is lengthy, expensive and uncertain. Moreover, regulatory approval, if granted, may include limitations on the approved uses of a product. If the Company fails to comply with applicable regulatory requirements it may incur fines, suspensions of approvals, product seizures, injunctions, recalls of products, operating restrictions and criminal prosecutions. If the Company fails to receive clearances to commence clinical studies or to market products, it would adversely affect the results of the Company’s future operations.

Variations in the regulatory requirements of foreign authorities could delay the Company’s introduction of products into countries outside the United States and limit its marketing scope . Because the Company intends to sell and market its products outside the United States, the Company will be subject to foreign regulatory requirements governing the conduct of clinical trials, product licensing, pricing and reimbursements. These requirements vary widely from country to country. The Company’s failure to meet each foreign country's requirements could delay the introduction of its proposed products in the respective foreign country and limit its revenues from sales of the Company’s proposed products in foreign markets.

The Company’s failure to comply with regulatory requirements could subject the Company to regulatory or enforcement actions. Even if the Company obtains regulatory approvals, the FDA and comparable foreign agencies continually review and regulate marketed products. A later discovery of previously unknown problems or the Company’s failure to comply with the applicable regulatory requirements could subject the Company to regulatory or judicial enforcement actions. These actions could result in the following:

      - recalls or seizures of the Company’s proposed products,

      - restrictions on marketing of the Company’s proposed products,
      - regulatory authorities' refusal to approve new products or withdrawal of existing approvals,

      - enhanced product liability exposure,

      - injunctions,

      - civil penalties, or

      - criminal prosecution.

The Company will face intense competition from companies that are substantially larger, have more substantial histories, backgrounds, experience and records of successful operations, greater financial, technical, marketing and other resources, more employees and more extensive facilities than the Company now has, or will have in the foreseeable future. The Company will compete directly with manufacturers of other proprietary test kits. The Company will also compete indirectly, and may in the future compete directly, with providers of related or alternative technologies. Almost all of the companies with which the Company competes are substantially larger, have more substantial histories, backgrounds, experience and records of successful operations, greater financial, technical, marketing and other resources, more employees and more extensive facilities than the Company now has, or will have in the foreseeable future. Further, the Company believes that certain of its key competitors have invested, and will continue to invest, substantially greater funds in developing new products and technologies. Accordingly, there can be no assurance that the Company’s competitors do not have, or will not develop or introduce, new products and technologies that could render the Company’s products less competitive or obsolete. Any failure by the Company to compete effectively with regard to new product offerings, product innovations and technological changes and to offer products that provide performance that is at least comparable to competing products would have a material adverse effect on the Company’s business, operating results and financial condition.

The Company’s success will be dependent upon its ability to increase the production volume on a timely and cost-effective basis, while maintaining product quality. The Company has only limited production facilities, located in Wokingham, England. Such production facilities will not be adequate to service projected demand for the Company’s products. The Company is currently negotiating with independent manufacturers to arrange production on a contract basis. There can be no assurances that such arrangements will be satisfactorily concluded or that, if so concluded, the manufacturers will be able to produce products at the quantity and quality adequate to meet demand. If the Company is unable to ship product in a timely basis, or if shipped products do not meet quality standards, the Company may lose important customer contracts.

ITEM 2. DESCRIPTION OF PROPERTY

The Company rents without a lease office space at 21 West Main Street, Waterbury, Connecticut for its headquarters and research and development. At June 30, 2007, the monthly rent is $1,210, which includes all management fees, real estates taxes, common area charges, heat, air-conditioning, electricity, janitorial services, limited parking and such other expenses normally incurred by a tenant.

DiaSys Europe leases approximately 4,300 square feet of office, final assembly and warehousing space in Wokingham, England. The lease rate is approximately $36,050 per year, on a triple net basis. The lease commenced May 1, 2002 and expires April 30, 2012.

Other than the leased properties set forth above, the Company does not invest in real estate interests, real estate mortgages or securities of or interests in persons primarily engaged in real estate activities.

ITEM 3. LEGAL PROCEEDINGS

In July 2006, G&H Steinvorth Ltda commenced legal proceedings against the Company, Tecno Diagnostica S.A. and Alejandro Munoz Villalobos in the First District Circuit Court in San Jose, Costa Rica. The complaint alleges breach of contract and related matters arising out of the Company’s termination of the plaintiff as the Company’s distributor in Costa Rica and the subsequent appointment of Tecno Diagnostica. S. A. The complaint seeks aggregate damages in the amount of $848,813. The Company believes that the complaint as against the Company is without merit and the Company intends to defend such matter vigorously.

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

No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended June 30, 2007.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

The Company is authorized to issue 99,900,000 shares of Common Stock, $0.001 par value, of which

25,191,364 shares were issued and outstanding as of June 30, 2007. The Company’s common stock is traded on the OTC Bulletin Board under the symbol “DYXC.OB”.

The following table sets forth the high and low sales price for the Company’s Common Stock as reported by The American Stock Exchange for the periods indicated.


Year Ended June 30, 2007		High		Low



4th Quarter	$	0.13	$	0.10
3rd Quarter		0.18		0.09
2 ^nd Quarter		0.20		0.08
1st Quarter		0.29		0.14


Year Ended June 30, 2006		High		Low



4th Quarter	$	0.33	$	0.17
3rd Quarter		0.44		0.15
2nd Quarter		0.50		0.11
1st Quarter		0.29		0.14

As of September 26, 2007 the Company’s Common Stock was held by approximately 150 holders of record.

To date, the Company has not declared or paid any cash dividends on its common stock, nor does is have the current intention to do so. The Company anticipates that any earnings if generated would be used to finance the development and expansion of its business. Further, future financing arrangements may restrict or prohibit the Company’s ability to declare and pay dividends without prior lender approval.

EQUITY COMPENSATION PLAN INFORMATION


Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and other rights	Weighted-average exercise price of outstanding options, warrants and other rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	1,990,194	$	.19	605,000

Recent Issuances of Unregistered Securities

On March 1, 2007, Morris Silverman, Chairman of the Board of Directors of the Company, agreed to invest $600,000 in the Company in exchange for (i) 5,000,000 shares of the Company’s Common Stock, and (ii) a five-year warrant to purchase 2,600,000 shares of Common Stock at $.001 per share. As additional consideration for such investment, the Company agreed to pay to Mr. Silverman $4,000 per month for one year. Such obligation is secured by a lien upon all assets of the Company. $458,220 of this committed amount was invested at various dates from March 2007 through June 2007, resulting in the issuance of 3,818,500 shares of common stock and 1,985,619 of stock purchase warrants. Such transaction was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof because Mr. Silverman is the Chairman of the Board of Directors and a substantial stockholder of the Company.

ITEM 6 - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

Certain statements contained herein are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that could prove not to be accurate. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. The Company’s ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to: the existence of, demand for, and acceptance of the Company’s products and services; the ability of the Company to develop new and timely products; the ability of the Company to maintain and expand its business relationship with its distributors and strategic partners (see: STRATEGIC RELATIONSHIPS above); the effect of regulatory approvals and developments, economic conditions, the impact of competition; and, other factors affecting the Company’s business that are beyond the Company’s control. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release the results of any revision to these forward-looking statements that may be made to reflect future events or circumstances.

FORWARD LOOKING STATEMENTS: This Annual Report on Form 10-KSB and the documents incorporated herein by reference contain forward-looking statements based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management. All statements, trends, analyses, and other information contained in this report relative to trends in net sales, gross margin, anticipated expense levels and liquidity and capital resources, as well as other statements including, but not limited to words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, “seek”, “intend”, and other similar expressions, constitute forward looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Accordingly, actual results may differ materially from those anticipated or expressed in such statements. Potential risks and uncertainties include, among others, those set forth herein under “Additional Factors That May Affect Future Results”, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources”. Particular attention should be paid to the cautionary statements involving the Company’s limited operating history, the unpredictability of its future revenues, the unpredictable and evolving nature of its business model, the intensely competitive online commerce and the risks associated with capacity constraints, systems development, management of growth and business expansion.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are adjusted as new information becomes available. The Company's significant accounting policies are set forth below.

Revenue Recognition - Sales and related cost of sales are recognized upon shipment of products. The Company does not custom build product nor does any product require customer acceptance. All product is shipped as a final sale FOB DiaSys. Allowances for estimated uncollectible accounts, returns and allowances are provided based upon historical experience, current trends and specific information which indicate that an allowance is appropriate. New workstations are covered under a 12 month limited warranty from date of shipment. Historically, costs associated with the limited warranty have been insignificant and no reserve has been established.

Inventories - Inventories are stated at the lower of standard cost, which approximates average cost, or market. Provision for slow moving inventory is provided based on historical experience and product demand. Obsolete inventory or inventory for discontinued products are not included in inventory. Should future product demand change, existing inventory could become slow moving or obsolete and provisions would be increased accordingly.

