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

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

                                   FORM 10-KSB

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005     Commission file number:  0-27943

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                           ADVANCED BIOPHOTONICS INC.

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

                    Delaware                              11-3386214
         (State or other jurisdiction of               (I.R.S. Employer
         incorporation or organization)               Identification No.)

                125 Wilbur Place
                Bohemia, New York                         11716-2415
              (Address of principal                       (Zip Code)
               executive offices)

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


         Issuer's telephone number, including area code: (631) 244-8244

       Securities registered under Section 12(b) of the Exchange Act: None

      Securities registered pursuant to Section 12(g) of the Exchange Act:

                             Common Stock, par value
                                 $.001 per share

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|
--------------------------------------------------------------------------------

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

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B and no disclosure will be contained, to the best of
the issuer'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. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

         The issuer's revenues for the fiscal year ended December 31, 2005 were
$0

         The aggregate market value of the Common Stock held by non-affiliates
of the issuer as of March 21, 2006 was $4,476,151

         The number of shares outstanding of the issuer's Common Stock as of
March 21, 2006 was 30,732,772 shares.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

         Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]



<PAGE>

                           ADVANCED BIOPHOTONICS INC.

                         2005 FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I   ......................................................................1

Item 1.  Description of Business...............................................1
Item 2.  Description of Property..............................................13
Item 3.  Legal Proceedings....................................................13
Item 4.  Submission of Matters to a Vote of Security Holders..................14


PART II  .....................................................................14

Item 5.  Market for Common Equity and Related Stockholder Matters.............14
Item 6.  Management's Discussion and Analysis or Plan of Operation............27
Item 7.  Financial Statements.................................................41
Item 8.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure..................................41
Item 8A. Controls and Procedures..............................................41
Item 8B. Other Information....................................................46

PART III .....................................................................43

Item 9.  Directors, Executive Officers, Promoters and Control Persons:
         Compliance with Section 16(a) of the Exchange Act....................43
Item 10. Executive Compensation...............................................43
Item 11. Security Ownership of Certain Beneficial Owners and
         Management and Related Stockholders..................................43
Item 12. Certain Relationships and Related Transactions.......................43
Item 13. Exhibits ............................................................43
Item 14. Principal Accountant Fees and Services...............................66


<PAGE>


                                     PART I

Item 1. Description of Business

Overview

         Advanced BioPhotonics Inc. (the "Company") formerly known as OmniCorder
Technologies Inc., was founded in 1997 to acquire, develop and commercialize
advanced medical imaging technology for the diagnosis and management of a large
variety of diseases including cancer and vascular disease. Our lead product, the
BioScanIR(R) system, detects diseases that affect the perfusion or reperfusion
(movement or flow) of blood in tissues and organs. Diseases such as cancer and
vascular disease affect perfusion. The BioScanIR(R) system assists physicians
and researchers in differentiating between normal and abnormal tissues by
detecting very small changes in perfusion. The BioScanIR(R) uses an infrared
sensor, called a Quantum Well Infrared Photodetector, or QWIP, which we have
licensed on an exclusive basis from the California Institute of Technology. QWIP
was developed by scientists at the Jet Propulsion Laboratory of the National
Aeronautics and Space Administration, or NASA, for the U.S. Department of
Defense's Strategic Defense Initiative (commonly referred to as the Star Wars
program).

         We have received FDA Section 510(k) clearance permitting our sale of
BioScanIR(R) in the United States that includes the following indication for
use: "The device is for adjunctive diagnostic screening for the detection of
breast cancer and diseases affecting the blood perfusion or reperfusion of
tissue of organs." Since all living tissue perfuses, there are multiple
diagnostic screening applications where the system can be utilized under the
current clearance. Adjunctive diagnostic screening is a secondary test or
procedure used to assist in the diagnosis of disease within an asymptomatic
population of patients. The BioScanIR(R) System has also received CE mark
approval permitting our sale of BioScanIR(R) in Europe.

         We received notice that we were awarded a New Technology Ambulatory
Procedure Code (APC) effective April 1, 2005 for usage of our system in
providing the service "dynamic infrared blood perfusion imaging." The APC
provided by Medicare allows users of the new technology to submit claims for
reimbursement for their use of the new technology in an outpatient setting for
Medicare patients. This type of code is used to collect actual clinical history
on the costs of using the new technology as a precursor to the assignment of a
permanent Current Procedural Terminology (CPT) code. Over the next three years,
we intend to build a history of claims submissions using the APC for the use of
our system in order to pave the way for securing a CPT code which is issued by
the American Medical Association. The service associated with the use of the
BioScanIR(R) system has been assigned APC Code 1502 and HCPCS Code C9723. The
service will be reimbursed at $75.00 per scan plus a $15.00 co-pay effective
April 1, 2005.

Corporate Information and History

         We were originally formed as a Colorado corporation in September 1992
and operated a promotional products business under the corporate name Promos,
Inc. On December 19, 2003, we completed a transaction in which we acquired all
the assets and assumed all the liabilities of OmniCorder in consideration for
the issuance of a majority of our shares of common stock. This transaction was
accounted for as a recapitalization of OmniCorder, who was the acquirer for
accounting purposes. Concurrent with the closing of the recapitalization
transaction, we completed a private placement of 5,686,027 shares of common
stock, from which we received gross proceeds of $7,820,405. Also, concurrent
with the recapitalization transaction, we sold the promotional products business
to one of our previous directors, and succeeded to the business of OmniCorder as
our sole line of business.

         In February 2004, at a special meeting of stockholders, our
stockholders approved resolutions to change our state of incorporation to
Delaware and our corporate name to OmniCorder Technologies, Inc. by means of a
merger with and into a new wholly-owned Delaware corporation called OmniCorder
Technologies, Inc., with OmniCorder Technologies surviving as the
publicly-traded company; and ratify our assumption and adoption of the
OmniCorder 1998 Stock Option Plan and approved an amendment to the plan
increasing the number of shares of common stock available for option grants.

         In December 2004, we completed a private placement of 1,550,000 shares
of our series A convertible preferred stock. We received gross proceeds of
$1,550,000 from this offering and issued 465,000 five year warrants


<PAGE>


to purchase 465,000 shares of our common stock.

         On March 4, 2005, we announced the appointment of Denis A. O'Connor as
our new President and Chief Executive Officer, effective March 23, 2005. Mr.
O'Connor was also appointed to our Board of Directors on March 7, 2005.

         On June 7, 2005, we changed our corporate name from OmniCorder
Technologies, Inc. to Advanced BioPhotonics Inc. The corporate name change was
approved by our stockholders at our 2005 annual meeting of stockholders on June
7, 2005.

         In August 2005, we consummated a subscription rights offering to
existing stockholders of the Company. At the closing of the subscription rights
offering on August 10, 2005, the Company received gross proceeds of $703,933,
issued 1,407,867 shares of Series B Convertible Preferred Stock and 703,934
five-year warrants to purchase 703,934 shares of common stock.

         On November 14, 2005, we entered into a Securities Purchase Agreement
with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners, II, LLC for the sale of (i) $4,000,000 in secured
convertible notes and (ii) warrants to purchase 4,000,000 shares of the
Company's common stock. The proceeds of the offering will be used support the
Company's commercialization activities for its BioScanIR(R) System and for
working capital.

         We filed a definitive information statement on Schedule 14C with the
Securities and Exchange Commission on December 23, 2005 pursuant to which a
majority of our stockholders approved by written consent an amendment to our
certificate of incorporation to increase our authorized common stock from
50,000,000 shares to 200,000,000 shares. We filed an amendment for the increased
authorized common shares to the certificate of incorporation with the state of
Delaware on February 1, 2006.

         Effective December 31, 2005, several of our directors, including,
Chairman of the Board Hon. Joseph A. Lisa, George Benedict, Gordon Lenz and
Robert Loy, voluntarily resigned their positions from the Company's Board of
Directors pursuant to the our long term strategic plan to reorganize and
restructure our Board of Directors reducing its size to seven members. There was
no disagreement or dispute between Messrs. Lisa, Benedict, Lenz and Loy and the
Company which led to their resignation. Director William J. Wagner will act as
Lead Director through the upcoming 2006 Annual Meeting of Stockholders.

         Our principal executive offices are located at 125 Wilbur Place, Suite
120, Bohemia, New York 11716, and our telephone number is (631) 244-8244.

Introduction to Technology

         Our lead product, the BioScanIR(R) system, is an advanced digital
infrared imaging device which is intended for use in biomedical imaging
applications. The BioScanIR(R) system measures minute changes in
passively-emitted infrared radiation which are produced by tissue. It then
identifies abnormal blood flow associated with the presence of tumors and
vascular disease, and assists physicians and researchers in differentiating
between normal and abnormal tissues.

         The basic principle behind the unit is the precise, rapid and
repeatable measurements of naturally occurring infrared energy that is emitted
from the human body. Like all objects, a human body emits infrared radiation at
a characteristic rate and frequency. Slight changes in this emission behavior
indicate the presence of disease. Thus, precisely measuring the changing rate of
this emission allows the remote detection of disease with no physical contact,
no contrast agent and with no source of outside radiation, such as x-rays.

         The medical usefulness of this information is a function of how
accurately and quickly it can be acquired and the data processed. The
BioScanIR(R) uses an infrared sensor, called a Quantum Well Infrared
Photodetector, or QWIP. Using the QWIP sensor technology and our proprietary
methods, these measurements can then be collected up to 400 times per second and
to an accuracy of 0.006 degrees by the BioScanIR(R) system and processed to
provide precise information about subtle changes in blood perfusion that are
caused by diseases.


                                       -2-
<PAGE>


         The flow of blood throughout the body varies naturally due to normal
physiology changes. For example, when the heart pumps, blood circulates faster
and thus infrared emission increases, but just for the fraction of a second that
the contraction of a single beat lasts. When the heart is resting between
contractions, the circulation slows and the opposite occurs, again for a
fraction of a second. This differing rate of blood transport leads to small
periodic changes in emitted infrared radiation that the BioScanIR(R) can detect.
Similar periodic changes are driven by other mechanisms in the body designed to
maintain homeostasis. For example, a periodic change in blood perfusion is
driven by the autonomic nervous system intended to maintain precise core body
temperature. These types of changes are subtle and require precise
instrumentation and complex data processing. We believe the ability to measure
these changes provides the ability to detect disease.

         As determined by published peer review research from several
independent investigators and documented in our patents, a growing tumor
modifies blood flow in a way that disrupts some of these periodic blood flow
changes. Consequently, there is measurable evidence of its presence and
continued growth. The areas in the body where this disruption is occurring can
be analyzed using our proprietary software, providing visual and analytical
evidence of the tumor's presence and activity.

         In addition to its featured speed and accuracy capabilities, the
technology used in the BioScanIR(R) system also benefits from being compact and
relatively inexpensive. When combined with its ability to image without touching
the patient's body, the BioScanIR(R) system is highly functional in the
operating room environment. In surgical applications, BioScanIR(R) can measure
the effects from brain activity and blood flow as they occur, and assist
surgeons in modifying their procedures in real time.

Research and Development

         In the third quarter 2005, we entered into a research agreement with
the Research Foundation of the State University of New York, a nonprofit,
educational corporation acting on behalf of Stony Brook University and the
Center for Biotechnology, a New York State Center for Advanced Technology. The
project will investigate the use of our DIRI(R) method of Dynamic Infrared
Imaging Technology in cancer drug discovery as well as in adjunctive diagnosis
of breast cancer. Adjunctive diagnostic screening is a secondary test or
procedure used to assist in the diagnosis of disease within an asymptomatic
population of patients. To conduct this research, the University Medical Center
at Stony Brook will employ the our BioScanIR(R) System, a functional medical
imaging modality that provides a fast, non-invasive, radiation free method for
detecting diseases that affect blood perfusion. The project will potentially be
expanded into several other applications including perforator vessel
localization for reconstructive surgery, intra-operative neurosurgery, and
cancer therapy monitoring (breast cancer, melanoma, etc.). The research will be
carried out by Dr. Terry Button an Associate Professor in the Department of
Biomedical Engineering and Radiology at Stony Brook University. The agreement
can be continued for a period of up to five years.

         We also have an agreement, described below under "Licensing Agreement -
CalTech License Agreement," with NASA's Jet Propulsion Laboratory, through the
California Institute of Technology, for new technical innovations (and rights to
potential patents) in this technology.

         The sensitivity of the product's detector technology, the speed of data
collection made possible by newly advanced camera technology, patented
algorithms that analyze changes in blood flow and the development of fast and
inexpensive CPU's, have together achieved a threshold that makes the
BioScanIR(R) system's diagnostic process possible. Research and development
expenditures were $1,898,015 and $1,413,194 in the years ended December 31, 2005
and 2004, respectively.

Patents and Intellectual Property

         The BioScanIR(R) system detects changes in blood flow distribution in
tissues and organs characteristic of a cancer or vascular disease utilizing new
patented QWIP sensor technology provided under exclusive license for specific
biomedical applications to us by the California Institute of Technology. NASA's
Jet Propulsion Laboratory, which is managed by the California Institute of
Technology, developed this technology for the Ballistic Missile Defense
Organization for the Strategic Defense Initiative (commonly referred to as the
Star Wars program). The sensor is more powerful than ones used previously for
infrared breast cancer detection. The data collected by this


                                       -3-
<PAGE>


sensor technology are analyzed using proprietary and patented methods and
software, which were developed by our research and development team.

         We use both the sensor and the method patents in the infrared
biomedical imaging field either through direct ownership or exclusive, worldwide
licenses. As part of our relationship with the California Institute of
Technology, we have received subsequent rights to new patents. We have a growing
portfolio of six issued and ten pending U.S. patents, along with corresponding
foreign patents covering more than 25 other developed countries. We believe that
none of these patents are "material" patents (i.e. if any of these patents were
invalidated, we could continue to make our product without any changes). We also
hold registered trademarks on several product names and logos, including
BioScanIR(R) and DIRI(R).

Licensing Agreements

         Through our exclusive licensing agreement, we control the patents that
protect the core diagnostic software and detection technology and other
intellectual property upon which the BioScanIR(R) system is based. Our principal
agreement is summarized below.

         CalTech License Agreement. In May 1998, based on an option granted in
September 1997, we entered into an agreement with NASA's Jet Propulsion
Laboratory, which is managed by the California Institute of Technology, known as
CalTech. Pursuant to this agreement, we obtained the exclusive license to
exploit infrared radiation detection technology as embodied in certain issued
and pending patents and any related U.S. or foreign patents or patent
applications relating to QWIP technology. The CalTech technology was originally
developed for earth/space science and weapon systems applications, through the
efforts of the:

         o Jet Propulsion Laboratory;

         o Center for Space Microelectronics Technology;

         o NASA Office of Space Access and Technology; and

         o Ballistic Missile Defense Organization/Innovative Science and
           Technology Office.

         Under this agreement, we own an exclusive license for the worldwide use
of the CalTech technology for detection of passively-emitted flux or induced
fluorescence from tissue, organs or organ systems for the generation of images
of temperature, emissivity,fluorescence or the modulation of regional
temperature for commercial medical and veterinary applications, including
related commercial devices for research, clinical trials and forensic
applications Under defined circumstances, CalTech may permit other parties to
exploit the CalTech technology, for specific applications or markets, if we are
not exploiting the specific application or market, and choose not to do so after
notification by CalTech that a third party is ready to do so. We must pay
CalTech a minimum royalty of $10,000 per year as a condition of the license. As
of March 21, 2006 we are current with our royalty payments to CalTech. The
CalTech agreement also provides us with the right to enter into agreements,
including sublicenses, to exploit the CalTech technology worldwide, subject to
payment of royalties. The license from CalTech does not expire other than as a
result of a breach of the license by us, but following the expiration of the
last of the patents that are the subject of the license, the license becomes
non-exclusive and royalty-free. The patents that are the subject of the license
agreement expire in October 2018.

         Lockheed Martin License Agreement. In September 1998, we entered into a
license agreement with Lockheed Martin Corporation ("Lockheed") pursuant to
which we were initially granted an exclusive license to exploit biomedical
applications of certain enhanced infrared detector technologies known as
Enhanced Quantum Well Infrared Photodetectors, or EQWIP. The EQWIP technology is
protected by a patent owned by Lockheed. In addition, we licensed the same
rights with respect to patent filings on the EQWIP technology in a number of
foreign countries. At the time we entered into the license agreement with
Lockheed, we believed that these technologies would enhance the sensitivity of
the technology we licensed from CalTech.

         In order to maintain the exclusivity of the license, we were required
to meet certain milestones relating to royalty generation, development of
markets and territories and utilization of the EQWIP technology in certain


                                       -4-
<PAGE>


percentages of our installed base of diagnostic equipment. If the license
agreement remained exclusive and Lockheed provided a source of manufactured
EQWIP detectors, we agreed to pay Lockheed certain minimum royalties. We also
agreed to pay Lockheed royalties on revenues we derived from utilization of the
EQWIP technology. To date, no manufacturer has produced EQWIPs and we have not
utilized the EQWIP technology licensed from Lockheed and, therefore, believed
that the license was no longer exclusive and that no minimum or other royalties
were due to Lockheed. Lockheed, however, believed that royalties were due and
had demanded payment. See Item 3, "Legal Proceedings." On January 30, 2006, we
paid Lockheed $225,000 and issued 500,000 ten year warrants at an exercise price
of $0.65 as part of a settlement agreement and mutual release dated January 18,
2006, which terminates the exclusive license and definitive contract and
releases us from any and all claims, demands and obligations. We do not believe
that the termination of the license granted under this agreement with Lockheed
will have a significant impact on us.

         Anbar License Agreement. In March 1997, we entered into an option
agreement with Michael Anbar, Ph.D., Professor in the Department of Physiology
and Biophysics, School of Medicine, and Chairman of Biomedical Sciences, at the
State University of New York at Buffalo (now retired), pursuant to which we
acquired the exclusive worldwide right to commercialize the technology relating
to a patent owned by Dr. Anbar, subject to specified research funding
requirements being met. The Anbar patent is entitled "Detection of cancerous
lesions by their effect on the periodic modulation of perfusion on the
surrounding tissue." This patent describes the disease related physiological
processes, which occur in the presence of cancerous tumors, as well as the
method by which BioScanIR(R) analyzes radiation emitted by tissue surrounding
cancerous tumors. We are required to pay Dr. Anbar, who currently owns
approximately 3.5% of our outstanding shares of common stock, a royalty of $300
for each commercial BioScanIR(R) system installed at a client site. The Anbar
license does not expire other than as a result of a breach of the license by us.
The Anbar patent expires in January 2015.

         Effective February 1, 2005, we have entered into a new two year
consulting agreement with Dr. Anbar, which provides for Dr. Anbar to advise
management on the optimization of our technology. As part of this agreement, we
will acquire one patent on complimentary technology developed and held by Dr.
Anbar, who will work closely with senior management, to provide, support and
assistance in order to advance our commercialization strategy, expand our
clinical applications and enhance new product development efforts. We have
obtained from Dr. Anbar U.S. Patent 5,771,261 which comprises methods and
apparatus for assessment of the mental stress effects involving the measurement
of periodic changes in skin perfusion. Using a remotely mounted infrared camera,
dynamic area telethermometry (DAT) measures the autonomic nervous activity by
monitoring and quantitatively analyzing the modulation of cutaneous perfusion.
Our strategy initially is to utilize our patents which relate to perfusion in
medical pathology. At a later date, we might look to utilize the patent that we
obtained from Dr. Anbar, which relates to psychological evaluation through the
assessment of changes in perfusion.

         AEG Infrarot-Module GmbH. Our primary supplier for BioScanIR(R) camera
components is AEG Infrarot-Module GmbH, or AEG, a subsidiary of DaimlerChrysler
AG. We entered into a strategic contract with AEG to manufacture and market
advanced infrared disease detection systems and services to the healthcare
industry for the early detection and management of cancer and other diseases. As
part of the agreement, we have provided a non-exclusive technology license to
AEG to utilize our proprietary digital infrared QWIP technology. AEG has granted
us the exclusive right to market AEG's QWIP camera for a wide array of cancer
and vascular disease detection applications.

         We have committed to purchase infrared camera systems and components
from AEG for approximately U.S. $564,000 (478,000 euros) as of December 31,
2005. These cameras represent the most current technology and replace our order
for previous generation units. These systems and components utilize QWIP
technology, for which we are the exclusive licensee.

Potential Strategic Alliances

         As part of our marketing efforts, we intend to pursue strategic
alliances with large pharmaceutical companies, research foundations and
government agencies. We are awaiting definitive clinical trial results in our
breast cancer therapy monitoring application, before pursuing such alliances.
Since our previous disclosure concerning these trials, we have no further
progress to report.


                                       -5-
<PAGE>


Product Overview

         How the BioScanIR(R) System Works. During the BioScanIR(R) examination,
the QWIP camera is positioned in front of the area on the patient to be studied,
and records minute changes in infrared radiation that is passively emitted from
the patient's body in a 20 second scan. The BioScanIR(R) system consists of two
modules:

         o Data Acquisition - the QWIP camera and positioning system o Data
         Processing - proprietary software and hardware

         The camera is a commercially-built, modular, high precision instrument
manufactured exclusively for our applications. For more information on this
instrument, see "Manufacturing" below. The data collected by the instrument are
analyzed using our proprietary software and hardware, which process the data
according to patented diagnostic principles. The results of this analysis are
provided to the patient's doctor for interpretation.

         The BioScanIR(R) provides important medical information in a
comfortable, non-invasive, cost-effective and timely manner. Unlike existing
imaging modalities, BioScanIR(R) does not require contrast agents and does not
emit potentially damaging radiation. We believe that, in addition to its
superior detection capabilities, a strong advantage of the BioScanIR(R) system
is its lower cost as compared with competing modalities. Due to the relatively
low cost of the unit and the fast scanning time the per-use cost of the
BioScanIR(R) is estimated to be significantly less than the cost of some other
functional imaging modalities. These per-use cost estimates are based upon the
following:

--------------------------------------------------------------------------------
                  Contrast Agent           Average Exam         Average Cost
Modality             Dosage Cost                   Time            of System
--------------------------------------------------------------------------------
CT Scanner             $2 to $45 (1)   20 to 30 minutes (2)       $1,600,000 (3)

MRI Scanner                 $100 (4)         45 minutes (5)       $2,000,000 (6)

PET                         $200 (7)   30 to 60 minutes (8)       $1,800,000 (9)
--------------------------------------------------------------------------------
ABPH BioScanIR(R)                $0        5 to 15 minutes          $300,000
--------------------------------------------------------------------------------
Sources

(1)   ASGE - Technology Assessment Radiographic Contrast Media Used in ERCP
      -2004
(2)   Niagara Health Quality Coalition - CT Services report - 2004
(3)   2004 Association or Hospital Radiology Administrators on-line
(4)   Approximation based industry average prices for gadolinium MRI contrast
      agents pricing
(5)   LifeSpan.org 2006
(6)   Pennsylvania Health Care Cost Containment Council - 2005
(7)   Harvard Medical Institute report April 2005
(8)   Massgeneralimaging.com 2006
(9)   BioTech Systems Inc. Market Research 2005

         We received the Frost & Sullivan's "2005 Medical Imaging in Cancer &
Vascular Disease Diagnostics Product Leadership of the Year Award" for
developing the BioScanIR(R) System. The award not only recognizes the innovative
technology behind the product but also its strong market potential.

Commercialization Strategy

         Pilot Program. We have completed clinical studies of the BioScanIR(R)
technology in several market segments over the last several years, and we
continue non-revenue generating pilot programs at prestigious medical centers.
The BioScanIR(R) has been clinically tested at Harvard's Dana-Farber Cancer
Institute (therapeutic monitoring), the Mayo Clinic (surgical applications) and
the State University of New York at Stony Brook (breast


                                      -6-
<PAGE>


cancer detection). Our pilot program sites have included Pasadena's Huntington
Memorial Hospital (neurosurgery), the University of Geneva Switzerland
(reconstructive surgery), the University of Leipzig Germany (heart surgery), the
Heidelberg Cancer Research Center Germany (cancer therapy), the University of
Bergamo Hospital Italy (brain surgery), the Milan Tumor Institute Italy (breast
cancer detection) and the Karolinska Institute Sweden (multiple applications).

         We shipped the BioScanIR(R) to the Cleveland Clinic Ohio (breast cancer
therapy monitoring), where the breast cancer therapy monitoring trial began in
June 2005 and will continue until June 2006. The results from the first five
patients from that trial have been submitted by the doctors at Cleveland Clinic
to the American Society of Clinical Oncology ("ASCO") for a potential
presentation at the 2006 annual conference. Due to the limited sample size of
five patients, the results are promising, but not definitive. Patients continue
to be enrolled in the trial and further results will be released as the trial
continues.

         In the first quarter of 2006 we entered into a pilot site agreement
with Yale University School of Medicine's Department of Surgery ("Yale"). Yale
will begin to conduct clinical trials using the BioScanIR(R) System, together
with our proprietary DIRI(R) dynamic infrared imaging software platform in a
reconstructive surgery application. Under the clinical trial protocol, Yale will
collect and interpret data relating to locating the perforator vessels in vivo,
then monitoring the healing process of the transplanted flaps. This trial builds
upon an earlier study done at the University of Geneva in Switzerland in
reconstructive surgery.

         Our studies completed through December 2005 served to validate our
basic technology. Our pilot program has already produced what we believe to be
positive results based on feedback from physicians, technicians and patients.

         As part of our rollout strategy, we intend to establish new pilot
installations, with the goal of validating a commercially viable product in
specific application areas, further demonstrating the efficacy of the
BioScanIR(R) system and developing a future revenue stream.

         Addressable Markets and Revenue Opportunities. We continue to build a
persuasive base of successful clinical studies and published papers through the
successful conclusion of pilot studies in reconstructive surgery and cancer
therapy monitoring in order to begin the rollout of our BioScanIR(R) system.
According to Medtech Insight's December 2002 report entitled "The Worldwide
Market for Diagnostic Imaging Equipment," one-third of the world's annual
healthcare budget, or $1.17 trillion, is spent on the detection and treatment of
cancer and vascular disease. In the United States alone, according to the
report, $400 billion is spent annually on cancer and vascular disease. Medical
imaging comprises a large component of the total healthcare market, in the
United States and abroad, and globally over one billion imaging procedures were
performed in 2002. These procedures are performed using computed axial
tomography (CTs), magnetic resonance imaging (MRIs), position emission
tomography (PETs), x-ray and ultra-sound machines. CT scans use computerized
analysis of x-rays to detect tumors. MRIs use magnetic fields and
radio-frequency waves to produce three-dimensional images of normal and abnormal
tissue. PET scans use a radioactive tracer to detect increased metabolic
activity found in cancerous growths. According to Medtech Insight's report, the
estimated number of annual procedures using these machines are:


CT Scans:                      57.5 million

MRIs:                          29.5 million

PETs (nuclear medicine):       34.5 million

X-rays:                        711 million

Ultra-sounds:                  204 million

         The installed United States base of larger machines is approximately
15,000 units (8,100 CT scanners, 6,100 MRI scanners and 380 PET scanners). In
view of BioScanIR(R)'s attributes and cost advantages, large and growing global
healthcare expenditures, and the vast number of imaging procedures and
applications for which the


                                      -7-
<PAGE>


BioScanIR(R) is suited, we believe that we will attract market share. Our plan
is to initially target revenue-generating opportunities in the following two
high-value areas: therapy/drug development and surgery.

         The estimated $4 billion market for therapy/drug development includes
cancer research and development, vascular research and development, and cancer
and vascular clinical trials. According to a 2003 report by the Pharmaceutical
Research and Manufacturers Association, there are approximately 400 drugs under
development for the treatment of cancer. Of these, we estimate that 219 are
ideal candidates for development with the imaging assistance of the BioScanIR(R)
system. The drug discovery, development and approval process lasts, on average,
74 months, according to a 2003 report by The Tufts Center for the Study of Drug
Development, and the average drug costs $802 million to develop and bring to
market. Only five in 5,000 compounds that enter pre-clinical testing advance to
human clinical testing, and only one of those five is ever approved for sale. We
believe any research tool that can reduce the time and cost of drug development
is of interest to biopharmaceutical companies. The BioScanIR(R) system is
designed to monitor patients in trials, and has product features which give it
competitive advantages, particularly with respect to quick and effective
tracking of a therapeutic regimen.

         The estimated $7 billion market for surgery includes brain,
cardiovascular, vascular, and general surgery, and post-surgical monitoring. We
believe any imaging tool that helps improve surgical outcomes, reduces the risk
to patients and lowers healthcare costs, should be widely accepted by
physicians, researchers, technicians and patients alike.

         If we are successful in penetrating our initial targeted markets, we
are planning a second phase of our business strategy to address the estimated
$12 billion diagnostics/screening market, which includes breast, cervical, skin
and other cancers, as well as diabetes. The technologies available today to
screen and diagnose cancer vary greatly according to the specific form of the
disease. We believe that the BioScanIR(R) system can potentially provide an
easy-to-use, significantly lower cost, completely non-invasive, method of
detection in each of these areas.

         With an estimated market size of $12 billion, the diagnostic/screening
market represents a significant opportunity for us. We recognize that, despite
the substantial potential in this market segment, there are many clinical,
regulatory and marketing hurdles to overcome in order to establish the
BioScanIR(R) as the standard of care in this fragmented and complex market.
Consequently, we plan to partner with large research foundations, healthcare
organizations and government agencies for the funding of large clinical trials
to establish the BioScanIR(R) as the standard of care in cancer detection and
screening.

         Initial sales will be handled by a small internal sales marketing team.
We do not intend to build-out a full-scale internal sales and marketing force.
Once the product adoption begins to accelerate our strategy will be to establish
marketing partnerships with medical device and/or biotechnology companies with a
strong presence in each of the multiple segments of the market.

         Revenue Model. We believe that initial revenues will come primarily
from the sale of the BioScanIR(R) system to customers for use in surgical
applications. We believe our second target market will be cancer therapy
monitoring and/or drug discovery applications. Other customers such as imaging
research organizations may purchase BioScanIR(R) systems for use in their own
research programs. It is possible, however, that initial revenues in certain
applications, such as cancer therapy monitoring, could involve an operating
lease for the equipment or a fee per use, either as the sole revenue source, or
more likely in combination with other forms of revenue. Such other forms could
include up front licensing fees, and/or annual maintenance fees over the
estimated 4-5 year life of the BioScanIR(R) system. Even if the initial source
of revenue is the sale of the BioScanIR(R) system, it is anticipated that such
sales would also be accompanied by annual maintenance fees.

         As we expand our efforts into other applications we will evaluate our
revenue model options. For example, in the diagnostic/screening market we
believe that an operating lease for the equipment or fee per use model could be
more appropriate. In this model, revenues may be generated through a combination
of several elements including a fee per use, a one-time up-front fee for
licensing, installation and training, and annual maintenance fees. Further, we
believe that a fee per use model may be more appropriate for physician
office-based diagnostic and screening applications to minimize capital equipment
purchase barriers.

         Sales and Marketing. Given the significant overall market size - there
are thousands of prospective


                                      -8-
<PAGE>


installation sites and millions of potential screenings - we believe there will
be significant demand for our BioScanIR(R) system. According to industry data,
there are approximately 5,800 hospitals(2005 annual survey included in AHA
Hospital Statistic, 2006 Edition), 11,100 freestanding ambulatory surgical
centers and other outpatient care clinics (2002 U.S. Census, Report release
October 2004), and 16,000 skilled nursing homes(American Association of Homes
and Services for the Aging) in the United States.

         As we broaden the distribution of our systems throughout our target
applications markets, we will likely rely upon the establishment of channel
partners in certain markets. Channel partners will perform the primary sales and
marketing functions for our systems. We expect that we may have different
channel partners for different applications. Channel partners could include
distributors (on a regional, national, multinational, or even global basis),
manufacturers of medical equipment (OEM relationship), manufacturer's
representative organizations, drug companies who market our system to physicians
and hospitals as part of their drug's protocol for patient treatment, or other
interested parties that can bring a strategy channel value to our company. To
support these channel partners, we do envision adding a limited set of our own
sales and customer support resources wherever appropriate globally.

         Clinical Studies and Efficacy. The BioScanIR(R) system has been
clinically tested for a variety of applications at leading institutions. We have
conducted clinical testing of our BioScanIR(R) technology in our initial target
market segments over a seven-year period, and we have commenced a non-revenue
generating pilot program at several prestigious medical centers in the United
States and Europe for applications in surgery and therapy. Our clinical test
sites (alpha sites) included Harvard's Dana-Farber Cancer Institute (for therapy
monitoring), the Mayo Clinic (for surgical applications) and the State
University of New York at Stony Brook (for breast cancer detection). Our beta
site pilot program involves the installation of our systems for evaluation by
physicians, technicians and patients. Units have been at the Ospedali Riuniti di
Bergamo (brain surface perfusion changes related to tumor pathology),
HUG-Hopitaux Universitaires de Geneve (plastic reconstructive surgery
applications), the Karolinska Institute (skin cancer, wound healing), and The
Instituto Nazionale dei Tumori in Milan (breast cancer and cutaneous angioma
therapy monitoring). A BioScanIR(R) system is situated in the Cleveland Clinic
(neoadjuvant breast chemotherapy), where clinical trials began in the second
quarter of 2005 and are expected to continue through June 2006. The results from
the first five patients from that trial have been submitted by the doctors at
Cleveland Clinic to the American Society of Clinical Oncology ("ASCO") for a
potential presentation at the 2006 annual conference. Due to the limited sample
size of five patients, the results are promising, but not definitive. Patients
shall continue to be enrolled in the trial and further results will be released
as the trial continues. In the first quarter of 2006 we shipped the BioScanIR(R)
system to Yale University School of Medicine's Department of Surgery ("Yale").
Yale will begin to conduct clinical trials using the BioScanIR(R) System,
together with our proprietary DIRI(R) dynamic infrared imaging software platform
in a reconstructive surgery application. Under the clinical trial protocol, Yale
will collect and interpret data relating to locating the perforator vessels in
vivo, then monitoring the healing process of the transplanted flaps. This trial
builds upon an earlier study done at the University of Geneva in Switzerland in
reconstructive surgery. In the fourth quarter 2005, we shipped the BioScanIR(R)
System to the Research Foundation of the State University of New York, a
nonprofit, educational corporation acting on behalf of Stony Brook University
and the Center for Biotechnology, a New York State Center for Advanced
Technology. The project will investigate the use of our DIRI(R) method of
dynamic infrared imaging technology in cancer drug discovery as well as in
adjunctive diagnosis of breast cancer. The project will potentially be expanded
into several other applications including perforator vessel localization for
reconstructive surgery, intra-operative neurosurgery, and cancer therapy
monitoring (breast cancer, melanoma, etc.). The research can be continued for a
period of up to five years.

          Additional beta site pilot studies in the USA are planned in our
target markets. All of our published testing results were reviewed and evaluated
by medical or research experts in the specific fields of use through the peer
review process. Leading physicians have documented the clinical efficacy of the
BioScanIR(R) in key peer-reviewed publications.

         In 2005 the BioScanIR(R) system and technology was presented at several
conferences in the United States and Europe. In March 2005, we were invited to
do a poster presentation at the Biomedical Imaging research Opportunities
Workshop 3 in Bethesda, Maryland. In September 2005, in Leuven, Belgium at the
9th European Conference of Scientists and Plastic Surgeons, the doctors involved
in our pilot site study at HUG-Hopitaux Universitaires de Geneve did an oral
presentation, "Dynamic Infrared Imaging: a new tool in flap perfusion
monitoring". The same doctors presented an E poster on Dynamic Infrared Imaging
in Plastic Surgery at the


                                      -9-
<PAGE>


Annual Congress of the American Society of Plastic Surgery, in September 2005 in
Chicago, and an oral presentation Dynamic Infrared Imaging and Applications in
Plastic Surgery at the Annual Congress of the Suisse Society of Plastic Surgery,
30 September - 1 October 2005, in Bienne, Switzerland. In October 2005, we did a
poster presentation "Novel Intra-operative Non-invasive Functional Assessment
Tool" at the Congress of Neurological Surgeons 55th Annual Meeting in Boston MA.
In December 2005, a poster presentation, "Dynamic Infrared Imaging to Monitor
Response to Primary Systemic Therapy", was presented by doctors at Cleveland
Clinic at the 28th Annual San Antonio Breast Cancer Symposium (SABCS 2005), in
San Antonio, TX.

         A study completed by neurosurgeons at the Mayo Clinic and published in
the Journal of Neurosurgery described the BioScanIR(R) system as "The Vision of
the Future." In addition, at the 2001 and 2002 American Society of Clinical
Oncology conventions, we were invited to present the results of the Dana-Farber
Cancer Institute's study documenting the advantages and imaging capabilities of
the BioScanIR(R) system. In the most recent peer reviewed publication entitled
"Dynamic Infrared Image of Newly Diagnosed Malignant Lymphoma Compared with
Gallium-67 and Fluorine-18 Fluorodeoxyglucose (FDG) Positron Emission Tomography
(PET)," researchers from Harvard's Dana-Farber Cancer Institute favorably
compared the performance of the BioScanIR(R) system with that of PET imaging for
applications involving cancer treatment.

         Regulatory Affairs and Milestones. We believe that we have sufficient
regulatory clearance to execute our initial business plan in the United States
and Europe. In December 1999, we received FDA Section 510(k) market clearance
which permits marketing of the BioScanIR(R) service as an adjunctive method to
detect breast cancer and other diseases affecting the perfusion or reperfusion
of blood in tissue and organs that included the following indication for use:
"The device is for adjunctive diagnostic screening for the detection of breast
cancer and diseases affecting the blood perfusion or reperfusion of tissue of
organs." Since all living tissue perfuses, there are multiple diagnostic
screening applications where the system can be utilized under the current
clearance. In August 2003, we received "CE mark" clearance that permits us to
market our BioScanIR(R) throughout the European Union. For more information
about how governmental regulation affects our business, see "Governmental
Regulation" below.

         We intend to file a supplemental FDA Section 510(k) filing for the
validation of the BioScanIR(R) measurement capabilities for its use in
reconstructive surgery applications. We believe that this supplemental filing
will validate our clinical capabilities in this surgical application and create
a potential barrier to entry.

Competition and Industry

         Product Feature Comparisons and Competitive Advantages. Compared to
other imaging modalities such as CTs, MRIs and PETs, the BioScanIR(R) exhibits
lower up-front and maintenance costs to hospitals, clinics and other healthcare
providers and, as a result, a lower cost per procedure. The basis for our belief
that BioScanIR(R) is a lower cost per procedure when compared to other imaging
modalities such as CTs, MRIs and PETs is set forth under the heading "Product
Overview" on page 6 of this document. The BioScanIR(R) examination is
non-invasive and patient-friendly, and the machine is easy for technicians to
operate. We believe that a less expensive, functional imaging tool like the
BioScanIR(R) system will enable the use of many of the new, targeted cancer
therapies that are being produced, as they require accurate, lower cost
functional imaging techniques to ascertain early tumor response.

Governmental Regulation

         FDA Regulation. Our products and manufacturing activities are subject
to regulation by the U.S. Food and Drug Administration, or FDA, and by other
federal, state, local and foreign authorities. Pursuant to the Food, Drug, and
Cosmetic Act of 1938, commonly known as the FD&C Act, and the regulations
promulgated under it, the FDA regulates the development, clinical testing,
manufacture, packaging, labeling, storage, distribution and promotion of medical
devices. Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a Section 510(k) notification
or approval through a Premarket Approval, or PMA. Remedies available to the FDA
for violations of the laws that it enforces include, but are not limited to, (i)
sending the violating company a warning letter, (ii) conducting a compliance
audit, (iii) conducting a worldwide recall of the violating product, or (iv)
closing the violating company down. This is not intended to be an exhaustive
list, but rather a sample of some of the FDA's enforcement options.


                                      -10-
<PAGE>


         Classification of Medical Devices. In the United States, medical
devices intended for human use are classified into three categories, Class I, II
or III, on the basis of the controls deemed reasonably necessary by the FDA to
assure their safety and effectiveness with Class I requiring the fewest controls
and Class III the most. Class I, unless exempted, and Class II devices are
marketed following FDA clearance of a Section 510(k) premarket notification.
Since Class III devices (e.g., implantable devices and life sustaining devices)
tend to carry the greatest risks, the manufacturer must demonstrate that such a
device is safe and effective for its intended use by submitting a PMA
application. PMA approval by the FDA is required before a Class III device can
be lawfully marketed in the United States. Usually, the PMA process is
significantly more time consuming and costly than the 510(k) process.

         Breast cancer screening devices that use infrared detection
instrumentation, such as that used in the BioScanIR(R) system, which are
intended to be used by physicians as an adjunct (supplement) to other
established clinical detection methods for breast disease, are currently
classified as Class I devices, requiring clearances under Section 510(k) before
marketing. Such devices that are intended for stand-alone use, i.e., for use as
a sole diagnostic screening tool for detection of breast cancer, are classified
as either Class II or Class III devices, requiring PMA before marketing.

         Changes in Approved Devices. The FD&C Act requires device manufacturers
to obtain a new FDA 510(k) clearance when there is a substantial change or
modification in the intended use of a legally marketed device or a change or
modification, including product enhancements and, in some cases, manufacturing
changes, to a legally marketed device that could significantly affect its safety
or effectiveness. Supplements for approved PMA devices are required for device
changes, including some manufacturing changes, that affect safety or
effectiveness. For devices marketed pursuant to 510(k) determinations of
substantial equivalence, the manufacturer must obtain FDA clearance of a new
510(k) notification prior to marketing the modified device. For devices marketed
with PMA, the manufacturer must obtain FDA approval of a supplement to the PMA
prior to marketing the modified device.

         Good Manufacturing Practices and Reporting. The FD&C Act requires
device manufacturers to comply with Good Manufacturing Practices regulations.
The regulations require that medical device manufacturers comply with various
quality control requirements pertaining to design controls, purchasing
contracts, organization and personnel, including device and manufacturing
process design, buildings, environmental control, cleaning and sanitation;
equipment and calibration of equipment; medical device components; manufacturing
specifications and processes; reprocessing of devices; labeling and packaging;
in-process and finished device inspection and acceptance; device failure
investigations; and record keeping requirements including complaint files and
device tracking. We are in compliance with the above requirements.

         Current Regulatory Status. The FDA found that the BioScanIR(R) system
was substantially equivalent to an existing legally marketed device, thus
permitting it to be marketed as an adjunct (supplemental) screening/diagnostic
device. We received 510(k) clearance in December 1999 and, together with our
field test data, are marketing the BioScanIR(R) System as an adjunct
(supplemental) method for the diagnosis of other diseases affecting the
perfusion or reperfusion of blood in tissue or organs.

         Reimbursement by Third-Party Payors. Most purchasers of medical devices
such as physicians, hospitals and imaging centers rely on reimbursements from
third-party payors including, by way of example, private indemnity health
insurers, managed care health insurers, federal health insurance programs (e.g.,
Medicare), and state administered programs (e.g., Medicaid). Therefore,
decisions by third-party payers concerning reimbursement for use of the
BioScanIR(R) system are likely to affect the use of this device. Use of the
BioScanIR(R) System for its current FDA cleared uses is not covered by any
third-party insurer. Failure to secure third-party coverage, or failure to
maintain coverage after it is received, could have a material adverse impact on
our operations.

         Favorable coverage determinations for a medical device do not
automatically follow FDA approval or clearance of the medical device. Rather,
manufacturers of medical devices must affirmatively seek favorable coverage
determinations from private and public insurers. A coverage determination
usually involves two fundamental decisions. First, the insurer decides whether
there are circumstances under which it will pay for a procedure involving the
device or will pay an additional amount for use of the device, where the device
is an adjunct to an already covered procedure. Second, if there are
circumstances where coverage would be appropriate, the


                                      -11-
<PAGE>


insurer sets out the conditions necessary to support coverage (e.g., medical
history). The coverage conditions can be broad allowing many patients to qualify
for coverage or so narrow, that few patients qualify for coverage. Following a
favorable coverage determination, the insurer sets a level of reimbursement or a
formula for determining that level.

         Coverage determinations by private and public insurers can proceed
slowly, their outcomes are uncertain and can vary even within a single program
owing in part to the fact that many determinations are made regionally, locally
or on a case-by-case basis, rather than nationally. This is even so for
Medicare, the federal health insurance program for the aged and disabled and
single largest third-party payor.

         New technologies can receive a special temporary reimbursement code (a
New Technology Ambulatory Procedure Code, or APC) provided by Medicare that
allows users of the new technology to submit claims for reimbursement for their
use of the new technology in an outpatient setting for Medicare patients. This
type of code is used to collect actual clinical history on the costs of using
the new technology as a precursor to the assignment of a permanent Current
Procedural Terminology, or CPT code. We received notice that we have been
awarded an APC code effective April 1, 2005 for usage of our system in providing
the service, "dynamic infrared blood perfusion imaging." Our BioScanIR(R) test,
like many new medical technologies, does not have sufficient data to determine
exactly what APC is appropriate for this service. For this reason, the Center
for Medicare and Medicaid Services (CMS) established "New Technology APCs" in
2002. Assignment to a New Technology APC is temporary and last only until enough
data is collected to move the service to an established APC. Although there is
not preordained period of time, typically this occurs within 36 months of the
original assignment. A critical element of our efforts over the next two years
must be to build a history of claims submissions using the APC for the use of
our system in order to demonstrate the viability of the technology and pave the
way for securing a CPT code which is issued by the American Medical Association.
The service associated with the use of the BioScanIR(R) system has been assigned
APC Code 1502 and HCPCS Code C9723. The service will be reimbursed at $75.00 per
scan plus a $15.00 co-pay effective April 1, 2005.

Manufacturing

         We subcontract the manufacturing of components for our BioScanIR(R)
system to several third parties. We provide the manufacturing specifications for
all of these components. Incoming components are tested and assembled, and the
final units are retested, before being shipped to customers. We believe that our
manufacturing environment is compliant with FDA GMP and ISO 9001. The
BioScanIR(R) is UL-certified.

Employees

         As of March 21, 2006, we had a total of 9 full-time employees, 5
part-time employees and 5 additional outside consultants (part-time). Together,
approximately 12 of these individuals are engaged in technology, research and
product development, and 7 in management and finance. We have never experienced
a work stoppage and believe our employee relations are very good.


                                      -12-
<PAGE>


Item 2. Description of Property

         Our corporate headquarters are located at 125 Wilbur Place, Suite 120,
Bohemia, New York, in approximately 6,550 square feet of space occupied under a
lease with a monthly rental rate of approximately $5,000 that expires in
November 2009.

Item 3. Legal Proceedings

         In September 1998, we entered into a license agreement with Lockheed
Martin Corporation, pursuant to which we were initially granted an exclusive
license to exploit biomedical applications of certain enhanced infrared detector
technologies known as Enhanced Quantum Well Infrared Photodetectors, or EQWIP.
We believed that these technologies would enhance the sensitivity of the
technology we licensed from CalTech. We have not utilized the EQWIP technology
licensed from Lockheed.

         In a letter dated October 12, 2004 and in subsequent correspondence,
Lockheed advised us that it believes that minimum royalties and other amounts
aggregating approximately $2,500,000 were owed to Lockheed by us pursuant to the
license agreement and demanded payment of such sum. In a letter dated November
1, 2004, Lockheed notified us that, in its view, we were in default under
certain of the provisions of the license agreement and, unless such conditions
were remedied within 60 days thereafter, Lockheed would regard the license
agreement as cancelled and terminated. We have responded to Lockheed that, among
other reasons, no sums are due to Lockheed by us, the license agreement by its
terms has become a non-exclusive license requiring no minimum or other royalties
be paid and that Lockheed failed to perform certain of its obligations provided
by the license agreement. Although we believed that we have no current monetary
obligations to Lockheed pursuant to the license agreement or otherwise, Lockheed
could have determined to pursue its claims through litigation, creating the
possibility that we could have incurred substantial costs and expenses,
including legal and other professional fees, in connection with such litigation.
On January 30, 2006, we entered into a settlement agreement and mutual release
("Settlement Agreement") with Lockheed. The Settlement Agreement terminates the
Exclusive License Agreement concerning Enhanced Quantum Well Infrared
Photodetector technology that we entered into with Lockheed on September 29,
1998 ("License Agreement") and Definitive Contract No. 6249801 concerning the
fabrication of Focal Plan Arrays that we entered into with Lockheed on June 24,
1998 (the "Definitive Contract"). Under the terms of the Settlement Agreement we
agreed to pay a one-time, fully paid up license fee of $225,000 to Lockheed and
we also agreed to issue 500,000 warrants to Lockheed, with each such warrant
entitling Lockheed to purchase from us, at any time prior to the expiration date
(as defined below), one share of our common stock for $0.65 per share; such
warrants shall expire on December 28, 2015 ("Expiration Date"). In consideration
for this settlement payment, Lockheed has agreed to release us and terminate all
prior agreements and understandings between us and Lockheed, including but not
limited to any and all claims which relate to, arise from, or are in any manner
connected to: (i) the License Agreement; (ii) the Definitive Contract; or (iii)
any claimed license fees or other monetary consideration, whether accrued or
not. In addition, we agreed to cease using any of the EQWIP technology that was
the subject of the patents referenced in the License Agreement. We do not
believe that the agreement to not use EQWIP technology will have a significant
impact our business. We have accrued the payment for the settlement and the fair
value of the warrants in our December 31, 2005 financial statements.

         On March 8, 2003, our former Chief Financial Officer filed a
declaratory judgment action against us in the U.S. District Court for the
District of New Jersey. The complaint alleges that while serving as both a
director and Chief Financial Officer, he was awarded stock options to purchase
2,538,324 shares of common stock. He is seeking specific determination that he
is entitled to these options, as well as approximately $462,000 in deferred
salary.

         On July 23, 2004, the Court granted, in part, our motion to dismiss.
The Court dismissed claims relating to 2,501,328 stock options, which were to
expire in April 2005, as unripe for adjudication. The Court found that a
justifiable dispute existed with respect to 36,966 options which expired on
April 1, 2004. We moved to dismiss the deferred salary claim based on an
arbitration provision in the plaintiff's employment agreement. The Court
declined to dismiss the deferred salary claim, but ordered the parties to
conduct limited discovery on the validity of the employment agreement and
revisit the issue on summary judgment.

         On February 15, 2005, we moved for partial summary judgment on
Plaintiff's deferred salary claim. By Order dated March 23, 2005, the court
denied our motion, but allowed us to renew our motion at the close of


                                      -13-
<PAGE>


discovery. The Court did find that it is unlikely that Plaintiff could recover
any deferred compensation prior to April 1, 1999. The parties have completed
discovery and a final pretrial conference was held on August 17, 2005. The
Company is currently negotiating a settlement agreement with its former Chief
Financial Officer.

         On December 22, 2004, our former President and Chief Executive Officer
Mark A. Fauci, who was terminated from employment on December 13, 2004, filed
for arbitration under his employment agreement with the American Arbitration
Association alleging that his termination was without cause as defined in the
agreement, and demanding monies allegedly due and owing under the agreement,
claimed to be in excess of $1.0 million but not exceeding $5.0 million. Mr.
Fauci is a director and significant stockholder of our company.

         On March 9, 2005, in settlement of an arbitration proceeding arising
from the December 13, 2004 termination of his employment agreement as President
and Chief Executive Officer, we announced that we entered into a consulting
agreement with Mr. Fauci. Mr. Fauci remains a member of our board of directors.
The agreement, which terminates Mr. Fauci's previous employment agreement with
us, provides that Mr. Fauci will perform consulting services for us for a
retroactive two-year period in exchange for consulting fees of $200,000 per year
during the term of the agreement which expires December 2006. Mr. Fauci will be
nominated at the next two annual meetings of stockholders to continue as a board
member. The agreement also provides for a three-year payout schedule of our
obligation to pay Mr. Fauci's deferred accrued salary under his previous
employment agreement, in the amount of $625,000. Those payments will commenced
on October 1, 2005. This amount is payable at the rate of $10,000 per month for
the initial 12 months and $20,000 per month thereafter. In 2005, we paid
$240,000 to Mr. Fauci of which $200,000 was for one year consulting as per
agreement and $40,000 for the deferred accrued salary. As of March 21, 2006 we
paid Mr. Fauci in aggregate $233,332 as part of his consulting agreement. We owe
Mr. Fauci $166,668 for the second year of this agreement. As of March 21, 2006,
we have paid Mr. Fauci in aggregate $60,000 as part of the payout schedule for
his deferred officer's salary and currently owe him $575,000. We are current on
both these obligations.

         Except as set forth above we are not a party to any other pending or
threatened legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders.

         On February 1, 2006, we amended our Certificate of Incorporation, to
increase the number of authorized shares of common stock, par value $.001 per
share of the Company from 50,000,000 shares to 200,000,000 shares pursuant to a
written consent of a majority of stockholders dated December 5, 2005, in lieu of
a special meeting of the stockholders. Out of a total of 37,465,974 possible
votes on the matter of increasing the authorized shares submitted to the
stockholders, the majority of stockholders voting in favor of the amendment held
in aggregate 19,234,645 votes.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

         In September 2000, our common stock became eligible for quotation on
the NASD's OTC Bulletin Board under the symbol "PMOS." We changed our corporate
name to OmniCorder Technologies, Inc. on February 26, 2004, and our trading
symbol became "OMCT." We changed our corporate name to Advanced BioPhotonics
Inc. on June 7, 2005, and on June 8, 2005, our trading symbol was changed to
"ABPH."

         For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These high and low bid prices
represent prices quoted by broker-dealers on the OTC Bulletin Board. These
prices represent inter-dealer quotations without retail markup, markdown, or
commission and may not necessarily represent actual transactions.

Year Ended December 31, 2003:                                   High      Low
-----------------------------                                  ------   ------
First Quarter                                                  $  .15   $  .03
Second Quarter                                                 $  .10   $  .10
Third Quarter                                                  $  .10   $  .04


                                      -14-
<PAGE>


Fourth Quarter (October 1 to December 18)                      $  .10   $  .04
Fourth Quarter (December 19, closing date of recapitalization) $ 1.20   $  .45
Fourth Quarter (December 22 to December 31)                    $ 8.00   $ 1.50

Year Ended December 31, 2004:
-----------------------------
First Quarter                                                  $ 8.50   $ 2.80
Second Quarter                                                 $ 4.90   $ 3.25
Third Quarter                                                  $ 4.05   $  .75
Fourth Quarter                                                 $ 1.60   $  .58


Year Ended December 31, 2005:
-----------------------------
First Quarter                                                  $ 1.10   $  .81
Second Quarter                                                 $ 1.00   $  .54
Third Quarter                                                  $ 1.04   $  .30
Fourth Quarter                                                 $  .40   $  .16

Year Ending December 31,2006:
-----------------------------
First Quarter (Through March 21, 2006)                         $ 0.29   $ .171

         Prior to the completion of the recapitalization transaction on December
19, 2003, privately-held OmniCorder's stock was not traded on a public trading
market and it had no registered securities outstanding.

         As of March 21, 2006, there were 30,732,772 shares of Advanced
BioPhotonic's common stock outstanding with approximately 193 stockholders of
record.

         Our authorized capital stock consists of 210,000,000 shares of stock,
of which 200,000,000 shares are designated common stock, par value $.001 per
share, and 10,000,000 shares are designated preferred stock, par value $.01 per
share. Of the preferred stock, 3,000,000 shares have been designated as series A
preferred stock and 7,000,0000 shares have been designated as series B preferred
stock. As of March 21, 2006, there were 33,409,772 shares of common stock issued
and 30,732,772 outstanding, 1,851,423 shares of series A preferred stock and
1,369,669 shares of series B preferred stock issued and outstanding. Further, as
of March 21, 2006, we have the following shares of our common stock underlying
outstanding securities: (i) 8,501,493 shares underlying options issued pursuant
to our 1998 and 2005 stock option plans, (ii) 7,443,086 shares underlying stock
purchase warrants, and we filed a definitive information statement on Schedule
14C with the Securities and Exchange Commission on December 23, 2005 pursuant to
which a majority of our stockholders have approved by written consent an
amendment to our certificate of incorporation to increase our authorized common
stock from 50,000,000 shares to 200,000,000 shares. We filed an amendment to our
certificate of incorporation to increase our authorized common shares with the
State of Delaware on February 1, 2006, after 20 days of mailing the information
statement to our shareholders.

         As of March 21, 2006, we inadvertently issued an additional 183,628
series A preferred dividend shares in lieu of cash dividends than the holders
were entitled to receive. We intend to send a notice letter to the holders
requesting the shareholders return the certificates for cancellation and
thereafter we will issue an aggregate of 117,795 series A preferred dividend
shares. In addition, we inadvertently issued an additional 16,701 series B
preferred dividend shares in lieu of cash dividends than the holders were
entitled to receive. We intend to send a notice letter to the holders requesting
the shareholders return the certificates for cancellation and thereafter we will
issue an aggregate of 59,766 series B preferred dividend shares.

         The following summary of the material provisions of our common stock,
series A preferred stock and series B preferred stock.

Common Stock


                                      -15-
<PAGE>


         The holders of common stock do not have cumulative voting rights and
are entitled to one vote per share on all matters to be voted upon by the
stockholders. Our common stock is not entitled to preemptive rights and is not
subject to redemption (including sinking fund provisions) or conversion. Upon
our liquidation, dissolution or winding-up, the assets (if any) legally
available for distribution to stockholders are distributable ratably among the
holders of our common stock after payment of all classes or series of our
preferred stock. All outstanding shares of our common stock are validly issued,
fully-paid and nonassessable. The rights, preferences and privileges of holders
of our common stock are subject to the preferential rights of all classes or
series of preferred stock that we may issue in the future.

Preferred Stock

         Our board of directors has the authority to issue 10,000,000 shares of
preferred stock in one or more series and to determine all of the rights,
preferences, privileges and restrictions of the preferred stock. In December
2004, our Board of Directors designated 6,000,000 preferred shares as series A
preferred stock. We did not issue all of the shares of series A preferred stock,
and in June 2005, our board of directors reduced the number of shares of series
A preferred stock subject to such designation to 3,000,000 shares and in June
2005, our board of directors designated 7,000,000 preferred shares as series B
preferred stock. If we issue any preferred stock, it may have the effect of
delaying or preventing a change in control without further action by our
stockholders and may adversely affect the voting, dividend and other rights of
the holders of our common stock. In addition, as discussed below, the issuance
of preferred stock with voting and/or conversion rights may adversely affect the
voting power of the holders of our common stock, including the loss of voting
control to others.

Series A Preferred Stock

         Conversion. Holders of series A preferred stock will be entitled at any
time to convert their shares of series A preferred stock into common stock
without any further payment therefor. The series A preferred stock will
automatically convert into common stock as of the close of business on the 20th
consecutive trading day on which the closing bid price for our common stock on
the principal stock exchange or market on which it is listed, including the
American Stock Exchange or Nasdaq SmallCap Market, or if not traded on such
exchange or market, on the OTC Bulletin Board, is at least $2.20, or 240% of the
conversion price of the series A preferred stock. Each share of series A
preferred stock is convertible into common stock, determined at a conversion
price of $0.39 per share as of January 3, 2006. A "trading day" shall be any day
on which the principal market for our common stock is open for trading,
notwithstanding the volume of trading.

         Anti-dilution Provisions. In the event of any issuances of shares of
common stock or stock options, warrants or securities convertible or exercisable
into common stock within two years after the final closing of our December 2004
private placement of series A preferred stock at a price per share of common
stock less than the 10-day volume-weighted average price of our common stock on
the American Stock Exchange, Nasdaq SmallCap Market or OTC Bulletin Board, the
conversion price of the series A preferred stock will be adjusted to a lower
price per share computed on the basis of a "weighted average formula." For
purposes of calculating the "weighted average formula," trading days in which
there are no trades still count as trading days in the calculation period, with
the price on such day being the previous trading day's closing price. The
conversion price of all the shares of series A preferred stock issued will also
be subject to adjustment in connection with any subdivision, stock split,
combination of shares, recapitalization or the issuance of common stock or
securities convertible or exercisable into common stock as a dividend in-kind
(other than as a dividend on the series A preferred stock). Employee stock
options, warrants for commercial banks and equipment lessors, strategic
alliances and acquisitions approved by our board of directors are excluded from
this provision. After we completed the subscription rights offering in August
2005 the price at which the series A preferred stock was converted into common
stock was reduced to $.50 per share from $1.10 per share, which was the price at
which the series B preferred stock was purchased in the rights offering. In
November 14, 2005, we entered a Securities Purchase Agreement. At December 31,
2005, the issuance of the note in the Securities Purchase Agreement triggered
another reduction in the conversion price of the series A preferred stock to
$0.44 per share. On January 3, 2006, upon the closing of the 2nd tranche of the
Securities Purchase Agreement, the conversion price of the series A preferred
stock was reduced to $0.39 per share. The conversion price was adjusted based on
a calculation set forth in the anti-dilution clause in the certificate of
designation of the series A preferred stock.


                                      -16-
<PAGE>


         Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of our company, holders of series A
preferred stock will be entitled to receive out of our assets available for
distribution to stockholders, before any distribution is made to holders of our
common stock, liquidating distributions in an amount per share equal to the
conversion price of the series A preferred stock, plus any accrued but unpaid
dividends.

         Dividends. Holders of series A preferred stock will be entitled to
receive an annual cumulative dividend at the end of each calendar year
calculated at a rate of 4% per year of the issue price of any outstanding share
of series A preferred stock. At our option, this dividend may be paid in either
cash or in additional shares of series A preferred stock. The first dividend was
paid on January 3, 2006 in additional shares of series A preferred stock. The
aggregate number of shares issued as dividends was 301,423. The Company
inadvertently issued an additional 183,628 series A preferred dividend shares in
lieu of cash dividends than the holders were entitled to receive. The Company
intends to send a notice letter to the holders requesting the shareholders
return the certificates for cancellation and thereafter the Company will issue
an aggregate of 117,795 series A preferred dividend shares. The amount of the
initial dividend, and any other dividend payable on the series A preferred stock
for any partial dividend period, will be computed on the basis of a 360-day year
consisting of twelve 30-day months. With respect to any given year, no dividends
(other than a dividend payable solely in our common stock), shall be paid upon,
or declared and set apart for, any junior securities if our board of directors
has failed to declare and pay in full a cash dividend to the holders of our
series A preferred stock with respect to such year in the amount described
above. If dividends on the series A preferred stock have not been paid or set
apart in full, the aggregate deficiency shall be cumulative and shall be fully
paid or set apart for payment prior to the payment of any dividend by our
company (other than a dividend payable solely in common stock) with respect to
any junior securities. Accumulations of dividends on our series A preferred
stock will not bear interest.

         Shares of series A preferred stock issued as dividends will be valued
at the product of: (i) the 10-day volume-weighted average price of our common
stock on the principal stock exchange on which it is traded, including the
American Stock Exchange or NASDAQ SmallCap Market, or if not traded on such
exchange, on the OTC Bulletin Board or, if, in the reasonable judgment of our
board of directors, there exists no exchange or other market on which the common
stock is traded, then as reasonably determined by the board; and (ii) the
aggregate number of shares of common stock into which the aggregate number of
series A preferred stock issued as dividends is then convertible. The dividends
issued on January 3, 2006 had the 10-day volume-weighted average price of our
common stock of $0.206.

         Voting Rights. Holders of series A preferred stock will have the right
to one vote for each share of common stock into which the series A preferred
stock then held by such holders may be converted, and will vote together with
the holders of common stock as a single class, except where otherwise required
by law.

         Redemption. The series A preferred stock may not be redeemed by us at
any time.

         Restrictions on Transfer. The offer and sale of the shares of series A
preferred stock issued in our December 2004 private placement was not registered
under either federal or state securities laws or the laws of any other country
and was made pursuant to claims of exemption there from. Consequently, neither
the shares of series A preferred stock nor the shares of common stock underlying
the series A preferred stock may be sold or otherwise transferred absent
compliance with the registration or qualification requirements of applicable
securities laws or the exemptive provisions of such laws.

Series B Preferred Stock

         Ranking. The series B preferred stock will rank senior to our shares of
common stock in right of payment of dividends and upon liquidation. The series B
preferred stock will rank pari passu in right of payment of dividends and upon
liquidation to our series A preferred stock and any other series or class of
preferred stock hereafter issued by our company, except and to the extent such
series or class of preferred stock are designated in our certificate of
incorporation as ranking senior or junior to the series B preferred stock.

         Conversion. Holders of series B preferred stock will be entitled at any
time to convert their shares of series


                                      -17-
<PAGE>


B preferred stock into common stock without any further payment therefor. The
series B preferred stock will automatically convert into common stock as of the
close of business on the 20th consecutive trading day on which the closing bid
price for our common stock on the principal stock exchange or market on which it
is listed, including the American Stock Exchange or Nasdaq SmallCap Market, or
if not traded on such exchange or market, on the OTC Bulletin Board, is at least
$2.20. Each share of series B preferred stock is convertible into one share of
common stock. A "trading day" shall be any day on which the principal market for
our common stock is open for trading, notwithstanding the volume of trading.

         Anti-dilution Provisions. The conversion price of all the shares of
series B preferred stock issued will be subject to adjustment in connection with
any subdivision, stock split, combination of shares, recapitalization or the
issuance of common stock or securities convertible or exercisable into common
stock as a dividend in-kind (other than as a dividend on the series B preferred
stock). Employee stock options, warrants for commercial banks and equipment
lessors, strategic alliances and acquisitions approved by our board of directors
are excluded from this provision.

         On November 14, 2005, we entered a Securities Purchase Agreement. The
issuance of the notes pursuant to the Securities Purchase Agreement triggered a
reduction in the conversion price of the series B preferred stock to $0.44 per
share from $0.50 per share. On January 3, 2006, upon the closing of the 2nd
tranche of the Securities Purchase Agreement, the conversion price of the series
B preferred stock was reduced to $0.39 per share. The conversion price was
adjusted based on a calculation set forth in the anti-dilution clause in the
certificate of designation of the series B preferred stock.

         Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of our company, holders of series B
preferred stock will be entitled to receive out of our assets available for
distribution to stockholders, before any distribution is made to holders of our
common stock, liquidating distributions in an amount per share equal to the
conversion price of the series B preferred stock, plus any accrued but unpaid
dividends.

         Dividends. Holders of series B preferred stock will be entitled to
receive an annual cumulative dividend at the end of each calendar year
calculated at a rate of 7% per year of the issue price of any outstanding share
of series B preferred stock. At our option, this dividend may be paid in either
cash or in additional shares of series B preferred stock. The first dividend was
paid on January 3, 2006 in additional shares of series B preferred stock. The
aggregate number of shares issued as dividends was 76,467. The Company
inadvertently issued an additional 16,701 series B preferred dividend shares in
lieu of cash dividends than the holders were entitled to receive. The Company
intends to send a notice letter to the holders requesting the shareholders
return the certificates for cancellation and thereafter the Company will issue
an aggregate of 59,766 series B preferred dividend shares. The amount of the
initial dividend, and any other dividend payable on the series B preferred stock
for any partial dividend period, will be computed on the basis of a 360-day year
consisting of twelve 30-day months. With respect to any given year, no dividends
(other than a dividend payable solely in our common stock), shall be paid upon,
or declared and set apart for, any junior securities if our board of directors
has failed to declare and pay in full a cash dividend to the holders of our
series B preferred stock with respect to such year in the amount described
above. If dividends on the series B preferred stock have not been paid or set
apart in full, the aggregate deficiency shall be cumulative and shall be fully
paid or set apart for payment prior to the payment of any dividend by our
company (other than a dividend payable solely in common stock) with respect to
any junior securities. Accumulations of dividends on our series B preferred
stock will not bear interest.

         Shares of series B preferred stock issued as dividends will be valued
at the product of: (i) the 10-day volume-weighted average price of our common
stock on the principal stock exchange on which it is traded, including the
American Stock Exchange or NASDAQ SmallCap Market, or if not traded on such
exchange, on the OTC Bulletin Board or, if, in the reasonable judgment of our
board of directors, there exists no exchange or other market on which the common
stock is traded, then as reasonably determined by the board; and (ii) the
aggregate number of shares of common stock into which the aggregate number of
series B preferred stock issued as dividends is then convertible. The dividends
issued on January 3, 2006 had the 10-day volume-weighted average price of our
common stock of $0.206.

         Voting Rights. Holders of series B preferred stock will have the right
to one vote for each share of


                                      -18-
<PAGE>


common stock into which the series B preferred stock then held by such holders
may be converted, and will vote together with the holders of common stock as a
single class, except where otherwise required by law.

         Redemption. The series B preferred stock may not be redeemed by us at
any time.

Dividend Policy

         We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends to stockholders in the
foreseeable future. In addition, any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements, and such
other factors as the Board of Directors deem relevant.

         Holders of our series A preferred stock are entitled to receive a
cumulative dividend of 4% per year, payable annually in cash or, at our option,
in additional shares of series A preferred stock (computed on the basis of the
10-day volume-weighted average price of our common stock on the American Stock
Exchange or Nasdaq SmallCap Market or, if not traded on such exchange or market,
on the OTC Bulletin Board). On January 3, 2006 holders of series A preferred
stock were issued dividends in aggregate of 301,423 shares of series A preferred
stock. The 10-day volume-weighted average price of our common stock was $0.206.
The Company inadvertently issued an additional 183,628 series A preferred
dividend shares in lieu of cash dividends than the holders were entitled to
receive. The Company intends to send a notice letter to the holders requesting
the shareholders return the certificates for cancellation and thereafter the
Company will issue an aggregate of 117,795 series A preferred dividend shares.

         Holders of our series B preferred stock will be entitled to receive a
cumulative dividend of 7% per year, payable annually in cash or, at our option,
in additional shares of series B preferred stock (computed on the basis of the
10-day volume-weighted average price of our common stock on the American Stock
Exchange or Nasdaq SmallCap Market or, if not traded on such exchange or market,
on the OTC Bulletin Board). On January 3, 2006 holders of series B preferred
stock were issued dividends in aggregate of 76,467 shares of series B preferred
stock. The 10-day volume-weighted average price of our common stock was $0.206.
The Company inadvertently issued an additional 16,701 series B preferred
dividend shares in lieu of cash dividends than the holders were entitled to
receive. The Company intends to send a notice letter to the holders requesting
the shareholders return the certificates for cancellation and thereafter the
Company will issue an aggregate of 59,766 series B preferred dividend shares.

Equity Compensation Plan Information

         The following table provides information regarding the status of our
existing equity compensation plans at March 21, 2006. It reflects the amendment
to the Company's 1998 Stock Option Plan, which was approved by our stockholders
at a special meeting of stockholders held on February 26, 2004 and the 2005
Incentive Compensation Plan approved by our stockholders at our annual meeting
on June 7, 2005.

<TABLE>
<CAPTION>
                                                                                          Number of securities
                                                                                          remaining available for
                                                                                          future issuance under
                                     Number of securities to    Weighted-average          equity compensation plans
                                     be issued upon exercise    exercise price of         (excluding securities
                                     of outstanding options,    outstanding options,      reflected in the second
Plan Category                        warrants and rights        warrants and rights       column)
-------------                        -----------------------    -------------------       -------------------------
<S>                                           <C>                        <C>                        <C>
Equity Compensation plans approved
by security holders                           8,501,493                  $0.80                      10,000
Equity Compensation plans not
approved by security holders                         --                  --                           --
Total                                         8,501,493                  $0.80                      10,000
</TABLE>


                                      -19-
<PAGE>


The new 2005 Incentive Compensation Plan that reserves 5,000,000 shares of
common stock for issuance upon the granting of awards under the 2005 Plan. Award
grants under the 2005 Plan may be either stock options, stock appreciation
rights, restricted shares of stock, deferred shares of stock, shares granted as
a bonus or in lieu of another award, dividend equivalent, and other stock based
award or performance award. On October 28, 2005, the board of directors approved
a proposed resolution to amend the 2005 Plan and increase the number of shares
from 5,000,000 to 10,000,000. The proposed amendment to the 2005 Incentive Plan
will be presented to the next meeting of stockholders in June 2006 for approval.
As of December 31, 2005, options to purchase 2,883,000 shares of common stock
were outstanding under the 2005 Plan, at a weighted-average exercise price of
$0.74 per share and options to purchase 3,841,490 shares of common stock were
outstanding under the 1998 Plan, at a weighted-average exercise price of $1.10
per share.

Unregistered Sales of Equity Securities

         To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on November 14,
2005 for the sale of (i) $4,000,000 in secured convertible notes and (ii)
warrants to buy 4,000,000 shares of our common stock. The secured convertible
notes bear interest at 8%, unless our common stock is greater than $0.2875 per
share for each trading day of a month, in which event no interest is payable
during such month. The secured convertible notes mature three years from the
date of issuance, and are convertible into our common stock, at the Purchasers'
option, at a 40% discount to the average of the three lowest trading prices of
the common stock during the 20 trading day period prior to conversion. At our
option, in any month where the current stock price is below the initial market
price (100% of the volume weighted average price of our common stock for the
five days prior to closing), we can pay the outstanding principal and interest
due for that month and this will stay any conversions for that month.

         The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.65 per share. The Purchasers may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In the
event the Purchasers exercise the warrants on a cashless basis, then we will not
receive any proceeds. In addition, the exercise price of the warrants will be
adjusted in the event we issue common stock at a price below market, with the
exception of any securities issued as of the date of the warrants or issued in
connection with the secured convertible notes issued pursuant to the Securities
Purchase Agreement.

         Pursuant to an amended Finder's Fee Agreement, between Axiom Capital
Management, Inc. ("Axiom") and us, Axiom will earn a finders fee on the November
14, 2005 Securities Purchase Agreement of $260,000 in cash of which $65,000 was
paid on November 16, 2005 and $65,000 was paid on January 6, 2006, and $130,000
will be paid when the registration statement is declared effective. In addition,
Axiom will receive five year warrants to purchase shares of our common stock at
an exercise price of $0.65 per share, 378,445 of which were granted on November
14, 2005 and 395,310 of which were granted on January 6, 2006. The warrants are
exercisable for a period of five years from date of issuance. The number of
warrants to be issued is computed by dividing the total dollar investment by the
initial market price (100% of the volume weighted average price of our common
stock for the five days prior to closing) multiplied by the 8% warrant coverage
as agreed. Warrants will be issued pro rata upon each investment tranche. The
initial market price was $0.211 and $0.202 for the 1st tranche and 2nd tranche,
respectively.

         The Securities Purchase Agreement as described above, triggered the
anti-dilution provisions in our Series A convertible preferred stock and Series
B convertible preferred stock if the conversion price, 40% discount to the
average of the three lowest trading prices of the common stock during the 20
trading day period prior to conversion, is less than the 30 day volume-weighted
average price of the common stock (the "Reference Price"). Both the Series A and
Series B preferred stock will be convertible into additional shares of common
stock. The conversion price of the Series A and Series B preferred stock shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying: (i) the conversion price in effect immediately prior thereto; by
(ii) a fraction, (A) the numerator of which shall be the sum of the number of
shares of common stock outstanding immediately prior to the issuance of such
dilutive securities and the number of shares of common stock which the aggregate
consideration received for the issuance of such dilutive securities would
purchase at the Reference Price and (B) the denominator of which shall be the
number of shares of common stock outstanding immediately after the issuance of
such dilutive securities (assuming the conversion to common stock of all such
dilutive securities that are derivative securities). As of March 21, 2006, the
triggering of the aforementioned anti dilution provisions of our series A and
series B preferred stock will result in issuing an aggregate of 4,739,643 and
1,753,176 shares of common stock upon conversion, respectively.



                                      -20-
<PAGE>

         On October 28, 2005, as anti-dilution protection to each investor in
the December 2004 Private Placement, we issued additional five year warrants to
purchase 1,550,000 shares of its common stock with an exercise price of $0.75
per share which will expire on August 9, 2010. We recorded a charge in the form
of a deemed dividend of approximately $449,500 for the fair value of those
warrants during the fourth quarter of 2005.

         On August 10, 2005, the Company consummated a subscription rights
offering to existing stockholders of the Company. The Company distributed to
holders of its common stock transferable subscription rights to purchase shares
of its newly-created series B convertible preferred stock. The Company issued
the subscription rights at the current rate of one right for approximately 4.33
shares of its common stock held on the record date of July 1, 2005, which
represented the ratio of subscription rights to total common shares outstanding
of 30,281,107 on the record date. Each subscription right represented the right
to purchase one share of newly-created series B preferred stock. The shares of
series B convertible preferred stock are convertible into shares of common stock
on a one-for-one basis (i) at any time at the option of the holder, and (ii)
automatically, as of the close of business on the 20th consecutive trading day
on which the closing bid price for the common stock on the principal stock
exchange or market on which it is listed, or if not traded on such exchange, on
the OTC Bulletin Board, is at least $2.20 per share. Stockholders that purchased
shares of our series B preferred stock in the rights offering will be issued,
for no additional consideration, five-year warrants to purchase that number of
shares of the Company's common stock equal to 50% of the number of shares of
series B preferred stock acquired by the stockholder in the offering. The
warrants have an exercise price of $0.75 per share. At the closing of the
subscription rights offering on August 10, 2005, the Company received gross
proceeds of $703,933, issued 1,407,867 shares of series B convertible preferred
stock and 703,934 five-year warrants to purchase 703,934 shares of common stock.
Holders of the series B convertible preferred stock are entitled to receive a
cumulative dividend of 7% per annum, payable either in cash or, at the Company's
option, additional shares of series B convertible preferred stock. As of
December 31, 2005, 114,665 shares of series B convertible stock were converted
into 114,665 shares of the Company's common stock. The Company could receive an
additional $527,950 if all of the warrants issued in the subscription rights
offering are exercised. There can be no assurance as to how many warrants will
be exercised.

* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of Advanced BioPhotonics Inc. or
executive officers of Advanced BioPhotonics Inc., and transfer was restricted by
Advanced BioPhotonics Inc. in accordance with the requirements of the Securities
Act of 1933. In addition to representations by the above-referenced persons, we
have made independent determinations that all of the above-referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.

Item 6. Management's Discussion and Analysis or Plan of Operation.

         Special Note on Forward-Looking Statements. Certain statements in
"Management's Discussion and Analysis or Plan of Operation" below, and elsewhere
in this annual report, are not related to historical results, and are
forward-looking statements. Forward-looking statements present our expectations
or forecasts of future events. You can identify these statements by the fact
that they do not relate strictly to historical or current facts. These
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements.
Forward-looking statements frequently are accompanied by such words such as
"may," "will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue," or the negative
of such terms or other words and terms of similar meaning. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
achievements, or timeliness of such results. Moreover, neither we nor any other
person assumes responsibility for the accuracy and


                                      -21-
<PAGE>


completeness of such forward-looking statements. We are under no duty to update
any of the forward-looking statements after the date of this annual report.
Subsequent written and oral forward looking statements attributable to us or to
persons acting in our behalf are expressly qualified in their entirety by the
cautionary statements and risk factors set forth below and elsewhere in this
annual report, and in other reports filed by us with the SEC.