Patent Costs - The Company’s patents are valued at cost and amortized over the remaining useful life of the patent. In 2000, the Company purchased Intercep Limited. A valuation was done at that time of the fair value of the patents acquired. The patents included the paracep product line technology and a method for the monitoring, screening and adjunctive testing of Multiple Myeloma and other cancers. Factors the Company generally considers important which could trigger an impairment review on the carrying value of patents include the following: (1) significant underperformance relative to expected historical or projected future operating results including expected undiscounted future cash flows; (2) significant changes in the manner of its use of acquired assets or the strategy for its overall business; and (3) discontinuance of product lines by the Company or its customers; Although the Company believes that the carrying value of its patents was recoverable as of June 30, 2007, future events could cause it to conclude otherwise. The paracep product line and the Multiple Myeloma testing product continue to sell at or above historical levels. The Company also performs quarterly impairment valuations of the patent valuations using a discounted cash flow analysis. Future revenues are projected for the remaining lives of the patents based on current sales of the patented technology. The projected revenues are discounted to present value at 6%, which is based upon a premium over the ten year Treasury rate per annum, and a 45% profit margin is applied, which is based on prior actual results. Management believes that its revenue projections are a reasonable expectation for future operations, that a 6% discount rate fairly reflects the current interest climate, and that a 45% operating margin is consistent with current operations. Since the patented products are manufactured and sold in the United Kingdom, no amounts are included with this analysis with respect to corporate overhead in the United States. Selling costs, which were immaterial, were not factored into the impairment testing calculations. Based on the most recent impairment valuation, the Company believes that it is appropriate to continue to carry its patents at cost less amortization.

Depreciable Assets - Property, plant and equipment are carried at cost less accumulated depreciation. The appropriateness and the recoverability of the carrying value of such assets are periodically reviewed taking into consideration current and expected business conditions.

LIQUIDITY AND CAPITAL RESOURCES


			June 30,
(In dollars, except for ratios)		2007		2006

TOTAL CURRENT ASSETS	$	633,244	$	544,786
TOTAL CURRENT LIABILITIES		1,679,567		1,409,891
WORKING CAPITAL DEFICIENCY	$	(1,046,323)	$	(865,105)

WORKING CAPITAL DEFICIT RATIO		(0.6)		(0.6)

The Company funds its working capital requirements from its revenues from operations and loans or sales of securities to private individuals, including its directors. The Company expects to continue to need to borrow from shareholders, board members, or others to fund its operations. During the year ended June 30, 2007, the Company raised $458,220 via stock sales to the Chairman of the Board of Directors, and issued $350,000 in promissory notes in consideration for amounts loaned to the Company by members of its Board of Directors. During the year ended June 30, 2006, the Company issued an aggregate of $87,800 of promissory notes in consideration for amounts loaned to the Company by members of the Board of Directors. An additional $173,046 was raised via stock sales at market to outside investors, $50,000 via stock sales to the Chairman of the Board of Directors and $70,345 from the exercising of various options by the Chairman of the Board of Directors. The Company intends to fund its working capital requirements from its revenues from operations and by borrowing additional funds from private individuals, including its directors, and will need to continue this practice or enter into other financing arrangements with financial institutions to augment its short-term working capital needs. There is no assurance that the Company will be able to obtain financing on terms satisfactory to it, if at all. The effects on the financial statements of not obtaining suitable financing cannot be determined.

FISCAL YEAR ENDED JUNE 30, 2007 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2006

FINANCIAL CONDITION

The working capital deficiency increased by $181,218 from June 30, 2006 to June 30, 2007. Cash and equivalents as of June 30, 2007 increased by $10,203, as compared to an increase of $40,048 in the previous period. Cash used in operating activities was $726,893 for the current fiscal year. The cash shortfall was funded primarily by (i) borrowings from management (see “Certain Relationships and Related Transactions”); and (ii) the issuance of shares of capital stock and warrants to the Chairman of the Board of Directors. Management believes that the Company will require additional financing to discharge its obligations for at least the next twelve months. The Company had unshipped orders totaling $216,500 as of June 30, 2007.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the years ended June 30, 2007 and 2006, the Company incurred net losses of $785,234 and $1,047,794, respectively, and, as of those dates, the Company's current liabilities exceeded its current assets by $1,046,323 and $865,105, respectively, and as of June 30, 2007 had an accumulated stockholders’ deficit from inception of $19,951,927. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. Management continues to focus on improving the Company’s results of operations by increasing sales globally and decreasing its cost structure to improve cash flows from operations to so that it can fund its working capital and other cash flow requirements. In September 2005, the Company engaged B. Riley & Co. to find alternative financing to supplement its working capital as well as to explore strategic alternatives. Furthermore, if necessary, or conditions warrant, the Company may borrow additional funds from private individuals, including members of management should it become practical or advantageous to do so.

RESULTS OF OPERATIONS

NET SALES

The Company’s net sales decreased 0.6% or $9,943 from $1,688,097 in fiscal year 2006 to $1,678,154

in fiscal 2007. Domestic US sales increased $109,760 from $298,805 in fiscal year 2006 to $408,565 in fiscal year 2007. International sales decreased $119,703 from $1,389,292 in fiscal year 2006 to $1,269,589 in fiscal year 2007. The decrease in international sales can be largely attributed to the shift of Mexican orders from UK to the Waterbury office. During its 2007 fiscal year, the Company entered into additional distribution agreements, and also obtained final approval from VLA for the marketing of the veterinary Paracep. The Company believes that the effects of such agreements will impact sales primarily in future periods. This is due to governmental requirements for product registration in those countries covered by the distribution agreements. Sales and marketing efforts are delayed until registration is complete. Although the time table for completion cannot be ascertained, the process itself is an administrative one not predicated on the products completing testing.

GROSS PROFIT AND GROSS PROFIT MARGINS

The Company’s gross profit decreased by 5.0% or $46,482 from $936,707 for fiscal year 2006 to $890,225 in fiscal year 2007. Such decrease is attributable primarily to the cost of converting workstation slide assemblies from glass to plastic. As workstation sales increase subsequent to the product registration process, the new slide assemblies will result in a significant increase in unit margins.

SELLING, GENERAL, AND ADMINISTRATIVE (SG&A)

The Company’s SG&A expenses decreased 17.4% or $310,193 from $1,785,997 for fiscal year 2006 to $1,475,804 for fiscal year 2007. The decrease in SG&A was due to the continuing consolidation of sales support function and the administration of the sales support function into the UK operation. Legal expenses were reduced by $43,899. Brokerage fees related to equity funding decreased by $116,500 and accounting fees decreased by approximately $50,000 related to a reduction in annual audit fees. Domestic salaries cost decreased by $36,770, related primarily to reductions in administrative staff in the Waterbury office.

RESEARCH AND DEVELOPMENT (R&D)

R&D expenses decreased 14.6% to $132,800 for fiscal year 2007 compared to $155,551 for fiscal year 2006. This decrease was due primarily to $61,709 in personnel expenses resulting from the elimination of one person in the Waterbury office. The Company incurs research and development costs as a result of its ongoing efforts to improve existing product and development of new products. The Company primarily conducts research and development internally and typically does not utilize the services of third parties for such purposes. However, with respect to the fecal concentrator designed for use in the veterinary market, the Company has relied on the development staff of the VLA to assist in product design and testing. The Company is focusing its research and development on several projects: new proprietary consumable products to be used in conjunction with the workstations, fully automated urine sediment and parasitology workstations. New applications for the Company’s technology are also being pursued in the industrial market. The Company is currently focusing its efforts to: (i) develop, acquire and patent several new proprietary technologies such as its fecal concentrator for use in the veterinary market, (ii)a version of Parasep that does not require the use of solvents,(iii) a fecal sample collection device incorporated into its existing fecal concentrator design,(iv) urine sediment and parasitology workstations that are closed systems, (v)adaptations of its fecal concentrator for DNA and ELISA testing, new screening test for Multiple Myeloma and other cancers, Monoclonal Gammopathies, Diabetes, Hypertension and other disease states.

INTEREST EXPENSE

Interest expense increased to $56,014 during the fiscal year compared to $36,931 for the previous fiscal year. The increase is attributable to additional borrowings of approximately $350,000 that were incurred in fiscal 2007.

NET LOSS

The Company’s net loss decreased $262,560 from $1,047,794 in fiscal year 2006 to $785,234 in fiscal year 2007. This decrease was due primarily to the implementation and completion of the consolidation of manufacturing facilities into the UK along with other cost reduction plans.

INFLATION

Although the Company believes that inflation has not had a material adverse affect on the results of operations to date, any increases in costs of raw materials or labor to the Company could affect the prices charged by the Company to its clients.

ITEM 7 - FINANCIAL STATEMENTS

The Company’s audited financial statements as of June 30, 2007 for its fiscal years ended June 30, 2007 and 2006 are included beginning at page F-1.

ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 8A. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Management concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report were effective in timely alerting them to material information required to be included in the Company's periodic Securities and Exchange Commission filings and are also effective to ensure that the information required to be disclosed in reports filed or submitted under The Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management to allow timely decisions regarding required disclosure. There was no other change in the Company's internal controls during the Company’s fourth fiscal quarter that has materially affected, or that is reasonably likely to materially affect, internal control over financial reporting.

PART III

ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS

Executive Officers and Directors are as follows:


Name	Company Position	Age *
Morris Silverman	Chairman of the Board of Directors & Chief Financial Officer	75
Fredric H. Neikrug	President and Chief Executive Officer (as of July 13, 2007)	62
Robert M. Wigoda	Director and Secretary	52
Sherwin Gilbert	Director	64
Howard Bloom	Director	52
Sherman Lazrus	Director	74

*As of October 1, 2007

Robert Wigoda joined the Company in January 2003 as the Company's Secretary and as a member of the Company's Board of Directors. Mr. Wigoda is an attorney licensed to practice law in the State of Illinois. He was admitted to the Illinois bar in November 1979. Since 1989, Mr. Wigoda has been a partner of Wigoda & Wigoda, a law firm in Chicago, Illinois, where he practices general corporate and commercial real estate law. He received his B.S. degree from the University of Illinois, and his J.D. degree at John Marshall Law School.

Morris Silverman has served as the Chairman of the Company's Board of Directors since November 2002. Effective October 1, 2007, Mr. Silverman was appointed Chief Financial Officer of the Company. Since 1977, Mr. Silverman is the majority owner and Chairman of the Board of M.S. Management Corporation, a private finance company with over 250 branches nationwide. Mr. Silverman has several years of experience in strategic planning and operations within and outside the medical community. He served as the Chairman of Medical Financial Services, Inc., an accounting and receivable financing company for the medical profession from 1975 to 1985. Prior thereto, Mr. Silverman served as Vice President of Operations for Petrie Stories, a New York Stock Exchange company.

Sherwin Gilbert joined the Company's Board of Directors in January 2003. Mr. Gilbert serves as Vice President-Taxation of Indeck Energy Services, Inc., a developer and operator of regeneration power plants. From 1977 to 2002, Mr. Gilbert served as a tax partner of BDO Seidman, LLP, an international public accounting firm. Mr. Gilbert received his B.S. degree in accounting from University of Illinois and his J.D. degree from DePaul University.

Howard Bloom was appointed to the Company's Board of Directors on August 8, 2003. Mr. Bloom, J.D., C.P.A., joined Kipnis, Rosen and Bloom in 1978 where he has a partner position and is a former board member of CBC Bancorp and Capital Bank & Trust with oversight of a $50 million portfolio.

Sherman Lazrus joined the Company’s Board of Directors on July 12, 2006. Mr. Lazrus has been an independent business consultant for more than the past five years. He presently serves as Chairman of the Board of Directors of Emergency Filtration Products, Inc. and is also a director of Imaging Diagnostic Systems, Inc. He has held several senior government positions in the health care area. He attended George Washington University, from which he received A.A., B.A. and M.B.A. degrees.

Fredric H. Neikrug j oined the Company on July 13, 2007 as President and Interim Chief Executive Officer. Mr. Neikrug has been an independent business consultant after selling his industrial lighting distributorship, and previously was a hospital administrator in the Chicago area.

Audit Committee Financial Expert – The Company’s Board of Directors has determined that Howard Bloom, who serves on the Company’s audit committee, is the audit committee financial expert. Mr. Bloom is both a certified public accountant and licensed attorney. He possesses the knowledge of financial accounting principles and experience in the preparation, audit, analysis and evaluation of financial statements as are necessary to fulfill this role. He is an independent director, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) requires the Company’s officers, directors and beneficial owners of more than 10% of the Company’s stock to file reports of ownership and changes of ownership of the Company’s securities with the Securities and Exchange Commission within two business days following any change or transaction. Based on management’s review of these reports during the fiscal year ended June 30, 2007, all reports required to have been filed were filed on a timely basis, except that Morris Silverman filed two of such reports after the time required.

Code of Conduct

The Company has adopted a Code of Ethics and Business Conduct that applies to all of its officers and directors. A copy of such Code of Ethics and Business Conduct has been posted on the Company’s web site at: www.DiaSys.com.

ITEM 10 - EXECUTIVE COMPENSATION

The following table sets forth compensation information for all persons serving as the Company’s Chief Executive Officer during the fiscal years ended June 30, 2007, 2006 and 2005, and any other executive officer who received compensation in excess of $100,000 during the fiscal year ended June 30, 2007. Mr. Witchel received no compensation other than as listed below. During fiscal year 2007 no executive officer received compensation in excess of $100,000.


			Long-Term Compensation
Name and Position	Fiscal Year	Salary	Stock Options	Other Compensations
Gregory Witchel, Chief Executive Officer	2007	$75,000	-0-	-0-
Gregory Witchel, Chief Executive Officer	2006	$75,000	150,000	-0-
Gregory Witchel, Chief Executive Officer	2005	$75,000 (1)	232,500	-0-

Stock Option Grants

The following options were granted to Mr. Witchel in October, 2005:

Name

Share

Options

Granted

% of Total

Options Granted

to All Employees

Exercise

Price

Expiration

Date

Gregory Witchel

150,000

24%

$0.18

10/12/15

No stock options were exercised by Mr. Witchel during the fiscal year ended June 30, 2007.

Directors do not receive cash compensation for their services as such. Non-management directors have been issued stock options for their services, as reflected in the table of stock option grants below.

Stock Options Granted to Directors


Directors Name	Date of Grant	Exercise Price	Number of Shares
Morris Silverman	10/12/05	$0.18	180,000
Jeffrey B. Aaronson	10/12/05	$0.18	120,000
Robert M. Wigoda	10/12/05	$0.18	50,000
Sherwin Gilbert	10/12/05	$0.18	50,000
Howard Bloom	10/12/05	$0.18	50,000

In addition, pursuant to informal arrangement, Mr. Robert M. Wigoda is entitled to receive shares of common stock as compensation for legal services rendered to the Company, with the number of shares being the dollar amount of each statement divided by the closing price of the Company’s shares at the time such statement is rendered. No shares were issued to Mr. Wigoda during the fiscal years ended June 30, 2006 and 2007.

Upon termination of Mr. Witchel’s services in February 2007, the Company agreed to extend the termination of his options to December 31, 2007, at which point all of his options not previously exercised will expire. The Company entered into a similar agreement with Mr. Aaronson in July, 2007 to extend his options through December 31, 2007, at which time all of his options will expire as well.

No officer or director of the Company has any employment contract or other written arrangement entitling him to receive compensation for termination or future services.

On October 12, 2005 the Board of Directors voted to adjust the exercise price of all outstanding stock options, including stock options held by management, to $0.18 per share, which was the closing price of the Company’s shares on the American Stock Exchange on the day preceding such adjustment. The entire Board of Directors determined that such adjustment was in the best interests of the Company because it provided enhanced incentives to the recipients to continue to support the financial success of the Company during the terms of the options.

AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

Name

Shares

Acquired

Exercise

Value

Realized

Number of

Securities

Underlying

Unexercised

Options/SARs

At FY-End (#)

(All Exercisable)

Value Of

Unexercised

In-The-Money

Options/SARs

At FY-End ($)

(All Exercisable)

Gregory Witchel

Chief Executive Officer

None

699,500

-0-

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table shows how much of the Company’s Common Stock is beneficially owned by: (i) each of the Company’s directors; (ii) each of the Company’s named executive officers; and (iii) each person (or group) known to the Company to be the beneficial owner of more than 5% of the Company’s Common Stock. This information is as of October 4, 2007.


	Number	Percentage of
	of Shares	Ownership (1)
Name
Morris Silverman (2)	14,737,432	50.47%
Robert M. Wigoda (3)	171,562	0.80%
Sherwin Gilbert (4)	183,101	0.85%
Howard M. Bloom (5)	250,792	1.17%
Sherman Lazrus		0.00%
John V. Winfield (6)	2,621,100	11.59%



Executive officers and directors as a group (6 persons)	15,342,887	48.25%

(1) Based on there being 25,721,822 shares of Common Stock outstanding as of October 4, 2007.

(2) Includes 2,884,479 shares which Mr. Silverman has the right to acquire pursuant to various warrants, 2,693,540 shares which Mr. Silverman has the right to acquire pursuant to convertible notes issued in 2006 and 2007, and 501,194 shares which Mr. Silverman has the right to acquire under currently-exercisable stock options. Mr. Silverman serves as Chairman of the Board of Directors.

(3) Includes 125,000 shares which Mr. Wigoda has the right to acquire under currently-exercisable stock options. Mr. Wigoda serves as the Company's Secretary and as a member of the Company's Board of Directors.

(4) Includes 7,500 shares which Mr. Gilbert has the right to acquire pursuant to various warrants and 117,500 shares which Mr. Gilbert has the right to acquire under currently-exercisable stock options. Mr. Gilbert serves as a member of the Company's Board of Directors.