         You should read the following description of our financial condition
and results of operations in conjunction with the financial statements and
accompanying notes included in this report beginning on page F-1.

Overview and Effect of Recapitalization Transaction

         Unless the context otherwise requires, "we," "our," "us" and similar
phrases refer to Advanced BioPhotonics Inc. (a publicly-traded company formerly
known as Promos, Inc. and then as OmniCorder Technologies, Inc.), which acquired
all the assets and assumed all the liabilities of OmniCorder Technologies,
Incorporated, a privately-held company, in a recapitalization transaction on
December 19, 2003, and succeeded to the business of OmniCorder as its sole line
of business. We were founded in 1997 to acquire, develop and commercialize
advanced technology for the diagnosis and management of a large variety of
diseases including cancer and vascular disease. Our lead product, the
BioScanIR(R) system, measures abnormal blood flow associated with the presence
of tumors and vascular disease, and assists physicians and researchers in
differentiating between normal and abnormal tissues. For a more complete
description of our company and our business, see "Business."

         On December 19, 2003, we completed a recapitalization transaction in
which we acquired all the assets and assumed all the liabilities of OmniCorder
in exchange for the issuance of a majority of our shares of common stock.
Concurrent with the closing of the recapitalization transaction, we completed a
private placement of 5,686,027 shares of common stock from which gross proceeds
of $7,820,405 were received. Following the completion of the recapitalization
transaction, private placement, related stock purchase and payment of
equity-based transaction fees, OmniCorder owned 21,538,400 shares, or 72.8% of
the outstanding shares of our common stock. OmniCorder filed a Certificate of
Dissolution on December 29, 2003 with the Delaware Secretary of State and
promptly thereafter, in accordance with the tax-free reorganization provisions
of Internal Revenue Code Section 368(a)(1)(C), liquidated the shares of our
common stock it received in the recapitalization transaction to its stockholders
in proportion to their respective interests in OmniCorder. The consideration and
other terms of these transactions were determined as a result of arm's-length
negotiations between the parties.

         Since the closing of the recapitalization and private placement
transactions, the stockholders of OmniCorder owned a majority of the shares of
our common stock as a result of the dissolution of OmniCorder. For accounting
purposes, OmniCorder was deemed to be the acquirer. The transaction has been
accounted for as a recapitalization of the company. Since we had no significant
business activities prior to the recapitalization transaction and our
promotional products business was sold to one of our former directors
concurrently with the recapitalization transaction, no goodwill or other
intangibles arose from the recapitalization transaction. In addition, since our
future business will be solely that of OmniCorder and the former OmniCorder
stockholders now control us, all information described below will be that of
OmniCorder as if OmniCorder had been the registrant for all accounting periods
presented. The audited financial information in this annual report is also that
of OmniCorder prior to the date of the recapitalization transaction, as it
provides the most relevant information about us on a continuing basis.

Application of Critical Accounting Policies

         For presentation purposes, we are considered to be a "development stage
enterprise" in accordance with Statement of Financial Accounting Standards No.
7, "Accounting and Reporting by Development Stage Enterprises." Our primary
activities since inception have been the research and development of our
technology, negotiating strategic alliances and other agreements, and raising
capital. We have not commercialized any of our products, and as a result we have
not generated any significant revenues from operations. We believe that we will
generate revenues from the sale of licenses, user fees and sales of our
BioScanIR(R) system to provider networks to use its cancer screening and
vascular disease diagnosis technology in the United States, Europe and Asia.
However, we cannot give any assurance that we will be able to generate any
revenues.

         We account for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes."


                                      -22-
<PAGE>


SFAS No. 109 requires the recognition of deferred tax assets and liabilities for
the expected impact of differences between the financial statements and the tax
basis of assets and liabilities and for the expected future tax benefits to be
derived from tax loss and tax credit carryforwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. We have recorded a full valuation allowance
against our deferred tax assets since we believe that, based upon currently
available objective evidence, it is more likely than not that the deferred tax
asset will be realized.

         We account for the fair value of options and warrants for non-employees
in accordance with SFAS No. 123, "Accounting for Stock Based Compensation,"
which requires that compensation cost be measured after the grant date based on
the value of the award and is recognized over the service period, which is also
the vesting period. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model. We will be required to
account for options and warrants issued to employees during the annual reporting
period beginning after December 15, 2005 as a result of the FASB's issuance of
SFAS No. 123R "Accounting For Stock Based Compensation."

         On October 26, 2005, our Compensation Committee of the Board of
Directors approved accelerating the vesting of approximately 2.9 million stock
options outstanding under the our stock plans and granted 1,000,000 options to
our President which vest immediately. The options have a range of exercise
prices of $0.30 to $4.40. The acceleration and immediate vesting affects grants
to our President of approximately 2.7 million options having a weighted average
exercise price of $0.74. The closing price of our common stock on October 25,
2005, the last trading day before approval of acceleration, was $0.30. The
purpose of the accelerated vesting was to enable us to avoid recognizing future
compensation expense associated with these options upon adoption of FASB
Statement No. 123R, "Share-Based Payment." The aggregate pre-tax expense that,
absent the accelerated and immediate vesting, would have been reflected in our
consolidated financial statements beginning in fiscal 2006 is estimated to be
approximately $1.6 million (approximately $900,000 of which relates to options
held by the President of the Company).

         In November 2005 we entered into a securities purchase agreement for
$4,000,000 of convertible notes and warrants exercisable into 4,000,000 shares
of common stock. (See Note 7of the accompanying financial statements). The
convertible notes are convertible into an indeterminate number of shares. The
conversion option and warrants shares are subject to registration rights
penalties with provisions that are outside of our control and collateral was
posted in connection with the sale of these instruments. As such the conversion
option and detachable warrants are required to be recorded as liabilities at
their fair value on the date of issuance under the guidance on EITF 00-19. As a
result the convertible notes are recorded on a residual value basis. The result
discount is accreted through the maturity date of the convertible notes using
the effective interest rate method.

         EITF 00-19 requires that the classification of contracts that could
result in derivative instruments be reassessed at each balance sheet date.
Because the convertible notes are convertible into an indeterminate number of
shares we might not have sufficient authorized shares in the future to settle
conversions or exercises of other non-employee instruments, such as convertible
preferred stock, warrants and non employee stock options. As a result of this
and anti-dilution features triggered in certain of these instruments we
reclassified these instruments from equity to a liability based on their fair
values on November 14, 2005.

         In accordance with SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities", at each reporting period these liabilities will be
adjusted for changes in their fair value. The conversion option embedded in the
convertible notes is valued at its intrinsic value as the conversion price is
fixed at a 40% discount to current market prices on conversion dates. The
conversion options embedded in the preferred stock, detachable warrants and
non-employee stock options are valued using the Black Scholes valuation model.
Actual period close common stock prices, applicable volatility rates and the
period close risk free interest rate for the instruments expected remaining life
are the key assumptions used in the Black Scholes valuation calculation. The
period-to-period changes in fair value will be recorded as either an addition or
charge to earnings. There is no cash effect to these additions or charges over
the life of these instruments. For the year ended December 31, 2005 we recorded
a $323,189 charge as a result of the change in fair value of these derivative
instruments.

         We have no off-balance sheet arrangements or liabilities, and none are
planned.


                                      -23-
<PAGE>


Revenue Model

         We believe that initial revenues will come primarily from the sale of
the BioScanIR(R) system to customers for use in reconstructive surgery
applications as well as cancer therapy monitoring and / or drug discovery. In
addition, initial customers will likely include imaging research organizations
that will purchase BioScanIR(R) systems for use in their own research programs.
It is possible, however, that initial revenues in certain applications, such as
cancer therapy monitoring, could involve a fee per use, either as the sole
revenue source, or more likely in combination with other forms of revenue. Such
other forms could include up front licensing fees, and/or annual maintenance
fees over the estimated 4-5 year life of the BioScanIR(R) system. Even if the
initial source of revenue is the sale of the BioScanIR(R) system, it is
anticipated that such sales would also be accompanied by annual maintenance
fees.

         As we expand our efforts into other applications we will evaluate our
revenue model options. For example, as we move into the diagnostic/screening
market it is anticipated that a fee per use model could be more appropriate. In
this model, which may also apply to other initiatives as noted above, revenues
would be generated through a combination of a fee per use, a one-time up-front
fee for licensing, installation and training, and annual maintenance fees. We
believe that the fee per use model may be more appropriate for physician
office-based diagnostic and screening applications by minimizing capital
equipment purchase barriers. This model is expected to generate sufficient fees
to recoup the cost of the BioScanIR(R) system within one year.

         We are presently in the development stage and will adopt revenue
recognition accounting policies that are reflective of our business model at the
time we begin to generate each type of revenue.

         We recognize revenues and costs and expenses generally utilizing the
accrual method of accounting. For specific discussion of these activities, see
Note 2, "Summary of Significant Accounting Policies - Basis of Presentation" in
the accompanying financial statements. Based upon our circumstances at the time,
we will apply the appropriate methods with respect to revenue recognition,
inventory and capitalized costs associated with our product that comply with
accounting principles generally accepted in the United States, as follows:

      o     Sale - We may sell BioScanIR(R) systems to medical, diagnostic or
            any other end user. These contracts may be for single or multiple
            units. We intend to recognize revenue associated with single or
            multiple unit contracts upon shipment and acceptance of each
            specific unit by the end-user. We may provide an initial warranty
            period of one year as part of their sales arrangements. We will
            establish a liability for estimated warranty costs as appropriate
            and record actual warranty expenses against this liability as
            incurred. We may offer an extended warranty and maintenance
            arrangement to our customers after the expiration of the initial
            warranty period. This arrangement would be sold pursuant to a
            contract distinctly separate from the original sales arrangement.
            These extended warranty and maintenance fees would be recognized
            ratably over the life of the extended warranty and maintenance
            contracts.

      o     Licensing - We may enter into licensing agreements for our
            technology as part of sublicensing or distribution agreements with
            third parties. We also intend to enter into licensing agreements
            that provide third parties with exclusive or semi-exclusive rights
            to some portion of our intellectual property in certain well defined
            fields of use. License revenues are expected to be recognized
            ratably over the life of the license.

      o     Development contracts - We may engage in research and development
            contracts or other specialized arrangements with specific customers.
            While each project may vary, it is planned that each would have
            milestones in the development or delivery process for which
            stipulated amounts of the contract value would be earned. We intend
            to recognize revenues as milestones are achieved and upon
            substantial evidence of acceptance by the customer.

         BioScanIR(R) systems available for sale, either newly-constructed or
which may have been previously rented to customers, would be maintained in
inventory at cost determined on a first-in, first-out method, or at depreciated
cost (if previously rented); in all cases at the lower of cost or market.


                                      -24-
<PAGE>


Results of Operations

         The following represents a summary of the results of operations for the
years ended December 31, 2005 and 2004:

<TABLE>
<CAPTION>
                                                                         For the Years Ended
                                                                            December 31,
                                                                     ----------------------------
                                                                         2005            2004
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
     DEVELOPMENT REVENUES                                            $          0    $     69,800
     DEVELOPMENT COSTS                                                          0          20,000
                                                                     ------------    ------------
         Gross Profit                                                           0          49,800
                                                                     ------------    ------------
OPERATING EXPENSES
     Research and development                                           1,898,015       1,413,194
     Selling, general and administrative                                3,538,032       3,288,844
                                                                     ------------    ------------
         Total Operating Expenses                                       5,436,047       4,702,038
                                                                     ------------    ------------
         Operating Loss                                                (5,436,047)     (4,652,238)
         Change in fair value of warrants and conversion options          323,189            --
         Interest and other (income) expenses, net                         22,257         (17,089)
                                                                     ------------    ------------
         Net Loss                                                      (5,781,493)     (4,635,149)
                                                                     ------------    ------------
     Series A Convertible Preferred Stock beneficial conversion
     feature                                                              703,128         458,121
     Series B Convertible Preferred Stock beneficial conversion
     feature                                                              420,258            --
     Deemed Dividend on issuance of additional Series A                   449,500            --
     Convertible Preferred Stock warrants
     Accumulated Dividend on Series A Convertible Preferred Stock          64,583            --
     Accumulated Dividend on Series B Convertible Preferred Stock          17,614            --
                                                                     ------------    ------------
         Net loss attributable to common stockholders- basic and
         diluted                                                     $ (7,436,576)   $ (5,093,270)
                                                                     ============    ============
         Basic and diluted net loss per share                        $      (0.25)   $      (0.17)
                                                                     ============    ============
         Weighted average number of shares outstanding                 30,107,408      29,584,357
                                                                     ============    ============
</TABLE>

Year ended December 31, 2005 compared to Year ended December 31, 2004

         Net Loss. The net loss for the year ended December 31, 2005 as compared
to the net loss for the year ended December 31, 2004 increased by $1,146,344
from $4,635,149 to $5,781,493. The net loss attributable to common stockholders
increased by $2,343,306 from $5,093,270 to $7,436,576. This included in 2005 a
non-cash charge of $703,128 and $420,258 associated with the sale of our series
A and series B convertible preferred stock, respectively. The charge measures
the difference between the relative fair value of the series A and series B
convertible preferred stock and the fair market value of the shares of our
common stock issuable pursuant to the conversion terms on the date of issuance.
Also, included in the year ended December 31, 2005 was a $449,500 deemed
dividend for issuance of additional warrants to the holders of our series A
convertible preferred stock. As more fully described below, we have been a
development stage enterprise and have had a cumulative net loss of $22,317,969
since inception in 1997. During this period we have expended cash raised through
various equity offerings, and issued stock and options and warrants to purchase
shares of our common stock in exchange for services. The increased loss has been
funded by the proceeds of the December 19, 2003, the December 14, 2004 private
placement and more recently the proceeds of the August 10, 2005 proprietary
rights offering and the November 14, 2005 Securities Purchase Agreement, which
has enabled us to continue product development, conduct clinical trials, build
our administrative organization and promote the sales and marketing of
BioScanIR(R) System.


                                      -25-
<PAGE>


         Development Revenues. There was $0 in revenue for the year ended
December 31, 2005 as compared to $69,800 revenues for the year ended December
31, 2004. In fiscal year 2004 we had a research and development contract with
the Department of Defense. We are still a development stage enterprise.

         Development Costs. There was $0 in development costs for the year ended
December 31, 2005 as compared to $20,000 costs for the year ended December 31,
2004.

         Research and Development Expenses. Research and development expense
increased by $484,821, to $1,898,015 from $1,413,194, for the year ended
December 31, 2005 as compared to the year ended December 31, 2004 and is
expected to continue to increase as we employ new technical personnel and
consultants in the development of our BioScanIR(R) technology, purchases
materials and components for development and expand our facilities. Cash
proceeds from private placements in 2003 and 2004, the proprietary rights
offering and the securities purchase agreement in 2005 provided the funding for
these activities. Refer to the Statement of Stockholders Equity included in the
accompanying financial statements for sources of capital, including cash and
noncash services received in exchange for equity. We hired consultants and
employees to obtain licensing, patent applications, support trial systems
deployed in the field and registration of our product.

         Significant components of the increase for the year ended December 31,
2005 as compared to December 31, 2004 were:

         Salaries and consulting expense increased by $200,211 to $791,636 from
$591,425. The increase was attributable to a stock grant of 250,000 restricted
common shares given to a consultant who is also one of our founders, as a result
of an settlement agreement in February 2005. The fair value of the grant was
$212,000. Recruitment expense increased by $50,239 to $91,375 from $41,136. A
significant part of the increase is attributable to the recruiting fees for our
general counsel. Business auto and travel and entertainment decreased by $84,211
to $77,351 from $161,562 due to less international travel to our pilot sites for
training and evaluation of equipment. The decrease in international travel
contributed to the $9,820 decrease in telephone expenses for the year ended
December 31, 2005 to $39,821 from $49,641 incurred for the year ended December
31, 2004. For the year ended December 31, 2005, there was a decrease in office
expense, printing and reproduction costs of $52,242 to $20,955 from $73,197 for
the year ended December 31, 2004. In 2005, there was a decrease in the
reproducing of industry reports. In May 2004, we signed a new lease for
additional office space as our staff increased. This resulted in an increase of
$29,062 for rent and utility expenses for the year ended December 31, 2005 to
$84,209 from $55,147 for the year ended December 31, 2004.

         Expenses related to research and development decreased by $6,058 to
$177,014 for the year ended December 31, 2005 from $183,072 in the year ended
December 31, 2004. In 2005 we purchased $87,371 less in materials to upgrade and
build new BioScanIR(R) systems and expensed $81,313 more to give financial
support some of our pilot sites for conducting clinical trials. During the year
ended December 31, 2005 patent expenses increased by $58,304 to $120,674 from
$62,370 in the year ended December 31, 2004 attributable to three new patent
applications filed in 2005.

         We incurred $333,000 in license and permit costs for the year ended
December 31, 2005 compared to $12,616 expensed for the year ended December 31,
2004, an increase of $320,384 - most of which was due to the accrual for the
Lockheed Martin settlement and release. See Note 11, Litigation.

Selling, General and Administrative Expenses (SG&A) Selling, general and
administrative expenses increased by $249,188 to $3,538,032 from $3,288,844 for
the year ended December 31, 2005 as compared to the year ended December 31,
2004. A significant component of the increase for the year ended December 31,
2005 as compared to year ended December 31, 2004 was a non cash charge recorded
of $600,000 for the fair value of warrants issued to Trilogy Capital Partners.
On November 17, 2005, Trilogy agreed to return and relinquish all right, title
and interest to the 2,400,000 warrants they were given and release the Company
of all prior agreements and understandings between Trilogy and the Company. See
Note 2, Management Liquidity.

         Effective December 19, 2004, we became a public company. In 2004 legal
and accounting costs were higher as we enhanced our systems and procedures and
accounting controls to comply with rules and regulations of the Securities and
Exchange Commission, including the Sarbanes-Oxley Act. For the year ended 2005,
accounting,


                                      -26-
<PAGE>


legal and consultants for Sarbanes-Oxley compliance decreased $239,237 to
$601,573 from $840,810 for the year ended December 31, 2004. In fiscal 2005,
Business development consulting fees increased by $256,411 to $394,719 from
$138,308 for the year ended December 31, 2004. A significant portion of the
increase is attributable to the $200,000 we paid our former President and Chief
Executive Officer as part of the consulting agreement we entered into on March
9, 2005 in settlement of an arbitration proceeding. See Note 12, Related Party
Transactions. For the year ended December 31, 2005 Administrative consulting
fees increased $175,236 to $228,830 from $53,594 for the year ended December 31,
2004. Most of the increase was due to a non cash expense of $196,000 for the
fair value of the stock granted to our outside Board of Directors for their 2005
year of service. Sales and marketing consultant expense decreased $114,626 to
$65,728 in fiscal 2005 from $180,354 for the year ended December 31, 2004. The
decrease is attributable to the reduction of international sales consultants in
2005 as we focused on completing clinical trials before commercialization.

         For the year ended December 31, 2005, investor relations expenses
including rent paid for our New York City location was $49,542 compared to
$136,419 for the year ended December 31, 2004. The $86,877 decrease is due to
vacating the New York City space on February 28, 2005 and in 2005 we did not
have an investment research report prepared as was conducted in 2004 for
$35,000. We incurred $47,306 in expenses for marketing costs and meetings and
seminars during the year ended December 31, 2005 compared to $176,492 during the
year ended December 31, 2004. The $129,186 decrease in fiscal 2005 was due in
part to the reduction of management seminars attended by personnel in fiscal
2004.

         For the year ended December 31, 2005, financing costs were $125,107
compared to $0 for the year ended December 31, 2004 as we searched for
additional financing to support operations and commercialization strategy for
the BioScanIR(R).

         Insurance increased by $18,693 to $240,754 for the year ended December
31, 2005 from $222,061 for the year ended December 31, 2004. The premium for
Directors and Officers Insurance accounted for most of the increased expense. In
the year ended December 31, 2005, we decreased personnel in sales, marketing and
administration, decreasing payroll and payroll related expenses by $400,460 to
$976,407 from $1,376,867.

         Depreciation and Amortization Expense. Depreciation and amortization
expense, which is included in the results of operations, approximated $133,000
and $145,000 for the years ended December 31, 2005 and 2004, respectively. This
primarily reflected depreciation expense associated with BioScanIR(R) equipment
installed in various clinics and hospitals for use in clinical trials, computer
and development tools.

         Income Taxes. No income taxes were recorded for either of the years
ended December 31, 2005 and 2004. As of December 31, 2005 and 2004, we had net
operating loss carryforwards of approximately $19,483,000 and $13,636,000. A
full valuation allowance has been provided against the deferred tax asset of
$8,187,000 and $5,854,000 as of December 31, 2005 and 2004, respectively, in the
accompanying financial statements.

Liquidity and Capital Resources

         We have a deficit accumulated during the development stage, which
commenced on February 7, 1997 through December 31, 2005, of $22,317,969. The
accumulated deficit resulted principally from costs incurred in developing our
business plan, acquiring licenses for our technology, research and development,
general and administrative expenses, establishing sales channels and fund
raising activities. As more fully described in Note 8 to the accompanying
financial statements, we received gross and net proceeds approximating $7.8
million and $6.7 million, respectively, on December 19, 2003 in a private
placement of our common stock and warrants. We could receive additional gross
proceeds upon the exercise of the associated warrants (which expire December 19,
2006) of approximately $327,000, although there is no assurance that they will
be exercised.

         On December 14, 2004, we completed a private placement of 1,550,000
shares of our series A preferred stock, (initially convertible into 1,409,091
shares of common stock) and issued, for no additional consideration, to the
investors in the private placement, five year warrants to purchase 465,000
shares of its common stock at an exercise price of $1.10 per share. We received
gross proceeds of $1,550,000 in the private placement and incurred offering
expenses of $31,072. We allocated $387,667 of the gross proceeds to the warrants
based on estimated fair value. In accordance with EITF Issue No. 00-27
"Application of EITF Issue No. 98-5 to Certain Convertible


                                      -27-
<PAGE>


Instruments", we recorded a non-cash charge of $1,161,249 to deficit accumulated
during the development stage, which is the difference between the relative fair
value of the series A preferred stock and the fair market value of our common
stock issuable pursuant to the conversion terms on the date of issuance. As a
result of anti-dilution provisions relating to the series A convertible
preferred stock and the warrants that were triggered by the subscription rights
offering the warrant exercise price was reduced to $0.50 per share. On November
14, 2005, the sale of $1,000,000 of securities under the Securities Purchase
Agreement described below, triggered anti dilution provisions which reduced the
conversion price of the series A convertible preferred stock from $0.50 to $0.44
per share. On January 3, 2006, after the sale of an additional $1,000,000 of
securities under the Securities Purchase Agreement, the conversion price of the
series A preferred stock was reduced further to $0.39 per share and are
convertible into 3,974,359 shares of common stock. The conversion price was
adjusted based on a calculation set forth in the anti-dilution clause in the
certificate of designation of the series A preferred stock. On October 28, 2005,
as anti-dilution protection to each investor in the December 2004 Private
Placement, we issued additional five year warrants to purchase 1,550,000 shares
of its common stock with an exercise price of $0.75 per share which will expire
on August 9, 2010. We recorded a deemed dividend charge of $449,500 for the fair
value of those warrants during the fourth quarter of 2005. We could receive an
additional $1,395,000 if all of the warrants issued to the Series A stockholders
are exercised though there is no assurance these warrants will be exercised.
Holders of the Series A convertible preferred stock are entitled to receive a
cumulative dividend of 4% per annum, payable either in cash or, at the our
option, additional shares of series A convertible preferred stock. On January 3,
2006, the we issued 301,423 shares of series A convertible preferred stocks as
in-kind dividends to the holders of series A preferred stock on the dividend
record date of December 15, 2005. We inadvertently issued an additional 183,628
series A preferred dividend shares in lieu of cash dividends than the holders
were entitled to receive. We intend to send a notice letter to the holders
requesting the shareholders return the certificates for cancellation and
thereafter we will issue an aggregate of 117,795 series A preferred dividend
shares. As of March 21, 2006, we had a total of 1,851,423 shares of series A
preferred stock which is convertible into 4,739,643 common stock.

         On August 10, 2005, we consummated a subscription rights offering to
our existing stockholders. We received gross proceeds of $703,933, issued
1,407,867 shares of our series B convertible preferred stock originally
convertible into shares of common stock on a one-for-one basis and 703,934
five-year warrants to purchase 703,934 shares of common stock. The warrants have
an exercise price of $0.75 per share and expire August 10, 2015. We could
receive an additional $527,950 if all of the warrants issued in the subscription
rights offering are exercised. There can be no assurance as to how many warrants
will be exercised. In accordance with EITF Issue No. 00-27 "Application of EITF
Issue No. 98-5 to Certain Convertible Instruments", we recorded a non-cash
charge of $420,258 to deficit accumulated during the development stage, which is
the difference between the relative fair value of the series B preferred stock
and the fair market value of our common stock issuable pursuant to the
conversion terms on the date of issuance. As a result of anti-dilution
provisions relating to the series B convertible preferred stock, the issuance of
notes in our November 14, 2005 Securities Purchase Agreement triggered a
reduction in the conversion price to $0.44 per share from $.50 per share. On
January 3, 2006, upon the closing of the 2nd tranche of the Securities Purchase
Agreement, the conversion price of the series B preferred stock was reduced to
$0.39 per share. Holders of the series B convertible preferred stock are
entitled to receive a cumulative dividend of 7% per annum, payable either in
cash or, at the our option, additional shares of series B convertible preferred
stock. On January 3, 2006 holders of Series B preferred stock received the
dividend in shares of in-kind stock. In aggregate, we issued 76,467 of preferred
series B preferred shares. We inadvertently issued an additional 16,701 series B
preferred dividend shares in lieu of cash dividends than the holders were
entitled to receive. We intend to send a notice letter to the holders requesting
the shareholders return the certificates for cancellation and thereafter we will
issue an aggregate of 59,766 series B preferred dividend shares. As of March 21,
2006, 114,665 shares of series B convertible stock were converted into 114,665
shares of the Company's common stock and the Company had a total of 1,369,669
shares of series B preferred stock which is convertible into 1,753,176 common
stock. The Company has incurred legal and accounting fees in connection with the
rights offering totaling approximately $212,000, as of December 31, 2005.

         On July 25, 2005, we signed a non-exclusive finder's fee agreement with
Trilogy Capital Partners, Inc. ("Trilogy"). Trilogy will act as finder to seek
financing and other strategic relationships. Under the agreement, if we received
any financing from a qualified introduction during the fee agreement period, we
would pay Trilogy a cash finder's fee equal to 10% of the gross proceeds of the
financing. The fee period commenced the date of the agreement and terminates one
year following the termination of Trilogy as finder. The agreement could be
terminated at any time by either party. There are no assurances that Trilogy
will be able to locate suitable investors


                                      -28-
<PAGE>


or that we will close a transaction with investors introduced by Trilogy.

         On September 14, 2005, we finalized a Letter of Engagement with
Trilogy, pursuant to which Trilogy agreed to implement a marketing program, and,
to the extent we request, to assist it in business development and strategic
advisory and investor relations services. The Letter of Engagement had an
initial term of 12 months and was terminable by us or Trilogy at any time
thereafter upon 30 days' prior written notice. For their services Trilogy was to
be paid $12,500 per month and was issued 2,400,000 warrants to purchase shares
of the Company's common stock. Each warrant represents the right to purchase one
share of the Company's common stock for $0.50 per share at any time through the
third year of issuance. The warrants had an estimated fair value of 600,000 on
the date of issuance and were recorded in general and administrative expense
during the quarter ended September 30, 2005. We agreed to support the marketing
program set up by Trilogy with a budget not less than $200,000. On October 31,
2005, Trilogy notified us that it has resigned the engagement.

         On November 17, 2005 we entered into a settlement agreement and mutual
release ("Settlement Agreement") with Trilogy. The Settlement Agreement
terminates the Consulting Agreement with Trilogy entered into on June 22, 2005,
the Finder's Fee Agreement with Trilogy entered into on July 25, 2005 and the
Letter of Engagement with Trilogy entered into on September 14, 2005. The terms
of the Settlement Agreement are that we agreed to pay Trilogy 3% of the gross
proceeds they receive from the Securities Purchase Agreement the Company entered
into on November 14, 2005 with AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, LLC and New Millennium Capital Partners, II, LLC for the
sale of (i) $4,000,000 in secured convertible notes and (ii) 4,000,000
warrants.. We also agreed to pay Trilogy $1,664 for marketing costs and $6,250
for fees under the Letter of Engagement from the period October 14, 2005 through
November 1, 2005. Trilogy agreed to return and relinquish all right, title and
interest to the 2,400,000 warrants they were given and release us of all prior
agreements and understandings between Trilogy and the Company. We paid Trilogy
$30,000 and accrued $90,000 related to this settlement as of December 31, 2005
with $44,000 allocated to the recovery of the warrants.

         On September 23, 2005 we signed a non-exclusive finder's fee agreement
with Axiom Capital Management, Inc. ("Axiom"). Axiom will use its best efforts
to introduce us to prospective investors with respect to an offering of issuance
of any security by us, in private placement or series of private placements.
Axiom agreed to introduce to us, only proposed investors that qualify as
"accredited investors" as defined in Regulation D promulgated under the
Securities Act of 1933. We agreed that for each introduced investor that
completes a transaction with us, we shall pay to Axiom (i) an amount in cash
equal to 8% of the dollar value of any securities issued by us which are
purchased by each introduced investor; and (ii) warrants to purchase the number
of shares of our common stock as shall equal 8% of shares sold in that
transaction to each introduced investor. The agreement will continue until (i) a
final closing of a transaction (ii) terminated by either party on 30 days prior
written notice to the other party or (iii) terminated immediately on written
notice by one party to the other party upon material breach of the agreement. On
November 8, 2005, an addendum was added to the agreement which reduced the
percentage that we shall pay to Axiom, to an amount in cash equal to 6.5% from
8% of the dollar value of any securities we issue. We paid Axiom $65,000 on each
of November 16, 2005 and January 6, 2006. We also issued warrants to purchase
378,445 and 395,310 shares of common stock on each of these dates.

         On November 14, 2005, we entered into a Securities Purchase Agreement
with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners, II, LLC for the sale of (i) $4,000,000 in secured
convertible notes and (ii) warrants to purchase 4,000,000 shares of our common
stock. Partners, Offshore, Qualified and Millennium are collectively referred to
as the "Purchasers". See Note 7, Securities Purchase Agreement in the
accompanying financial statements.

         The Purchasers are obligated to provide us with the funds as follows:

         o $1,000,000 was disbursed on November 15, 2005;

         o $1,000,000 was disbursed on January 6, 2006; and

         o $2,000,000 will be disbursed within two days of the effectiveness of
           the registration statement.

         The proceeds of the offering will be used to support our
commercialization activities for its BioScanIR(R)


                                      -29-
<PAGE>


System and for working capital.

         The warrants are issued pro rata upon each investment tranche. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.65 per share. The Purchasers may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the Purchasers exercise the warrants on a cashless basis, then we will not
receive any proceeds. In addition, the exercise price of the warrants will be
adjusted in the event we issue common stock at a price below market, with the
exception of any securities issued as of the date of the warrants or issued in
connection with the secured convertible notes issued pursuant to the Securities
Purchase Agreement. On November 15, 2005 the Purchasers received 1,000,000
warrants and January 16, 2006 the purchasers received 1,000,000 warrants.
Another 2,000,000 warrants will be issued to the Purchasers when the
registration statement is declared effective.


         The convertible debentures issued in connection with the November 14,
2005 Securities Purchase Agreement are convertible into an indeterminate number
of shares. Because of this we would not have sufficient authorized shares to
settle exercises of the warrants issued to the Purchasers or Axiom on the date
of issuance. In addition underlying shares of the Purchasers warrants were
subject to the liquidating damages provisions of the Registration Rights
Agreement. If the registration statement that was filed by us is not declared
effective within 120 days from November 14, 2005 or fails to maintain
effectiveness of the registration statement then the Company will be required to
pay liquidated damages to the Purchasers in the amount of 2% per month on the
outstanding principal amount of the convertible debentures in shares or cash. In
accordance with the provisions of EITF 00-19 both the Purchasers and Axiom
warrants were recorded as liabilities at their fair values on the date of
issuance of $160,048 and $60,569, respectively. (See Note 7 of the accompanying
financial statements)

         EITF 00-19 requires that the classification of contracts that could
result in derivative instruments be reassessed at each balance sheet date. The
convertible debentures issued in connection with the November 14, 2005
Securities Purchase agreement are convertible into an indeterminate number of
shares. Because of this wey might not have sufficient authorized shares in the
future to settle exercises of its other issued warrants. Under the guidance of
EITF 00-19, share settlement of our other issued warrants could no longer
considered to be within our control. We reclassified these other warrants to a
liability based on the fair value of the conversion option on November 14, 2005
of $636,412.

         We will re-measure the fair value of the warrants at each reporting
date with changes in fair value recorded in its statement of operations for the
period which was $21,679 for the year ended December 31, 2005. The fair value of
our warrants was $878,708 at December 31, 2005. We used the Black Scholes
Valuation model to determine the fair value of the warrants. The significant
assumptions used include the actual period closing price of our common stock,
applicable volatility rates and the period close risk free interest rate for the
instruments remaining contractual life. The Securities Purchase Agreement as
described above, upon conversion of notes, will trigger the anti-dilution
provisions in our Series A convertible preferred stock and Series B convertible
preferred stock. Both the Series A and Series B preferred stock will be
convertible into additional shares of common stock.

         As of December 31, 2005, we had cash balances and working capital
deficit of $868,363 and $670,083, respectively and total stockholders' deficit
of $3,410,241. At March 21, 2006, we had approximately $600,000 in cash balances
(unaudited).

         We estimate that we will require additional cash resources in 2006,
based upon our current operating plans and condition. We are currently
investigating financing alternatives, including equity and/or debt financing and
asset based funding sources associated with the commencement of product
delivery. There is no assurance that capital in any form would be available to
us, and if available, on terms and conditions acceptable to us. Our success
depends upon many factors, including securing market acceptance for our
products, obtaining adequate additional financing on acceptable terms, and our
ability to roll out our BioScanIR(R) system in sufficient quantities and at
profitable revenue levels. The uncertainties regarding the availability of
continued financing and commencement of adequate commercial revenues raise
substantial doubt about our ability to continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The accompanying financial statements do not include
any adjustments relating to the recoverability of the recorded assets or the
classification of liabilities that may be necessary should we be unable to
continue as a going concern.


                                      -30-
<PAGE>


         Operations used cash of $3,509,807 for the year ended December 31, 2005
compared to $4,427,238 used for the year ended December 31, 2004 as we further
developed our technology for commercialization and in support of clinical
trials, technical and administrative staff and expenses.

         The BioScanIR(R) system has received FDA Section 510(k) clearance
permitting its sale in the US, and CE mark approval permitting its sale in
Europe. We have designed and implemented manufacturing systems and procedures to
be ISO 9000, FDA CFR 21 and EC MDD Directive 93/42 EEC compliant. We estimate
that our build cycle approximates 120 days from the date of receipt of a firm
order to shipment date.

         We continue to further improve our system for our target end-market
applications based upon pilot site feedback. Current systems production is
driven by our need for units for pilot site and internal development activities.
Such units are non-revenue generating at this time, but could be sold or leased
at some time in the future. We will build and deploy these units to the extent
that they advance our product development and validation efforts and our drive
to commercialization. On November 1, 2005, we delivered the new cancer therapy
monitoring configuration of our BioScanIR(R) System to the Cleveland Clinic for
test and evaluation in detecting the effects of cancer treatments in patients
undergoing neoadjuvant breast cancer therapy; clinical trials began in the
second quarter of 2005. In the 1sr quarter of 2006, we entered into a pilot site
agreement with Yale University School of Medicine ("Yale"). Yale will begin to
conduct clinical trials using our BioScanIR(R) System, together with its
proprietary DIRI(R) dynamic infrared imaging software platform in a
reconstructive surgery application. Under the clinical trial protocol, Yale will
use our BioScanIR(R) System and DIRI(R) software to collect and interpret data
relating to locating the perforator vessels in vivo, then monitoring the healing
process of the transplanted flaps. The clinical trial at Yale will build upon
earlier work done at the University of Geneva in reconstructive surgery. As of
December 31, 2005, we had three fully functional prototype or commercial units
installed in various U.S. and European medical institutions for testing and
evaluation.

         We have committed to purchase infrared camera components from AEG
Infrarot-Module GmbH for approximately $564,000 (478,000 euros) as of December
31, 2005. These systems and components utilize QWIP technology, for which we are
the exclusive licensee.

         We do not currently have any additional off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to our stockholders.

Recently Issued Accounting Pronouncements

         In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations" ("FIN 47"), which is effective for
the Company on December 31, 2005. FIN 47 clarifies that the phrase "conditional
asset retirement obligation," as used in FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" (FAS 143), refers to a legal obligation to perform
an asset retirement activity for which the timing and/or method of settlement
are conditional on a future event that may or may not be within the control of
the company. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and/or method of
settlement. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. FAS 143 acknowledges that
in some cases, sufficient information may not be available to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. We do not expect that adoption of FIN
47 will have a significant effect on its condensed financial position or results
of operations.

         In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle. It also
requires that the new accounting principle be applied to the balances of assets
and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings for that period rather than
being reported in an income statement. The statement will be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We do not expect the adoption of SFAS 154 will have a
material effect on its condensed financial position or results of operations.


                                      -31-
<PAGE>


         In June 2005, the EITF reached consensus on Issue No. 05-2, "The
Meaning of 'Conventional Convertible Debt Instrument' in EITF Issue No. 00-19,
'Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock.'" Issue 00-19 is used to evaluate whether
embedded derivatives should be bifurcated under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended.
Specifically, Statement 133 provides guidance as to when an issuer is required
to bifurcate a conversion option that is embedded in convertible debt. The
adoption of the Issue may have an impact on our financial position and its
results of operations in future periods. upon issuance of new and currently
outstanding convertible securities.

         In June 2005, the EITF reached consensus on Issue No. 05-6, Determining
the Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. The guidance in EITF 05-6 will be applied prospectively and is
effective for periods beginning after June 29, 2005. EITF 05-6 is not expected
to have a material impact on our condensed financial position or results of
operations.

         In September 2005, the FASB ratified the EITF Issue No. 05-7,
"Accounting for Modifications to Conversion Options Embedded in Debt Instruments
and Related Issues.", which addresses whether a modification to a conversion
option that changes its fair value effects the recognition of interest expense
for the associated dept instrument after the modification, and whether a
borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). In
September 2005, the FASB also ratified the EITF's Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature",
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date (which is
treated recorded in the shareholder's equity for book purposes, but as a
liability for income tax purposes) and, if so, whether that basis difference is
a temporary difference under FASB Statement No. 109, Accounting for Income
Taxes. The adoption of the Issues may have a material effect on our consolidated
financial position or results of operations in future periods.