(5) Includes 10,000 shares held in accounts for the benefit of Mr. Bloom’s two minor children, 7,500 shares which Mr. Bloom has the right to acquire pursuant to various warrants and 100,000 shares which Mr. Bloom has the right to acquire under currently-exercisable stock options. Mr. Bloom serves as a member of the Company's Board of Directors.

(6) Includes 1,250,000 shares which Mr. Winfield has the right to acquire pursuant to a warrant issued on December 30, 2004.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On September 29, 2005, the Company and Messrs. Silverman and Witchel entered into a Payment, Release and Exchange Agreement pursuant to which the $100,000 Convertible Promissory Notes issued to such persons on November 1, 2004 were refinanced through the issuance of the Company’s unsecured 6% Convertible Promissory Notes due September 28, 2008, convertible into shares of the Company’s Common Stock of the rate of $0.19 per share, which was the closing price of the Company’s Common Stock on the American Stock Exchange on the trading day preceding such transaction.

On October 21, 2005, Mr. Silverman loaned $20,000 to the Company and received a simple promissory note in such amount. Such loan was repaid in February, 2006.

On May 18, 2006, Mr. Silverman advanced $50,000 to the Company in exchange for 333,333 shares of the Company’s Common Stock and a Common Stock Purchase Warrant entitling him to purchase an additional 333,333 shares of Common Stock at $0.50 per share. The closing price of the Company’s Common Stock on the OTC Bulletin Board on the trading day preceding such transaction was $0.19 per share.

On June 12, 2006, Mr. Silverman loaned $17,500 to the Company and received a $17,500 6% Convertible Promissory Note due June 11, 2007, convertible into shares of the Company’s Common Stock at $0.20 per share, which was the closing price of the Company’s Common Stock on the OTC Bulletin Board on the day preceding such transaction.

On October 25 and 31, 2006, Mr. Silverman loaned $305,000 and $18,000, respectively, to the Company and received one-year convertible promissory notes bearing interest at 10% per annum The notes are convertible into common stock at the rate of $0.13 per share and $0.11 per share, respectively, the then current market prices of the stock.

On November 13, 2006, Mr. Silverman loaned $23,000 to the Company and received a $23,000 one-year convertible promissory note bearing interest at 10% per annum. The note is convertible into common stock at the rate of $0.16 per share, the then current market price of the stock.

On December 27, 2006, Mr. Silverman loaned $4,000 to the Company and received a $4,000 one-year convertible promissory note bearing interest at 10% per annum. The note is convertible into common stock at the rate of $0.10 per share, the then current market price of the stock.

All shares issued to the Directors and officers referred to above were issued with restrictions limiting the ability of the holders to sell such shares without regulation under the Securities Act of 1933. The Company has no plans to register any of such Shares.

PART IV

ITEM 13 - EXHIBITS


Number		Description of Document
3.1		Certificate of Incorporation (Incorporated by reference to the Exhibit 3.1 filed with Company's Registration Statement on Form 8-A on October 20, 1994 )
3.2		By-Laws (Incorporated by reference to Exhibit 3.2 filed with Company's Registration Statement on Form 8-A on October 20, 1994)
4.1		Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 filed with Company's Registration Statement on Form 8-A on October 20, 1994)
10.1		Common Stock Purchase Agreement with Icon Investors, Ltd. (Incorporated by reference to Exhibit 1.1 filed with Company’s Registration Statement on Form SB-2 on March 24, 2004)
10.2		Registration Rights Agreement with Icon Investors, Ltd. (Incorporated by reference to Exhibit 1.2 filed with Company’s Registration Statement on Form SB-2 on March 24, 2004)
10.3		Consulting Agreement, dated February 17, 2004, with Capital Management Internationale (Incorporated by reference to Exhibit 1.3 filed with Company’s Registration Statement on Form SB-2 on March 24, 2004)
10.4		Amendment No. 1 to Common Stock Purchase Agreement with Icon Investors, LLC (Incorporated by reference to Exhibit 1.4 to Amendment No. 2 filed with Company’s Registration Statement on Form SB-2 on April 27, 2004)
10.5		Rights Agreement (Incorporated by reference to Exhibit 4.2 filed with Company's Registration Statement of Form S-3 on November 27, 2002)
10.6		Loan and Security Agreement dated as of August 12, 2004 between the Company and Morris Silverman (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004)
10.7		Indemnification and Mutual Contribution Agreement dated as of August 12, 2004 among Morris Silverman, Gregory Witchel, Robert M. Wigoda, Howard M. Bloom, Jeffrey B. Aaronson and the Company (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004)
10.8		Convertible Promissory Note dated as of August 12, 2004 payable to Morris Silverman in the amount of $475,000 (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004 )
10.9		Convertible Promissory Note dated as of September 9, 2004 payable to Morris Silverman in the amount of $120,316.47 (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004)
10.10		Personal Guaranty Agreement of Gregory Witchel dated as of August 13, 2004 (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004)
10.11		Personal Guaranty Agreement of Robert M. Wigoda dated as of August 13, 2004 (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004)
10.12		Personal Guaranty Agreement of Howard Bloom dated as of August 13, 2004 (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004)
10.13		Personal Guaranty Agreement of Jeffrey B. Aaronson dated as of August 13, 2004 (Incorporated by reference to the exhibit of the same number filed with the Company’s Annual Report on Form 10-KSB on October 29, 2004)
10.14A		Purchasing Agreement with Healthtrust Purchasing Group dated December 1, 2001 (Incorporated by reference to exhibit of the same number filed with the Company’s Annual Report on Form 10-K on October 14, 2005) (1) (3)
10.14A-A		Exhibit A to Purchasing Agreement with Healthtrust Purchasing Group dated December 1, 2001 (Incorporated by reference to the exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006)
10.14A-B		Exhibit B to Purchasing Agreement with Healthtrust Purchasing Group dated December 1, 2001 (Incorporated by reference to the exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K filed on August 8, 2006)


10.15A		Agreement for Urinalysis Equipment, Related Supplies, and Service with Broadlane, Inc. dated April 1, 2002 (Incorporated by reference to exhibit of the same number filed with the Company’s Annual Report on Form 10-K on October 14, 2005) (1)(3)
10.15A-A		Exhibit A to Agreement for Urinalysis Equipment, Related Supplies, and Service with Broadlane, Inc. dated April 1, 2002. (Incorporated by reference to exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006) (3)
10.16		Supplier Set-up form with Allegiance dated December 8, 1999. (Incorporated by reference to the exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-KSB on June 30, 2005)
10.17A		Distribution Agreement with Fisher Scientific Company, LLC, dated July 23, 2001 (Incorporated by reference to exhibit of the same number filed with the Company’s Annual Report on Form 10-K on October 14, 2005) (1)(3)
10.17A-A		Exhibit A to Distribution Agreement with Fisher Scientific Company, LLC, dated July 23, 2001 (Incorporated by reference to exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006)
10.18A		Non-Exclusive Distribution Agreement with VWR International, Inc., dated as of November 1, 2003 (Incorporated by reference to exhibit of the same number filed with the Company’s Annual Report on Form 10-K on October 14, 2005) (1)(3)
10.18A-A		Exhibit A to Non-Exclusive Distribution Agreement with VWR International, Inc., dated as of November 1, 2003 (Incorporated by reference to exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006) (3)
10.19A		International Sales and Service Agreement, effective May 16, 2005, between the Company and Genesee Brazil (Incorporated by reference to exhibit of the same number filed with the Company’s Annual Report on Form 10-K on October 14, 2005) (1)(3)
10.19A-A		Exhibit A to International Sales and Service Agreement, effective May 16, 2005, between the Company and Genesee Brazil (Incorporated by reference to exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006) (3)
10.20		International Distributor Agreement, effective June 20, 2005, between the Company’s wholly-owned subsidiary, DiaSys Europe, Ltd, and Cooplab, Crl. ( Incorporated by reference to the exhibit of the same number filed with the Registrant's Current Report on Form 8-K on July 28, 2005)
10.21A		International Sales and Service Agreement, effective as of May 4, 2005, between the Company and Diagnostic Bioserve Limited. (Incorporated by reference to exhibit of the same number filed with the Company’s Annual Report on Form 10-K on October 14, 2005) (1)(3)
10.21A-A		Exhibit A to International Sales and Service Agreement, effective as of May 4, 2005, between the Company and Diagnostic Bioserve Limited (Incorporated by reference to exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006) (3)
10.22A		International Sales and Service Agreement, effective as of May 22, 2005, between the Company and Bionuclear (Incorporated by reference to exhibit of the same number filed with the Company’s Annual Report on Form 10-K on October 14, 2005) (1)(3)
10.22A-A		Exhibit A to International Sales and Service Agreement, effective as of May 22, 2005, between the Company and Bionuclear (Incorporated by reference to exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006) (3)
10.23		2004 Stock Option and Award Plan (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-KSB on April 7, 2006)
10.24		$50,000 Convertible Promissory Note of the Company dated August 27, 2003 payable to Howard Bloom (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.25		$100,000 Promissory Note of the Company dated February 3, 2004 payable to Morris Silverman (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)


10.26		Common Stock Purchase Warrant for 150,000 shares dated February 3, 2004 issued to Morris Silverman (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.27		$50,000 Promissory Note of the Company dated February 3, 2004, payable to Gregory Witchel (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.28		Common Stock Purchase Warrant for 75,000 shares issued to Gregory Witchel (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.29		$50,000 Promissory Note of the Company dated February 3, 2004, payable to Jeffrey B. Aaronson (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 filed with Company’s Annual Report on Form 10-K on April 7, 2006)
10.30		Common Stock Purchase Warrant for 50,000 shares issued to Jeffrey B. Aaronson (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.31		Loan and Security Agreement, dated as of November 1, 2004 by and among the Company, Morris Silverman and Gregory Witchel (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.32		$100,000 Promissory Note of the Company dated November 1, 2004 payable to Morris Silverman (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.33		$100,000 Promissory Note of the Company dated November 1, 2004 payable to Gregory Witchel (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.34		$50,000 Promissory Note of the Company dated November 29, 2004 payable to Morris Silverman (Incorporated by reference to exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-K on April 7, 2006)
10.35		Settlement Agreement and General Release, dated as of July 16, 2004, between the Company and Todd DeMatteo (Incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K/A on July 20, 2004.)
10.36		Investment Agreement, dated as of December 28, 2004 between the Company and John Winfield (Incorporated by reference to exhibit of the same number filed with Amendment No. 2 to the Company’s Annual Report on Form 10-K on August 8, 2006)
10.37		Common Stock Purchase Warrant, dated as of December 30, 2004, issued to John Winfield (Incorporated by reference to Exhibit 4.2 filed with the Company’s Current Report on Form 8-K on January 6, 2005)
10.38		International Sales and Service Agreement, dated as of December 16, 2005, between the Company and DICPA (2) (3)
10.39		10% Convertible Promissory Noted dated October 24, 2006 in the principal amount of $85,000 (Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on November 15, 2006.)
10.40		10% Convertible Promissory Noted dated October 25, 2006 in the principal amount of $60,000 (Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on November 15, 2006.)
10.41		10% Convertible Promissory Noted dated October 30, 2006 in the principal amount of $160,000 (Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on November 15, 2006.)
10.42		10% Convertible Promissory Noted dated October 31, 2006 in the principal amount of $18,000 (Incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on November 15, 2006.)

14		Code of Ethics and Business Conduct (Incorporated by reference to the exhibit of the same number filed with Amendment No. 1 to the Company’s Annual Report on Form 10-KSB filed on June 30, 2005)
21.1		Subsidiaries of the Company: DiaSys Europe, Ltd, a United Kingdom company


31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)
31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)
32		Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)

(1) Amendment of previously filed exhibit correspondingly numbered

(2) Filed herewith.

(3) Portions of this document have been omitted and filed separately with the Securities and Exchange Commission, together with an Application for Confidential Treatment of such information.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for professional audit services rendered and fees billed for other services rendered by Fiondella, Milone & LaSaracina for the fiscal year ended June 30, 2007, and Deloitte & Touche LLP for Fiscal 2007 interim work and the fiscal years ended June 30, 2006:


	Year Ended	Year Ended
	June 30, 2007	June 30, 2006

Audit Fee	$112,000	$170,000
Audit-Related Fees	-	-
Tax Fees	18,500	18,500
All Other Fees	-	-
Total Fees	$130,500	$188,500

Audit Fees . This category includes fees paid for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s quarterly reports on Form 10-QSB. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of the Company’s interim financial statements.

Audit-Related Fees. Deloitte and Touche LLP did not perform any services in this category for us during the fiscal years ended June 30, 2007 or 2006. Fiondella, Milone & LaSaracina did not perform any services in this category for us during the fiscal year ended June 30, 2007.

Tax Fees. This category consists of professional services rendered by Deloitte & Touche LLP for tax compliance and tax advice. The services for the fees disclosed under this category include tax advisory services associated with the Company’s ongoing business and business ventures.

All Other Fees . Deloitte & Touche LLP did not perform any services in this category for us during the fiscal years ended June 30, 2007 and 2006. Fiondella, Milone & LaSaracina did not perform any services in this category for us during the fiscal year ended June 30, 2007.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated: October 10, 2007	DIASYS CORPORATION

		By: /s/ Frederic H. Neikrug
		Frederic H. Neikrug President and Chief Executive Officer (principal executive officer)


Dated : October 5, 2007	DIASYS CORPORATION

		By: /s/ Morris Silverman
		Morris Silverman Chief Financial Officer (principal financial officer and principal accounting officer)

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


/s/ Frederic H. Neikrug
Frederic H. Neikrug President and Chief Executive Officer (principal executive officer)		Dated: October 10, 2007


/s/ Morris Silverman
Morris Silverman
Chief Financial Officer (principal financial officer and principal accounting officer) and Chairman of the Board of Directors		Dated: October 4, 2007

/s/ Robert M. Wigoda
Robert M. Wigoda
Secretary and Director		Dated: October 8, 2007

/s/ Sherwin Gilbert
Sherwin Gilbert
Director		Dated: October 5, 2007

/s/ Howard Bloom
Howard Bloom
Director		Dated: October 10, 2007


Sherman Lazrus
Director		Dated:

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Reports of Independent Registered Public Accounting Firms	F-2

Consolidated Financial Statements:	F-4

Consolidated Balance Sheet at June 30, 2007	F-4

Consolidated Statements of Operations for the years ended June 30, 2007 and 2006	F-5

Consolidated Statements of Changes in Stockholders’ Equity for the years ended June 30, 2007 and 2006	F-6

Consolidated Statements of Cash Flows for the years ended June 30, 2007 and 2006	F-7

Notes to Consolidated Financial Statements	F-8

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

DiaSys Corporation

Waterbury, Connecticut

We have audited the accompanying consolidated balance sheet of DiaSys Corporation and subsidiary as of June 30, 2007 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended June 30, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DiaSys Corporation and subsidiary at June 30, 2007, and the results of their operations and their cash flows for the year ended June 30, 2007, 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 described in Note 1 to the consolidated financial statements, the Company's recurring losses from operations, cash used by operating activities, negative working capital, and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Fiondella, Milone & LaSaracina LLP

Glastonbury, Connecticut

October 15, 2007

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
DiaSys Corporation
Waterbury, Connecticut

We have audited the accompanying consolidated statements of income, changes in stockholders' equity, and cash flows of DiaSys Corporation and subsidiary for the year ended June 30, 2006. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion . An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of DiaSys Corporation and subsidiary’s operations and their cash flows for the year ended June 30, 2006 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated statements of income, changes in stockholders’ equity and cash flows for the year ended June 30, 2006 have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company's recurring losses from operations, cash used by operating activities, negative working capital, and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Deloitte & Touche LLP

Hartford, Connecticut

November 14, 2006

F-3


DIASYS CORPORATION & SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
				As of:
				June 30, 2007

CURRENT ASSETS:
	Cash and cash equivalents		$	51,244
	Accounts receivable, less allowance for doubtful
	accounts of $12,876			213,296
	Inventories, net			272,623
	Prepaid expenses and other current assets			96,081
		Total Current Assets		633,244

EQUIPMENT, FURNITURE AND FIXTURES, less
	Accumulated depreciation of $508,457			198,219

PATENTS, less accumulated amortization of $1,331,888				1,657,408

TOTAL ASSETS			$	2,488,871

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
	Bank overdraft		$	27,841
	Accounts payable			742,617
	Accrued expenses			291,309
	Loans payable to shareholders			617,800
		Total Current Liabilities		1,679,567

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
	Preferred stock $.001 par value:
		Authorized 100,000 shares,
		0 issued and outstanding		-
	Common stock $.001 par value:
		Authorized 99,900,000 shares, 25,191,364
		issued and outstanding		25,191
	Additional paid-in-capital			20,569,566
	Accumulated deficit			(19,951,927)
	Accumulated other comprehensive income			166,474
		Total Stockholders' Equity		809,304

		Total Liabilities and Stockholders' Equity	$	2,488,871

See accompanying notes to condensed consolidated financial statements.