          In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140"
("SFAS 155"). SFAS 155 clarifies certain issues relating to embedded derivatives
and beneficial interests in securitized financial assets. The provisions of SFAS
155 are effective for all financial instruments acquired or issued after fiscal
years beginning after September 15, 2006. The Company is currently assessing the
impact that the adoption of SFAS 155 will have on its financial position and
results of operations.

         In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The Company
is currently evaluating the effect that adopting this statement will have on the
Company's financial position and results of operations.


                                  RISK FACTORS

         In addition to other information contained in this Form 10-KSB, the
following Risk Factors should be considered when evaluating the forward-looking
statements contained in this Form 10-KSB:

              RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS

We have incurred losses in past and have a limited operating history on which to
base an evaluation of our prospects, which can have a detrimental effect on the
long-term capital appreciation of our stock.


                                      -32-
<PAGE>


         We have a limited operating history on which to base an evaluation of
our business and prospects. Our prospects must be considered in light of
inherent risks, expenses and difficulties encountered by companies in their
early stage of development, particularly companies in new and evolving markets.
These risks include acceptance by physicians, researchers, technicians and
patients in an evolving and unpredictable business environment, the lack of a
well-developed brand identity and the ability to bring products to market on a
timely basis. For the years ended December 31, 2005 and 2004, we had net losses
attributable to common stockholders of $7,436,576 and $5,093,270, respectively.
We cannot give any assurance that we will ever generate significant revenue or
have profits. In addition, we anticipate that we may require additional capital
commitments during 2006 and 2007 to sustain our operations. This could have a
detrimental effect on the long-term capital appreciation of our stock.

We are dependent on our technology license agreements with third parties which
require us to satisfy obligations to keep them effective, and if these
agreements are terminated, our technology and our business would be seriously
and adversely affected.

         We have entered into important, long-term license agreements with the
California Institute of Technology and Michael Anbar, Ph.D. to incorporate their
proprietary technologies into our BioScanIR(R) system. These license agreements
require us to, in some cases, pay minimum royalties and satisfy other
conditions. We cannot give any assurance that sales of products incorporating
these technologies will be sufficient to recover the amount of third-party
payments. Failure by us to satisfy our obligations under these agreements may
result in modification of the terms or early termination of the respective
agreement, which would have a serious adverse effect on us. We expect that we
will be dependent on these licensors for the foreseeable future.

We rely entirely on outside manufacturers for our key components and cannot
guarantee that they will not have prolonged supply shortages, resulting in our
inability to timely satisfy customer orders.

         All of the infrared cameras and other key components utilized in our
BioScanIR(R) system are manufactured by outside companies. Our ability to enter
new markets and sustain satisfactory levels of sales in each market will depend
in significant part upon the ability of these companies to manufacture the
components for introduction into our markets. We cannot give any assurance that
we will be successful in entering into agreements with all of the manufacturers
to maintain a constant supply of our key components. In addition, once we enter
into manufacturing contracts, we face the possibility that the contracts will
not be extended or replaced. This could result in our inability to timely
satisfy customer orders, and cause us to possibly lose business to alternative
providers of diagnostic scanning devices.

We have not fully developed an effective internal sales force to market and sell
the BioScanIR(R) system, and if we are unsuccessful, our overall growth will be
hampered.

         We have limited marketing experience and limited financial, personnel
and other resources to undertake the extensive marketing activities necessary to
market our BioScanIR(R) system. Our ability to generate revenue from the
licensing of our BioScanIR(R) system will be dependent upon, among other things,
our ability to manage an effective internal direct sales force. We will need to
develop a sales force and a marketing group with technical expertise to
coordinate marketing efforts with strategic partners. In addition, we cannot
give any assurance that we will be able to market our products or services
effectively through an internal direct sales force, independent sales
representatives, through arrangements with an outside sales force or through
strategic partners, which could hamper our overall growth.

We may experience infringement of our intellectual property rights, including
our patents, proprietary technology and confidential information, which would
undermine our technology platform.

         Our success will depend, in large part, on our ability to obtain and
protect patents, protect trade secrets and operate without infringing on the
proprietary rights of others. We cannot give any assurance that the patent
applications that have been or will be filed on products developed by us will be
approved, that any issued patents will provide us with competitive advantages or
will not be challenged by others, or that the patents of others will not have an
adverse effect on us.


                                      -33-
<PAGE>


Existing and newly-developed technologies may compete with our BioScanIR(R)
system, potentially making BioScanIR(R) less attractive to prospective customers
and resulting in it becoming no longer in demand.

         We are not aware of any devices currently on the market which will be
capable of competing directly with our BioScanIR(R) system, although several new
companies are developing technologies aimed at the same market niche as the
BioScanIR(R) system, and there may be others of which we are unaware. Our
potential competitors may succeed in developing products that are more effective
or less costly (or both) than our products, and such competitors may also prove
to be more successful than us in manufacturing, marketing and sales. Some of our
potential competitors may be large, well-financed and established companies that
have greater resources and, therefore, may be better able than us to compete for
a share of the market even in areas in which we may have superior technology. We
also compete with existing diagnostic alternatives, most notably x-ray
mammography, CT, MRI and PET. Significant barriers to our success are posed by
these existing alternatives. See "Business -- Competition and Industry."

Our product liability insurance coverage may not be adequate in a catastrophic
medical situation, and a large claim may cause us to pay damages to third
parties and incur bad publicity.

         The nature of our medical products may expose us to product liability
risks. Although we have obtained $2.0 million of product liability insurance
coverage, our current annual premiums of approximately $35,000 are expected to
increase. We cannot give any assurance that this insurance will provide adequate
coverage against product liability claims. In addition, some of our key license
agreements require this coverage to be maintained when we sell licensed
services. While no product liability claims are pending or threatened against us
to date, a successful product liability claim against us in excess of our
insurance coverage could have a serious adverse effect on us, including bad
publicity.

We are subject to extensive government regulation by the U.S. Food and Drug
Administration and other authorities on all aspects of our business, and if we
do not comply with these regulations, we could be prevented from marketing our
products.

         The U.S. Food and Drug Administration, or FDA, has established
procedures and standards for initial approval to market medical devices and for
the manufacture of the devices. We are subject to inspection by the FDA for
compliance with these standards. Should the FDA determine, at any time, that we
or any of our products are not in compliance with these standards, it may
withhold approval and prevent the marketing of our products. Negative
determinations by the FDA and other governmental authorities and third-party
payors, such as Medicare and private insurers, could have a serious adverse
effect on us. For more information on how we are impacted by governmental
regulation, see Item 1, "Description of Business -- Governmental Regulation."

Medicare reimburses patients for the use of our BioScanlR system on a temporary
basis and, although we will seek permanent coverage at a higher rate of
reimbursement, that process is lengthy and complex, which will make our
prospects less certain.

         Whether a medical procedure involving a medical device is covered by a
third-party payor can significantly influence the marketability of that device.
Medicare, the federal health insurance program for the aged and disabled, is the
single largest third-party payor. Medicare coverage decisions frequently
influence private third-party payors. Medicare covers medically necessary
therapies, surgery and diagnostic tests. By contrast, Medicare generally does
not cover screening tests. However, it does cover a few expressly delineated
screening procedures or tests. Thus, by way of example, Medicare covers
screening pap smears, screening pelvic examinations, screening tests for early
detection of prostate cancer, screening for colorectal cancer and screening
mammography for early detection of breast cancer. With respect to breast cancer,
mammography is the only screening technique covered by Medicare and the amount
of that coverage is set by a free schedule or by the Outpatient Prospective
Payment System, depending on where the test is performed.

Effective April 1, 2005, we received a temporary reimbursement code. We will
seek permanent Medicare coverage of our system for treatment and diagnosis. The
coverage process is lengthy, complex and the results are uncertain and could
vary geographically.


                                      -34-
<PAGE>


         Even if BioScanIR(R) were to be covered by Medicare on a permanent
basis, the amounts of those payments can be changed by legislative or regulatory
actions and by determinations of the fiscal agents for the program. In addition,
private payors and the states, under their Medicaid programs for the poor,
increasingly are demanding or imposing discounted fee structures. Efforts to
impose greater discounts and more stringent cost controls by third-party payors
and healthcare providers are expected to continue. Even if Medicare and other
third-party payors were to cover procedures involving BioScanIR(R), we cannot be
certain that the reimbursement levels will be adequate. We will be seeking a
higher level of reimbursement than we received effective April 1, 2005. Our
BioScanIR(R) test, like many new medical technologies, does not have sufficient
data to determine exactly what APC is appropriate for this service. For this
reason, the Center for Medicare and Medicaid Services (CMS) established "New
Technology APCs" in 2002. Assignment to a New Technology APC is temporary and
last only until enough data is collected to move the service to an established
APC. Although there is not preordained period of time, typically this occurs
within 36 months of the original assignment.

We purchase infrared camera components in Euros, and therefore our cost of goods
and operating margins may be adversely affected by currency fluctuations and
result in exchange losses.

         We purchase infrared camera components from AEG Infrarot-Module GmbH, a
German company, in Euros, which is the prevailing currency of Europe, rather
than in U.S. dollars. In fiscal 2003, we paid approximately 44,000 Euros (or
$51,583 at then current exchange rates) for camera systems from this supplier.
As of December 31, 2005, we committed to purchase approximately 478,000 Euros
(or $564,000 at current exchange rates) of camera components from this supplier
this year. Accordingly, exchange rate fluctuations in the Euro relative to the
U.S. dollar could affect our cost of goods and operating margins and could
result in exchange losses. In fiscal 2003, we incurred a small loss resulting
from foreign currency transactions, and this loss can be expected to increase
with larger component orders. We do not use derivative financial instruments to
hedge our exposure to changes in foreign currency exchange rates. Our results of
operations will be adversely affected if we are unable to mitigate the effects
of currency fluctuations in the future.

If we fail to enter into strategic alliances with large pharmaceutical
companies, research foundations or government agencies, our business may grow
slower than anticipated.

         In addition to our direct marketing efforts, we are pursuing strategic
alliances with large pharmaceutical companies, as well as research foundations
and government agencies, that have a significant presence in our target markets,
can introduce BioScanIR(R) as an accepted technology to industry participants
and can bear a portion of the expenses associated with the sales and marketing
of our technology. However, we have not yet and we cannot be certain that we
will ever enter into any definitive strategic alliance with these companies,
foundations and agencies, or that any future strategic alliance will be on terms
and conditions that will enable us to generate profits. If we are unsuccessful
in obtaining one or more strategic alliances, our business may grow slower than
anticipated, and our results of operations may suffer.

Our ability to raise additional capital is uncertain and may cause us to curtail
our operation or take actions that may dilute your financial interest, if we are
not timely in these funding efforts.

         We do not currently generate sufficient cash to fully fund our
operations. If additional funds are raised through the issuance of equity
securities, the percentage of ownership of our then-current stockholders will be
reduced and such equity securities may have rights, preferences or privileges
senior to those of the existing holders of our common stock. Further, we may
have to raise substantial additional capital thereafter if changes in our
production plans cause unexpected large future capital expenditures or changes
in our sales and distribution plans cause a significant increase in distribution
expenses or decrease in revenues.

         We also contemplate raising funds in the future through public or
private financings, or from other sources. We cannot give any assurance that
necessary additional financing will be available to us or available on
acceptable terms. The uncertainties regarding the availability of continued
financing and commencement of adequate commercial revenues raise substantial
doubt about our ability to continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business.


                                      -35-
<PAGE>


We are subject to Section 203 of the General Corporation Law of the State of
Delaware which may inhibit a takeover at a premium price that may be beneficial
to our stockholders.

         We are subject to Section 203 of the Delaware General Corporation Law.
Subject to limited exceptions, Section 203 prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder unless the proposed business combination was approved by
the corporation's board of directors before the stockholder became an interested
stockholder. In general, Section 203 defines an interested stockholder as any
stockholder directly or indirectly owning 15% or more of the outstanding voting
stock of a Delaware corporation. Section 203 could have the effect of
discouraging others from making tender offers for our shares, and also may have
the effect of preventing changes in our management.

Our Officers and Directors may in the future own enough shares to control
shareholder vote in our Company which could limit the rights of existing or
future shareholders.

         Our executive officers and directors own approximately 48.3% of the
outstanding common stock. As a result, these executive officers and directors
may in the future control the vote on matters that require stockholder approval
such as election of directors, approval of a corporate merger, increasing or
decreasing the number of authorized shares, adopting corporate benefit plans,
affecting a stock split, amending our Certificate of Incorporation or other
material corporate actions.

We currently are the subject of a legal proceeding with our former chief
financial officer. If we are not successful in defending this proceeding, we may
be required to pay him alleged deferred salary and issue him stock options. No
assurances can be given that we will prevail in our defense or that we will have
sufficient funds to pay the judgment against us.

         On March 28, 2003, our former Chief Financial Officer filed a
declaratory judgment action against us in the US District Court for the District
of New Jersey. The complaint alleges that while serving as both a director and
CFO, he was awarded 2,538,324 stock options and he is seeking specific
determination that he is entitled to these options, as well as approximately
$462,000 in deferred salary. On July 23, 2004, the Court granted, in part, our
motion to dismiss related to the 2,501,328 stock options, which expired in April
2005, as unripe for adjudication. The Court did find that a justiciable dispute
with respect to 36,966 stock options which expired on April 1, 2004. In
addition, on February 15, 2005, we moved for partial summary judgment on our
former CFO's deferred compensation claim, which was denied by the Court, but we
are allowed to renew said motion at the close of discovery.

         Although we are in settlement discussions with our former CFO, no
assurance can be given that we will prevail in our defense or that we will have
sufficient funds to pay any judgment against us to our former CFO.

                       RISKS RELATING TO OUR COMMON STOCK

IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.

         Companies trading on the OTC Bulletin Board, such as us, must be
reporting issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the OTC Bulletin Board. If we fail to
remain current on our reporting requirements, we could be removed from the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.

OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.


                                      -36-
<PAGE>


         The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:

         o that a broker or dealer approve a person's account for transactions
in penny stocks; and

         o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny stock to
be purchased.

         In order to approve a person's account for transactions in penny
stocks, the broker or dealer must:

         o obtain financial information and investment experience objectives of
the person; and

         o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.

         The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:

         o sets forth the basis on which the broker or dealer made the
suitability determination; and

         o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.

         Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.

         Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.

OUR CORPORATE CHARTER CONTAINS AUTHORIZED, UNISSUED "BLANK CHECK" PREFERRED
STOCK WHICH CAN BE ISSUED WITHOUT STOCKHOLDER APPROVAL WITH THE EFFECT OF
DILUTING THEN CURRENT STOCKHOLDER INTERESTS.

         Our certificate of incorporation authorizes the issuance of up to
10,000,000 shares of "blank check" preferred stock with designations, rights and
preferences as may be determined from time to time by our board of directors.
Accordingly, our board of directors is empowered, without stockholder approval,
to issue one or more series of preferred stock with dividend, liquidation,
conversion, voting or other rights which could dilute the interest of, or impair
the voting power of, our common stockholders. Of the preferred stock, 3,000,000
shares have been designated as series A preferred stock and 7,000,0000 shares
have been designated as series B preferred stock. As of March 21, 2006, we have
1,851,423 shares of series A preferred stock and 1,369,669 shares of series B
preferred stock convertible. The issuance of a series of preferred stock could
be used as a method of discouraging, delaying or preventing a change in control.

               RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT

THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.


                                      -37-
<PAGE>


         As of March 21, 2006, we had 33,409,772 shares of common stock issued
and 30,732,772 outstanding, secured convertible notes outstanding that may be
converted into an estimated 16,666,666 shares of common stock at current market
prices and outstanding warrants to purchase 2,000,000 shares of common stock.
Additionally, we have an obligation to sell secured convertible notes that may
be converted into an estimated 16,666,666 shares of common stock at current
market prices and issue warrants to purchase 2,000,000 shares of common stock in
the near future. As of March 21, 2006, there were 1,851,523 shares of series A
preferred stock convertible into 4,739,643 shares of common stock and 1,369,669
shares of series B preferred stock convertible into 1,753,176 shares of common
stock issued and outstanding. Further, as of March 21, 2006, we have the
following shares of our common stock underlying outstanding securities: (i)
8,501,493 shares underlying options issued pursuant to our 1998 and 2005 stock
option plans, (ii) 7,443,086 shares underlying stock purchase warrants, and In
addition, the number of shares of common stock issuable upon conversion of the
outstanding secured convertible notes may increase if the market price of our
stock declines. All of the shares issuable upon conversion of the secured
convertible notes and upon exercise of our warrants may be sold without
restriction. The sale of these shares may adversely affect the market price of
our common stock.

THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH
WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.

         Our obligation to issue shares upon conversion of our secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of our common stock that are issuable, upon conversion of our
$4,000,000 secured convertible notes (excluding accrued interest), based on
market prices 25%, 50% and 75% below the market price, as of March 21, 2006 of
$0.20.

% Below Market   Price Per Share   Discount of 40%   Number of Shares Issuable
--------------   ---------------   ---------------   -------------------------
      25%              $.150             $.0900               44,444,444
      50%              $.100             $.0600               66,666,667
      75%              $.050             $.0300              133,333,333

         As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders. We
amended our Articles of Incorporation to increase our authorized shares of
common stock from 50,000,000 to 200,000,000.

THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES MAY HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.

         The secured convertible notes are convertible into shares of our common
stock at a 40% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholders convert and sell material amounts of common stock
could have an adverse effect on our stock price. In addition, not only the sale
of shares issued upon conversion or exercise of secured convertible notes and
warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.

THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.

         The issuance of shares upon conversion of the secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 4.99% of our


                                      -38-
<PAGE>


outstanding common stock, this restriction does not prevent AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II,
LLC from converting and/or exercising some of their holdings and then converting
the rest of their holdings. In this way, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC could
sell more than this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.

IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE SECURED CONVERTIBLE NOTES MAY NOT BE ADEQUATE AND WE MAY
BE REQUIRED TO FILE A SUBSEQUENT REGISTRATION STATEMENT COVERING ADDITIONAL
SHARES AND FURTHER AMEND OUR ARTICLES OF INCORPORATION TO INCREASE OUR
AUTHORIZED SHARES OF COMMON STOCK. IF THE SHARES WE HAVE ALLOCATED ARE NOT
ADEQUATE AND WE ARE REQUIRED TO FILE AN ADDITIONAL REGISTRATION STATEMENT, WE
MAY INCUR SUBSTANTIAL COSTS IN CONNECTION THEREWITH.

         Based on our current market price and the potential decrease in our
market price as a result of the issuance of shares upon conversion of the
secured convertible notes, we have made a good faith estimate as to the amount
of shares of common stock that we are required to register and allocate for
conversion of the secured convertible notes. Accordingly, we have allocated
70,666,668 shares to cover the conversion of the secured convertible notes. In
the event that our stock price decreases, the shares of common stock we intend
to allocate for conversion of the secured convertible notes may not be adequate.
If the shares we have allocated are not adequate and we are required to file an
additional registration statement and further amend our Articles of
Incorporation to increase our authorized shares of common stock, we may incur
substantial costs in connection with the preparation and filing of such
registration statement.

IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.

         In November 2005, we entered into a Securities Purchase Agreement for
the sale of an aggregate of $4,000,000 principal amount of secured convertible
notes. The secured convertible notes are due and payable, with 8% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. Although we currently have $2,000,000 secured convertible
notes outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $2,000,000. In addition, any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes, including a default interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the secured convertible notes will
be converted into shares of our common stock, in accordance with the terms of
the secured convertible notes. If we were required to repay the secured
convertible notes, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the notes when required, the
note holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.

IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR


                                      -39-
<PAGE>


GOODS, INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES,
DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.

         In connection with the Securities Purchase Agreements we entered into
in November 2005, we executed a Security Agreement and an Intellectual Property
Security Agreement in favor of the investors granting them a first priority
security interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The Security Agreements and Intellectual Property
Security Agreements state that if an even of default occurs under the Securities
Purchase Agreement, Secured Convertible Notes, Warrants, Security Agreements or
Intellectual Property Security Agreements, the Investors have the right to take
possession of the collateral, to operate our business using the collateral, and
have the right to assign, sell, lease or otherwise dispose of and deliver all or
any part of the collateral, at public or private sale or otherwise to satisfy
our obligations under these agreements.

DUE TO THE INDETERMINATE NUMBER OF COMMON SHARES WHICH WE MAY BE REQUIRED TO
ISSUE UNDERLYING OUR SECURED CONVERTIBLE NOTES, AND OUR PREVIOUSLY ISSUED
CONVERTIBLE INSTRUMENTS, SUCH AS OUR SERIES A AND B CONVERTIBLE PREFERRED STOCK,
WARRANTS AND STOCK OPTIONS, WE MAY NOT HAVE ENOUGH AUTHORIZED COMMON SHARES TO
HONOR CONVERSION REQUESTS FOR OUR SECURED CONVERTIBLE NOTES OR SELL EQUITY
SECURITIES IN FUTURE PERIODS.

         In November 2005, we entered into a Securities Purchase Agreement for
the sale of an aggregate of $4,000,000 principal amount of secured convertible
notes. The agreement provides that the conversion price of the notes is equal to
a 40% discount to the average of the three lowest prices our common stock during
the 20 day trading period prior to conversion of the notes. At the present time,
the number of shares of common stock that we may need to issue, pursuant to this
provision of the agreement, is indeterminate. The potential effect of this
provision could cause us not to have enough shares of common stock to honor
conversion requests for the notes and our previously issued convertible
instruments, such as our Series A and B Convertible Preferred Stock, warrants
and stock options, or have the ability to sell equity securities in future
periods.

WE ARE REQUIRED TO PAY LIQUIDATED DAMAGES PURSUANT TO OUR NOVEMBER 2005
REGISTRATION RIGHTS AGREEMENT AS A RESULT OF OUR FAILURE TO HAVE A REGISTRATION
STATEMENT DECLARED EFFECTIVE PRIOR TO MARCH 14, 2006, AND THE PAYMENT OF
LIQUIDATED DAMAGES WILL RESULT IN DEPLETING OUR WORKING CAPITAL AND WE MAY BE
REQUIRED TO SEEK ADDITIONAL FUNDING TO SATISFY SUCH PAYMENT.

         Pursuant to the terms of our registration rights agreement entered into
in connection with our November 2005 securities purchase agreement, if we did
not have a registration statement registering the shares underlying the secured
convertible notes and warrants declared effective on or before March 14, 2006,
we are obligated to pay liquidated damages in the amount of 2.0% per month of
the face amount of the issued and outstanding secured convertible notes, which
equals $40,000, until the registration statement is declared effective. For
example, if we are required to  pay liquidated damages for one month on April
14, 2006, we will be required to pay $40,000 (2.0% of the $2,000,000 of secured
convertible notes outstanding on April 14, 2006). As of the date hereof, the
investors have not demanded payment of the liquidated damages. The payment of
liquidated damages will result in depleting our working capital and we may be
required to seek additional funding to satisfy such payment.


                                      -40-


<PAGE>



         Item 7. Financial Statements.

         The response to this item is submitted as a separate section of this
Report beginning on page F-1.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

         None.

Item 8A. Controls and Procedures.

Evaluation of Our Disclosure Controls and Internal Controls

         As of the end of the period covered by this Annual Report, we carried
out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13-d-15(e)
and 15d-15(e)). Based upon that evaluation and the material weakness described
below, our Chief Executive Officer ("CEO") and Principal Accounting Officer
("PAO") concluded that as of the end of the period covered by this Annual Report
on Form 10-KSB our disclosure controls and procedures were not designed and are
not effective in ensuring that we can record, process, summarize and report
information required to be included in our periodic SEC filings within the
required time period.

CEO and PFO Certifications

         Appearing as exhibits to this Annual Report are "Certifications" of the
CEO and the PAO. The Certifications are required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2003 (the "Section 302 Certifications"). This section of
the Annual Report contains information concerning the Controls Evaluation
referred to in the Section 302 Certifications and this information should be
read in conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.

Disclosure Controls and Internal Controls

         Disclosure Controls are procedures that are designed with the objective
of ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 ("Exchange Act"), such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure Controls are also designed
with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and PAO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) our transactions are properly authorized, recorded and
reported; and (2) our assets are safeguarded against unauthorized or improper
use, to permit the preparation of our financial statements in conformity with
generally accepted accounting principles.

         Our company is not an accelerated filer (as defined in the Securities
Exchange Act) and is not required to deliver management's report on control over
our financial reporting until our fiscal year ended December 31, 2007.
Nevertheless, in our efforts to comply with Section 404 of the Sarbanes-Oxley
Act of 2002, during the years ended December 31, 2005 and 2004, we identified
certain matters that would constitute material weakness (as such term is defined
under the Public Company Accounting Oversight Board Auditing Standard No. 2) in
our internal controls over financial reporting.

         In 2005, we identified material weaknesses in the accounting and
reporting of complex transactions. Also, there is a lack of the necessary
corporate accounting resources to realign and cross-train other current
personnel. This has led to dependence on our Controller, the loss of whom could
impair our ability to ensure consistently complete and accurate financial
reporting. During fiscal 2005, to help correct this deficiency, we hired an
outside consulting firm to assist with internal control procedure documentation
for Sarbanes-Oxley compliance. With our limited resources, it would be difficult
to hire additional competent personnel to assist in the segregation of duties.
We have implemented internal control procedures such as dual approval procedures
at the CEO and Controller level,


                                      -41-
<PAGE>


as well as requiring approvals for purchases by two authorized signers and check
signatories from the CEO and/or Controller plus, in the absence of the CEO and
Controller, another department head, to help prevent error and fraud.

         We believe that, for the reasons described above, we will be able to
improve our disclosure controls and procedures and remedy the material
weaknesses identified above.

         Except as described above, there were no significant changes in our
internal controls over financial reporting that occurred during the year ended
December 31, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

         We believe that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Our disclosure controls and procedures are designed to provide a
reasonable assurance of achieving their objectives and our Chief Executive
Officer and Principal Accounting Officer have concluded that such controls and
procedures are effective at the "reasonable assurance" level.

Item 8B. Other Information

     None.


                                      -42-
<PAGE>


                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.

         The following table sets forth information about our executive
officers, key employees and directors as of March 21, 2006, several of whom
joined us following the closing of the recapitalization transaction in December
2003 and several of whom previously served as executive officers or directors of
privately-held OmniCorder.


<TABLE>
<CAPTION>
Name                            Age   Position
-----------------------------   ---   ------------------------------------------------
<S>                             <C>   <C>
Denis A. O'Connor               53    Director and President and Chief Executive Officer

Robert P. Ellis                 55    Senior Vice President, Business Development

Marek Pawlowski, Ph.D.          57    Vice President - Product Development

Kevin J. Healy                  44    General Counsel

Celia I. Schiffner              50    Controller

Joseph T. Casey                 74    Director

Michael A. Davis, M.D., D.Sc.   63    Director

Mark A. Fauci                   46    Director

Anthony A. Lombardo             58    Director

Jed Schutz                      46    Director

William J. Wagner               55    Director
</TABLE>

         The principal occupations for the past five years (and, in some
instances, for prior years) of each of our executive officers and directors,
followed by our key employees, are as follows:

         Denis A. O'Connor - President and Chief Executive Officer and Director.
Mr. O'Connor joined us on March 23, 2005 as President and Chief Executive
Officer and as a member of our Board of Directors and Executive Committee of the
Board of Directors. Mr. O'Connor recently resigned from DOBI Medical
International, Inc., a publicly-traded company focused on breast imaging
technology, where he was responsible for the commercial leadership of the
business. He had joined DOBI Medical in December 2003 as Senior Vice President -
Sales and Marketing. On February 28, 2005, Mr. O'Connor tendered his resignation
as DOBI Medical's Senior Vice President, Sales, Marketing and Service, effective
March 11, 2005. Mr. O'Connor has held senior management positions at Philips
Medical Systems, Sony Medical Systems and Lockheed Martin Medical Systems. From
March 1997 to June 2000, Mr. O'Connor was President and Chief Executive Officer
of Life Imaging Systems, Inc. From July 2000 to May 2003, Mr. O'Connor was
Chairman and Chief Executive Officer of Advanced Imaging Technologies, Inc., a
medical imaging company. Mr. O'Connor received an M.B.A. from New York
University's Stern School of Business and a B.S. in Computer Science and
Business Administration from the City College of New York. He is also a graduate
of Columbia University School of Radiological Technology, from which he received
his certification in Radiologic Technology.

         Robert P. Ellis - Senior Vice President - Business Development. Mr.
Ellis joined our company in January 2006. Prior to joining Advanced BioPhotonics
Inc., since March 2005, Mr. Ellis had been Vice President of Marketing, Sales
and Service of DOBI


                                      -43-
<PAGE>


Medical International, Inc., a publicly traded company specializing in breast
imaging technology. From January 2004 to July 2005 he was the Director of
Business Development at DOBI Medical. From December 2001 to January 2004 he
served as General Manager of Business Development at Sony Electronics supporting
Medical, Education, and Security Business Application Systems. From 1996 to 2001
he served as the General Manager of Sales and Marketing for the Sony Medical
Systems Group.

         Marek Pawlowski, Ph.D. - Vice President - Product Development. Dr.
Pawlowski has worked with our company since November 2002. He became our Vice
President -- Product Development on December 19, 2003. Dr. Pawlowski has 20
years of medical device development experience. Dr. Pawlowski's responsibilities
include the commercialization of technology through market launch. He has held
senior product development or research and development positions at Viatronix,
Inc. (April 2001 to July 2002); RTS Wireless/Aether Systems, Inc. (March 2000 to
April 2001); Veeco Instruments, Inc. (August 1998 to March 2000); Neuromedical
Systems, Inc. (December 1995 to August 1998); and Medical Systems Corp. (August
1991 to November 1995). From July to November 2002, Dr. Pawlowski was an
independent consultant. Dr. Pawlowski holds a Ph.D. in Technical Sciences,
Warsaw University of Technology, Warsaw, Poland, and completed postgraduate work
in statistics, linear algebra, digital filters and signal processing.

         Kevin J. Healy - General Counsel. Mr. Healy joined our company in June
2005 as General Counsel. Mr. Healy had been Corporate Counsel to Vishay
Intertechnology's General Semiconductor Division since November 2001. From
November 1997 to November 2001 he was with General Semiconductor, Inc., where he
served as Assistant General Counsel handling all corporate legal matters. Mr.
Healy holds a Master of Business Administration from Dowling College School of
Business, a Juris Doctor from St. John's University School of Law and a B.A.
degree from University at Albany. Mr. Healy is admitted to the New Jersey Bar,
the District of Columbia Bar, and the United States District Court, District of
New Jersey.

         Celia I. Schiffner - Controller. Ms. Schiffner joined our company in
April 2004 as the Controller. Ms. Schiffner has over 20 years of accounting
experience in technology, retail and not-for-profit. Most recently, from January
2001 to March 2004, Ms. Schiffner served as C.F.O. and Treasurer of
VillageWorld.com where she helped her former employer complete a reverse merger.
For more than three years prior to holding that position, she was the Controller
of Montauk Rug and Carpet Corporation. Ms. Schiffner holds a B.A. degree in
Accounting from St Joseph's College.

         Joseph T. Casey - Director. Mr. Casey became a member of our Board of
Directors in January 2004. Mr. Casey retired as Vice Chairman and Chief
Financial Officer of Litton Industries, Inc., an aerospace and defense company,
in March 1994, and had held various positions at Litton Industries beginning in
October 1963. Mr. Casey served as Vice Chairman, Chief Financial Officer and
Director of Western Atlas Inc., a global supplier of oilfield information
services and industrial automation systems with annual revenues of more than
$2.5 billion, from March 1994 until August 1996. He was a director of Pressure
Systems, Inc. from October 1997 through September 2004, a director and member of
the Audit and Compliance Committee of UNOVA, Inc. from September 1998 through
May 2005, and a director of Baker Hughes Incorporated from 1996 through 2003.
Mr. Casey has been a member of the Board of Trustees of Claremont McKenna
College since 1988 and of the Don Bosco Technical Institute since 1972. He has
also been a member of the Board of Overseers of the Center for Russia and Asia
of the Rand Corporation since 1997. Mr. Casey received a B.S. degree from
Fordham University and is a licensed certified public accountant in New York and
New Jersey.

         Michael A. Davis, M.D., D.Sc. - Director. Dr. Davis has been a member
of our Board of Directors since December 14, 2004 and is also the Chairman of
the Executive Committee of the Board of Directors. From 1995 until December
2004, Dr. Davis served as a Director of E-Z-EM, Inc., a leader in the design,
manufacture and marketing of contrast media for gastrointestinal tract
radiology, and has been its Medical Director since 1994 and was its Technical
Director from 1997 to 2000. Since December 2004, Dr. Davis has been a Director
Emeritus of E-Z-EM, Inc. Dr. Davis was a Visiting Professor of Radiology at
Harvard Medical School and Visiting Scientist in Radiology at Massachusetts
General Hospital in 2002 and 2003. He has also served as Senior Vice President
and Chief Medical Officer of MedEView, Inc., a radiology informatics company,
from 2002 to 2003. He was Professor of Radiology and Nuclear Medicine and
Director of the Division of Radiologic Research, University of Massachusetts
Medical Center, from 1980 to 2002. During 1999, he also served as the President
and Chief Executive Officer of Amerimmune Pharmaceuticals, Inc. and its
wholly-owned subsidiary, Amerimmune, Inc., which were involved in pharmaceutical
research, and served as a director there from 1999 to 2003. Dr. Davis is also a
director of MacroChem Corp., a publicly-traded specialty pharmaceutical company.


                                      -44-
<PAGE>


         Mark A. Fauci - Director. Mr. Fauci has served as a director since
privately-held OmniCorder's incorporation in 1997. He served as our President
and Chief Executive Officer since privately-held OmniCorder's incorporation
until December 2004. In March 2005, Mr. Fauci signed a two year consulting
agreement with our company. Prior to 1997, Mr. Fauci served in a variety of
roles at Reuters Health Information Services, a Reuters-owned, start-up company
based in New York. Among his roles at Reuters, Mr. Fauci headed New Business
Development, and was responsible for building strategic relationships in the
United States and Europe, developing strategic technical business plans and
exploring commercial applications of technology developed in private and
government research laboratories. Before joining Reuters, Mr. Fauci served as
President of E.C.A., Inc., a consulting firm specializing in the field of
computer-aided design and digital-imaging systems. In the seven prior years, he
was an engineer at Standard Microsystems Corporation and General Instruments.
His work at these companies included research, development and the manufacture
of application specific integrated circuits utilizing the same manufacturing
processes now employed in the manufacturing of state-of-the-art infrared imaging
sensors. Mr. Fauci received a B.S. degree in Science from the State University
of New York at Stony Brook and an M.B.A. degree from Dowling College.

         Anthony A. Lombardo - Director. Mr. Lombardo had been a director of
privately-held OmniCorder since August 2003, and became a member of our Board of
Directors in January 2004. Mr. Lombardo is a member of the Executive Committee
of our Board of Directors. Mr. Lombardo is an executive with more than 30 years
of experience in the medical device industry and related industries. Since April
2000, he has been the President and Chief Executive Officer of E-Z-EM Inc., a
company focused on the contrast market for gastrointestinal imaging. From 1998
to 1999, he was the President of ALI Imaging Systems Inc., a full-service
provider of radiology information and image management systems. From 1996 to
1998, Mr. Lombardo was the General Manager of the Integrated Imaging Solutions
division of General Electric Medical Systems. He also headed divisions of
Loral/Lockheed Martin Corp. from 1994 to 1996, Sony Corporation from 1990 to
1994 and Philips Medical Systems from 1979 to 1990. Mr. Lombardo received a B.S.
degree in Biology from St. Francis College and an M.S. degree in Physiology from
Duquesne University.

         Jed Schutz - Director. Mr. Schutz had been a director of privately-held
OmniCorder since December 2002, and became a member of our Board of Directors on
December 19, 2003. Mr. Schutz is a member of the Executive Committee of the
Board of Directors. For more than the past five years, Mr. Schutz has been a
private investor and advisor to emerging technology companies, as well as a real
estate developer. He is the Chairman of the Board of Campusfood.com, Inc., a
company in the online food ordering business. He also currently serves as a
director of Greenshoe, Inc., an alternative electronic payments company. He
served as a director from 1993 to 1999, and for one year as Chairman of the
Board, of FRM Nexus, a publicly-held company engaged primarily in medical
financing. Mr. Schutz received a B.S. degree in biology from Duke University and
a post-graduate Certificate in Business from New York University.

         William J. Wagner - Director. Mr. Wagner became a member of our Board
of Directors in January 2004. Mr. Wagner is a member of the Executive Committee
of the Board of Directors. Mr. Wagner has been a Managing Director of
Dauk/Wagner Investments, LLC, a private investment firm focused primarily on
early-stage companies, since 1994. Prior to then, Mr. Wagner was a Managing
Director and Co-Head of the Mergers & Acquisitions Group at Smith Barney from
1980 to 1993. Mr. Wagner received an M.B.A. degree from Wharton Graduate School
of Business and a B.S. degree from the University of Pennsylvania.

         All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. A majority of our
directors are considered "independent" under the SEC's new independence
standards. Officers are elected annually by the board of directors and serve at
the discretion of the board.

Committees of the Board

         Audit Committee. The Board has an Audit Committee comprised of two
non-employee directors, Messrs. Wagner and Casey (Chairman). Each member of the
Audit Committee is independent as defined in Section 121(A) of the American
Stock Exchange's listing standards. The Board of Directors has determined that
each of Messrs. Wagner and Casey qualifies as an "audit committee financial
expert." The Audit Committee functions pursuant to a written Charter which was
adopted by the Board in January 2004. The Audit Committee has such powers as may
be


                                      -45-
<PAGE>


assigned to it by the Board from time to time. The Audit Committee is currently
charged with, among other things:

         o recommending to the Board of Directors the engagement or discharge of
our independent public accountants, including pre-approving all audit and
non-audit related services;

         o the appointment, compensation, retention and oversight of the work of
the independent auditor engaged by us for the purpose of preparing or issuing an
audit report or performing other audit review or attest services for us;

         o establishing procedures for the receipt, retention and treatment of
complaints received by us regarding accounting, internal accounting controls or
auditing matters and for the confidential, anonymous submission by our employees
of concerns regarding questionable accounting or auditing matters;

         o approving the scope of the financial audit;

         o requiring the rotation of the lead audit partner;

         o consulting regarding the completeness of our financial statements;

         o reviewing changes in accounting principles;

         o reviewing the audit plan and results of the auditing engagement with
our independent auditors and with our officers;

         o reviewing with our officers, the scope and nature and adequacy of our
internal accounting and other internal controls over financial reporting and
disclosure controls and procedures;

         o reviewing the adequacy of the Audit Committee Charter at least
annually;

         o meeting with our internal auditor on a regular basis;

         o performing an internal evaluation of the Audit Committee on an annual
basis; and

         o reporting to the Board of Directors on the Audit Committee's
activities, conclusions and recommendations.

         The Audit Committee conducted eight formal meetings and conferred on an
informal basis on numerous occasions in 2005.

         Compensation Committee. The Board has a Compensation Committee was
comprised of three non-employee directors, Messrs. Lombardo (Chairman), Loy and
Schutz. However, Mr. Loy resigned as a member of our board of directors and as a
member of our Compensation Committee effective as of December 31, 2005. Each
member of the Compensation Committee is independent as defined in Section 121(A)
of the American Stock Exchange's listing standards. The Compensation Committee
functions pursuant to a written Charter which was adopted by the Board in
January 2004. The Compensation Committee has such powers as may be
assigned to it by the Board from time to time. It is currently charged with,
among other things, assisting the Board in:

         o approving and evaluating the compensation of directors and executive
officers;

         o establishing strategies and compensation policies and programs for
employees to provide incentives for delivery of value to our stockholders;

         o establishing policies to hire and retain senior executives, with the
objective of aligning the compensation of senior management with our business
and the interests of our stockholders;

         o together with management, surveying the amount and types of executive
compensation paid by


                                      -46-
<PAGE>


comparable companies, and engaging consultants as necessary to assist them;

         o periodically reviewing corporate goals and objectives relevant to
executive compensation and making recommendations to the Board for changes;

         o assisting management in evaluating each executive officer's
performance in light of corporate goals and objectives, and recommending to the
Board (for approval by the independent directors) the executive officers'
compensation levels based on this evaluation;

         o overseeing our stock option plan or other stock-based plans with
respect to our executive officers and employee Board members, who are subject to
the short-swing profit restrictions of Section 16 of the Securities Exchange Act
of 1934, as amended;

         o reviewing the overall performance of our employee benefit plans and
making recommendations to the Board regarding incentive-compensation plans and
equity-based plans;

         o together with the Nominations and Governance Committee, reviewing and
making recommendations to the independent directors of the Board regarding the
form and amount of director compensation;

         o ensuring that our compensation policies meet or exceed all legal and
regulatory requirements and any other requirements imposed on us by the Board;
and

         o producing an annual report on executive compensation for inclusion in
our proxy statement.

         In general, the Compensation Committee formulates and recommends
compensation policies for Board approval, oversees and implements these
Board-approved policies, and keeps the Board apprised of its activities on a
regular basis. In addition, the Compensation Committee together with the
Nominations and Governance Committee, develops criteria to assist the Board's
assessment of the Chief Executive Officer's leadership of our company.

         The Compensation Committee conducted three formal meetings and met and
conferred on an informal basis on numerous occasions in 2005.

         Nominations and Governance Committee. The Board has a Nominations and
Governance Committee which was comprised of three non-employee directors,
Messrs. Lisa (Chairman), Benedict and Vietor. Effective December 31, 2005, all
three of these directors voluntarily resigned their positions from our Board of
Directors pursuant to our long term strategic plan to reorganize and restructure
our Board of Directors reducing its size to seven members. At the March 13, 2006
Board meeting, the board of directors appointed Dr. Michael Davis (Chairman) and
Mr. Joseph Casey to serve on this committee. Each member of the Nominations and
Governance Committee is independent as defined in Section 121(A) of the American
Stock Exchange's listing standards. The Nominations and Governance Committee
functions pursuant to a written Charter which was adopted by the Board in
January 2004. The Nominations and Governance Committee has such powers as may be
assigned to it by the Board from time to time. It is currently charged with,
among other things, assisting the Board in:

         o identifying individuals qualified to become Board members and
recommending that the Board select a group of director nominees for each next
annual meeting of our stockholders;

         o ensuring that the Audit, Compensation and Nominations and Governance
Committees of the Board shall have the benefit of qualified and experienced
"independent" directors;

         o developing and recommending to the Board a set of effective corporate
governance policies and procedures applicable to us, and reviewing and
reassessing the adequacy of such guidelines annually and recommending to the
Board any changes deemed appropriate;

         o periodically reviewing the charters of all Board committees and
recommending to the committees and Board any changes deemed appropriate;


                                      -47-
<PAGE>


         o developing policies on the size and composition of the Board;

         o conducting annual evaluations of the performance of the Board,
committees of the Board and individual directors;

         o reviewing conflicts of interest and the independence status of
directors;

         o together with the Compensation Committee, reviewing and making
recommendations to the independent directors of the Board regarding the form and
amount of director compensation;

         o reviewing the structure of our senior staffing and management
succession plans with the Chief Executive Officer;

         o together with the Compensation Committee, developing criteria to
assist the Board's assessment of the Chief Executive Officer's leadership of our
company; and

         o generally advising the Board (as a whole) on corporate governance
           matters.

         The Corporate Governance/Nominating Committee did not conduct any
formal meetings in 2005 but met and conferred on an informal basis on numerous
occasions during the year.

         The Nominations and Governance Committee is responsible for evaluating
potential candidates to serve on our Board of Directors, and for selecting
nominees to be presented for election to the Board at our Annual Meeting of
Stockholders. In evaluating potential director candidates, the Nominations and
Governance Committee considers the skills and characteristics possessed by each
candidate in the context of the perceived needs of the Board at that point in
time. Among the factors considered by the Nominations and Governance Committee
in considering a potential nominee are the following:

         o the nominee's independence;

         o the nominee's relevant professional skills and depth of business
experience;

         o the nominee's character, judgment and personal and professional
integrity;

         o the nominee's ability to read and understand financial statements;

         o the nominee's willingness to commit sufficient time to attend to his
or her duties and responsibilities as a member of the Board;

         o the nominee's qualifications for membership on certain committees of
the Board;

         o any potential conflicts of interest involving the nominee; and

         o the make up and diversity of our existing Board.

         In identifying potential candidates for the Board, the Committee relies
on recommendations from a number of possible sources, including current
directors. The Nominations and Governance Committee may also retain outside
consultants or search firms to help in identifying potential candidates for
membership on the Board.

         Executive Committee. We had established an executive committee of the
board of directors, which consists of Michael A. Davis, M.D., D.Sc., (Chairman),
Denis A. O'Connor, Anthony A. Lombardo, Jed Schutz and William J. Wagner. The
purpose of the executive committee was to concentrate on strategic initiatives
and opportunities to maximize the commercial prospects of our functional medical
imaging technology in drug discovery, cancer therapy monitoring, surgery, and
screening and diagnostics.


                                      -48-
<PAGE>


         The Executive Committee met and conferred, both on a formal and
informal basis, on approximately a weekly basis since it was formed in 2005. By
unanimous consent of the Board of Directors on December 13, 2005, the Executive
Committee was disbanded effective December 31, 2005 in keeping with our long
term strategic plan to reorganize and restructure our Board.

Director Compensation

         Each member of our board of directors received a grant of stock options
for his 2004 year of service. On February 14, 2005, each director was granted
stock options to purchase 30,000 shares of our Common Stock at an exercise price
of $1.00 per share vesting over three years from our 1998 Stock Option Plan and
a stock option grant to purchase 30,000 shares of our common stock at an
exercise price of $1.00 per share vesting over three years from the 2005
Incentive Compensation Plan. Additionally, members of the Executive Committee of
the Board of Directors each received a grant of stock options to purchase 15,000
shares of our common stock at an exercise price of $1.00 per share vesting over
three years from the 1998 Plan and a grant of stock options to purchase 15,000
shares of our common stock at an exercise price of $1.00 per share vesting over
three years from the 2005 Plan. The Chairman of the Executive Committee received
an additional grant of 5,000 stock options from the 1998 Plan and 5,000 stock
options from the 2005 Plan with the same vesting terms. The 2005 Plan was
approved by our stockholders on June 7, 2005 at our 2005 annual meeting of
stockholders.

         On March 7, 2005 the Board of Directors approved a grant of options to
purchase 30,000 shares of our common stock to each of our outside directors. The
options are exercisable at $1.00 per share and vest in equal installments over
three years. In addition, the Board of Directors approved a grant of 30,000
shares of restricted common stock to each outside director. These restricted
shares may not be sold for two years following the date of grant. The Board of
Directors also approved a grant of options to purchase 30,000 shares of our
common stock to each member of the Executive Committee of the Board of
Directors. These options are exercisable at $1.00 per share and vest in equal
installments over three years. The Chairman of the Executive Committee received
an additional grant of options to purchase 10,000 shares of common stock at an
exercise price of $1.00 per share. Each grant of options and restricted shares
was made to each person for their service to our company during 2004 and 2005,
and were made under our 2005 Incentive Compensation Plan, which was approved by
our stockholders on June 7, 2005 at our 2005 annual meeting of stockholders.
When originally granted, these options vest in equal installments over three
years. On October 26, 2005, the Company's Compensation Committee of the Board of
Directors approved accelerating the vesting of approximately 2.9 million stock
options outstanding under the Company's stock plans and granted 1,000,000
options to our President which vest immediately. The purpose of the accelerated
vesting was to enable the Company to avoid recognizing future compensation
expense associated with these options upon adoption of FASB Statement No. 123R,
"Share-Based Payment." The aggregate pre-tax expense that, absent the
accelerated and immediate vesting, would have been reflected in the Company's
consolidated financial statements beginning in fiscal 2006 is estimated to be
approximately $1.6 million (approximately $900,000 of which relates to options
held by the President of the Company).

         On March 14, 2006 the Company granted 30,000 stock options to purchase
30,000 shares of its common stock from its 2005 Incentive Plan to each of its
outside Board of Directors in lieu of cash payment for their participation,
attendance at meetings and service to the Company for the first nine months of
2006. These 10 year stock options vest immediately and have an exercise price of
$0.24 per share. Each outside director was also granted 150,000 stock options to
purchase shares of common stock from the Company's 2005 Incentive Plan for their
service to the Company in 2006. The 10 year stock options vest immediately and
have an exercise price of $0.24 per share. The Company's audit committee
chairperson will receive 30,000 stock options to purchase 30,000 shares of its
common stock at an exercise price of $0.24 per share from the Company's 2005
Incentive Plan.

         In 2005, the Chairman of the Executive Committee of the Board of
Directors earned $95,000 paid to Synergy Consulting Group (an entity which the
Chairman controls) for his service to the Company. Effective December 31, 2005,
the Executive Committee was disbanded in keeping with the long term strategic
plan to reorganize and restructure our Board.

Indebtedness of Executive Officers and Directors

         No executive officer, director or any member of these individuals'
immediate families or any corporation or


                                      -49-
<PAGE>


organization with whom any of these individuals is an affiliate is or has been
indebted to us since the beginning of our last fiscal year.

Family Relationships

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

Section 16(a) Beneficial Ownership Compliance

         Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who beneficially own more than ten
percent of a registered class of our equity securities to file with the SEC
initial reports of ownership and reports of change in ownership of common stock
and other equity securities of our company. Officers, directors and greater than
ten percent stockholders are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file. Based solely upon a review of Forms
3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the
fiscal year ended December 31, 2005, and Forms 5 and amendments thereto
furnished to us with respect to the fiscal year ended December 31, 2005, we
believe that during the year ended December 31, 2005, our executive officers,
directors and all persons who own more than ten percent of a registered class of
our equity securities complied with all Section 16(a) filing requirements.

Item 10. Executive Compensation

         The following table sets forth the cash compensation (including cash
bonuses) paid or accrued by us for our years ended December 31, 2005, 2004 and
2003 to our Chief Executive Officer and our four most highly compensated
officers other than the Chief Executive Officer at December 31, 2005.

                           Summary Compensation Table


<TABLE>
<CAPTION>
                                                        Annual                  Long-term
                                                     Compensation             Compensation
                                                ----------------------- --------------------------
                                                                           Awards       Payouts
                                                                        -------------- -----------
                                                                         Securities
                                                                         Underlying       LTIP        All Other
                                       Fiscal     Salary       Bonus      Options/      Payouts      Compensation
Name and Principal Position             Year        ($)         ($)       SARs (#)        ($)            ($)
------------------------------------- --------- ------------ ---------- -------------- ----------- -----------------
<S>                                     <C>         <C>          <C>      <C>              <C>            <C>
Denis A. O'Connor
President & CEO (1)                     2005        171,000      --       2,677,000        --           27,500

Mihai Dimancescu                        2005        149,000      --          20,000        --             --
Vice President - Medical                2004        164,000      --          22,500        --             --
Affairs                                 2003           --        --            --          --             --

Marek Pawlowski, Ph.D                   2005        112,600      --          10,000        --             --
Vice President - Product                2004        103,000      --            --          --             --
Development                             2003         85,000      --           8,728        --             --

Anne Marie Fields                       2005         53,500      --          15,000        --             --
Vice President - Corporate              2004        112,000      --          13,750        --             --
Communications & Business Strategy (2)  2003           --        --            --          --             --

Loring D. Andersen                      2005         83,000      --          30,000        --             --
Vice President - Market Development(3)  2004        124,000      --         120,000        --             --
                                        2003           --        --            --          --             --

Mark A. Fauci                           2005             --      --            --          --             --
Former President and Chief              2004        180,000      --            --          --             --
Executive Officer (4)                   2003        180,000      --         250,000        --             --
</TABLE>

(1) Mr. O'Connor joined the Company on March 23, 2005. Mr. O'Connor's other
compensation is one half the


                                      -50-
<PAGE>


executive 2004 bonus ($55,000) the company agreed to pay in as per his
employment agreement.

(2) Ms. Fields ceased being an employee of our company effective June 30, 2005.

(3) Mr. Andersen ceased being an employee of our company effective September 9,
2005.

 (4) Mr. Fauci ceased being an officer on December 13, 2004. Mr. Fauci deferred
an aggregate of $625,000 of his salary since the commencement of privately-held
OmniCorder's operations through December 31, 2003. This liability is included in
deferred officer's salaries - current and deferred salaries - non current in our
financial statements. Mr. Fauci signed a two year consulting agreement with us
effective March 1, 2005.

Options Grants in Last Fiscal Year

         The following table sets forth information with respect to grants of
options to purchase our common stock under our 1998 Stock Option Plan to the
named executive officers during the fiscal year ended December 31, 2005.

<TABLE>
<CAPTION>
                                                                 Percent of Total
                                                                   options/SARs
                                         Number of Securities       Granted to
                                          Underlying Options/   Employees Exercise
Name                                         SARs Granted         in Fiscal Year      or Base Price       Expiration
--------------------------------------   ---------------------  -------------------  ---------------     ------------
                                                  (#)                                    ($/Sh)
<S>                                         <C>                     <C>                   <C>            <C>
Denis O'Connor (1)
President and                                 852,000               28.2%                 1.00            3/23/2015
Chief Executive Officer                       825,000               27.3%                 1.00             6/7/2015
                                            1,000,000               33.1%                  .30           10/26/2015

Loring D. Andersen
Vice President - Market Development (2)        30,000                1.0%                 1.00            12/6/2005

Mihai Dimancescu
Vice President - Medical Affairs (4)           20,000                0.7%                 1.00            2/14/2010

Marek Pawlowski, Ph.D
Vice President - Product Development           10,000                0.3%                 1.00            2/14/2010

Anne Marie Fields
Vice President - Corporate
Communications & Business Strategy (3)         15,000                0.5%                 1.00            10/1/2005
</TABLE>


(1) Mr. O'Connor joined our company on March 23, 2005.
(2) Mr. Andersen ceased being an employee of our company effective September 9,
2005.
(3) Ms. Fields ceased being an employee of our company effective June 30,
2005.
(4) Dr. Dimancescu became a part time employee effective September 9,
2005.

Aggregate Option Exercises In Last Fiscal Year and Fiscal Year End Option Values

         The following table sets forth with respect to the named executive
officers information with respect to options exercised, unexercised options and
year-end option values in each case with respect to options to purchase shares
of our common stock.


                                      -51-
<PAGE>


<TABLE>
<CAPTION>
                                                       Number of Securities Underlying    Value of Unexercised In The
                                                       Unexercised Options at December          Money Options At
                                                                   31, 2005                   December 31, 2005(1)
                                                       -------------------------------    ----------------------------
                                Shares      Value
                             Acquired on   Realized                      Unexercisable   Exercisable    Unexercisable
           Name              Exercise (#)     ($)      Exercisable (#)        (#)            (#)             (#)
---------------------------  ------------  --------    ---------------   -------------   -----------    -------------
<S>                              <C>          <C>        <C>                    <C>           <C>            <C>
Denis O'Connor (2)
President and
Chief Executive Officer          0            0          2,677,000              0             0              0

Loring D. Anderson
Vice President- Market
Development(3)                    0           0                  0              0             0              0

Mihai Dimancescu (5)
Vice President - Medical
Affairs                           0           0             42,500              0             0              0

Marek Pawlowski, Ph.D.
Vice President-Product
Development                       0           0            106,009              0             0              0

Anne Marie Fields
Vice President - Corporate
Communications & Business
Strategy (4)                      0           0             77,013              0             0              0
</TABLE>

(1) Represents the difference between the last reported sale price of our common
stock on December 31, 2005 and the exercise price of the option multiplied by
the applicable number of shares.
(2) Mr. O'Connor joined our company on March
23, 2005.
(3) Mr. Andersen ceased being an employee of our company effective September 9,
2005.
(4) Ms. Fields ceased being an employee of our company effective June 30,
2005.
(5) Dr. Dimancescu became a part time employee effective September 9,
2005.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth, as of March 21, 2006, the number of and
percent of the Company's common stock beneficially owned by:

o all directors and nominees, naming them,
o our executive officers,
o our directors and executive officers as a group, without naming them, and o
persons or groups known by us to own beneficially 5% or more of our common
stock:

         The Company believes that all persons named in the table have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them.

         A person is deemed to be the beneficial owner of securities that can be
acquired by him within 60 days from March 21, 2006 upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage ownership
is determined by assuming that options, warrants or convertible securities that
are held by him, but not those held by any other person, and which are
exercisable within 60 days of March 21, 2006 have been exercised and converted.

 Name and Address of                       Amount Beneficially        Percent of
 Beneficial Owner                                Owned (1)             Class (1)
 -----------------------------------       -------------------        ----------
Mark A. Fauci
   Common Stock                                   9,029,883(2)           26.7%

Jed Schutz
   Common Stock                                   3,351,443(3)            10%
   Series A Preferred                               765,682(3)            2.3%
   Series B Preferred                               143,367(3)              *

Marek Pawlowski, Ph.D.
   Common Stock                                     106,009(8)              *


                                      -52-
<PAGE>


Celia I. Schiffner
   Common Stock                                      19,375(8)              *

Kevin J. Healy
   Common Stock                                     200,000(10)             *

Michael A. Davis, M.D., D.Sc.
   Common Stock                                     385,000(4)            1.2%
   Series B Preferred                                14,336(4)               *

Joseph T. Casey
   Common Stock                                   1,500,080(5)            4.5%
   Series A Preferred                               765,682(5)            2.3%
   Series B Preferred                               215,049(5)            1.2%

Anthony A. Lombardo
   Common Stock                                     426,744(6)              *

William J. Wagner
   Common Stock                                     602,948(7)            1.8%

Denis A. O'Connor
   Common Stock                                   2,677,000(9)            7.4%

George Benedict
     Common Stock                                 1,547,344(11)           4.6%
   Series A Preferred                               306,274(11)             *
   Series B Preferred                               143,367(11)             *

Columbia Ventures Corp.
   Common Stock                                   1,055,628(12)           3.2%
   Series A Preferred                             1,531,367(12)           4.6%
   Series B Preferred                               122,913(12)              *

Loring Andersen                                           0(14)             *

Ann Marie Fields                                     77,013(15)             *

Robert Ellis
    Common Stock                                    667,000(10)           2.0%

All executive officers and directors
as a group (10 persons)                          20,869,597(16)          48.3%
----------

* Less than one percent.

(1) In accordance with Rule 13d-3(d)(1)(i) of the Securities Exchange Act of
1934, as amended, or the Exchange Act, shares beneficially owned at any date
include shares issuable upon the exercise of stock options, warrants, rights or
conversion privileges within 60 days of that date. For the purpose of computing
the percentage of outstanding shares beneficially owned by a particular person,
any securities not outstanding that are subject to stock options, warrants,
rights or conversion privileges exercisable by that person within 60 days of
January 31, 2006 have been deemed to be outstanding, but have not been deemed
outstanding for the purpose of computing the percentage of the class
beneficially owned by any other person.

(2) Based on a Schedule 13D filed on January 5, 2004, and other information
known to us. Includes stock options to


                                      -53-
<PAGE>


purchase 250,000 shares of our common stock granted under the 1998 Stock Option
Plan pursuant to Mr. Fauci's employment agreement and 210,000 shares of our
common stock issuable upon exercise of stock options granted under the 2005
Incentive Compensation Plan.

(3) Based on a Schedule 13D filed on January 5, 2004, and other information
known to us. Includes: (i) 1,401,840 shares of our common stock issuable upon
exercise of outstanding warrants; (ii) 152,816 shares of our common stock
issuable upon exercise of stock options granted under the 1998 Stock Option Plan
and 285,000 shares of our common stock issuable upon exercise of stock options
granted under the 2005 Incentive Compensation Plan, which are currently
exercisable; (iii) 765,682 shares of our common stock issuable upon the
conversion of shares of series A preferred stock and (iv) 173,367 shares of our
common stock issuable upon the conversion of shares of series B preferred stock
..The shares of common stock and warrants beneficially owned by Mr. Schutz are
held jointly with his spouse.

(4) Based on the information known to us. Includes: (i) 50,000 shares of our
common stock issuable upon exercise of stock options granted under the 1998
Stock Option Plan and 300,000 shares of our common stock issuable upon exercise
of stock options granted under the 2005 Incentive Compensation Plan, which are
currently exercisable; (ii) 14,339 shares of our common stock issuable upon the
conversion of shares of series B preferred stock; and (iii) 5,000 shares of our
common stock issuable upon exercise of an outstanding warrant.

(5) Held by The Casey Living Trust, of which Mr. Casey and his spouse are
co-trustees. Includes (i) 472,735 shares of our common stock issuable upon
exercise of outstanding warrants, which is currently exercisable; (ii) 30,000
shares of our common stock issuable upon exercise of stock options granted under
the 1998 Stock Option Plan and 240,000 shares of our common stock issuable upon
exercise of stock options granted under the 2005 Incentive Compensation Plan,
which are currently exercisable; (iii) 765,682 shares of our common stock
issuable upon the conversion of shares of series A preferred stock; and (iv)
215,049 shares of our common stock issuable upon the conversion of shares of
series B preferred stock.

(6) Includes 111,744 shares of our common stock issuable upon exercise of stock
options granted under the 1998 Stock Option Plan and 285,000 shares of our
common stock issuable upon exercise of stock options granted under the 2005
Incentive Compensation Plan, which are currently exercisable.

(7) Held by Dauk/Wagner Investments, LLC, of which Mr. Wagner is a managing
director. Includes 157,948 shares of our common stock issuable upon exercise of
stock options granted under the 1998 Stock Option Plan and 315,000 shares of our
common stock issuable upon exercise of stock options granted under the 2005
Incentive Compensation Plan, which are currently exercisable.

(8) Representing shares of our common stock issuable upon exercise of stock
options granted under the 1998 Stock Option Plan.

(9) Includes 852,000 shares of our common stock issuable upon exercise of stock
options granted under the 1998 Stock Option Plan and 1,825,000 shares of our
common stock issuable upon exercise of stock options granted under the 2005
Incentive Compensation Plan, which are currently exercisable.

(10) Representing shares of our common stock issuable upon exercise of stock
options granted under the 2005 Incentive Compensation Plan.

(11) Includes (i) 385,368 shares of our common stock issuable upon exercise of
outstanding warrants; (ii) 137,818 shares of our common stock issuable upon
exercise of stock options granted under the 1998 Stock Option Plan and 60,000
shares of our common stock issuable upon exercise of stock options granted under
the 2005 Incentive Compensation Plan, which are currently exercisable; (iii)
306,274 shares of our common stock issuable upon the conversion of shares of
series A preferred stock purchased in our December 2004 private placement; and
(iv) 143,367 shares of our common stock issuable upon the conversion of shares
of series B preferred stock purchased in our August 2005 Rights Offering.

(12) Shares are held in the name Columbia Ventures Corp. of which Kenneth J.
Peterson as CEO has voting power and investment control over the shares owned by
this entity. Includes (i) 363,636 shares of our stock; (ii) 1,531,367


                                      -54-
<PAGE>


shares of our common stock issuable upon the conversion of shares of series A
preferred stock purchased in our December 2004 private placement;(iii) 122,913
shares of our common stock issuable upon the conversion of shares of series B
preferred stock purchased in our August 2005 Rights Offering; (iv) 691,990
shares of our common stock issuable upon exercise of outstanding warrants.

(13) Mr. Anderson ceased being an employee of our Company September 9, 2005. His
options granted under the 1998 Option plan went unexercised and were forfeited
90 days after separation.

(14) AnnMarie Fields ceased being an employee June 20, 2005. The shares
represent options granted from our 1998 Option Plan to Ms. Fields when she
served as consultant on our Management Advisory Board.

(15) Includes shares held in aggregate of current officers and directors of (i)
11,029,015 shares of our common stock; (ii) 1,486,121 shares of our common stock
issuable upon the conversion of shares of series A preferred stock purchased in
our December 2004 private placement;(iii) 376,484 shares of our common stock
issuable upon the conversion of shares of series B preferred stock purchased in
our August 2005 Rights Offering; (iv) 1,729,892 shares of our common stock
issuable upon exercise of stock options granted under the 1998 Stock Option Plan
and 4,327,000 shares of our common stock issuable upon exercise of stock options
granted under the 2005 Incentive Compensation Plan; (v) 1,879,575 shares of our
common stock issuable upon exercise of outstanding warrants

Item 12. Certain Relationships and Related Transactions

         In March 1997, we entered into an option agreement with Michael Anbar,
Ph.D., Professor in the Department of Physiology and Biophysics, School of
Medicine, and Chairman of Biomedical Sciences, at the State University of New
York at Buffalo (now retired), pursuant to which we could acquire the exclusive
worldwide right to commercialize the technology relating to a patent owned by
Dr. Anbar, subject to specified research funding requirements being met. We are
required to pay Dr. Anbar a royalty of $300 for each commercial BioScanIR(R)
system installed at a client site. The Anbar license does not expire other than
as a result of a breach of the license by us. As of March 21, 2006, Dr. Anbar
has not received any compensation under this agreement. The Anbar patent expires
in January 2015. Dr. Anbar currently owns 3.5% of the outstanding shares of our
common stock, but is not an officer or director of the company.

         Effective February 1, 2005, we entered into a two-year consulting
agreement with Dr. Anbar. The agreement provides for the payment of $1,000 and
1,000 restricted shares of common stock per day with a minimum fee of $12,000
for the first 12 month period as well as a grant of 250,000 additional
restricted shares. The agreement may be extended at either party's option for an
additional two year term. As part of this agreement, we acquired a patent on
complementary technology developed and held by Dr. Anbar, who will work closely
with senior management, to provide support and assistance in order to advance
our commercialization strategy, expand our clinical applications and enhance new
product development efforts. We obtained from Dr. Anbar U.S. Patent 5,771,261
which comprises methods and apparatus for assessment of the effects of mental
stress involving the measurement of periodic changes in skin perfusion. Using a
remotely mounted infrared camera, dynamic area telethermometry (DAT) measures
the autonomic nervous activity by monitoring and quantitatively analyzing the
modulation of cutaneous perfusion. Our strategy initially is to utilize our
patents which relate to perfusion in medical pathology. At a later date, we
might look to utilize the patent that we obtained from Dr. Anbar, which relates
to psychological evaluation through the assessment of changes in perfusion. As
of December 31, 2005 we have paid Dr. Anbar $22,400 and granted 250,000 shares
of restricted stock under this agreement. As of March 21, 2006 we granted Dr.
Anbar an additional 12,000 of restricted stock under this agreement.

         Gordon A. Lenz, one of our directors, is the Chairman and Chief
Executive Officer of New York State Business Group, Inc./Conference Associates,
Inc., which has provided insurance brokerage services to us during the past two
fiscal years. Insurance premiums paid to carriers dealt with by Mr. Lenz's
company totaled $241,000 in 2005 and $239,000 in 2004. We do not pay Mr. Lenz'
Company. Mr. Lenz resigned from our board effective December 31, 2005.

         Investors in our December 2004 private placement included three members
of our board of directors. Joseph Casey, as co-trustee for the Casey Living
Trust, and Jed Schutz each invested $250,000 and received 250,000 shares of
series A convertible preferred stock and warrants to purchase 75,000 shares of
common stock. George


                                      -55-
<PAGE>


Benedict invested $100,000 and received 100,000 shares of series A convertible
preferred stock and warrants to purchase 30,000 shares of common stock. Mr.
Benedict resigned from our board effective December 31, 2005.

         Investors in our August 2005 rights offering included three members of
our board of directors, Jed Schutz, Joseph T. Casey and Michael Davis. Mr.
Schutz purchased 100,000 shares of series B convertible preferred stock for a
purchase price of $50,000, and issued warrants to purchase 50,000 shares of
common stock. Mr. Casey purchased 150,000 shares of series B convertible
preferred stock for a purchase price of $75,000, and was issued warrants to
purchase 75,000 shares of common stock. Dr. Davis purchased 10,000 shares of
series B convertible preferred stock for a purchase price of $5,000, and was
issued warrants to purchase 5,000 shares of common stock.

         The Company's Chairman of the Board, Hon. Joseph F. Lisa, who
beneficially owns 94,284 shares of our common stock currently serves as counsel
in the intellectual property department of the New York office of Greenberg
Traurig, LLP, an international law firm. In the year ended December 31, 2005 and
2004, Greenberg Traurig LLP billed the Company approximately $677,200 and
$570,300, respectively for legal services rendered. Effective December 31, 2005,
Joseph Lisa voluntarily resigned from his position from our Board of Directors.

         Under a Guaranty and Pledge Agreement entered into on November 14,
2005, Mr. Denis A. O'Connor, our President and Chief Executive Officer, agreed
(i) to unconditionally guarantee the timely and full satisfaction of all
obligations, whether matured or unmatured, now or hereafter existing or created
and becoming due and payable to Offshore, Qualified, Partners, and Millennium,
their successors, endorsees, transferees or assigns under the Securities
Purchase Agreement and other transaction documents to the extent of 2,677,000
shares of our common stock issued in our name, and (ii) to grant to AJW
Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New
Millennium Capital Partners II, LLC, their successors, endorsees, transferees or
assigns a security interest in the 2,677,000 shares, as collateral security for
such obligations. (See Note 8 to the accompanying interim financial statements).
Our CEO does not own any shares of our common stock, only stock options.
Accordingly, we, the investors and our CEO agreed that we would pledge 2,677,000
shares of common stock, issued in the name of our company and delivered to the
investors to be held in escrow together with a duly executed power of attorney
in favor of the investors. These pledged shares underlie 852,000 stock options
issued to our CEO under the 1998 Stock Option Plan and 1,825,000 options granted
under the 2005 Incentive Compensation Plan, which are currently exercisable.
Until such time as we pay the notes in full, or that the investors have
converted the full principal amount of the notes, plus any accrued and unpaid
interest, the investors will return the pledge shares to us for cancellation.

         On March 9, 2005, in settlement of an arbitration proceeding arising
from the December 13, 2004 termination of his employment agreement as President
and Chief Executive Officer, we announced that we entered into a consulting
agreement with Mr. Fauci. Mr. Fauci remains a member of our board of directors.
The agreement, which terminates Mr. Fauci's previous employment agreement with
us, provides that Mr. Fauci will perform consulting services for us for a
retroactive two-year period in exchange for consulting fees of $200,000 per year
during the term of the agreement which expires December 2006. Mr. Fauci will be
nominated at the next two annual meetings of stockholders to continue as a board
member. The agreement also provides for a three-year payout schedule of our
obligation to pay Mr. Fauci's deferred accrued salary under his previous
employment agreement, in the amount of $625,000. Those payments commenced in the
earlier October 1, 2005. This amount is payable at the rate of $10,000 per month
for the initial 12 months and $20,000 per month thereafter. In 2005, we paid
$240,000 to Mr. Fauci of which $200,000 was for one year consulting as per
agreement and $40,000 for the deferred accrued salary.

         During 2005, Dr. Michael Davis, the Chairperson of the Executive
Committee of our Board of Directors was compensated $95,000 for his service in
this role to the Company. By unanimous consent of the Board of Directors on
December 13, 2005, the Executive Committee was disbanded effective December 31,
2005 in keeping with the long term strategic plan to reorganize and restructure
our Board. In January 2006, the Company offered Dr. Davis a consulting contract
whereby he will provide medical and scientific expertise to the Company. The
terms of the contract have not yet been finalized.

         We believe that these transactions were advantageous to us and were on
terms no less favorable to us than could have been obtained from unaffiliated
third parties.

Item 13.      Exhibits.

                                      -56-
<PAGE>


         (a) Exhibits:


Exhibit No.    Description
-----------    ------------------------------------------------------------

2.1            Agreement  of Purchase  and Sale,  dated as of December 19, 2003,
               between Promos, Inc. and OmniCorder Technologies, Inc.(1)

3.1            Amended and Restated Articles of Incorporation.(1)

3.2            Articles  of  Amendment  to  Amended  and  Restated  Articles  of
               Incorporation(2)

3.3            By-laws.(3)

3.4            Certificate of  Designation,  Preferences  and Rights of Series A
               Convertible Preferred Stock.(4)

3.5            Amended  Certificate of  Designation,  Preferences  and Rights of
               Series A Convertible Preferred Stock.(7)

3.6            Certificate of  Designation,  Preferences  and Rights of Series B
               Convertible Preferred Stock.(7)

4.1            Form of Warrant  Certificate to Purchase Common Stock issued with
               the Series B Convertible Preferred Stock.(7)

4.2            Form of Warrant to Purchase Common Stock. (4)

4.3            Form of Subscription Rights Certificate.(6)


10.1           Employment Agreement, dated as of December 19, 2003, between Mark
               A.  Fauci and  OmniCorder  Technologies,  Inc.,  as  assigned  to
               Promos, Inc.(1)

10.2           Indemnification  Agreement,  dated as of December 19, 2003, among
               Promos, Inc., Judith F. Harayda and Stephan R. Levy.(1)

10.3           Form of Private Placement Subscription Agreement.(1)

10.4           Registration Rights Letter.(1)

10.5           1998 Stock Option Plan, as amended.(5)
10.6           License  Agreement,  dated as of May 11, 1998, between California
               Institute of Technology and OmniCorder  Technologies,  Inc., with
               amendments.(3)

10.7           Exclusive  License  Agreement,  dated as of  September  29, 1998,
               between Lockheed Martin Corporation and OmniCorder  Technologies,
               Inc.(3)

10.8           Option Agreement,  dated March 19, 1997, between Michael A. Anbar
               and OmniCorder Technologies, Inc., with amendments.(3)

10.9           Exclusive  Sale  Agreement,  dated  February  2000,  between  AEG
               Infrarot-Module GmbH and OmniCorder Technologies, Inc.(3)


                                      -57-
<PAGE>


10.10          Agreement,  dated  August 12,  2003,  between the  Department  of
               Defense and OmniCorder Technologies, Inc.(3)

10.11          Form of Subscription  Agreement between OmniCorder  Technologies,
               Inc. and the private placement subscribers. (3)

10.12          Employment  Agreement,  dated as of  February  9,  2004,  between
               Loring D. Anderson and OmniCorder Technologies, Inc. (7)

10.13          2005 Incentive Compensation Plan.(8)

10.14          Securities Purchase Agreement, dated November 14, 2005, by and
               among Advanced BioPhotonics, Inc. and AJW Offshore, Ltd., AJW
               Qualified Partners, LLC, AJW Partners, LLC and New Millennium
               Capital Partners II, LLC. *

10.15          Callable Secured  Convertible Note issued to AJW Offshore,  Ltd.,
               dated November 14, 2005. (9)

10.16          Callable  Secured   Convertible  Note  issued  to  AJW  Qualified
               Partners, LLC, dated November 14, 2005. (9)

10.17          Callable Secured  Convertible  Note issued to AJW Partners,  LLC,
               dated November 14, 2005. (9)

10.18          Callable  Secured  Convertible  Note  issued  to  New  Millennium
               Capital Partners II, LLC, dated November 14, 2005. (9)

10.19          Stock  Purchase  Warrant  issued  to AJW  Offshore,  Ltd.,  dated
               November 14, 2005.

10.20          Stock  Purchase  Warrant issued to AJW Qualified  Partners,  LLC,
               dated November 14, 2005. (9)

10.21          Stock  Purchase  Warrant  issued  to  AJW  Partners,  LLC,  dated
               November 14, 2005. (9)


10.22          Stock Purchase Warrant issued to New Millennium  Capital Partners
               II, LLC, dated November 14, 2005. (9)

10.23          Registration Rights Agreement,  dated as of November 14, 2005, by
               and among Advanced  BioPhotonics,  Inc., AJW Offshore,  Ltd., AJW
               Qualified  Partners,  LLC, AJW Partners,  LLC and New  Millennium
               Capital Partners II, LLC. (9)

10.24          Security  Agreement,  dated as of November 14, 2005, by and among
               Advanced  BioPhotonics,  Inc., AJW Offshore,  Ltd., AJW Qualified
               Partners,  LLC,  AJW  Partners,  LLC and New  Millennium  Capital
               Partners II, LLC. (9)

10.25          Intellectual  Property  Security  Agreement,  dated  November 14,
               2005, by and among  Advanced  BioPhotonics,  Inc.,  AJW Offshore,
               Ltd.,  AJW Qualified  Partners,  LLC, AJW  Partners,  LLC and New
               Millennium Capital Partners II, LLC. (9)


                                      -58-
<PAGE>


10.26          Guaranty and Pledge  Agreement,  dated  November 14, 2005, by and
               among  Advanced  BioPhotonics,   Inc.,  Denis  A.  O'Connor,  AJW
               Offshore,  Ltd., AJW Qualified Partners,  LLC, AJW Partners,  LLC
               and New Millennium Capital Partners II, LLC. (9)


10.27          Employment  Agreement dated February 28, 2005 between  OmniCorder
               Technologies, Inc. and Denis A. O'Connor. (10)

10.28          Engagement  Letter  dated  September  23, 2005  between  Advanced
               BioPhotonics Inc. and Axiom Capital Management, Inc. (11)

10.29          Settlement  and Mutual  Release  dated  November  17, 2005 by and
               between Advanced  BioPhotonics Inc. and Trilogy Capital Partners,
               Inc. (11)

10.30          Consulting  Agreement  dated as of March 1,  2005 by and  between
               Advanced BioPhotonics Inc. and Mark Fauci. (11)

10.31          Option  Agreement to Purchase  Exclusive  License dated March 19,
               1997 by and between OmniCorder Technologies, Inc. and Dr. Michael
               Anbar. (11)

10.32          Amendments  to Option  Agreement  to Purchase  Exclusive  License
               dated  July  25,  1997  and  September  13,  1997 by and  between
               OmniCorder Technologies, Inc. and Dr. Michael Anbar. (11)

10.33          Amendment to Option Agreement to Purchase Exclusive License dated
               March 19, 1998 by and between OmniCorder  Technologies,  Inc. and
               Dr. Michael Anbar. (11)

10.34          Settlement  Agreement  dated as of October 3, 2001 by and between
               OmniCorder Technologies, Inc. and Dr. Michael Anbar. (11)

10.35          Consulting  Agreement and Amendment to Settlement Agreement dated
               as of February 17, 2005 by and between  OmniCorder  Technologies,
               Inc. and Dr. Michael Anbar. (11)

23.1           Consent of Marcum & Kliegman LLP.*

99.1           Form   of   Subscription   Agent   Agreement   between   Advanced
               BioPhotonics Inc. and Corporate Stock Transfer, Inc. (6)

99.2           Form of Warrant Agreement between Advanced  BioPhotonics Inc. and
               Corporate Stock Transfer, Inc.(6)

99.3           Form of Letter to Stockholders.(6)

99.4           Form  W-9,  Request  for  Taxpayer   Identification   Number  and
               Certification.(6)

99.5           Form W-8BEN,  Certificate of Foreign  Status of Beneficial  Owner
               for United States Tax Withholding.(7)

99.6           Form of Letter to Brokers.(6)


                                      -59-
<PAGE>


99.7           Form of Letter to Clients.(6)

99.8           Form of Beneficial Owner Election Form.(6)

99.9           Form of Nominee Holder Certification.(6)

99.10          Form of DTC Participant Over-Subscription Form.

----------
31.1   Certification of Principal Executive Officer Required by Exchange Act
       Rule 13a-14(a).
31.2   Certification of Principal Financial Officer Required by Exchange Act
       Rule 13a-14(a).*
32.1   Joint  Certification of Principal  Executive  Officer and Principal
       Financial  Officer Required by Exchange Act Rule 13a-14(b).*

* Filed herewith.