F-4


DIASYS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS


		Years Ended
		June 30,
		2007		2006

NET SALES	$	1,678,154	$	1,688,097

COST OF GOODS SOLD		787,929		751,390

GROSS PROFIT		890,225		936,707

OPERATING EXPENSES
Selling		255,448		286,612
General & administrative		1,220,356		1,499,385
Research & development		132,800		155,551
		1,608,604		1,941,548

LOSS FROM OPERATIONS		(718,379)		(1,004,841)

OTHER INCOME:
Interest income		-		(8)
Interest expense		56,014		36,931

LOSS BEFORE INCOME TAXES		(774,393)		(1,041,764)

INCOME TAXES		(10,841)		(6,030)

NET LOSS	$	(785,234)	$	(1,047,794)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		22,278,970		19,607,892

BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.04)	$	(0.05)

See accompanying notes to the consolidated financial statements

F-5


DIASYS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006

				Accumulated
			Additional	Other			Total
	Common Stock		Paid in	Comprehensive	Accumulated	Total	Comprehensive
	Shares	Par Value	Capital	Income	Deficit	Equity	Loss

BALANCE JUNE 30, 2005	18,278,875	$ 18,279	$19,466,110	$109,571	($18,118,899)	$1,475,061

Comprehensive Loss:

Net loss	-	-	-	-	(1,047,794)	(1,047,794)	($1,047,794)

Other Comprehensive Income:

Foreign currency translation
adjustment				9,579	-	9,579	9,579

Unrealized gain on investment				6,050	-	6,050	6,050

Comprehensive Loss							($1,032,165)

Sale of common stock and issuance
of common stock warrants	1,319,519	1,319	199,917	-	-	201,236

Stock compensation	-	-	73,449	-	-	73,449

Shares issued to financial advisors	250,000	250	54,750	-	-	55,000

Conversion of notes payable	1,133,664	1,134	214,084	-	-	215,218

Proceeds from exercise of options	390,806	391	69,954	-	-	70,345

BALANCE JUNE 30, 2006	21,372,864	21,373	20,078,264	125,200	(19,166,693)	1,058,144

Comprehensive Loss:

Net loss	-	-	-	-	(785,234)	(785,234)	($785,234)

Sale of common stock	3,818,500	3,818	454,402	-	-	458,220

Stock compensation	-	-	36,900	-	-	36,900	-

Unrealized gain on investment	-	-	-	(1,330)	-	(1,330)	(1,330)

Foreign currency translation adjustment	-	-	-	42,604	-	42,604	42,604

BALANCE JUNE 30, 2007	25,191,364	$25,191	$20,569,566	$166,474	($19,951,927)	$809,304	($743,960)

See accompanying notes to the consolidated financial statements

F-6


DIASYS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Years Ended
		June 30,
		2007		2006

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(785,234)	$	(1,047,794)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Amortization of patents		127,236		128,862
Depreciation of equipment, furniture and fixtures		52,784		70,940
Bad debt expense		-		3,600
Stock compensation		36,900		73,449
Shares issues to financial advisors		-		55,000
Accrued interest payable converted to common stock		-		15,216
Non-cash interest expense		-		6,112
changes in assets and liabilities:
Accounts receivable		(47,642)		44,556
Inventories, net		(55,082)		104,614
Prepaid expenses and other current assets		24,469		21,243
Other assets		-		10,151
Accounts payable and accrued expenses		(80,324)		233,960

Net cash flows used in operating activities		(726,893)		(280,091)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures		(70,852)		(18,645)

Net cash flows used in investing activities		(70,852)		(18,645)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		458,220		201,236
Proceeds from loans from shareholders		350,000		67,802
Proceeds from exercise of options		-		70,345

Net cash flows provided by financing activities		808,220		339,383

Effect of foreign currency translation on cash		(272)		(599)

NET CHANGE IN CASH AND CASH EQUIVALENTS		10,203		40,048

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		41,041		993

CASH AND EQUIVALENTS, END OF PERIOD	$	51,244	$	41,041

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	7,744	$	2,456

See accompanying notes to condensed consolidated financial statements.

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF THE BUSINESS:

Nature of the Business: DiaSys Corporation (“the Company”), designs, develops, manufactures, and distributes proprietary workstation and consumable products for medical and clinical laboratory applications. The Company currently conducts business within one business segment. The Company distributes its products primarily through sales managers employed by the Company and through distributors in North America, Europe, Middle East, Africa, China, Pacific Asia and Australia.

Management's Plan: The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the years ended June 30, 2007 and 2006, the Company incurred net losses of $785,234 and $1,047,794, respectively, and, as of those dates, the Company's current liabilities exceeded its current assets by $1,046,323 and $865,105, respectively, and as of June 30, 2007 had an accumulated stockholders' deficit from inception of $19,951,927. These factors, among others, raise substantial doubt about the Company’s to continue as a going concern.

The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations. Management continues to focus on improving the Company's results of operations by increasing sales globally and decreasing its cost structure to improve cash flows from operations to so that it can fund its working capital and other cash flow requirements. In September 2005, the Company engaged B. Riley & Co. to find alternative financing to supplement its working capital as well as to explore strategic alternatives. Furthermore, if necessary, or conditions warrant, the Company may borrow additional funds from private individuals, including members of management should it become practical or advantageous to do so.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, DiaSys Europe, Ltd. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition: Sales and related cost of sales are recognized upon shipment of products. The Company does not custom build product nor does any product require customer acceptance. All product is shipped as a final sale FOB DiaSys. Allowances for estimated uncollectible accounts, returns and allowances are provided based upon historical experience, current trends and specific information which indicate that an allowance is appropriate. The Company recognizes sales returns as a reduction of revenue and cost of sales for the sales price and cost, respectively, when the products are returned. The Company’s customer return policy allows customers to return products only if the products have the ability to be added back to inventory and resold at full value or can be returned to vendors for credit at the sole discretion of the Company. New workstations are covered under a 12 month limited warranty from date of shipment. Historically, costs associated with the limited warranty have been insignificant and no reserve has been established.

Foreign Currency Translation: Assets and liabilities of the Company’s wholly owned foreign subsidiary are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are translated at average rates prevailing during the year. Translation adjustments are included as other comprehensive income (loss). Foreign currency transaction gains and losses, which have been immaterial, are included in results of operations.

Income Taxes: Deferred income taxes are provided based on the difference between the financial statement and income tax basis of assets and liabilities, principally bad debt expense and net operating loss carry-forwards, at currently enacted tax rates.

F-8

Financial Instruments: Financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. The amounts reported for financial instruments are considered to be reasonable approximations of their fair values based on market information available to management. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents: The Company considers money market funds and all other highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Short-Term Investments—Available-For-Sale: The Company accounts for its short-term equity investment in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115). The Company classifies its equity investment as available-for-sale and, accordingly, such investment is stated on the balance sheet at fair market value with unrealized gains (losses) recorded as a separate component of shareholders’ equity and comprehensive income (loss).

Inventories: Inventories are stated at the lower of standard cost, which approximates average cost, or market. Provisions for slow moving inventory is provided based on historical experience and product demand. Obsolete inventory or inventory for discontinued products are not included in inventory. Should future product demand change, existing inventory could become slow moving or obsolete and provisions would be increased accordingly.

Equipment, Furniture and Fixtures: Equipment, Furniture and Fixtures are recorded at cost and are depreciated primarily using the straight-line method over their estimated useful lives of 3 to 10 years. Computer software is recorded at cost and is amortized over 3-5 year lives.

Patents: The Company accounts for its patents in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. The Company’s patents are recorded at cost and amortized over the remaining useful life of the patent. In 2000, the Company purchased Intercep Limited. A valuation of the fair value of the patents acquired was performed at that time. The patents included the paracep product line technology and a method for the monitoring, screening and adjunctive testing of Multiple Myeloma and other cancers.

The patents are assessed for impairment on a quarterly basis using a discounted cash flow model. The revenues used in the impairment analysis are based on the actual revenues for the patented products for the preceding year. Actual revenues for the patented products for fiscal 2006 and 2007 were $784,435 and $884,721, respectively. Estimated future cash flows were discounted using a 6% rate based upon a premium over the ten year Treasury rate. A term of ten years was used to estimate future cash flows. The gross margin used in the analysis is based on prior actual results. The actual gross margin for sales of the patented products in fiscal 2006, and 2007 was 50.0%, and 45.1%, respectively. Since the patented products are manufactured and sold in the United Kingdom , no amounts are included with this analysis with respect to corporate overhead in the United States . Selling costs, which were immaterial, were not factored into the impairment testing calculations.

Factors the Company generally considers important which could trigger an impairment of the carrying value of patents include the following: (1) significant underperformance relative to expected historical or projected future operating results included expected undiscounted future cash flows; (2) significant changes in the manner of our use of acquired assets or the strategy for our overall business; and (3) discontinuance of product lines by ourselves or our customers. The Company believes that the carrying value of its patents was recoverable as of June 30, 2007, as such no impairment charge was recorded. Amortization expense for the years June 30, 2007 and 2006 was $127,236 and $128,862, respectively. Annual amortization expense is expected to be approximately $127,236 for each of the years 2008 through 2012.

Warranty Costs: The Company assembles its finished goods, and will repair or replace any unit which fails to operate due to defective parts or workmanship within one year from the purchase date. As warranty costs have been and are expected to remain insignificant, no accrual for warranty costs is deemed to be necessary.

Loss per Share: Basic loss per share is based upon the weighted average common shares outstanding. The computation of diluted loss per share does not assume the conversion, exercise or contingent issuance of securities that would have an anti-dilutive effect on loss per share. If the assumed exercise of certain stock options had been dilutive, the incremental average shares outstanding would have been 1,405,585 and 1,375,194 for fiscal 2007 and 2006, respectively.