(1) Incorporated by reference from the exhibits filed with the Current Report on
Form 8-K, dated December 19, 2003 (filed on January 5, 2004).

(2) Incorporated by reference from the exhibits filed with the definitive Proxy
Statement, dated May 16, 2005 (filed on May 16, 2005).

(3) Incorporated by reference from the exhibits filed with the Annual Report on
Form 10-KSB, dated December 31, 2003 (filed on April 15, 2004).

(4) Incorporated by reference from the exhibits filed with the Current Report on
Form 8-K, dated December 14, 2004 (filed on December 20, 2004).

(5) Incorporated by reference from the exhibits filed with the definitive
Information Statement on Schedule 14C, dated February 3, 2004 (filed on February
3, 2004).

(6) Incorporated by reference from the exhibits filed with the registration
statement on Form SB-2 filed on June 27, 2005.

(7) Previously filed.

(8) Incorporated by reference from the exhibits filed with OmniCorder
Technologies' preliminary proxy statement (filed on May 5, 2005).

(9) Incorporated by reference from the exhibits filed with Advanced BioPhotonics
Inc.'s Current Report on Form 8-K filed on November 16, 2005).

(10) Incorporated by reference from the exhibits filed with the Current Report
on Form 8-K, dated March 4, 2005 (filed on March 14, 2005).

(11) Incorporated by reference from the exhibits filed with the registration
statement on Form SB-2/A filed on February 13, 2006.

Item 14. Principal Accountant Fees and Services.

Audit Fees

         The aggregate fees billable to us by Marcum & Kliegman LLP during 2005
and 2004 for the audits of our annual financial statements for the fiscal years
and review of our financial statements included in our Forms 10-QSB totaled
approximately $131,000 and $184,000.


                                      -60-
<PAGE>


Audit-Related Fees

         We incurred assurance and audit-related fees during 2005 and 2004 of
$110,000 and $77,000, respectively to Marcum & Kliegman LLP in connection with
the audit of the financial statements of Advanced BioPhotonics Inc. from
February 7, 1997 (Inception) through December 31, 2003 and for the reviews of
registration statements and issuance of related consents and assistance with SEC
letters of comment.

Tax Fees

         We incurred fees of $12,000 billed to us by Marcum & Kliegman for
services rendered to us fiscal years for tax compliance, tax advice, or tax
planning for each year ended December 31, 2005 and 2004.

All Other Fees

         There were no fees billed to us by Marcum & Kliegman LLP for services
rendered to us during the last two fiscal years, other than the services
described above under "Audit Fees" and "Audit-Related Fees."

         It is the audit committee's policy to pre-approve all services provided
by Marcum & Kliegman LLP.

         As of the date of this filing, our current policy is to not engage
Marcum & Kliegman LLP to provide, among other things, bookkeeping services,
appraisal or valuation services, or international audit services. The policy
provides that we engage Marcum & Kliegman LLP to provide audit, tax, and other
assurance services, such as review of SEC reports or filings.


                                      -61-
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                 Advanced BioPhotonics Inc.

Date:  March 30, 2006            By: /s/ Denis A. O'Connor
                                     -------------------------------------------
                                          Denis A. O'Connor
                                          President and Chief Executive Officer


                                 By: /s/ Celia I. Schiffner
                                     -------------------------------------------
                                          Celia I. Schiffner
                                          Controller
                                          (Principal Financial Officer)

                                POWER OF ATTORNEY

         We, the undersigned officers and directors of Advanced BioPhotonics
Inc. hereby severally constitute and appoint Denis A. O'Connor and Celia I.
Schiffner and each of them (with full power to each of them to act alone), our
true and lawful attorneys-in-fact and agents, with full power of substitution,
for us and in our stead, in any and all capacities, to sign any and all
amendments to this annual report and all documents relating thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the U.S. Securities and Exchange Commission, granting to said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or advisable to be done in
and about the premises, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all the said attorneys-in-fact and
agents, or any of them, or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.

         In accordance with the Exchange Act, 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/ Denis A. O'Connor
-----------------------------          President and Chief
Denis A. O'Connor                      Executive Officer          March 30, 2006

/s/ Michael A. Davis
Michael A. Davis, M.D., D.Sc.          Director                   March 30, 2006

/s/ Celia I. Schiffner
Celia I. Schiffner                     Controller                 March 30, 2006

/s/ Mark A. Fauci
Mark A. Fauci                          Director                   March 30, 2006

/s/ Jed Schutz
Jed Schutz                             Director                   March 30, 2006

/s/ Joseph T. Casey
Joseph T. Casey                        Director                   March 30, 2006

/s/ Anthony A. Lombardo
Anthony A. Lombardo                    Director                   March 30, 2006

/s/ William J. Wagner
William J. Wagner                      Director                   March 30, 2006


<PAGE>


                           ADVANCED BIOPHOTONICS INC.

                                   FORM 10-KSB

                                     ITEM 7

                          INDEX OF FINANCIAL STATEMENTS

                           ADVANCED BIOPHOTONICS INC.

                        (A Development Stage Enterprise)

                              FINANCIAL STATEMENTS

                 For the Years Ended December 31, 2005 and 2004,
      and the Period From February 7, 1997 (Inception) to December 31, 2005



<PAGE>


<TABLE>
<CAPTION>
                           ADVANCED BIOPHOTONICS INC.


                        (A Development Stage Enterprise)

                                                                                        CONTENTS
------------------------------------------------------------------------------------------------

                                                                                            Page

<S>                                                                                            <C>
Report of Independent Registered Public Accounting Firm                                      F-1

FINANCIAL STATEMENTS

Balance Sheet - December 31, 2005 and 2004                                                 F-2-4

Statements of Operations - For the Years Ended December 31, 2005 and 2004, and
         For the Period From February 7, 1997 (Inception)
         to December 31, 2005                                                                F-5

Statement of Stockholders' Equity
         - For the Years Ended December 31, 2005 and 2004,
         and For the Period From February 7, 1997 (Inception) to
         December 31, 2005                                                                 F-6-7

Statements of Cash Flows - For the Years Ended December 31, 2005 and 2004, and
         For the Period From February 7, 1997
         (Inception) to December 31, 2005                                                 F-8-10

NOTES TO FINANCIAL STATEMENTS                                                            F-11-43
</TABLE>


<PAGE>


             Report of Independent Registered Public Accounting Firm

To the Audit Committee of the Board of Directors and Stockholders
Advanced BioPhotonics Inc. (F/K/A OmniCorder Technologies, Inc.)

We have audited the accompanying balance sheets of Advanced BioPhotonics Inc.
(F/K/A OmniCorder Technologies, Inc.) (the "Company") (A Development Stage
Enterprise) as of December 31, 2005 and 2004 and the related statements of
operations, stockholders' equity (deficiency), and cash flows for the years
ended December 31, 2005 and 2004, and for the period from February 7, 1997
(inception) to December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced BioPhotonics Inc.
(F/K/A OmniCorder Technologies, Inc.) (A Development Stage Enterprise) as of
December 31, 2005 and 2004 and the results of its operations and its cash flows
for the years ended December 31, 2005 and 2004, and for the period from February
7, 1997 (inception) to December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has incurred a deficit accumulated during the
development stage of $22,317,969, and cash flows used in operating activities of
$13,755,707 during the development stage, which commenced on February 7, 1997
through December 31, 2005. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ Marcum & Kliegman LLP

Melville, New York
March 20, 2006


                                       F-1
<PAGE>

<TABLE>
<CAPTION>
                                    Advanced BioPhotonics Inc.
 ------------------------------------------------------------------------------------------------
                              (F/K/A OmniCorder Technologies, Inc.)
                                 (A Development Stage Enterprise)

                                          BALANCE SHEETS
 ------------------------------------------------------------------------------------------------

                                                          December 31, 2005    December 31, 2004
                                                        --------------------  -------------------
<S>                                                            <C>                  <C>
 CURRENT ASSETS
      Cash and cash equivalents                                 $868,363           $3,403,712
      Prepaid expenses and other current assets                  207,589              226,519
                                                        --------------------  -------------------
          Total Current Assets                                 1,075,952            3,630,231

      Property and equipment, net                                176,827              284,850
      Other assets:
         Equipment deposits                                      257,983               97,245
         Deferred financing costs, net                           220,962               37,000
         Security deposits                                         9,662               17,700
                                                        --------------------  -------------------

          TOTAL ASSETS                                        $1,741,386            $4,067,026
                                                        ====================  ===================
</TABLE>


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


                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                                   Advanced BioPhotonics Inc.
                             (F/K/A OmniCorder Technologies, Inc.)
                                (A Development Stage Enterprise)

                                       BALANCE SHEETS
-------------------------------------------------------------------------------------------------
                      LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) / EQUITY
                      ---------------------------------------------------

                                                           December 31, 2005    December 31, 2004
                                                           -----------------    -----------------
CURRENT LIABILITIES
-----------------------------------
<S>                                                          <C>                  <C>
     Notes payable                                           $    152,512         $    165,883
     Accounts payable and accrued expenses                        445,991              280,656
     Professional fees payable                                    242,171              159,062
     License agreement payable                                    323,000                   --
     Deferred officers salaries                                   504,632              431,555
     Dividends payable                                             77,729                   --
                                                             ------------         ------------
         Total Current Liabilities                              1,746,035            1,037,156
                                                             ------------         ------------
    Convertible debentures(net of debt discount
    $758,171)                                                     241,829                   --
    Detachable warrants                                           878,708                   --
    Non employee stock options                                    104,483                   --
    Conversion option on convertible debentures                   891,892                   --
    Conversion option on series A convertible
             preferred stock                                      602,387                   --
    Conversion option on series B convertible
             preferred stock                                      251,293                   --
     Deferred officers salaries, non current                      435,000              555,000
                                                             ------------         ------------
         Total Long term Liabilities                            3,405,592              555,000
                                                             ------------         ------------
         Total Liabilities                                      5,151,627            1,592,156
                                                             ------------         ------------

COMMITMENTS AND CONTINGENCIES
-----------------------------------

STOCKHOLDERS' (DEFICIENCY) / EQUITY
-----------------------------------
     Series A Convertible preferred stock, $.01 par
         value, 3,000,000 shares authorized;
         1,550,000 shares issued and outstanding,
         respectively, liquidation preference
         $1,550,000                                                15,500               15,500
     Series B Convertible preferred stock, $.01 par
         value, 7,000,000 shares authorized;
         1,293,202 and 0 shares issued and
         outstanding, respectively, liquidation
         preference $640,776                                       12,932                   --
     Common stock, $.001 par value; 200,000,000
         shares authorized; 33,072,772 issued and
         30,395,772 outstanding and 29,695,889 shares
         issued and outstanding, respectively                      33,073               29,695
     Additional paid-in capital                                18,897,622           17,842,765
     Deferred compensation                                        (48,722)                  --
     Deficit accumulated during the development stage         (22,317,969)         (15,413,090)


                                      F-3
<PAGE>



     Treasury stock, at cost, 2,677,000 and 0 shares
         issued, respectively                                      (2,677)                  --
                                                             ------------         ------------
         Total Stockholders' (Deficiency) / Equity             (3,410,241)           2,474,870
                                                             ------------         ------------
             TOTAL LIABILITIES AND
                  STOCKHOLDERS' (DEFICIENCY) / EQUITY        $  1,741,386         $  4,067,026
                                                             ============         ============
</TABLE>


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


                                      F-4
<PAGE>


                           Advanced BioPhotonics Inc.
                      (F/K/A OmniCorder Technologies, Inc.)
                        (A Development Stage Enterprise)


<TABLE>
<CAPTION>
                                             STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------
                                                                                                    Cumulative For
                                                                                                    the Period From
                                                                                                    February 7, 1997
                                                                                                      (inception)
                                                                    For the Years Ended             through December
                                                                       December 31,                       31,
                                                            ---------------------------------       -----------------
                                                                 2005                2004                 2005
                                                            -------------       -------------         -------------
<S>                                                         <C>                 <C>                   <C>
     DEVELOPMENT REVENUES                                   $          --       $      69,800         $     69,800
     DEVELOPMENT COSTS                                                 --              20,000               20,000
                                                            -------------       -------------         -------------
             GROSS PROFIT                                              --              49,800               49,800
                                                            -------------       -------------         -------------
OPERATING EXPENSES
     Research and development                                   1,898,015           1,413,194            8,719,223
     Selling, general and administrative                        3,538,032           3,288,844            9,677,140
     Related party legal expense                                       --                  --              544,881
     Write-off of public offering costs                                --                  --              501,992
                                                            -------------       -------------         -------------
         TOTAL OPERATING EXPENSES                               5,436,047           4,702,038           19,441,236

         OPERATING LOSS                                        (5,436,047)         (4,652,238)         (19,393,436)

     Change in fair value of non employee stock
     options, warrants and conversion options                     323,189                  --              323,189
     Interest and other  expenses (income), net                    22,257             (17,089)           1,019,837
                                                            -------------       -------------         -------------
         NET LOSS                                              (5,781,493)         (4,635,149)         (20,736,462)

     Series A Convertible Preferred Stock beneficial
         conversion feature                                       703,128             458,121            1,161,249
     Series B Convertible Preferred Stock beneficial
         conversion feature                                       420,258                  --              420,258
     Deemed dividend on issuance of additional Series A
         Convertible Preferred Stock Warrants                     449,500                  --              449,500
     Accumulated Dividends on Series A Convertible
         Preferred Stock                                           64,583                  --               64,583
     Accumulated Dividends on Series B Convertible
         Preferred Stock                                           17,614                  --               17,614
                                                            -------------       -------------         -------------

     NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS-BASIC
         AND DILUTED
                                                            $  (7,436,576)      $  (5,093,270)        $(22,849,666)
                                                            =============       =============         =============
     Basic and diluted net loss per share                          $(0.25)             $(0.17)
                                                            =============       =============
     Weighted average number of shares outstanding             30,107,408          29,584,357
                                                            =============       =============

</TABLE>

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


                                      F-5
<PAGE>

                           Advanced BioPhotonics Inc.
                      (F/K/A OmniCorder Technologies, Inc.
                        (A Development Stage Enterprise)
           CONDENSED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) / EQUITY
   For the period from February 7, 1997 (inception) through December 31, 2005



<TABLE>
<CAPTION>


                                                                                        Series A                    Series B
                                                      Common Stock                   Preferred Stock             Preferred Stock
                                                    Shares          Amount        Shares        Amount        Shares        Amount
<S>                                               <C>             <C>           <C>          <C>            <C>           <C>
Issuance of common stock to founders              10,301,259      $ 10,301            --           $--            --           $--
Sale of common stock at $.55 per share,
     net of expenses of $35,164                      361,437           361            --            --            --            --
Issuance of common stock warrants to
     related party for legal services                     --            --            --            --            --            --
Sale of common stock warrants to related party            --            --            --            --            --            --
        Net loss                                          --            --            --            --            --            --
                                                 -----------      ---------     --------      --------      --------      --------
Balance at December 31, 1997                      10,662,696        10,662            --            --            --            --
                                                 -----------      ---------     --------      --------      --------      --------
Issuance of common stock to founders               2,710,858         2,711            --            --            --            --
Sale of common stock at $.55 per share,
     net of expenses of $62,900                      885,539           886            --            --            --            --
Issuance of common stock for research
     and development                                 271,086           271            --            --            --            --
Issuance of common stock warrants to
related party for legal services                          --            --            --            --            --            --
Cash received from sale of common stock warrant           --            --            --            --            --            --
Issuance of common stock warrants in
connection with sale of bridge notes                      --            --            --            --            --            --
        Net loss                                          --            --            --            --            --            --
                                                 -----------      ---------     --------      --------      --------      --------
Balance at December 31, 1998                      14,530,179        14,530            --            --            --            --
                                                 -----------      ---------     --------      --------      --------      --------
Conversion of bridge notes into common stock       1,433,015         1,433            --            --            --            --
Issuance of common stock for research
   and development                                   135,543           136            --            --            --            --
Sale of common stock at $1.14 per share              945,282           945            --            --            --            --
        Net loss                                         --            --            --            --            --            --
                                                 -----------      ---------     --------      --------      --------      --------
Balance at December 31, 1999                      17,044,019      $ 17,044            --            --            --            --
                                                 -----------      ---------     --------      --------      --------      --------
</TABLE>


<TABLE>
<CAPTION>
                                                                                                     Deficit
                                                                                                   Accumulated
                                                                   Deferred       During the          Stock
                                                   Additional     Stock Based      Development     Subscription
                                                 Paid-in-Capital  Compensation        Stage         Receivable
<S>                                               <C>              <C>             <C>            <C>
Issuance of common stock to founders                  $ 6,419            --        $         --      $(15,070)
Sale of common stock at $.55 per share,
     net of expenses of $35,164                       164,469            --                  --            --
Issuance of common stock warrants to
     related party for legal services                  75,000            --                  --            --
Sale of common stock warrants to related party         40,000            --                  --       (30,000)
        Net loss                                           --            --            (168,516)          --
                                                  -----------      --------        ------------   -----------
Balance at December 31, 1997                          285,888            --            (168,516)      (45,070)
                                                  -----------      --------        ------------   -----------
Issuance of common stock to founders                    1,689            --                  --            --
Sale of common stock at $.55 per share,
     net of expenses of $62,900                       426,209            --                  --            --
Issuance of common stock for research
     and development                                  149,729            --                  --            --
Issuance of common stock warrants to
related party for legal services                       20,000            --                  --            --
Cash received from sale of common stock warrant            --            --                  --        30,000
Issuance of common stock warrants in
connection with sale of bridge notes                  329,625            --                  --            --
        Net loss                                           --            --          (1,594,054)           --
                                                  -----------      --------        ------------   -----------
Balance at December 31, 1998                        1,213,140            --          (1,762,570)      (15,070)
                                                  -----------      --------        ------------   -----------
Conversion of bridge notes into common stock          789,192            --                  --            --
Issuance of common stock for research
   and development                                     74,864            --                  --            --
Sale of common stock at $1.14 per share             1,073,055            --                  --            --
        Net loss                                          --            --          (1,547,973)           --
                                                  -----------      --------        ------------   -----------
Balance at December 31, 1999                      $ 3,150,251            --        $ (3,310,543)     $(15,070)
                                                  -----------      --------        ------------   -----------
</TABLE>


<TABLE>
<CAPTION>



                                                     Treasury Stock
                                                   Shares        Amount          Total
<S>                                              <C>          <C>               <C>
Issuance of common stock to founders                   --           $--            $ 1,650
Sale of common stock at $.55 per share,
     net of expenses of $35,164                        --            --            164,830
Issuance of common stock warrants to
     related party for legal services                  --            --             75,000
Sale of common stock warrants to related party         --            --             10,000
        Net loss                                       --            --           (168,516)
                                                 --------      --------         ----------
Balance at December 31, 1997                           --            --             82,964
                                                 --------      --------         ----------
Issuance of common stock to founders                   --            --              4,400
Sale of common stock at $.55 per share,
     net of expenses of $62,900                        --            --            427,095
Issuance of common stock for research
     and development                                   --            --            150,000
Issuance of common stock warrants to
related party for legal services                       --            --             20,000
Cash received from sale of common stock warrant        --            --             30,000
Issuance of common stock warrants in
connection with sale of bridge notes                   --            --            329,625
        Net loss                                       --            --         (1,594,054)
                                                 --------      --------         ----------
Balance at December 31, 1998                           --            --           (549,970)
                                                 --------      --------         ----------
Conversion of bridge notes into common stock           --            --            790,625
Issuance of common stock for research
   and development                                     --            --             75,000
Sale of common stock at $1.14 per share                --            --          1,074,000
        Net loss                                      --            --         (1,547,973)
                                                 --------      --------         ----------
Balance at December 31, 1999                           --            --         $ (158,318)
                                                 --------      --------         ----------
</TABLE>




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


<PAGE>

                           Advanced BioPhotonics Inc.
                      (F/K/A OmniCorder Technologies, Inc.)
                        (A Development Stage Enterprise)
                 STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
     For the Period February 7, 1997 (Inception) Through December 31, 2005
                                  (continued)



<TABLE>
<CAPTION>


                                                                                                    Series A
                                                                    Common Stock                  Preferred Stock
                                                               Shares           Amount         Shares         Amount
                                                              --------------------------------------------------------
<S>                                                           <C>               <C>            <C>             <C>
Issuance of common stock for research
 and development                                                  135,543          $ 136             --            $--
Issuance of common stock for
 services rendered                                                  8,810              9             --             --
Sale of common stock at $1.14 and $1.38 per
 share for 691,269 and 924,156 shares, respectively             1,615,425          1,615             --             --
Issuance of stock options and warrants
 for services rendered                                                 --             --             --             --
Net loss                                                               --             --             --             --
                                                              -----------       --------       ---------       -------
Balance at December 31, 2000                                   18,803,797         18,804             --             --
                                                              -----------       --------       ---------       -------
Issuance of common stock for
 services rendered                                                 12,322             12             --             --
Sale of common stock at $2.44 per share                           164,294            164             --             --
Issuance of stock options and warrants for
 services rendered                                                     --             --             --             --

Net loss                                                               --             --             --             --
                                                              -----------       --------       ---------       -------
Balance at December 31, 2001                                   18,980,413         18,980             --             --
                                                              -----------       --------       ---------       -------
Issuance of common stock in
 accordance with anti-dilution provisions                         164,294            164             --             --
Sale of common stock at $1.22 and $.97 per
  share for102,684 and 385,065 shares, respectively               487,749            488             --             --
Issuance of stock options and warrants
 for services rendered                                                 --             --             --             --
Net loss                                                               --             --             --             --
                                                              -----------       --------       ---------       -------
Balance at December 31, 2002                                   19,632,456         19,632            --             --
                                                              -----------       --------       ---------       -------
Elimination of subscription receivable                                 --             --             --             --
Sale of common stock at $.97 per share                          1,317,849          1,318             --             --
Issuance of stock options and warrants
 for services rendered                                                 --             --             --             --
Issuance of common stock in accordance with
  antidilution provisions                                         107,821            108             --             --
Exercise of warrants                                              480,274            480             --             --
Issuance of common shares to shareholders of                    1,133,600          1,134             --             --
company acquired in reverse acquisition
Net assets acquired in reverse acquistion
Sale of common stock for cash at $1.375 per share, net          5,486,027          5,486             --             --
Conversion of Bridge Loan at $1.375 per share                     200,000            200             --             --
Issuance of common stock for offering services                  1,212,073          1,212             --             --
Net loss                                                               --             --             --             --
                                                              -----------       --------       ---------       -------
Balance at December 31, 2003                                   29,570,100       $ 29,570            --             --
                                                              -----------       --------       ---------       -------
Issuance of stock options and warrants
 for services rendered                                                 --             --             --             --
Issuance of stock granted for services
 rendered                                                           15000             15             --             --
 Sale of preferred stock at $1.00 per share                            --             --      1,550,000         15,500
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                    --             --             --             --
Costs incurred asssociated with sale of stock and
   reverse acquisition                                                 --             --             --             --
Costs incurred asssociated with sale of Series A
 preferred stock                                                       --             --             --             --
 Exercise of options                                               76,101             76             --             --
 Exercise of options  (cashless)                                   27,388             27             --             --
Adjustment of Sale of common stock for cash                         7,300              7             --             --
at $1.375 per share, net (Unaudited)
Net Loss
                                                                       --             --             --             --
                                                              -----------       --------       ---------       -------
Balance at December 31, 2004                                   29,695,889       $ 29,695       1,550,000       $15,500
                                                              ===========       ========       =========       =======
 Exercise of options                                                5,218              6             --             --
 Issuance of common stock for
  services rendered                                               580,000            580             --             --
 Issuance of stock options for services rendered                       --             --             --             --
 Issuance of warrants for services rendered                            --             --             --             --
Amortization of deferred stock compensation                            --             --             --             --
 Sale ofSeries B preferred stock at $0.50 per share                    --             --             --             --
   Seriers B Convertible Preferred Stock
      beneficial conversion feature                                    --             --             --             --
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                    --             --             --             --
Costs incurred asssociated with sale of Series B
 preferred stock                                                       --             --             --             --
   Conversion of Seriers B Convertible Preferred Stock
      to common stock                                             114,665            115             --             --
   Issuance of collateral shares in Company's name              2,677,000          2,677             --             --
  Series A Convertible Preferred Stock dividends declared              --             --             --             --
  Series B Convertible Preferred Stock dividends declared              --             --             --             --
Reclassification of conversion option liabilty - series                --             --             --             --
A convertible preferred stock
Reclassification of conversion option liabilty - series                --             --             --             --
B convertible preferred stock
Reclassification of non-employee                                       --             --             --             --
stock options liabilty
Reclassification of detachable warrants liability                      --             --             --             --
Reacquisition of warrants held by Trilogy                              --             --             --             --
Issuance of additional warrants to holders of                          --             --             --             --
series A convertible preferred stock
  Deemed Dividend associated with issuance of                          --             --             --             --
additional warrants to holders of series A
convertible preferred stock
Net Loss                                                               --             --             --             --

Balance at December 31, 2005                                   33,072,772       $ 33,073       1,550,000       $15,500
                                                              ===========       ========       =========       =======
</TABLE>




<TABLE>
<CAPTION>


                                                                    Series B                                     Deferred
                                                                  Preferred Stock             Additional        Stock Based
                                                               Shares          Amount       Paid-in-Capital     Compensation
                                                              ---------------------------------------------------------------------
<S>                                                           <C>               <C>            <C>                   <C>
Issuance of common stock for research
 and development                                                     --             $--           $ 74,864              $ --
Issuance of common stock for
 services rendered                                                   --              --             10,001                --
Sale of common stock at $1.14 and $1.38 per
 share for 691,269 and 924,156 shares, respectively                  --              --          2,058,786                --
Issuance of stock options and warrants
 for services rendered                                               --              --             51,357                --
Net loss                                                             --              --                 --                --
                                                              ---------         -------        -----------           -------
Balance at December 31, 2000                                         --              --          5,345,259                --
                                                              ---------         -------        -----------           -------
Issuance of common stock for
 services rendered                                                   --              --             29,988                --
Sale of common stock at $2.44 per share                              --              --            399,836                --
Issuance of stock options and warrants for
 services rendered                                                   --              --             21,012                --

Net loss                                                             --              --                 --                --
                                                              ---------         -------        -----------           -------
Balance at December 31, 2001                                         --              --          5,796,095                --
                                                              ---------         -------        -----------           -------
Issuance of common stock in
 accordance with anti-dilution provisions                            --              --               (164)               --
Sale of common stock at $1.22 and $.97 per
  share for102,684 and 385,065 shares, respectively                  --              --            499,512                --
Issuance of stock options and warrants
 for services rendered                                               --              --            595,188                --
Net loss                                                             --              --                 --                --
                                                              ---------         -------        -----------           -------
Balance at December 31, 2002                                        --              --           6,890,631               --
                                                              ---------         -------        -----------           -------
Elimination of subscription receivable                               --              --            (15,070)               --
Sale of common stock at $.97 per share                               --              --          1,282,084                --
Issuance of stock options and warrants
 for services rendered                                               --              --            691,377                --
Issuance of common stock in accordance with
  antidilution provisions                                            --              --               (108)               --
Exercise of warrants                                                 --              --               (480)               --
Issuance of common shares to shareholders of                         --              --             (1,134)               --
company acquired in reverse acquisition
Net assets acquired in reverse acquistion                                                           20,584                --
Sale of common stock for cash at $1.375 per share, net               --              --          6,702,924                --
Conversion of Bridge Loan at $1.375 per share                        --              --            274,800                --
Issuance of common stock for offering services                       --              --             (1,212)               --
Net loss                                                             --              --                 --                --
                                                              ---------         -------        -----------           -------
Balance at December 31, 2003                                        --              --        $ 15,844,396               --
                                                              ---------         -------        -----------           -------
Issuance of stock options and warrants
 for services rendered                                               --              --             53,156
Issuance of stock granted for services
 rendered                                                            --              --             43,485
 Sale of preferred stock at $1.00 per share                          --              --          1,534,500
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                  --              --            458,121
Costs incurred asssociated with sale of stock and
   reverse acquisition                                               --              --           (101,711)
Costs incurred asssociated with sale of Series A
 preferred stock                                                     --              --            (31,072)
 Exercise of options                                                 --              --             41,924
 Exercise of options  (cashless)                                     --              --                (27)
Adjustment of Sale of common stock for cash                          --              --                 (7)
at $1.375 per share, net (Unaudited)
Net Loss
                                                                     --              --                 --                --
                                                              ---------         -------        -----------           -------
Balance at December 31, 2004                                         --         $    --        $17,842,765                --
                                                              =========         =======        ===========           =======
 Exercise of options                                                 --              --              2,875                --
 Issuance of common stock for
  services rendered                                                  --              --            409,920                --
 Issuance of stock options for services rendered                     --              --            133,818          (133,818)
 Issuance of warrants for services rendered                          --              --            600,000                --
Amortization of deferred stock compensation                          --              --                 --            85,096
 Sale ofSeries B preferred stock at $0.50 per share           1,407,867          14,079            689,854                --
   Seriers B Convertible Preferred Stock
      beneficial conversion feature                                  --              --            420,258                --
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                  --              --            703,128                --
Costs incurred asssociated with sale of Series B
 preferred stock                                                     --              --           (212,245)               --
   Conversion of Seriers B Convertible Preferred Stock
      to common stock                                          (114,665)         (1,147)             1,032                --
   Issuance of collateral shares in Company's name                   --              --                 --                --
  Series A Convertible Preferred Stock dividends declared            --              --            (62,000)               --
  Series B Convertible Preferred Stock dividends declared            --              --            (15,729)               --
Reclassification of conversion option liabilty - series              --              --           (586,182)               --
A convertible preferred stock
Reclassification of conversion option liabilty - series              --              --           (244,533)               --
B convertible preferred stock
Reclassification of non-employee                                     --              --           (104,927)               --
stock options liabilty
Reclassification of detachable warrants liability                    --              --           (636,412)               --
Reacquisition of warrants held by Trilogy                            --              --            (44,000)               --
Issuance of additional warrants to holders of                        --              --            449,500                --
series A convertible preferred stock
  Deemed Dividend associated with issuance of                        --              --           (449,500)               --
additional warrants to holders of series A
convertible preferred stock
Net Loss                                                             --              --                 --                --

Balance at December 31, 2005                                  1,293,202         $12,932        $18,897,622          $(48,722)
                                                              =========         =======        ===========          ========
</TABLE>




<TABLE>
<CAPTION>
                                                                 Deficit
                                                               Accumulated
                                                                During the             Stock
                                                                Development         Subscription
                                                                   Stage            Receivable
                                                              --------------------------------------
<S>                                                              <C>                    <C>
Issuance of common stock for research
 and development                                                        $ --               $ --
Issuance of common stock for
 services rendered                                                        --                 --
Sale of common stock at $1.14 and $1.38 per
 share for 691,269 and 924,156 shares, respectively                       --                 --
Issuance of stock options and warrants
 for services rendered                                                    --                 --
Net loss                                                           (1,446,203)               --
                                                                 ------------           -------
Balance at December 31, 2000                                       (4,756,746)          (15,070)
                                                                 ------------           -------
Issuance of common stock for
 services rendered                                                        --                 --
Sale of common stock at $2.44 per share                                   --                 --
Issuance of stock options and warrants for
 services rendered                                                        --                 --

Net loss                                                           (1,675,158)               --
                                                                 ------------           -------
Balance at December 31, 2001                                       (6,431,904)          (15,070)
                                                                 ------------           -------
Issuance of common stock in
 accordance with anti-dilution provisions                                 --                 --
Sale of common stock at $1.22 and $.97 per
  share for102,684 and 385,065 shares, respectively                       --                 --
Issuance of stock options and warrants
 for services rendered                                                    --                 --
Net loss                                                           (1,511,997)               --
                                                                 ------------           -------
Balance at December 31, 2002                                      (7,943,901)           (15,070)
                                                                 ------------           -------
Elimination of subscription receivable                                    --             15,070
Sale of common stock at $.97 per share                                    --                 --
Issuance of stock options and warrants
 for services rendered                                                    --                 --
Issuance of common stock in accordance with
  antidilution provisions                                                 --                 --
Exercise of warrants                                                      --                 --
Issuance of common shares to shareholders of                              --                 --
company acquired in reverse acquisition
Net assets acquired in reverse acquistion                                 --                 --
Sale of common stock for cash at $1.375 per share, net                    --                 --
Conversion of Bridge Loan at $1.375 per share                             --                 --
Issuance of common stock for offering services                            --                 --
Net loss                                                           (2,375,919)               --
                                                                 ------------           -------
Balance at December 31, 2003                                    $(10,319,820)              $ --
                                                                 ------------           -------
Issuance of stock options and warrants
 for services rendered
Issuance of stock granted for services
 rendered
 Sale of preferred stock at $1.00 per share
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                 (458,121)
Costs incurred asssociated with sale of stock and
   reverse acquisition
Costs incurred asssociated with sale of Series A
 preferred stock
 Exercise of options
 Exercise of options  (cashless)
Adjustment of Sale of common stock for cash
at $1.375 per share, net (Unaudited)
Net Loss                                                          (4,635,149)
                                                                          --                 --
                                                                 ------------           -------
Balance at December 31, 2004                                     $(15,413,090)             $ --
                                                                 ============           =======
 Exercise of options                                                      --                 --
 Issuance of common stock for
  services rendered                                                       --                 --
 Issuance of stock options for services rendered                          --                 --
 Issuance of warrants for services rendered                               --                 --
Amortization of deferred stock compensation                               --                 --
 Sale ofSeries B preferred stock at $0.50 per share                       --                 --
   Seriers B Convertible Preferred Stock
      beneficial conversion feature                                 (420,258)                --
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                 (703,128)                --
Costs incurred asssociated with sale of Series B
 preferred stock                                                          --                 --
   Conversion of Seriers B Convertible Preferred Stock
      to common stock                                                     --                 --
   Issuance of collateral shares in Company's name                        --                 --
  Series A Convertible Preferred Stock dividends declared                 --                 --
  Series B Convertible Preferred Stock dividends declared                 --                 --
Reclassification of conversion option liabilty - series                   --                 --
A convertible preferred stock
Reclassification of conversion option liabilty - series                   --                 --
B convertible preferred stock
Reclassification of non-employee                                          --                 --
stock options liabilty
Reclassification of detachable warrants liability                         --                 --
Reacquisition of warrants held by Trilogy                                 --                 --
Issuance of additional warrants to holders of                             --                 --
series A convertible preferred stock
  Deemed Dividend associated with issuance of                             --                 --
additional warrants to holders of series A
convertible preferred stock
Net Loss                                                           (5,781,493)               --

Balance at December 31, 2005                                     $(22,317,969)             $ --
                                                                 ============           =======
</TABLE>



<TABLE>
<CAPTION>



                                                                      Treasury Stock
                                                                   Shares             Amount              Total
                                                              ----------------------------------------------------
<S>                                                                  <C>                <C>           <C>
Issuance of common stock for research
 and development                                                          --                $--           $ 75,000
Issuance of common stock for
 services rendered                                                        --                 --             10,010
Sale of common stock at $1.14 and $1.38 per
 share for 691,269 and 924,156 shares, respectively                       --                 --          2,060,401
Issuance of stock options and warrants
 for services rendered                                                    --                 --             51,357
Net loss                                                                  --                 --          (1,446,203)
                                                                     -------            -------       ------------
Balance at December 31, 2000                                              --                 --            592,247
                                                                     -------            -------       ------------
Issuance of common stock for
 services rendered                                                        --                 --             30,000
Sale of common stock at $2.44 per share                                   --                 --            400,000
Issuance of stock options and warrants for
 services rendered                                                        --                 --             21,012
                                                                                                                --
Net loss                                                                  --                 --          (1,675,158)
                                                                     -------            -------       ------------
Balance at December 31, 2001                                              --                 --            (631,899)
                                                                     -------            -------       ------------
Issuance of common stock in
 accordance with anti-dilution provisions                                 --                 --                 --
Sale of common stock at $1.22 and $.97 per
  share for102,684 and 385,065 shares, respectively                       --                 --            500,000
Issuance of stock options and warrants
 for services rendered                                                    --                 --            595,188
Net loss                                                                  --                 --          (1,511,997)
                                                                     -------            -------       ------------
Balance at December 31, 2002                                             --                 --          (1,048,708)
                                                                     -------            -------       ------------
Elimination of subscription receivable                                    --                 --                 --
Sale of common stock at $.97 per share                                    --                 --          1,283,402
Issuance of stock options and warrants
 for services rendered                                                    --                 --            691,377
Issuance of common stock in accordance with
  antidilution provisions                                                 --                 --                 --
Exercise of warrants                                                      --                 --                 --
Issuance of common shares to shareholders of                              --                 --                 --
company acquired in reverse acquisition
Net assets acquired in reverse acquistion                                                                   20,584
Sale of common stock for cash at $1.375 per share, net                    --                 --          6,708,410
Conversion of Bridge Loan at $1.375 per share                             --                 --            275,000
Issuance of common stock for offering services                            --                 --                 --
Net loss                                                                  --                 --          (2,375,919)
                                                                     -------            -------       ------------
Balance at December 31, 2003                                              --                 --        $ 5,554,146
                                                                     -------            -------       ------------
Issuance of stock options and warrants
 for services rendered                                                    --                 --             53,156
Issuance of stock granted for services
 rendered                                                                 --                 --             43,500
 Sale of preferred stock at $1.00 per share                               --                 --          1,550,000
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                       --                 --                  -
Costs incurred asssociated with sale of stock and
   reverse acquisition                                                    --                 --           (101,711)
Costs incurred asssociated with sale of Series A
 preferred stock                                                          --                 --            (31,072)
 Exercise of options                                                      --                 --             42,000
 Exercise of options  (cashless)                                          --                 --                  -
Adjustment of Sale of common stock for cash                               --                 --
at $1.375 per share, net (Unaudited)
Net Loss                                                                                                (4,635,149)
                                                                          --                 --                 --
                                                                     -------            -------       ------------
Balance at December 31, 2004                                              --                 --       $ 2,474,870
                                                                     =======            =======       ============
 Exercise of options                                                      --                 --              2,881
 Issuance of common stock for                                                                                    -
  services rendered                                                       --                 --            410,500
 Issuance of stock options for services rendered                          --                 --                 --
 Issuance of warrants for services rendered                               --                 --            600,000
Amortization of deferred stock compensation                               --                 --             85,096
 Sale ofSeries B preferred stock at $0.50 per share                       --                 --            703,933
   Seriers B Convertible Preferred Stock
      beneficial conversion feature                                       --                 --                 --
   Seriers A Convertible Preferred Stock
      beneficial conversion feature                                       --                 --                  -
Costs incurred asssociated with sale of Series B                                                                 -
 preferred stock                                                          --                 --           (212,245)
   Conversion of Seriers B Convertible Preferred Stock
      to common stock                                                     --                 --                  -
   Issuance of collateral shares in Company's name                (2,677,000)            (2,677)                 -
  Series A Convertible Preferred Stock dividends declared                 --                 --            (62,000)
  Series B Convertible Preferred Stock dividends declared                 --                 --            (15,729)
Reclassification of conversion option liabilty - series                   --                 --           (586,182)
A convertible preferred stock
Reclassification of conversion option liabilty - series                   --                 --           (244,533)
B convertible preferred stock
Reclassification of non-employee                                          --                 --           (104,927)
stock options liabilty
Reclassification of detachable warrants liability                         --                 --           (636,412)
Reacquisition of warrants held by Trilogy                                 --                 --            (44,000)
Issuance of additional warrants to holders of                             --                 --            449,500
series A convertible preferred stock
  Deemed Dividend associated with issuance of                             --                 --           (449,500)
additional warrants to holders of series A
convertible preferred stock
Net Loss                                                                  --                 --         (5,781,493)
                                                                                                                 -
Balance at December 31, 2005                                       (2,677,000)            (2,677)      $ (3,410,241)
                                                                   ==========            =======       ============
</TABLE>