F-9

Stock Options: In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS"), No. 123R "Share-Based Payment". SFAS 123R applies to all transactions involving the issuance, by a company, of its own equity (stock, stock options, or other equity instruments) in exchange for goods or services, including employee services. SFAS 123R requires entities to recognize the cost of employee services received in exchange for the stock-based compensation using the fair value of those stocks on the grant date (with limited exceptions). In April 2005, this statement was deferred per the Securities and Exchange Commission Release 2005-57, and was effective as of the beginning of the first fiscal year beginning after December 15, 2005. The Company adopted SFAS 123R early on July 1, 2005 using the modified prospective method. The Company did not have any unvested options as of July 1, 2005. On October 12, 2005 the Board of Directors approved an award under the Company's Stock Option Plan of 615,000 options. Charges of $3,265, $9,796 and $11,322 were recorded during the quarters ended December 31, 2005, March 31, 2006 and June 30, 2006, respectively, for the award. Also on October 12, 2005 the Board of Directors approved the re-pricing of outstanding Plan options previously granted from an exercise price of $0.39 to $0.18, the then current market price. As a result of the re-pricing, the Company incurred a charge of $25,735 during the three months ended December 31, 2005. The Company estimates the fair value of stock options using the Black-Scholes valuation model. Had the Company continued under SFAS 123, the pro-forma adjustment for the year ended June 30, 2005 would have been $444,775 and the pro-forma loss $2,474,020. Loss per share would have been $0.15. The Company recognizes expense for stock-based compensation with graded vesting on a straight-line basis over the vesting period of the entire award. Stock-based compensation expense includes the estimated effects of forfeitures, and estimates of forfeitures will be adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of expense to be recognized in future periods. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company's stock over the option's expected term, the risk-free interest rate over the option's expected term, and the Company's expected annual dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

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


	2006
Risk free interest rate (1)	4.5	%
Expected annual dividend yield	0.0	%
Expected option term (2)	5 years
Expected volatility factor (3)	114.0	%

(1)

The risk-free interest rate for periods equal to the expected term of the share option is based on the U.S. Treasury yield curve in effect at the time of the grant.

(2)

The option term was determined based on historical data.

(3)

The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company’s common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

The Company did not issue any options during the period July 1, 2006 through June 30, 2007.

Advertising Expense: Advertising costs are expensed as incurred. Advertising expense for the years ended June 30, 2007 and 2006 amounted to $10,472 and $12,853, respectively.

F-10

New Accounting Pronouncements:

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the uncertainty in income taxes recognized in the Company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. The provisions of FIN 48 are effective for the fiscal year beginning July 1, 2007. The Company is currently evaluating the impact of the provisions of FIN 48 upon adoption.

Estimates and Uncertainties: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results, as determined at a later date, could differ from those estimates.

NOTE 3 - INVENTORIES:

Inventories at June 30, 2007 consist of the following:


Raw material	$	233,538
Finished goods	39,085
	$	272,623

NOTE 4 - EQUIPMENT, FURNITURE AND FIXTURES:

Equipment, furniture and fixtures at June 30, 2007 are summarized as follows:



Machinery and equipment	$	664,475
Furniture and fixtures	17,339
Computer & software	24,862
	706,676
Less accumulated depreciation	508,457
	$	198,219

NOTE 5 - ACCRUED EXPENSES:

Accrued expenses are summarized as follows:


Accrued legal and accounting	$	142,079
Other accrued expenses		149,230

Total	$	291,309

F-11

NOTE 6 - INCOME TAXES:

For income tax purposes, the Company has a December 31 year end.

The components of the Company’s expected tax expense as computed by applying the US Federal corporate income tax rate of 34% to income (loss) before taxes and the recorded tax (benefit) expense as follows:


Expected Tax Expense	$	(263,294)	34.00%
State Income Taxes, Net of Federal Benefit		85	(0.01)%
Stock Based Compensation		12,546	(1.62)%
Foreign Rate Differential		11,609	(1.50)%
Other		1,025	(0.13)%
Effect of Valuation Allowance		248,870	(32.14)%

Total	$	10,841	(1.40)%

The components of the Company’s deferred income taxes at June 30, 2007 are as follows:


Allowance for Doubtful Accounts	$	5,143
Net Operating Loss Carry forwards		6,983,470
Tax Credits		66,737
Valuation Allowance		(7,055,350)

Total	$	-

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company has determined, based on the Company’s history of losses, that realization is not likely and a full valuation allowance is appropriate for June 30, 2007. Realization of the net deferred tax asset is primarily dependent on the Company generating sufficient taxable income prior to the expiration of the loss carry forwards.

At June 30, 2007, the Company had approximately $17,439,000 of federal net operating losses that expire from 2012 and 2027, approximately $11,356,000 of state net operating losses that expire from 2020 and 2027 and approximately $440,000 of foreign net operating losses. At June 30, 2007 the Company had tax credit carry forwards of approximately $101,000 which begin to expire in 2015.

As defined in Section 382 of the Internal Revenue Code, certain ownership changes limit the annual utilization of federal net operating losses. As a result of issuance of, sales of and other transactions involving the Company’s common stock, the Company may have experienced an ownership change which could cause such federal net operating losses to be subject to limitation under Section 382.

NOTE 7 - PREFERRED STOCK:

The Board of Directors is authorized to issue 100,000 shares of Preferred Stock, $0.001 par value, in one or more series and, to the extent now or hereafter permitted by the laws of the State of Delaware, to fix and determine the preferences, voting powers, qualifications and special and relative rights or privileges of each series.

F-12

NOTE 8 - STOCK OPTION PLANS:

The Company maintains four stock option plans, the 1993 Incentive Stock Option Plan (the “1993 ISO Plan”), the 2000 Incentive Stock Option Plan (the “2000 ISO Plan”), the 2004 Stock Option and Award Plan (the “2004 Plan”), (and constitute together with the 2000 ISO Plan and 1993 ISO Plan, the “ISO Plans”) and the 2000 Non-qualified Incentive Stock Option Plan (the “2000 NQSO Plan” and, together with the ISO Plans, the “Plans” and individually, a “Plan”). The ISO Plans are maintained under Section 422 of the Internal Revenue Code. The Company has reserved 1,000,000 shares of its common stock for the purpose of granting options (the “Options”) under each of the 1993 ISO Plan and the 2000 NQSO Plan. The Company has reserved 500,000 shares of its common stock for the purpose of granting Options under the 2000 ISO Plan. Under each of the 1993 ISO plan, the 2000 ISO Plan and the 2000 Non-Qualified Plan, Options are granted to the Company’s officers and employees by the Board of Directors and to members of the Board on a non-discretionary basis. No Options may be granted under the 1993 ISO Plan after November 14, 2003, and no Options may be granted under the 2000 ISO Plan after January 18, 2011. Under each Plan, no Options may be exercised until the twenty-fourth month following the date the Option was granted. At such time, 50% of the shares of common stock covered by the Option may be exercised, the remaining 50% balance are exercisable thirty-six months after issuance of the Option. Options may not be exercisable more than ten years after the date of grant (five years if held by a person holding more than 10% of total voting rights of the Company’s outstanding capital stock at the date of grant). The 2004 Plan provides for the granting of incentive sock options, non-qualified stock options and stock awards covering up to 2,500,000 shares to key employees, officers, directors and others upon terms to be determined in the discretion of the Board of Directors.

Unless otherwise provided, no Options granted under the Plans are transferable by the Optionee other than by will or by the law of descent and distribution. Options granted under the Plans terminate within a specified period of time following termination of an Optionee’s employment.

Under each Plan, the exercise price of the Options shall be equal to or greater than the fair market price of the Company’s common stock on the date the Option is granted. With respect to an Option granted to a person who possesses more than 10% of the voting rights of the Company’s outstanding capital stock on the date of grant, the exercise price of the Option must be at least equal to 110% of the fair market value of the shares subject to the Option on the date of the grant.

The aggregate fair market value of the common stock (determined at the date of the Option grant) for which stock options granted under the ISO Plans that may become first exercisable in a calendar year may not exceed $100,000.

Options under the Stock Option Plans are summarized as follows:


	Year Ended June 30, 2007			Year Ended June 30, 2006
	Shares	Weighted		Shares	Weighted
	Under Option	Average		Under Option	Average
		Exercise Price			Exercise Price
Options outstanding at beginning of year	1,990,194	$	0.19	1,768,500	$	0.40
Options granted		0.00		615,000	0.18
Options expired/withdrawn		0.00		(393,306)	0.18
Options outstanding at end of year	1,990,194	$	0.19	1,990,194	$	0.19
Options exercisable:
Number of shares	1,990,194	$	0.19	1,375,194	$	0.19

Fair value of options granted	$ 0.19	$	0.19		$	0.19

F-13

On October 12, 2005 the Board of Directors approved the issuance of 615,000 options under the Company’s 2004 Plan to certain officers and directors of the Company. The exercise price for all of the options issued was $0.18 per share.

For the year ended June 30, 2007, the Company recorded $36,900 in compensation expense related to options issued in prior years. The total amount of compensation expense that remains to be amortized over the vesting period for options issued to employees prior to 2007 is $52,275.

The following table summarizes option data as of June 30, 2007 with respect to all outstanding Options:


	Number Outstanding	Weighted
		Average	Weighted		Weighted
Range of		Remaining	Average		Average
Exercise		Contractual	Exercise	Number	Exercise
Prices		Life	Price	Exercisable	Price
$0.18 - $1.00	1,964,194	9.25	$0.18	1,349,194	$0.18
$1.01 - $1.25	26,000	6.51	$1.21	26,000	$1.21
Total	1,990,194	9.22	$0.19	1,375,194	$0.19

NOTE 9 - COMMITMENTS:

Leases: The following is the future minimum rental payment required for all non-cancelable operating leases:


Year Ended June 30:
2008	$36,050
2009	36,050
2010	36,050
2011	36,050
2012	30,042
	$174,242

The rent expense for the years ended June 30, 2007 and 2006 was $88,703 and $134,039, respectively.

NOTE 10 - GEOGRAPHIC AND CUSTOMER INFORMATION:

Sales to one foreign customer in China as a percentage of net sales totaled .0% and .2% in 2007 and 2006, respectively.

The Company transacts sales in the domestic and international markets. Reportable sales are as follows:


	Fiscal Year Ended	Fiscal Year Ended
	June 30, 2007	June 30, 2006

Domestic	$408,565	$298,805
International	1,269,589	1,389,292

Total	$1,678,154	$1,688,097

F-14

NOTE 11 – NOTES PAYABLE and COMMON STOCK:

Loans payable at June 30, 2007 include $150,000 and $50,000 promissory notes bearing interest at 3% per year to two individuals who are shareholders but not members of management. In September 2005 members of the Board of Directors loaned the Company $25,000 in demand promissory notes bearing interest at 6% per annum. Warrants to purchase 37,500 shares at $0.20 per share, the then current market price were issued in connection with the notes payable. The warrants were valued using the Black-Scholes method with a charge to interest of $6,112 recorded in the Company's financial statements during the year ended June 30, 2006. In October 2005 a member of the Board of Directors loaned the Company $20,000 in demand promissory notes bearing interest at 7% per annum.

On October 14, 2005, the Company sold to a group of outside investors, for an aggregate cash investment of $142,046, an equity package consisting of 835,561 shares of DiaSys Common Stock and Common Stock Purchase Warrants entitling them to purchase 1,671,122 shares of Common Stock at $0.17 per share, the then current market price at any time prior to the fifth anniversary of the transaction date.

On October 28, 2005, the Company sold to an outside investor, for an aggregate cash investment of $25,000, an equity package consisting of 119,047 shares of DiaSys Common Stock and a Common Stock Purchase Warrant for the purchase of 238,094 shares of Common Stock at $0.21 per share, the then current market price at any time prior to the fifth anniversary of the transaction date. The Company allocated the proceeds of such financing to equity on the Balance Sheet.

On November 3, 2005, the Company sold to an outside investor, for an aggregate cash investment of $6,000, an equity package consisting of 31,578 shares of DiaSys Common Stock and a Common Stock Purchase Warrant for the purchase of 63,156 shares of Common Stock at $0.19 per share, the then current market price at any time prior to the fifth anniversary of the transaction date.

In February 2006, Mr. Silverman loaned the Company $25,300 in demand promissory notes bearing interest at 6% per annum.

On February 6, 2006, the Company issued to B. Riley & Co. 125,000 shares of common stock as compensation for financial advisory services rendered pursuant to an agreement with B. Riley & Co. dated August 25, 2005. The Company valued such shares at $0.22, the closing price of the Company’s shares on August 25, 2005, the date of the agreement. As such $27,500 is included in General and Administrative expenses in the accompanying Statement of Consolidated Operations for the year ended June 30, 2006.

On February 24, 2006, the Company issued 390,806 shares of common stock to Morris Silverman upon the exercise of various stock options held by Mr. Silverman for proceeds of $70,345 inclusive of the demand promissory note from October 2005 in the amount of $20,000 which was retired.

On March 1, 2006, the Company issued 566,832 shares of Common Stock to each of Morris Silverman and Gregory Witchel to reflect the conversions of $100,000 Convertible Promissory Notes held by each of such persons and accrued interest of $15,218.

On March 1, 2006, the Company issued to B. Riley & Co. an additional 125,000 shares of common stock as compensation for financial advisory services rendered pursuant to the August 25, 2005 agreement referred to above. The Company valued such shares at $0.22, the closing price of the Company’s shares on August 25, 2005, the date of the agreement. As such $27,500 is included in General and Administrative expenses in the accompanying Statement of Consolidated Operations for the year ended June 30, 2006.

On May 18, 2006, Mr. Silverman purchased from the Company, for $50,000, an equity package consisting of 333,333 shares of common stock and a five-year warrant to purchase another 333,333 shares of common stock at $0.50 per share. A Compensation charge of $13,333 was recorded for the discounted stock price. The market price of the stock was $0.19 and the price paid for the stock was $0.15.

On June 12, 2006, Mr. Silverman loaned $17,500 to the Company and received a $17,500 one-year convertible promissory note bearing interest at 6% per annum and convertible into common stock at the rate of $0.20 per share, the then current market price of the stock.

F-15

On October 25 and 31, 2006, Mr. Silverman loaned $305,000 and $18,000, respectively, to the Company and received one-year convertible promissory notes bearing interest at 10% per annum. The notes are convertible into common stock at the rate of $0.13 per share and $0.11 per share, respectively, the then current market prices of the stock.

On November 13, 2006, Mr. Silverman loaned $23,000 to the Company and received a $23,000 one-year convertible promissory note bearing interest at 10% per annum. The note is convertible into common stock at the rate of $0.11 per share, the then current market price of the stock.

On March 2, 2007, pursuant to the March 1, 2007 investment agreement, Mr. Silverman invested $269,000 to the company in exchange for 2,241,666 shares of the Company’s Common Stock and a common Stock Purchase Warrant entitling him to purchase an additional 1,165,666 shares of Common Stock at $.001 per share. The closing price of the Company’s Common Stock on the OTC Bulletin Board on the day of the transaction was $0.13 per share.

On April 25, 2007, pursuant to the March 1, 2007 investment agreement, Mr. Silverman invested $60,000 to the company in exchange for 500,000 shares of the Company’s Common Stock and a common Stock Purchase Warrant entitling him to purchase an additional 260,000 shares of Common Stock at $0.001 per share. The closing price of the Company’s Common Stock on the OTC Bulletin Board on the day of the transaction was $0.10 per share.

On May 10, 2007, pursuant to the March 1, 2007 investment agreement, Mr. Silverman invested $50,000 to the company in exchange for 416,667 shares of the Company’s Common Stock and a common Stock Purchase Warrant entitling him to purchase an additional 216,667 shares of Common Stock at $0.001 per share. The closing price of the Company’s Common Stock on the OTC Bulletin Board on the day of the transaction was $0.10 per share.

On May 23, 2007, pursuant to the March 1, 2007 investment agreement, Mr. Silverman invested $28,000 to the company in exchange for 233,333 shares of the Company’s Common Stock and a common Stock Purchase Warrant entitling him to purchase an additional 121,333 shares of Common Stock at $0.001 per share. The closing price of the Company’s Common Stock on the OTC Bulletin Board on the day of the transaction was $0.10 per share.

On June 28, 2007, pursuant to the March 1, 2007 investment agreement, Mr. Silverman invested $51,220 to the company in exchange for 426,833 shares of the Company’s Common Stock and a common Stock Purchase Warrant entitling him to purchase an additional 221,953 shares of Common Stock at $0.001 per share. The closing price of the Company’s Common Stock on the OTC Bulletin Board on the day of the transaction was $0.12 per share.

The fair market value of the common stock purchase warrants granted in 2007 was estimated to be $213,458, which has been recorded as part of additional paid-in-capital in stockholders’ equity. As of June 30, 2007 the Company had 5,845,493 warrants outstanding. The warrants are exercisable at prices ranging from $0.001 to $0.74 per share and have terms from 3 to 5 years expiring in 2008 to 2012.

NOTE 12 – LITIGATION:

In July, 2006, G&H Steinvorth Ltda commenced legal proceedings against the Company, Tecno Diagnostica S.A. and Alejandro Munoz Villalobos in the First District Circuit Court in San Jose, Costa Rica. The complaint alleges breach of contract and related matters arising out of the Company’s termination of the plaintiff as the Company’s distributor in Costa Rica and the subsequent appointment of Tecno Diagnostica. S. A. The complaint seeks aggregate damages in the amount of $878,813. The Company believes that the complaint as against the Company is without merit and the Company intends to defend such matter vigorously.

F-16

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