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


                                      F-8
<PAGE>


                           Advanced BioPhotonics Inc.
                      (F/K/A OmniCorder Technologies, Inc.)
                        (A Development Stage Enterprise)
                            STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                               Cumulative
                                                                                             For the Period
                                                                                          from February 7, 1997
                                                               For the Years Ended         (inception) through
                                                                    December 31,              December 31,
                                                               2005            2004                2005
                                                          -------------   -------------   ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                       <C>             <C>             <C>
Net loss                                                  $ (5,781,493)   $ (4,635,149)   $        (20,736,462)
                                                          -------------   -------------   ----------------------
     Adjustments to reconcile net loss to net cash
         used in operating activities:
         Depreciation and amortization                         133,338         144,846                 896,536
         Loss on disposal of net assets                           --              --                    20,584
         Unrealized loss from foreign currency
             transactions                                         --              --                    19,271
         Warrants issued to related party for legal
             services                                             --              --                    95,000
         Issuances of warrants and stock options for
             services rendered                                 685,096          96,656               2,180,696
         Issuance of common stock for research and
             development                                       410,500            --                   710,500
         Amortization of original issue discount                  --              --                   329,625
         Amortization of deferred financing costs                9,607            --                   197,732
         Amortization of debt discount on convertible
             debebtures                                         14,779            --                    14,779
              Write off of deferred offering costs              37,000            --                    37,000
         Change in fair value of non-employee stock
         options, warrants and conversion options              323,189            --                   323,189

         Changes in operating assets and liabilities:
         Prepaid expenses and other current assets             169,617         183,638                 155,092
         Other assets                                            8,038        (148,407)               (143,907)
         Accounts payable and accrued expenses                 527,445         (75,745)              1,205,026
         Deferred officers salaries                            (46,923)          6,923                 939,632
                                                          -------------   -------------   ----------------------

             NET CASH USED IN OPERATING ACTIVITIES          (3,509,807)     (4,427,238)            (13,755,707)
                                                          -------------   -------------   ----------------------

CASH FLOWS USED IN INVESTING ACTIVITIES
     Purchases of property and equipment                      (165,163)       (179,348)             (1,234,105)
                                                          -------------   -------------   ----------------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from (costs of) issuance of common stock            --          (101,711)             12,522,477
     Net proceeds from issuance of Series A preferred
         stock                                                    --         1,518,928               1,518,928
     Net proceeds from issuance of Series B preferred
         stock                                                 491,688            --                   491,688
</TABLE>


                                      F-8
<PAGE>
                           Advanced BioPhotonics Inc.
                      (F/K/A OmniCorder Technologies, Inc.)
                        (A Development Stage Enterprise)
                            STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                               Cumulative
                                                                                             For the Period
                                                                                          from February 7, 1997
                                                               For the Years Ended         (inception) through
                                                                    December 31,              December 31,
                                                               2005            2004                2005
                                                          -------------   -------------   ----------------------
<S>                                                       <C>             <C>             <C>
     Proceeds from issuance of warrants                           --              --                    40,000
     Proceeds from options exercised                             2,880          42,000                  44,880
     Issuance of bridge note payable                              --              --                 1,025,000
     Payment of deferred financing costs                       (65,000)           --                  (212,500)
     Proceeds from convertible debenture, net                  895,000            --                   895,000
     Repayment of notes payable                               (184,947)       (265,173)               (467,298)
                                                          -------------   -------------   ----------------------

         NET CASH PROVIDED BY FINANCING ACTIVITIES           1,139,621       1,194,044              15,858,175
                                                          -------------   -------------   ----------------------

         NET (DECREASE) INCREASE IN CASH                    (2,535,349)     (3,412,542)                868,363

CASH AND CASH EQUIVALENTS -Beginning                         3,403,712       6,816,254                    --
                                                          -------------   -------------   ----------------------

     CASH AND CASH EQUIVALENTS - Ending                   $    868,363    $  3,403,712    $            868,363
                                                          =============   =============   ======================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
     Cash paid during the periods for:

         Interest                                         $      5,457    $      7,277    $            969,495
         Income Taxes                                             --              --                     4,509

     Non cash investing and financing activities:

         Conversion of bridge notes                               --              --                 1,065,625
         Conversion of accounts payable to notes
             payable                                              --              --                   237,861
         Insurance premiums financed using a note              171,576         191,104                 545,411
     Cashless exercise of stock options resulting  the
         issuance of 27,399 shares of common stock                --                27                      27
       Issuance of collateral shares in Company's name           2,677            --                     2,677
     Beneficial conversion charge attributable to
         Series A preferred stock                              703,128         458,121               1,161,249
     Beneficial conversion charge attributable
     to Series B preferred stock                               420,258            --                   420,258

Deemed dividend onissuance of warrants to series A
preferred stockholders                                         449,500            --                   449,500
Dividends accrued on preferred stock                            77,729            --                    77,729
Recovery of Trilogy warrants                                    44,000            --                    44,000
Conversion option liability on the convertible
debenture                                                      612,903            --                   612,903
</TABLE>


                                      F-9
<PAGE>


                           Advanced BioPhotonics Inc.
                      (F/K/A OmniCorder Technologies, Inc.)
                        (A Development Stage Enterprise)
                            STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                               Cumulative
                                                                                             For the Period
                                                                                          from February 7, 1997
                                                               For the Years Ended         (inception) through
                                                                    December 31,              December 31,
                                                               2005            2004                2005
                                                          -------------   -------------   ----------------------



<S>                                                       <C>             <C>             <C>
Reclassification of conversion option liability on
convertible preferred stock                                    830,715            --                   830,715
Reclassification of non-employee stock option                  104,927            --                   104,927
Detachable warrants liability - convertible debenture          160,047            --                   160,047
Reclassification of  detachable warrants                       636,412            --                   636,412

Detachable warrants  issued as deferred financing costs
                                                                60,570            --                    60,570
</TABLE>


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


                                      F-10
<PAGE>


NOTE 1 - Organization and Business

Advanced BioPhotonics Inc. formerly known as OmniCorder Technologies Inc. (the
"Company") was incorporated in the State of Delaware on February 7, 1997, to
develop and commercialize an advanced digital imaging technology for the
diagnosis and management of a large variety of diseases including cancer and
vascular disease through its lead product, the BioScanIR(R) System ("System").

In December 1999, the Company received FDA Section 510(k) market clearance,
which permits marketing, throughout the United States, of the BioScanIR(R)
System, an adjunctive method to detect breast cancer and other diseases
affecting the perfusion of blood in tissue and organs. In August 2003, the
Company received CE mark clearance to market its BioScanIR(R) System throughout
the European Union. The Company believes that it will generate revenues from the
sale of licenses, user fees and sale of the medical device to commercial,
institutional and clinical customers to use its technology for plastic and
reconstructive surgery, cancer therapy treatment monitoring, neurosurgery,
cancer detection and cardiac surgery applications throughout the United States
and Europe. However, there is no assurance that the Company will be able to
generate any revenues.

In April 2005, the Company received notice that it had been awarded a New
Technology Ambulatory Procedure Code (APC) for usage of its system in providing
the service "dynamic infrared blood perfusion imaging." The APC provided by
Medicare allows users of the new technology to submit claims for reimbursement
for their use of the new technology in an outpatient setting for Medicare
patients. This type of code is used to collect actual clinical history on the
costs of using the new technology as a precursor to the assignment of a
permanent Current Procedural Terminology (CPT) code. A critical element of the
Company's efforts over the next three years must be to build a history of claims
submissions using the APC for the use of its system in order to demonstrate the
viability of the technology and pave the way for securing a CPT code which is
issued by the American Medical Association. The service associated with the use
of the BioScanIR(R) system has been assigned APC Code 1502 and HCPCS Code C9723.

On June 7, 2005, the Company changed its corporate name from OmniCorder
Technologies, Inc. to Advanced BioPhotonics Inc. The corporate name change was
approved by its stockholders at the 2005 annual meeting of stockholders.

Recapitalization Transaction

On December 19, 2003, the Company completed a transaction with Promos, Inc.
("Promos") in which Promos acquired all the assets and assumed all the
liabilities of the Company, in consideration for the issuance of a majority of
Promos' shares of common stock (the "Recapitalization"). The transaction was
completed pursuant to an Agreement of Purchase and Sale, dated as of December
19, 2003. On December 29, 2003, the Company subsequently merged into a newly
formed Delaware corporation under the original name of the accounting acquirer,
OmniCorder Technologies, Inc. Subsequent to the Recapitalization, the original
shareholders of the Company owned 95% of the outstanding shares of the Company
and the original Promos shareholders owned 5% before the impact of the
concurrent private placement. Concurrent with the Recapitalization, all of the
net assets of Promos, Inc. were sold to its former President for no monetary
consideration and her indemnification to the Company against any potential
liabilities from the historical Promos operations. After the sale of all of the
net assets, Promos, in substance, became a public shell. For accounting
purposes, the Company is deemed to be the acquirer in the transaction and has
been accounted for as a recapitalization. Consequently the assets and
liabilities and the historical operations reflected in the financial statements
are those of the Company and are recorded at the historical cost basis of the
Company.

Since the transaction is in substance a recapitalization of the Company and not
a business combination, pro forma information is not presented. Such pro forma
statements of operations would be substantially identical to the historical
statements of operations of the Company, which are presented in the accompanying
statements of operations.

Following the completion of the Recapitalization, the December 19, 2003 private
offering (Note 8), related stock purchase and payment of equity-based
transaction fees, the shareholders of the Company owned 21,538,400 shares, or
72.8% of the outstanding shares of Promos' common stock. The Company filed a
Certificate of Dissolution on



<PAGE>


December 29, 2003 with the Delaware Secretary of State and promptly thereafter,
in accordance with the tax-free reorganization provisions of Internal Revenue
Code Section 368(a) (1) (C), liquidated the shares of Promos' common stock it
received in the Recapitalization to its stockholders in proportion to their
respective interests in OmniCorder Technologies, Inc. The consideration and
other terms of these transactions were determined as a result of arm's-length
negotiations between the parties.

As more fully described in Note 8, all share and per share amounts have been
retroactively restated in all periods for the effect of the Recapitalization.

NOTE 2 - Summary of Significant Accounting Policies

Basis of Presentation

The Company has been presented as a "development stage enterprise" in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company's primary activities
since inception have been securing technology licenses, the research and
development of its technology and the commercial development of its BioScanIR(R)
System including negotiating strategic alliances, securing production component
purchase agreements including customized infrared cameras and related
components, and securing FDA clearance, UL and CE approval and raising capital.

Management's Liquidity Plans

The Company has a deficit accumulated during the development stage, which
commenced on February 7, 1997 through December 31, 2005 of $22,317,969 and cash
flows used in operating activities during the development stage of $13,755,707.
The accumulated loss resulted principally from costs incurred in developing its
business plan, acquiring licenses for its technology, research and development,
general and administrative expenses, establishing sales channels and fund
raising activities. As more fully described in Note 8, the Company received
gross and net proceeds approximating $7.8 million and $6.7 million,
respectively, on December 19, 2003 in a private placement of its common stock
and warrants. The Company could receive additional gross proceeds upon the
exercise of the associated warrants (which expire December 19, 2006) of
approximately $327,000, although there is no assurance that they will be
exercised.

On December 14, 2004, the Company completed a private placement of 1,550,000
shares of its Series A convertible preferred stock (initially convertible into
1,409,091 shares of common stock) and issued, for no additional consideration,
to the investors in the private placement, five year warrants to purchase
465,000 shares of its common stock at an exercise price of $1.10 per share which
expire December 14, 2009. The Company received gross proceeds of $1,550,000 in
the private placement. The Company allocated $387,667 of the gross proceeds to
the warrants based on estimated fair value. In accordance with Emerging Issues
Task Force (EITF) Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain
Convertible Instruments", a non-cash charge of $1,161,249 was recorded to
deficit accumulated during the development stage, which is the difference
between the relative fair value of the series A preferred stock and the fair
market value of our common stock issuable pursuant to the conversion terms on
the date of issuance. As a result of anti-dilution provisions relating to the
series A convertible preferred stock and the warrants that were triggered by the
subscription rights offering the warrant exercise price was reduced to $0.50 per
share. On November 14, 2005, the sale of $1,000,000 of securities under the
Securities Purchase Agreement described below and in Note 7, triggered anti
dilution provisions which reduced the conversion price of the series A
convertible preferred stock from $0.50 to $0.44 per share. On January 3, 2006,
after the sale of an additional $1,000,000 of securities under the Securities
Purchase Agreement, the conversion price of the series A preferred stock was
reduced further to $0.39 per share and are convertible into 4,739,643 shares of
common stock. The conversion price was adjusted based on a calculation set forth
in the anti-dilution clause in the certificate of designation of the series A
preferred stock. On October 28, 2005, as anti-dilution protection to each
investor in the December 2004 Private Placement, the Company issued additional
five year warrants to purchase 1,550,000 shares of its common stock with an
exercise price of $0.75 per share which will expire on August 9, 2010. The
Company recorded a deemed dividend charge of $449,500 for the fair value of
those warrants during the fourth quarter of 2005. The Company could receive an
additional $1,395,000 if all of the warrants issued to the Series A stockholders
are exercised though there is no assurance these warrants will be exercised.
Holders of the Series A convertible preferred stock are entitled to receive a
cumulative dividend of 4% per annum, payable either in cash or, at the


                                      F-12
<PAGE>


Company's option, additional shares of series A convertible preferred stock. On
January 3, 2006, the Company issued 301,423 shares of series A convertible
preferred stocks as in-kind dividends to the holders of series A preferred stock
on the dividend record date of December 15, 2005. The Company inadvertently
issued an additional 183,628 series A preferred dividend shares in lieu of cash
dividends than the holders were required to receive. The Company intends to send
a notice letter to the holders requesting the shareholders return the
certificates and thereafter the Company will issue an aggregate of 117,795
series A preferred dividend shares.

On August 10, 2005, the Company consummated a subscription rights offering to
existing stockholders of the Company. The Company distributed to holders of its
common stock transferable subscription rights to purchase shares of its
newly-created series B convertible preferred stock. The Company issued the
subscription rights at the current rate of one right for approximately 4.33
shares of its common stock held on the record date of July 1, 2005, which
represents the ratio of subscription rights to total common shares outstanding
of 30,281,107 on the record date. Each subscription right represented the right
to purchase one share of newly-created series B preferred stock. The shares of
series B convertible preferred stock are convertible into shares of common stock
on a one-for-one basis (i) at any time at the option of the holder, and (ii)
automatically, as of the close of business on the 20th consecutive trading day
on which the closing bid price for the common stock on the principal stock
exchange or market on which it is listed, or if not traded on such exchange, on
the OTC Bulletin Board, is at least $2.20 per share. Stockholders that purchased
shares of our series B preferred stock in the rights offering will be issued,
for no additional consideration, five-year warrants to purchase that number of
shares of the Company's common stock equal to 50% of the number of shares of
series B preferred stock acquired by the stockholder in the offering. The
warrants have an exercise price of $0.75 per share. At the closing of the
subscription rights offering on August 10, 2005, the Company received gross
proceeds of $703,933, issued 1,407,867 shares of series B convertible preferred
stock and 703,934 five-year warrants to purchase 703,934 shares of common stock.
Holders of the series B convertible preferred stock are entitled to receive a
cumulative dividend of 7% per annum, payable either in cash or, at the Company's
option, additional shares of series B convertible preferred stock. In accordance
with EITF 00-27 the Company recorded a non-cash charge of approximately $420,000
during the third quarter of 2005 associated with the sale of our series B
convertible preferred stock. As a result of anti-dilution provisions relating to
the series B convertible preferred stock that were triggered by the November 14,
2005 sale of $1,000,000 of securities under the Securities Purchase Agreement
described below and in Note 7, the shares of the series B convertible preferred
stock have an conversion price of $0.44 per share. On January 3, 2006, after the
sale of an additional $1,000,000 of securities under the Securities Purchase
Agreement, the conversion price of the series B preferred stock was further
reduced to $0.39 per share and are convertible into 1,753,176 shares of common
stock, The conversion price was adjusted based on a calculation set forth in the
anti-dilution clause in the certificate of designation of the series B preferred
stock. As of December 31, 2005, 114,665 shares of series B convertible stock
were converted into 114,665 shares of the Company's common stock. On January 3,
2006, the Company issued 76,467 shares of series B convertible preferred stock
as in-kind dividends in to the holders of series B preferred stock on the
dividend record date of December 15, 2005. The Company inadvertently issued an
additional 16,701 series B preferred dividend shares in lieu of cash dividends
than the holders were required to receive. The Company intends to send a notice
letter to the holders requesting the shareholders return the certificates and
thereafter the Company will issue an aggregate of 59,766 series B preferred
dividend shares. The Company could receive an additional $527,950 if all of the
warrants issued in the subscription rights offering are exercised. There can be
no assurance as to how many warrants will be exercised. The Company has incurred
legal and accounting fees in connection with the rights offering totaling
approximately $212,000, as of December 31, 2005.

On July 25, 2005, the Company signed a non-exclusive finder's fee agreement with
Trilogy Capital Partners, Inc. ("Trilogy"). Trilogy agreed to act as finder to
seek financing and other strategic relationships for the Company. Under this
agreement, if the Company received any financing from a qualified introduction
during the fee agreement period, the Company would be required to pay Trilogy a
cash finder's fee equal to 10% of the gross proceeds of the financing. The fee
period commenced the date of the agreement and was to terminate one year
following the termination of Trilogy as finder. Either Trilogy or the Company
could terminate the agreement at any time. There are no assurances that Trilogy
will be able to locate suitable investors or that the Company will close a
transaction with investors introduced by Trilogy.

On September 14, 2005, the Company finalized a Letter of Engagement with Trilogy
pursuant to which Trilogy agreed to implement a marketing program, and, to the
extent the Company requested to assist it in business development and strategic
advisory and investor relations services. The Letter of Engagement had an
initial term of


                                      F-13
<PAGE>


12 months and was terminable by the Company or Trilogy at any time thereafter
upon 30 days' prior written notice. For their services Trilogy was to be paid
$12,500 per month and was issued 2,400,000 warrants to purchase shares of the
Company's common stock (see Note 8). Each warrant represents the right to
purchase one share of the Company's common stock for $0.50 per share at any time
through the third year of issuance. The warrants had an estimated fair value of
$600,000 on the date of issuance and were recorded in general and administrative
expense during the quarter ended September 30, 2005. The Company agreed to
support the marketing program set up by Trilogy with a budget of not less than
$200,000. On October 31, 2005, Trilogy notified the Company that it has resigned
the engagement.

On November 17, 2005 the Company entered into a settlement agreement and mutual
release ("Settlement Agreement") with Trilogy. The Settlement Agreement
terminates the Consulting Agreement with Trilogy entered into on June 22, 2005,
the Finder's Fee Agreement with Trilogy entered into on July 25, 2005 and the
Letter of Engagement with Trilogy entered into on September 14, 2005. The terms
of the Settlement Agreement are that the Company agreed to pay Trilogy 3% of the
gross proceeds they receive from the Securities Purchase Agreement the Company
entered into on November 14, 2005 with AJW Partners, LLC, AJW Offshore, Ltd.,
AJW Qualified Partners, LLC and New Millennium Capital Partners, II, LLC ("the
Purchasers") for the sale of (i) $4,000,000 in secured convertible notes and
(ii) 4,000,000 warrants.. The Company also agreed to pay Trilogy $1,664 for
marketing costs and $6,250 for fees under the Letter of Engagement from the
period October 14, 2005 through November 1, 2005. Trilogy agreed to return and
relinquish all right, title and interest to the 2,400,000 warrants they were
given and release the Company of all prior agreements and understandings between
Trilogy and the Company. The Company paid $30,000 and accrued $90,000 related to
this settlement as of December 31, 2005 with $44,000 allocated to the recovery
of the warrants.

On September 23, 2005 the Company signed a non-exclusive finder's fee agreement
with Axiom Capital Management, Inc. ("Axiom"). Axiom will use its best efforts
to introduce the Company to prospective investors with respect to an offering of
issuance of any security by the Company, in private placement or series of
private placements. Axiom agreed to introduce to the Company, only proposed
investors that qualify as "accredited investors" as defined in Regulation D
promulgated under the Securities Act of 1933. The Company agreed that for each
introduced investor that completes a transaction with the Company, it shall pay
to Axiom (i) an amount in cash equal to 8% of the dollar value of any securities
issued by the Company which are purchased by each introduced investor; and (ii)
warrants to purchase the number of shares of common stock of the Company as
shall equal 8% of shares sold in that transaction to each introduced investor.
The agreement will continue until (i) a final closing of a transaction (ii)
terminated by either party on 30 days prior written notice to the other party or
(iii) terminated immediately on written notice by one party to the other party
upon material breach of the agreement. On November 8, 2005, an addendum was
added to the agreement which reduced the percentage that the Company shall pay
to Axiom, to an amount in cash equal to 6.5% from 8% of the dollar value of any
securities issued by the Company.

On November 14, 2005, the Company entered into a Securities Purchase Agreement
with the Purchasers for the sale of (i) $4,000,000 in secured convertible notes
and (ii) warrants to purchase 4,000,000 shares of our common stock. See Note 7,
Securities Purchase Agreement.

As of March 21, 2006, the Purchasers have provided the Company $2,000,000 of the
$4,000,000 in two tranches. The final payment of $2,000,000 will be disbursed
within two days of the effectiveness of a registration statement.

The proceeds of the offering are being used to support the Company's
commercialization activities for its BioScanIR(R) System and for working
capital.

The secured convertible notes bear interest at 8%, unless our common stock is
greater than $0.2875 per share for each trading day of a month, in which event
no interest is payable during such month. The secured convertible notes mature
three years from the date of issuance, and are convertible into our common
stock, at the Purchasers' option, at a 40% discount to the average of the three
lowest trading prices of the common stock during the 20 trading day period prior
to conversion. At the Company's option, in any month where the current stock
price is below the initial market price (100% of the volume weighted average
price of our common stock for the five days prior to closing), the Company can
pay the outstanding principal and interest due for that month and this will stay
any conversions for that month. The debt discount recorded on our secured
convertible notes will be amortized over the three-year life of the instrument
using the effective interest rate method.


                                      F-14
<PAGE>


The full principal amount of the secured convertible notes is due upon a default
under the terms of secured convertible notes. In addition, the Company granted
the Purchasers a security interest in substantially all of its assets and
intellectual property. The Company was required to file a registration statement
covering two times the number of shares issuable upon conversion of the
debentures and exercise of the warrants with the Securities and Exchange
Commission. A Registration Statement was filed on December 22, 2005 and an
amendment on February 13, 2006 but has not yet been declared effective. If the
registration statement is not declared effective within 120 days from November
14, 2005 or if the Company fails to maintain effectiveness of the registration
statement, then the Company will be required to pay liquidated damages to the
Purchasers in the amount of 2% per month on the then outstanding principal
amount of the convertible debentures in shares or cash. In the event that the
Company breaches any representation or warranty in the Securities Purchase
Agreement, it will be required to pay liquidated damages in shares or cash, at
its election, in an amount equal to 2% of the outstanding principal amount of
the secured convertible notes per month plus accrued and unpaid interest.

The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.65 per share. The Purchasers may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the Purchasers exercise the warrants on a cashless basis, then the Company will
not receive any proceeds. In addition, the exercise price of the warrants will
be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the secured convertible notes issued
pursuant to the Securities Purchase Agreement. There can be no assurance to how
many, if any, of these warrants will be exercised.

The conversion price of the secured convertible notes and the exercise price of
the warrants may be adjusted in certain circumstances such as if the Company
pays a stock dividend, subdivide or combine outstanding shares of common stock
into a greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholders' position.

The Purchasers have agreed to restrict their ability to convert their secured
convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.9% of the then issued and outstanding shares of common stock.

Under a Guaranty and Pledge Agreement, the Company's President and Chief
Executive Officer, agreed (i) to unconditionally guarantee the timely and full
satisfaction of all obligations, whether matured or unmatured, now or hereafter
existing or created and becoming due and payable to the Purchasers, their
successors, endorsees, transferees or assigns under the Securities Purchase
Agreement and other transaction documents to the extent of 2,677,000 shares of
the Company's common stock issued in its name, and (ii) to grant to the
Purchasers, their successors, endorsees, transferees or assigns a security
interest in the 2,677,000 shares, as collateral security for such obligations.

The Company claims an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Act") for the private placement of
these securities pursuant to Section 4(2) of the Act and/or Regulation D
promulgated thereunder since, among other things, the transaction did not
involve a public offering, the Purchasers were accredited Purchasers and/or
qualified institutional buyers, the Purchasers had access to information about
The Company and their investment, the Purchasers took the securities for
investment and not resale, and the Company took appropriate measures to restrict
the transfer of the securities.

Pursuant to the amended Finder's Fee Agreement, between Axiom and the Company,
Axiom will earn a finders fee of $260,000 in cash of which $65,000 was paid on
November 16, 2005 and $65,000 was paid on January 6, 2006, and $130,000 will be
paid when the registration statement is declared effective. In addition, Axiom
will receive five year warrants to purchase shares of the Company's common stock
at an exercise price of $0.65 per share, of which 378,445 were granted on
November 14, 2005 and 395,310 were granted on January 6, 2006 (see Note 8). The
warrants are exercisable for a period of five years from date of issuance. The
number of warrants to be issued is computed by dividing the total dollar
investment by the initial market price (100% of the volume weighted average
price of our common stock for the five days prior to closing) multiplied by the
8% warrant coverage as agreed.


                                      F-15
<PAGE>


Warrants will be issued pro rata upon each investment tranche. The initial
market price was $0.211 and $0.202 for the 1st tranche and 2nd tranche,
respectively.


The Securities Purchase Agreement as described above, upon conversion of notes,
will trigger the anti-dilution provisions in our Series A convertible preferred
stock and Series B convertible preferred stock. Both the Series A and Series B
preferred stock will be convertible into additional shares of common stock. See
Note 8.

On March 7, 2005, the Company's board of directors unanimously agreed to extend
the original stock lock-up agreements entered into in September 2004 and set to
expire on March 17, 2005, until December 31, 2005. Under this agreement, all
board members extended their commitment not to publicly sell any of their shares
through the end of 2005. This agreement was not extended in 2006.


As of December 31, 2005, the Company had cash balances and working capital
deficit of $868,363 and $670,083, respectively and total stockholders' deficit
of $3,410,241. At March 21, 2006, the Company has approximately $600,000 in cash
balances (unaudited).

Management estimates that it will require additional cash resources during 2006,
based upon its current operating plan and condition. The Company is currently
investigating additional financing alternatives, including equity and/or debt
financing and asset based funding sources associated with the commencement of
product delivery. There is no assurance that capital in any form would be
available to the Company, and if available, on terms and conditions that are
acceptable. The success of the Company depends upon many factors, including
securing market acceptance for its products, obtaining adequate additional
financing on acceptable terms, and its ability to roll out the BioScanIR(R)
system in sufficient quantities and at profitable revenue levels. The
uncertainties regarding the availability of continued financing and commencement
of adequate commercial revenues raise substantial doubt about the Company's
ability to continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability of the recorded assets or the classification of liabilities that
may be necessary should the Company be unable to continue as a going concern.

The BioScanIR(R) System has received FDA Section 510(k) clearance, permitting
its sale in the U.S., and CE mark approval permitting its sale in Europe. The
Company's approved labeling permits it to market the BioScanIR(R) system for use
in imaging a large variety of diseases - such as cancer and vascular disease -
that affect the movement of blood (known as blood perfusion), in tissue and
organs.

The Company continues to further improve its system for target end-market
applications based upon pilot site feedback. Current systems production is
driven by its need for units for pilot site and internal development activities.
Such units are non-revenue generating at this time, but could be sold, leased,
or converted to revenue generating sites at some time in the future. The Company
will build and deploy these units to the extent that they advance its product
development and validation efforts and its drive to commercialization. On
November 1, 2004, the Company delivered the new cancer therapy monitoring
configuration of our BioScanIR(R) System to the Cleveland Clinic's Department of
Hematology/Oncology for test and evaluation in detecting the effects of cancer
treatments in patients undergoing neoadjuvant breast cancer therapy; clinical
trials began in the second quarter of 2005. In the first quarter of 2006, the
Company entered into a pilot site agreement with Yale University School of
Medicine ("Yale"). Yale will begin to conduct clinical trials using the
Company's BioScanIR(R) System, together with its proprietary DIRI(R) dynamic
infrared imaging software platform in a reconstructive surgery application.
Under the clinical trial protocol, Yale will use the Company's BioScanIR(R)
System and DIRI(R) software to collect and interpret data relating to locating
the perforator vessels in vivo, then monitoring the healing process of the
transplanted flaps. The clinical trial at Yale will build upon earlier work done
at the University of Geneva in reconstructive surgery. As of December 31, 2005,
the Company had three fully functional prototype or commercial units installed
in various U.S. and European medical institutions for testing and evaluation.

The Company has committed to purchase infrared camera components from AEG
Infrarot-Module GmbH for approximately (euro) 478,000, or $564,000 as of
December 31, 2005. These components utilize QWIP technology. The Company has the
exclusive license for QWIP technology from the California Institute of
Technology


                                      F-16
<PAGE>


("Caltech") for biomedical applications.

Use of Estimates

The preparation of 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Critical estimates include management's
judgments associated with deferred income tax valuation allowance, valuation of
derivative liabilities and the capitalization and depreciation of long-term
assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

For the purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents.

Concentration of Credit Risk

The Company maintains cash and cash equivalents with major financial
institutions. Cash is insured by the Federal Deposit Insurance Corporation
("FDIC") up to $100,000 at each institution. At times, such amounts may exceed
the FDIC limits. At December 31, 2005 the uninsured cash balance at one bank was
approximately $768,000.

Property and Equipment

Property and equipment are recorded at cost and depreciated, using the
straight-line method, over the estimated useful lives of the related assets,
generally five to seven years. Upon retirement or other disposition of these
assets, the cost and related accumulated depreciation of these assets are
removed from the accounts and the resulting gain or losses are reflected in the
results of operations. Expenditures for maintenance and repairs are charged to
operations. Renewals and betterments are capitalized.

Software Development Costs

Software development costs have been charged to operations as incurred since
technological feasibility for the Company's computer software is generally based
upon achievement of a detail program design, free of high risk development
issues and the completion of research and development on the product hardware in
which it is to be used. These costs are included in research and development in
the accompanying financial statements.

Convertible Debentures and Derivative Liabilities

In November 2005 the Company entered into a Securities Purchase Agreement for
convertible notes and warrants. (See Note 7). The convertible notes are
convertible into an indeterminate number of shares. The conversion option and
warrants shares are subject to registration rights penalties with provisions
that are outside the control of the Company and collateral was posted in
connection with the sale of these instruments. As such the conversion option and
detachable warrants are required to be recorded as liabilities at their fair
value on the date of issuance under the guidance on EITF 00-19. The convertible
notes are recorded at their residual value. The resultant discount is accreted
up to the maturity date of the convertible notes using the effective interest
rate method.

EITF 00-19 requires that the classification of contracts that could result in
derivative instruments be reassessed at each balance sheet date. Because the
convertible notes are convertible into an indeterminate number of shares the
Company might not have sufficient authorized shares in the future to settle
conversions or exercises of other non-employee instruments, such as convertible
preferred stock, warrants and non employee stock options. As a result of this
and anti-dilution features triggered in certain of these instruments the Company
reclassified these instruments from equity to a liability based on their fair
values on November 14, 2005 (See Notes 8 & 9).


                                      F-17
<PAGE>


In accordance with SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", at each reporting period these liabilities will be adjusted
for changes in their fair value. The conversion option embedded in the
convertible notes is valued at its intrinsic value as the conversion price is
fixed at a 40% discount to current market prices on conversion dates. The
conversion options embedded in the preferred stock, detachable warrants and
non-employee stock options are valued using the Black Scholes valuation model.
Actual period close common stock prices, applicable volatility rates and the
period close risk free interest rate for the instruments expected remaining life
are the key assumptions used in the Black Scholes valuation calculation. The
period-to-period changes in fair value will be recorded as either an addition or
charge to earnings. There is no cash effect to these additions or charges over
the life of these instruments. For the year ended December 31, 2005 the Company
recorded a $323,189 charge as a result of the change in fair value of these
derivative instruments.

Research and Development

Research and development costs are charged to operations as incurred.

Revenue Recognition

The Company recognizes revenues and costs and expenses generally utilizing the
accrual method of accounting. The Company is presently in the development stage
and will adopt revenue recognition accounting policies that are reflective of
its business model at the time the Company begins to generate each type of
revenue. For specific discussion of these activities, see the "Summary of
Significant Accounting Policies-Basis of Presentation." Based upon its
circumstances at the time, the Company will apply the appropriate methods that
comply with accounting principles generally accepted in the United States as
they relate to its business practices, as follows:

1. Sale - The Company may sell Systems to medical, diagnostic or any other end
user. These contracts may be for single or multiple units. The Company intends
to recognize revenue associated with single or multiple unit contracts upon
shipment and acceptance of each specific unit by the end-user. The Company may
provide an initial warranty period of one year as part of their sales
arrangements. The Company will establish a liability for estimated warranty
costs as appropriate and record actual warranty expenses against this liability
as incurred. The Company may offer an extended warranty and maintenance
arrangement to its customers after the expiration of the initial warranty
period. This arrangement would be sold pursuant to a contract distinctly
separate from the original sales arrangement. These extended warranty and
maintenance fees would be recognized ratably over the life of the extended
warranty and maintenance contracts.

2. Licensing - The Company may enter into licensing agreements for its
technology as part of sublicensing or distribution agreements with third
parties. The Company also intends to enter into licensing agreements that
provide third parties with exclusive or semi-exclusive rights to some portion of
its intellectual property in certain well defined fields of use. License
revenues are expected to be recognized ratably over the life of the license.

3. Development contracts - The Company may engage in research and development
contracts or other specialized arrangements with specific customers. While each
project may vary, it is planned that each would have milestones in the
development or delivery process for which stipulated amounts of the contract
value would be earned. The Company intends to recognize revenues as milestones
are achieved and upon substantial evidence of acceptance by the customer.

Systems available for sale, either newly constructed or which may have been
previously rented to customers, would be maintained in inventory at cost
determined on a first-in, first out method, or at depreciated cost (if
previously rented); in all cases at the lower of cost or market.

Patents

Patent costs have been charged to operations as incurred as their realizability
was uncertain. These costs are included in research and development in the
accompanying financial statements.


                                      F-18
<PAGE>


Employee Benefit Plans

The Company provides medical insurance coverage to eligible employees through a
third party provider. Employees pay a percentage of the associated premium.
Also, available to eligible employees at their cost, through a third party
provider, are dental and long term disability insurance. In fiscal 2005 the
Company established a 401-K plan through a third party provider for its
employees. At this time, the Company does not contribute any money to the plan.
The Company has a Stock Based Compensation Plans as described in Note 9.

Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the expected impact of differences between the
financial statements and the tax basis of assets and liabilities and for the
expected future tax benefits to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the establishment of a
valuation allowance to reflect the likelihood of realization of deferred tax
assets.

Foreign Currency Transactions

The Company entered into exclusive agreement with a Germany manufacturer to
manufacture the BioScanIR(R) System, payable in Euro dollars. The translation
from Euro dollars to U.S. dollars is performed for the balance sheet accounts
using current exchange rates in effect at the balance sheet date and for
operations accounts using the actual rate at the time of the transaction. The
Company did not incur transaction losses for the years ended December 31, 2005
and 2004 but had $19,271 resulting from foreign currency transactions included
in interest and other expenses for the period from February 7, 1997 (inception)
to December 31, 2005 in the accompanying financial statements.

Loss Per Common Share

Loss per share ("EPS") is computed based on weighted average number of common
shares outstanding and excludes any potential dilution. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock, which would then share in the earnings of the Company.
The shares issuable upon the exercise of stock options, warrants, conversion of
the convertible debenture and conversion of the series A and series B
convertible preferred stock are excluded from the calculation of net loss per
share as their effect would be antidilutive. Securities that could be
potentially dilute basic EPS in the future that were not included in the
computation of diluted EPS because to do so would have been antidilutive for the
periods presented consist of the following:

                  Total potential common shares as of December 31, 2005:

                  Warrants to purchase common stock           5,547,776

                  Options to purchase common stock            6,724,490

                  Series A convertible preferred stock        3,522,727

                  Series B convertible preferred stock        1,469,548

                  Conversion of convertible debenture:

                  (1st Tranche)                               9,090,909
                                                             ----------

                                                             26,355,450
                                                             ==========


                                      F-19
<PAGE>


                  Additional issuances as of March 21, 2006

                  Warrants to purchase common stock           1,895,310

                  Options to purchase common stock            1,777,000

                  Additional convertible Preferred Stock

                  as in kind dividends:

                  Series A convertible preferred stock           771,643

                  Series B.convertible preferred stock            97,878

                  Additional shares of convertible preferred

                  convertible stock due to anti dilution:

                  Series A convertible preferred stock          445,273

                  Series B convertible preferred stock          185,750

                  Conversion of convertible debenture:

                  (2nd Tranche)                               8,333,333
                                                             ----------
                                                             39,861,673

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board ("FASB") revised SFAS
No. 123 ("SFAS No. 123R"), "Accounting for Stock Based Compensation." The
revision establishes standards for the accounting of transactions in which an
entity exchanges its equity instruments for goods or services, particularly
transactions in which an entity obtains employee services in share-based payment
transactions. The revised statement requires a public entity to measure the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost is to be recognized
over the period during which the employee is required to provide service in
exchange for the award. Changes in fair value during the requisite service
period are to be recognized as compensation cost over that period. In addition,
the revised statement amends SFAS No. 95, "Statement of Cash Flows," to require
that excess tax benefits be reported as a financing cash flow rather than as a
reduction of taxes paid. For small business issuers, the provisions of the
revised statement are effective for financial statements issued for the first
interim or annual reporting period of the first fiscal year beginning after
December 15, 2005, with early adoption encouraged.

After evaluation, on October 26, 2005, the Company's Compensation Committee of
the Board of Directors approved accelerating the vesting of approximately 2.9
million stock options outstanding under the Company's stock plans and granted
1,000,000 options to our President which vest immediately. The options have a
range of exercise prices of $0.30 to $4.40. The acceleration and immediate
vesting affects grants to the Company's President of approximately 2.7 million
options having a weighted average exercise price of $0.74. The closing price of
the Company's common stock on October 25, 2005, the last trading day before
approval of acceleration, was $0.30. The purpose of the accelerated vesting was
to enable the Company to avoid recognizing future compensation expense
associated with these options upon adoption of SFAS No. 123R, "Share-Based
Payment." The aggregate pre-tax expense that, absent the accelerated and
immediate vesting, would have been reflected in the Company's consolidated
financial statements beginning in fiscal 2006 is estimated to be approximately
$1.6 million (approximately $900,000 of which relates to options held by the
President of the Company).


                                      F-20
<PAGE>


SFAS No. 123R will require the Company to expense stock options based on grant
date fair value in its financial statements. In fiscal 2005, $18,000
compensation expense has been recognized for options granted to an employee.
that had an exercise price less than the market value of the underlying common
stock on the date of grant..The effect on net loss and net loss per share had
the Company applied the fair value recognition using the Black-Scholes option
pricing model is presented in the following proforma table:
<TABLE>
<CAPTION>
                                                                               For the Years Ended December 31,
                                                                                   2005                2004

<S>                                                                              <C>            <C>
     Net loss attributable to common stockholders - basic and diluted            $(7,436,576)   $  (5,093,270)
     Add:

           Stock based employee compensation expense included in net income           18,000             --
     Deduct:
         Total stock-based employee compensation expense determined under fair
         value-based method for all awards                                        (2,912,157)        (342,877)
                                                                                 -----------    -------------
     Pro forma net loss attributable to common stockholders

                                                                                $(10,330,733)     $(5,436,147)
                                                                                 ===========    =============
     Basic and diluted net loss per share as reported                           $      (0.25)     $     (0.17)
                                                                                 ===========    =============
     Basic and diluted pro forma net loss per share                             $      (0.34)     $     (0.18)
                                                                                 ===========    =============
</TABLE>


The fair value of the Company's options at date of grant was estimated using the
Black-Scholes fair value based method with the following weighted average
assumptions:

                                            For the Years Ended December 31,
                                               2005                  2004
                                               ----                  ----
Expected life (years)                           9.6                   4.3
Risk free interest rate                        4.16%                 3.61%
Volatility                                    131.1%                147.7%
Dividends                                         0%                    0%

The weighted average fair value of option s at the date of grant using the
Black-Scholes fair value based methodology for options granted in the years
ended December 31, 2005 and 2005 is estimated at $0.83 and $3.79, respectively.

The Company will adopt the provisions of SFAS No. 123R on January 1, 2006. The
adoption of SFAS No. 123R may have a material impact on the Company's financial
position or results of operations in future periods upon issuance of new awards.
(See Note 14).

Impact of Recently Issued Accounting Standards

In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), which is effective for the
Company on December 31, 2005. FIN 47 clarifies that the phrase "conditional
asset retirement obligation," as used in FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" (FAS 143), refers to a legal obligation to perform
an asset retirement activity for which the timing and/or method of settlement
are conditional on a future event that may or may not be within the control of
the company. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and/or method of
settlement. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. FAS 143 acknowledges that
in some cases, sufficient information may not be available to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The Company does not expect that
adoption of FIN 47 will have a significant effect on its financial position or
results of operations.

In May 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154


                                      F-21
<PAGE>


requires retrospective application to prior periods' financial statements of
changes in accounting principle. It also requires that the new accounting
principle be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings for that period rather than being reported in an income
statement. The statement will be effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect the adoption of SFAS 154 will have a material effect
on its condensed financial position or results of operations.

In June 2005, the EITF reached consensus on Issue No. 05-2, "The Meaning of
'Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, 'Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.'" Issue 00-19 is used to evaluate whether embedded
derivatives should be bifurcated under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. Specifically,
Statement 133 provides guidance as to when an issuer is required to bifurcate a
conversion option that is embedded in convertible debt. The adoption of the
Issue may have an impact on the Company's financial position and its results of
operations in future periods. upon issuance of new and currently outstanding
convertible securities.

In June 2005, EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material impact on the Company's financial position or results of operations.

In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues.", which addresses whether a modification to a conversion option that
changes its fair value effects the recognition of interest expense for the
associated dept instrument after the modification, and whether a borrower should
recognize a beneficial conversion feature, not a debt extinguishment, if a debt
modification increases the intrinsic value of the debt (for example, the
modification reduces the conversion price of the debt). In September 2005, the
FASB also ratified the EITF's Issue No. 05-8, "Income Tax Consequences of
Issuing Convertible Debt with a Beneficial Conversion Feature", which discusses
whether the issuance of convertible debt with a beneficial conversion feature
results in a basis difference arising from the intrinsic value of the beneficial
conversion feature on the commitment date (which is treated recorded in the
shareholder's equity for book purposes, but as a liability for income tax
purposes) and, if so, whether that basis difference is a temporary difference
under FASB Statement No. 109, Accounting for Income Taxes. The adoption of the
Issues may have a material effect on our financial position or results of
operations in future periods.

In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("SFAS
155"). SFAS 155 clarifies certain issues relating to embedded derivatives and
beneficial interests in securitized financial assets. The provisions of SFAS 155
are effective for all financial instruments acquired or issued after fiscal
years beginning after September 15, 2006. The Company is currently assessing the
impact that the adoption of SFAS 155 will have on its financial position and
results of operations.


                                      F-22
<PAGE>


In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 permits the choice of the amortization method or
the fair value measurement method, with changes in fair value recorded in
income, for the subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. The statement is effective for years
beginning after September 15, 2006, with earlier adoption permitted. The Company
is currently evaluating the effect that adopting this statement will have on the
Company's financial position and results of operations.


Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
that the Company disclose estimated fair values of financial instruments. The
carrying amounts reported in the statement of financial position for current
assets and current liabilities qualifying as financial instruments is a
reasonable estimate of fair value.

Reclassifications

Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements. These reclassifications have no effect on previously
reported income.

NOTE 3 - Property and Equipment

         Property and equipment consists of the following:

                                                   December      December 31,
                                                     2005            2004
                                                     ----            ----

         Research and development equipment        $ 800,831       $ 876,563
         Office equipment                             73,905          67,603
         Furniture and fixtures                       26,804          26,804
         Leasehold Improvements                       21,075          17,465
                                                    --------        --------
                                                     922,615         988,435
         Less:  accumulated depreciation and
          Amortization                               745,788         703,585
                                                    --------        --------
                                                    $176,827        $284,850
                                                    ========        ========

         Depreciation and amortization expenses charged to operations for the
         years ended December 31, 2005 and 2004 and for the period February 7,
         1997 (inception) to December 31, 2004 was $133,338, $144,846 and
         $896,537, respectively.

NOTE 4 - Notes Payable

The Company financed its annual insurance premiums over a nine-month period with
one financing Company. The notes payable balances at December 31, 2005 and 2004
were $152,512 and $165,883, respectively. The balance as of December 31, 2005 is
due in monthly installments approximating $19,000 including interest at the rate
of 7.95 % per annum through August 2006.

NOTE 5 - Income Taxes

         The tax effect of temporary differences and carryforwards that give
         rise to significant portions of the deferred assets are as follows:

                                           December 31,   December 31,
                                              2005              2004
                                           -----------    -----------
Deferred tax assets(liabilities):
Net operating loss carryforward            $ 7,793,000    $ 5,412,000
Property and equipment                          (6,000)        (1,000)
Accrued expenses                               412,000        443,000
Convertible debentures                         (12,000)            --
     Valuation allowance                    (8,187,000)    (5,854,000)
                                           -----------    -----------
      Net Deferred Tax Asset               $        --    $        --
                                           ===========    ===========


       The expiration dates for the net operating loss carry forward are as
follows:


                                      F-23
<PAGE>



          2019                        $  2,746,000
          2020                           1,467,000
          2021                           1,688,000
          2022                           1,260,000
          2023                           1,607,000
          2024                           4,868,000
          2025                           5,847,000
                                      ------------
                                      $ 19,483,000
                                      ------------

The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that based upon current available objective
evidence it is more likely than not that the deferred tax asset will not be
realized. The Company's effective tax rate differs from the federal statutory
rate as a result of the change in the valuation allowance.

A reconciliation between the effective rate for income taxes and the amount
computed by applying the statutory Federal income tax rate to loss from
continuing operations before provision for income taxes and cumulative effect
for a change in accounting principle as follows:

                                                             For the Years Ended
                                                                 December 31,
                                                             -------------------
                                                              2005        2004
                                                             ---------  --------
Tax provision at statutory rate                                (34%)       (34%)
Non deductible expenses                                         (0%)        (1%)
Other                                                             0%          1%
Change in valuation allowance for net deferred tax assets        34%         34%
                                                             ---------  --------
                                                                  0%          0%
                                                             =========  ========

The change in the valuation allowance for deferred tax assets are summarized as
follows:

                                                        Years Ended December 31,
                                                           2005         2004
                                                        -----------  -----------
Beginning Balance                                       $ 5,854,000  $ 4,258,000
Change in Allowance                                       2,333,000    1,596,000
                                                        -----------  -----------
Ending Balance                                          $ 8,187,000  $ 5,854,000
                                                        -----------  -----------

As of December 31, 2005 and 2004, the Company has net operating loss
carryforwards of $19,483,000 and $13,636,000, respectively, available to offset
future taxable income. These carryforwards will expire at various dates through
2025. Internal Revenue Code Section 382 rules limit the utilization of net
operating losses upon a change of control of a company. The Company has not
performed an evaluation whether a change of control has taken place and as such,
utilization of its net operating losses may be subject to substantial limitation
in future periods.

NOTE 6 - Deferred Officers Salaries

Deferred officers' salaries, current and non-current, represent payroll amounts
deferred by the former Chief Executive Officer ("CEO") and former Chief
Financial Officer ("CFO"), which aggregated $939,632 and $986,555 at December
31, 2005 and, 2004, respectively. (See Note 11, Litigation).

NOTE 7 - Securities Purchase Agreement


                                      F-24
<PAGE>


On November 14, 2005, the Company entered into a Securities Purchase Agreement
with the Purchasers for the sale of (i) $4,000,000 in secured convertible notes
and (ii) warrants to purchase 4,000,000 shares of our common stock.

The Purchasers are obligated to provide us with the funds as follows:

o $1,000,000 - which was disbursed on November 15, 2005;

o $1,000,000 - which was disbursed on January 4, 2006; and

o $2,000,000 - which will be disbursed within two days of the effectiveness of
the registration statement.

The secured convertible notes bear interest at 8%, unless the Company's common
stock is greater than $0.2875 per share for each trading day of a month, in
which event no interest is payable during such month. The secured convertible
notes mature three years from the date of issuance, and are convertible into
common stock, at the Purchasers' option, at a 40% discount to the average of the
three lowest trading prices of the common stock during the 20 trading day period
prior to conversion. As such these notes are convertible into an indeterminate
number of shares of the Company's common stock. At the Company's option, in any
month where the current stock price is below the initial market price (100% of
the volume weighted average price of our common stock for the five days prior to
closing), the Company can pay the outstanding principal and interest due for
that month and this will stay any conversions for that month

In addition the Company entered into a Registration Rights Agreement whereby it
was required to file a registration statement with the SEC within the 45 days of
the November 14, 2005. The Company is required to use its best efforts to have
the registration statement declared effective within 120 days of November 14,
2005. The Registration Rights Agreement required that the number of shares of
common stock included in the registration statement was equal to 200% of the
common stock underlying the sum of the number of shares that were then issuable
upon conversion of the notes and the number of shares that were then issuable
upon exercise of the warrants. The Company filed a original registration
statement on December 22, 2005 and an amended registration statement on February
13, 2006. The registration statement has not yet been declared effective.

Pursuant to the Registration Rights Agreement, the Company will be subject to
liquidation damages of two percent per month of the then outstanding principal
amount of the secured convertible notes in the following instances:

      1.    If the registration statement is not declared effective within 120
            days from November 14, 2005
      2.    If the Company fails to timely file all reports with the SEC
            pursuant to the Securities Exchange Act of 1934
      3.    If the Company fails to maintain effectiveness of the registration
            statement after it has been declared effective.
      4.    If the Company's common stock is not listed for quotation on the
            Nasdaq National Market, Nasdaq SmallCap Market, New York Stock
            Exchange, American Stock Exchange once listed there or ceases to be
            traded on the Over-the-Counter Bulletin Board or equivalent
            replacement exchange

The full principal amount of the secured convertible notes is due upon a default
under the terms of secured convertible notes. In addition, the Company granted
the Purchasers a security interest in substantially all of its assets and
intellectual property.

The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.65 per share. The warrants shares carry the same
registration rights as the shares underlying the convertible notes. The
Purchasers may exercise the warrants on a cashless basis if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event the Purchasers exercise the warrants on a
cashless basis, then the Company will not receive any proceeds. In addition, the
exercise price of the warrants will be adjusted in the event the Company issues
common stock at a price below the average of the last price on the five days
preceding the issuance with the exception of any securities issued as of the
date of the warrants or issued in connection with the secured convertible notes
issued pursuant to the Securities Purchase Agreement.



                                      F-25
<PAGE>

The conversion price of the secured convertible notes and the exercise price of
the warrants may be adjusted in certain circumstances such as if the Company
pays a stock dividend, subdivides or combines outstanding shares of common stock
into a greater or lesser number of shares, or takes such other actions as would
otherwise result in dilution of the Purchasers' position.

The Purchasers have agreed to restrict their ability to convert their secured
convertible notes or exercise their warrants and receive shares of the Company`s
common stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock.

Under a Guaranty and Pledge Agreement, the Company's President and Chief
Executive Officer, agreed (i) to unconditionally guarantee the timely and full
satisfaction of all obligations, whether matured or unmatured, now or hereafter
existing or created and becoming due and payable to the Purchasers, their
successors, endorsees, transferees or assigns under the Securities Purchase
Agreement and other transaction documents to the extent of 2,677,000 shares of
the Company `s common stock issued in its own name, and (ii) to grant to the
Purchasers, their successors, endorsees, transferees or assigns a security
interest in the 2,677,000 shares, as collateral security for such obligations.

In connection with the closing on November 14, 2005 of the first tranche of
$1,000,000 of convertible notes and warrants for 1,000,000 shares of common
stock, the Company reviewed the provisions of EITF 00-19 to determine if the
conversion option and the detachable warrants should be accounted for as
derivative financial instruments. The convertible notes are convertible into an
indeterminate number of shares. The conversion option and warrants shares are
subject to registration rights penalties with provisions that are outside the
control of the Company and collateral was posted in connection with the sale of
these instruments. As such the conversion option and detachable warrants are
required to be recorded as liabilities at their fair value on the date of
issuance under the guidance on EITF 00-19. The fair value of the conversion
option on the date of issuance of the notes was $612, 903. The fair value of the
warrants on the date of issuance was $160,048. As such the convertible notes
were recorded on the date of issuance at the residual value of $227,049. The
resultant debt discount recorded on the secured convertible notes will be
amortized over the three-year life of the instrument using the effective
interest rate method with a charge to interest expense.

In accordance with SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", at each reporting period these liabilities will be adjusted
for changes in their fair value. The conversion option is valued at its
intrinsic value because of the 40% discount to current market prices of the
Company's common stock and the detachable warrants are valued using the Black
Scholes valuation model. Actual period close common stock prices, applicable
volatility rates and the period close risk free interest rate for the
instruments expected remaining life are the key assumptions used in the
valuation calculation. The period-to-period changes in fair value will be
recorded as either an addition or charge to earnings. These additions or charges
have no cash effect over the life of the instrument. The change in the fair
value of the conversion option and warrants for the year ended December 31, 2005
was $284,941.

NOTE 8 - Stockholders'  Equity

Initial Capitalization and Founders' shares

In February 1997 and March 1998, the Company issued to its founders 10,301,259
and 2,710,858 shares of common stock, respectively, for an aggregate of $6,050
including technology rights (valued at $4,400) transferred to the Company.

Stock Splits and Recapitalization

In August 1998, the Company's board of directors approved a 2.2 for 1 stock
split on its common stock and in June 2001, the Company's board of directors
approved a 3 for 1 stock split on its common stock. On December 19, 2003, the
Company completed the recapitalization transaction with Promos, Inc. This
resulted in the issuance of 2.054 shares of Promos, Inc. (subsequently renamed
OmniCorder Technologies, Inc.) for each outstanding share of the original
OmniCorder, and the corresponding adjustment of the number of options and
warrants and their exercise prices. All share information in the accompanying
financial statements have been retroactively restated to reflect such stock
splits and the Recapitalization .



                                      F-26
<PAGE>


Private Placements

In October 1997, the Company commenced a private placement of shares of common
stock at a price of $.55 per share. The placement agent received a commission of
5% of the aggregate purchase price of the common stock placed, and was granted
warrants with a five year term to purchase 76,810 shares of common stock on
August 31, 1998, at an exercise price of $.55 per share, which expired on August
31, 2003. The Company issued 1,246,976 shares of its common stock at $.55 per
share, which related to this private placement, from October 1997 through May
1998 for net proceeds of $591,925.

In April 1999, the Company issued 945,282 shares of common stock at a price of
$1.14 per share for aggregate proceeds of $1,074,000. The Company's former chief
financial officer purchased 184,831 of these shares.

In 2000, the Company issued 1,615,425 shares of common stock to various
investors for aggregate proceeds of $2,060,401.

In 2001, the Company issued 164,294 shares of common stock to various investors
for aggregate proceeds of $400,000.

In 2002, the Company issued 487,749 shares of common stock for aggregate
proceeds of $500,000. Additionally, the Company issued 164,294 shares of common
stock to the stockholders who participated in the 2001 private placement in
accordance with the anti-dilution provisions of the subscription agreements. In
October 2003, the Company issued to these stockholders an additional 107,822
shares of common stock based on the anti-dilution provisions of the subscription
agreements.

In 2003, the Company issued 1,317,849 shares of common stock to various
investors for aggregate proceeds of $1,238,402 at $.97 per share. Concurrent
with the closing of the recapitalization transaction on December 19, 2003, the
Company completed a private offering of 5,686,027 (including the issuance of
200,000 common shares upon the conversion of the $275,000 Bridge Promissory
Note) shares common stock at a price of $1.375 per share, with gross proceeds of
$7,820,405. Promos also issued warrants to three investors to purchase an
aggregate of 218,189 shares of its common stock at an exercise price of $1.50
per share for a three-year period. Prior to the completion of the
recapitalization transaction, Promos redeemed and cancelled 1,135,300 shares of
its outstanding common stock from seven existing stockholders for a total cash
consideration of $10. At the time of the completion of the recapitalization
transaction, private offering, related stock purchase and payment of
equity-based transaction fees, OmniCorder had 29,570,100 outstanding shares of
common stock, warrants to purchase 1,450,397 shares and stock options to
purchase 2,781,899 shares of common stock.

In connection with the private offering and recapitalization transaction, the
Company incurred cash transaction expenses which reduced the proceeds as
follows: (i) placement agent fees associated with the private offering of
approximately $289,000, which included reimbursement expenses were paid on
closing; (ii) investor and financial relations services fees associated with the
recapitalization transaction of approximately $135,000 and (iii) legal fees and
reimbursement expenses associated with the recapitalization transaction of
approximately $223,000.

As part of the transaction, the Company purchased and distributed to its
shareholders as part of the recapitalization transaction purchase of 7,764,700
shares of Promos common stock for a consideration of $180,000 from a former
director of Promos. This payment has been reflected as a reduction of the
proceeds of the December 19, 2003 private placement. In the transaction,
13,773,700 shares held by Promos shareholders were redeemed and distributed to
shareholders of the Company, and an aggregate of 1,135,300 shares of Promos
common stock from seven unaffiliated and existing stockholders were cancelled.

In addition, the Company issued 1,212,073 of its common stock to the placement
agent and its financial advisors in connection with the private offering and
recapitalization transaction.


                                      F-27
<PAGE>

Series A Convertible Preferred Stock

On December 14, 2004, the Company completed a private placement of 1,550,000
shares of its series A convertible preferred stock and warrants to purchase
465,000 shares of its common stock at $1.10 per share. The Company received
gross proceeds of $1,550,000. The Company allocated $387,667 of the gross
proceeds to the warrants based on estimated fair value. In accordance with EITF
Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
Instruments," ("EITF 00-27") the Company recorded a non-cash charge of
$1,161,249 to deficit accumulated during the development stage in fiscal 2004.
The non-cash charge measures the difference between the relative fair value of
the series A convertible preferred stock and the fair market value of the
Company's common stock issuable pursuant to the conversion terms on the date of
issuance. Holders of the series A convertible preferred stock are entitled to
receive a cumulative dividend of 4% per annum, payable either in cash or, at the
Company's option, additional shares of series A convertible preferred stock. As
a result of anti-dilution provisions relating to the series A convertible
preferred stock and the warrants that were triggered by the subscription rights
offering consummated on August 10, 2005, the conversion price of its series A
convertible preferred stock was reduced to $0.50 per share and the exercise of
the warrants was reduced to $0.50 per share. As a result of the reduction in the
series A convertible preferred stocks conversion price, the Company recorded a
non-cash charge of approximately $703,000 during the third quarter of 2005 in
accordance with EITF 00-27. On October 28, 2005, as anti-dilution protection,
the Company issued additional five year warrants to purchase 1,550,000 shares of
its common stock to the December 2004 private placement investors. The warrants
have an exercise price of $0.75 per share and will expire August 9, 2010. The
Company recorded a deemed dividend charge of $449,500 for the fair value of
those warrants during the fourth quarter of 2005. As a result of the November
14, 2005 Securities Purchase Agreement the series A preferred stock conversion
price was reduced to $0.44 per share pursuant to the anti-dilution clause of the
certificate of designation. On January 3, 2006, after the close of the second
tranche of the Securities Purchase Agreement, the conversion price of the series
A preferred stock was further reduced to $0.39 per share. The series A
convertible preferred stock is convertible into shares of common stock (i) at
any time at the option of the holder thereof, and (ii) automatically, as of the
close of business on the 20th consecutive trading day on which the closing bid
price for the common stock on the principal stock exchange or market on which it
is listed, including the American Stock Exchange or Nasdaq Small Cap Market, or
if not traded on such exchange or market, on the OTC Bulletin Board, is at least
$2.20, or 200% of the $1.10 conversion price per share, subject to adjustment.
No underwriter or selling agent was involved in this offering. As of March 21,
2006 1,851,423 shares of series A preferred stock convert into 4,739,643 shares
of common stock.

EITF 00-19 requires that the classification of contracts that could result in
derivative instruments be reassessed at each balance sheet date. The convertible
debentures issued in connection with the November 14, 2005 Securities Purchase
Agreement are convertible into an indeterminate number of shares. (See Note 7)
Because of this the Company might not have sufficient authorized shares in the
future to settle conversions or exercises of other non-employee instruments. In
addition the series A convertible preferred stock anti dilution provisions will
be triggered upon conversions of the November 14, 2005 convertible debentures
should their conversion price be less than the existing conversion price of the
series A convertible preferred stock. As such the November 14, 2005 sale of
convertible debentures caused the series A convertible preferred stock to be
convertible into an indeterminate number of shares. Under the guidance of EITF
00-19, share settlement of the series A convertible preferred stock could no
longer considered to be within the control of the Company. The Company
reclassified the embedded conversion option in the series A convertible
preferred stock from equity to a liability based on the fair value of the
conversion option on November 14, 2005 of $586,182. The Company will re-measure
the fair value of the embedded conversion option at each reporting date with
changes in fair value recorded in its statement of operations for the period
which was $16,204 for the year ended December 31, 2005. The fair value of the
series A conversion option was $602,386 at December 31, 2005. The Company used
the Black Scholes Valuation model to determine the fair value of the conversion
option. The significant assumptions used include the actual period closing price
of the Company's common stock, applicable volatility rates and the period close
risk free interest rate for the instruments remaining contractual life.



                                      F-28
<PAGE>


Proprietary Rights Offering

On August 10, 2005 the Company consummated a subscription rights offering to
existing stockholders of the Company, for which the Company received gross
proceeds of $703,934, issued 1,407,867 shares of series B convertible preferred
stock convertible originally on a one-to-one basis of the Company's common stock
and five year warrants to purchase 703,934 shares of common stock. In accordance
with EITF 00-27 the Company recorded a non-cash charge of approximately $420,000
during the third quarter of 2005 associated with the sale of our series B
convertible preferred stock. The charge measures the difference between the
relative fair value of the series B convertible preferred stock and the fair
market value of the shares of our common stock issuable pursuant to the
conversion terms on the date of issuance. As a result of the November 14, 2005
Securities Purchase Agreement the series B preferred stock conversion price was
reduced from $0.50 per share to $0.44 per share pursuant to the anti-dilution
clause of the certificate of designation. On January 3, 2006, after the close of
the second tranche of the Securities Purchase Agreement, the conversion price of
the series B preferred stock was further reduced to $0.39 per share. Holders of
the series B convertible preferred stock are entitled to receive a cumulative
dividend of 7% per annum, payable either in cash or, at the Company's option,
additional shares of series B convertible preferred stock. As of December 31,
2005 a total of 114,665 shares of series B preferred convertible stock were
converted into 114,665 shares of the Company's common stock. As of March 21,
2006 1,369,669 shares of series B preferred stock convert into 1,753,176 shares
of common stock.

EITF 00-19 requires that the classification of contracts that could result in
derivative instruments be reassessed at each balance sheet date. The convertivle
debentures issued in connection with the November 14, 2005 Securities Purchase
Agreement are convertible into an indeterminate number of shares. (See Note 7).
Because of this the Company might not have sufficient authorized shares in the
future to settle conversions or exercises of other non-employee instruments. In
addition the series B convertible preferred stock anti dilution provisions will
be triggered upon conversions of the November 14, 2005 convertible debentures
should their conversion price be less than the existing conversion price of the
series B convertible preferred stock. As such the November 14, 2005 sale of
convertible debentures caused the series B convertible preferred stock to be
convertible into an indeterminate number of shares. Under the guidance of EITF
00-19, share settlement of the series B convertible preferred stock could no
longer considered to be within the control of the Company. The Company
reclassified the embedded conversion option in the series B convertible
preferred stock from equity to a liability based on the fair value of the
conversion option on November 14, 2005 of $244,533. The Company will re-measure
the fair value of the embedded conversion option at each reporting date with
changes in fair value recorded in its statement of operations for the period was
$6,760 for the year ended December 31, 2005. The fair value of the series B
conversion option was $251,293 at December 31, 2005. The Company used the Black
Scholes Valuation model to determine the fair value of the conversion option.
The significant assumptions used include the actual period closing price of the
Company's common stock, applicable volatility rates and the period close risk
free interest rate for the instruments remaining contractual life.

Warrants

In 1997, the Company received $40,000 from the sale of stock warrants to a
former director of the Company who is a partner at the Company's former law
firm. These warrants entitled the holder to purchase up to $180,000 of any
securities the Company may issue through January 6, 2004, on the same terms and
conditions as those issued. In October 2003, these warrants were exercised on a
cashless basis and the Company issued 142,304 shares of common stock.

In 1997, the Company issued warrants to a law firm in which a former director of
the Company is a partner, in consideration for the deferral of payment of legal
fees. The warrants entitled the Company's former legal counsel to purchase up to
$427,500 of any securities sold by the Company to outside investors at the same
prices as sold to such investors through January 6, 2004 (as to $337,500 worth
of such securities) and through February 15, 2004 (as to $90,000 worth of such
securities). The estimated fair value of the warrants was $95,000, of which
$75,000 and $20,000 was charged to general and administrative expense for the
period February 7, 1997 (inception) to December 31, 1997 and the year ended
December 31, 1998. In October 2003, these warrants were exercised on a cashless
basis and the Company issued 337,970 shares of common stock.

In 2004, the Company issued warrants in connection with the December 14, 2004
private placement transaction. The warrants entitled the participants of the
private placement to purchase up to 465,000 shares of common stock at an
exercise price of $1.10 per share. The exercise price was adjusted to $0.50 per
share on August 10, 2005 as a result of the consummation of the subscription
rights offering. These warrants will expire if unexercised on December 14, 2009.
As noted above in October 2005, the investors in the December 2004 private
placement received an additional 1,550,000 warrants to purchase the Company's
common stock with an exercise price of $0.75, which expire on August 9, 2010.



                                      F-29
<PAGE>

On August 10, 2005, the Company's subscription rights offering of newly-created
series B convertible preferred stock closed. Stockholders that purchased shares
of the Company's series B preferred stock in the rights offering were issued,
for no additional consideration, five-year warrants to purchase that number of
shares of the Company's common stock equal to 50% of the number of shares of
series B preferred stock acquired by the stockholder in the offering. The
warrants have an exercise price of $0.75 per share. The Company issued warrants
to purchase 703,934 shares of common stock and could receive an additional
$527,950 if all of the warrants issued in the subscription rights offering are
exercised. There is no assurance as to how many warrants will be exercised.

On September 14, 2005, the Company issued warrants to purchase 2,400,000 shares
of the Company's common stock in connection with the Letter of Engagement with
Trilogy. Each warrant represents the right to purchase one share of the
Company's common stock for $0.50 per share at any time through the third year of
issuance. The estimated fair value of the warrants was determined to be
$600,000, which was charged to general and administrative expense in September
2005. On October 31, 2005, Trilogy notified the Company that it has resigned the
engagement, and the parties have finalized the terms of such resignation. On
November 17, 2005 the Company entered into a settlement agreement and mutual
release ("Settlement Agreement") with Trilogy. The Settlement Agreement
terminates the Consulting Agreement with Trilogy entered into on June 22, 2005,
the Finder's Fee Agreement with Trilogy entered into on July 25, 2005 and the
Letter of Engagement with Trilogy entered into on September 14, 2005. Under the
terms of the Settlement Agreement, Trilogy agreed to return and relinquish all
right, title and interest to the 2,400,000 warrants they were given and release
the Company of all prior agreements and understandings between Trilogy and the
Company. (See Note 2 "Management Liquidity Plans")

On November 14, 2005, the Company entered into a Securities Purchase Agreement
with the Purchasers for the sale of (i) $4,000,000 in secured convertible notes
and (ii) warrants to purchase 4,000,000 shares of our common stock. The warrants
are issued pro rata upon each investment tranche. The warrants are exercisable
until five years from the date of issuance at a purchase price of $0.65 per
share. The Purchasers may exercise the warrants on a cashless basis if the
shares of common stock underlying the warrants are not then registered pursuant
to an effective registration statement. In the event the Purchasers exercise the
warrants on a cashless basis, then the Company will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event the
Company issues common stock at a price below market, with the exception of any
securities issued as of the date of the warrants or issued in connection with
the secured convertible notes issued pursuant to the Securities Purchase
Agreement. On November 15, 2005 the Purchasers received 1,000,000 warrants and
January 16, 2006 the purchasers received 1,000,000 warrants. Another 2,000,000
warrants will be issued to the Purchasers when the registration statement is
declared effective.

Pursuant to an amended Finder's Fee Agreement, between Axiom and the Company,
Axiom received five year warrants to purchase 378,445 and 395,310 shares of our
common stock at an exercise price of $0.65 per share on November 14, 2005 and
January 6, 2006, respectively. The warrants are exercisable for a period of five
years from date of issuance. The number of warrants issued was computed by
dividing the total dollar investment by the initial market price (100% of the
volume weighted average price of our common stock for the five days prior to
closing) multiplied by the 8% warrant coverage as agreed. Warrants are issued
pro rata upon each investment tranche. The initial market price was $0.211 and
$0.202 for the first tranche and second tranche, respectively. Axiom will
receive additional warrants when the registration statement is declared
effective.

The convertible debentures issued in connection with the November 14, 2005
Securities Purchase Agreement are convertible into an indeterminate number of
shares. Because of this the Company would not have sufficient authorized shares
to settle exercises of the warrants issued to the Purchasers or Axiom on the
date of issuance. In addition underlying shares of the Purchasers warrants were
subject to the liquidating damages provisions of the Registration Rights
Agreement . If the registration statement that was filed by the Company is not
declared effective within 120 days from November 14, 2005 or fails to maintain
effectiveness of the registration statement then the Company will be required to
pay liquidated damages to the Purchasers in the amount of 2% per month on the
outstanding principal amount of the convertible debentures in shares or cash. In
accordance with the provisions of EITF 00-19 both the Purchasers and Axiom
warrants were recorded as liabilities at their fair values on the date of
issuance of $160,048 and $60,569, respectively.(See Note 7)



                                      F-30
<PAGE>


EITF 00-19 requires that the classification of contracts that could result in
derivative instruments be reassessed at each balance sheet date. The convertible
debentures issued in connection with the November 14, 2005 Securities Purchase
agreement are convertible into an indeterminate number of shares. Because of
this the Company might not have sufficient authorized shares in the future to
settle exercises of its other issued warrants. Under the guidance of EITF 00-19,
share settlement of the Company's other issued warrants could no longer
considered to be within the their control. The Company reclassified these other
warrants to a liability based on the fair value of the conversion option on
November 14, 2005 of $636,412.

The Company will re-measure the fair value of the warrants at each reporting
date with changes in fair value recorded in its statement of operations for the
period which was $21,679 for the year ended December 31, 2005. The fair value of
the Company's warrants was $649,886 at December 31, 2005. The Company used the
Black Scholes Valuation model to determine the fair value of the warrants. The
significant assumptions used include the actual period closing price of the
Company's common stock, applicable volatility rates and the period close risk
free interest rate for the instruments remaining contractual life.

As of December 31, 2005 and 2004, the Company had warrants outstanding to
purchase an aggregate of 5,547,776 and 1,915,397 common shares respectively.

Bridge Financing

On August 31, 1998, the Company sold an aggregate of $750,000 of 10%
Exchangeable Senior Bridge Notes ("Bridge Notes") to accredited investors. The
net proceeds of the Bridge Notes were approximately $602,500 after the payment
of offering costs of $147,500. The Company issued warrants to purchase 1,540,260
shares of common stock at an exercise price of $.97 per share. Included in the
Bridge Financing is $150,000 of Bridge Notes and 308,052 warrants with related
parties. The Company allocated $329,625 of the gross proceeds to the Bridge
Warrants based on estimated fair value, which resulted in $329,625 of original
issue discount and a corresponding amount of additional paid-in capital.

In March 1999, the Company exercised its option to convert the Bridge Notes and
accrued interest into common stock at a conversion price of $.55 per share. The
Company issued 1,443,015 shares of its common stock in conjunction with the
conversion. As a result of the Bridge Notes conversion, the amount of
convertible warrants was reduced by half to 770,130 shares of warrants to
purchase common stock. These warrants expired unexercised on August 31, 2003.

On November 20, 2003, the Company entered into a one-year Bridge Promissory Note
in the amount of $275,000 bearing interest at 1%. By its terms, this note was
automatically converted into 200,000 common shares of the Company at $1.375 per
share as part of the December 19, 2003 private placement.

NOTE 9 - Stock Option Plan and Warrants

In 1998, the Company adopted a stock option plan, as amended on February 26,
2004, under which it may grant qualified and nonqualified options to purchase up
to 4,435,500 shares of common stock to employees and consultants. Qualified
options are exercisable for a period of up to ten years from the date of the
grant at no less than the fair value of the common stock on the date of grant.
The term of such options is five years from the date of grant for stockholders
who own more than ten percent of the voting power of all classes of stock of the
Company at the date of grant, and are exercisable for no less than 110% of fair
value on the date of grant for such holders.

For the year ended December 31, 2005, under the 1998 stock option plan, the
Company awarded stock options to purchase 1,422,500 shares of common stock, of
which 143,000 were to employees, 852,000 were to the Company's President and
CEO, 365,000 were to members of the Board of Directors and 62,500 shares were to
consultants. At December 31, 2005, options to purchase 3,841,493 shares of
common stock were outstanding. These options have exercise prices ranging from
$0.55 to $4.00 per share. Effective June 7, 2005, no further options can be
granted from the 1998 stock option plan.

On March 7, 2005, the board of directors of the Company adopted and approved the
2005 Incentive Compensation Plan (the "2005 Plan"), which was approved by the
stockholders on June 7, 2005 at the annual meeting of stockholders.



                                      F-31
<PAGE>


The terms of the 2005 Plan provide for the issuance of up to 5,000,000 awards of
stock options, stock appreciation rights or SARs, restricted stock, deferred
stock, other stock related awards and performance awards that may be settled in
cash, stock or other property.

As of December 31, 2005, 3,213,000 awards have been granted under the 2005 Plan,
of which 330,000 were restricted stock grants and 2,883,000 were stock option
grants. Of the 3,213,000 awards, 1,825,000 were granted to our new CEO pursuant
to the terms of his employment agreement, 200,000 were issued to an employee,
33,000 were granted to management advisory consultants and 1,155,000 were
granted to outside directors for their service to the Company in 2004 and 2005.

On October 26, 2005, the Company's Compensation Committee of the Board of
Directors approved accelerating the vesting of approximately 2.9 million stock
options held by employees and members of the Board of Directors which were
outstanding under the Company's stock plans and granted 1,000,000 options to our
President which vest immediately and are exercisable at $0.30 per share. The
options have a range of exercise prices of $0.30 to $4.00. The acceleration and
immediate vesting affects grants to the Company's President of approximately 2.7
million options having a weighted average exercise price of $0.74. The closing
price of the Company's common stock on October 25, 2005, the last trading day
before approval of acceleration, was $0.30. The purpose of the accelerated
vesting was to enable the Company to avoid recognizing future compensation
expense associated with these options upon adoption of FASB Statement No. 123R,
"Share-Based Payment." The aggregate pre-tax expense that, absent the
accelerated and immediate vesting, would have been reflected in the Company's
consolidated financial statements beginning in fiscal 2006 is estimated to be
approximately $1.6 million (approximately $900,000 of which relates to options
held by the President of the Company).

EITF 00-19 requires that the classification of contracts that could result in
derivative instruments be reassessed at each balance sheet date. The convertible
debentures issued in connection with the November 14, 2005 Securities Purchase
agreement are convertible into an indeterminate number of shares. (See Note 7).
Because of this the Company might not have sufficient authorized shares in the
future to settle exercises of its non employee issued stock options. Under the
guidance of EITF 00-19, share settlement of the Company's non employee issued
stock options could no longer considered to be within the their control. The
Company reclassified these non employee stock options to a liability based on
the fair value of the stock options on November 14, 2005 of $104,927. The
Company will re-measure the fair value of the non employee stock options at each
reporting date with changes in fair value recorded in its statement of
operations for the period which was $444 for the year ended December 31, 2005.
The fair value of the Company's non employee stock options was $104,483 at
December 31, 2005. The Company used the Black Scholes Valuation model to
determine the fair value. The significant assumptions used include the actual
period closing price of the Company's common stock, applicable volatility rates
and the period close risk free interest rate for the instruments remaining
contractual life.

A summary of activity under the stock option plans is as follows:

                                      December 31, 2005       December 31, 2004
                                                 Weighted               Weighted
                                                  Average                Average
                                                 Exercise               Exercise
                                     Shares        Price    Shares       Price

Outstanding, beginning of year      3,039,875    $    .73  2,781,899    $    .96
Options granted                     4,305,500         .83    565,983        2.66
Options exercised                      (5,218)        .55   (113,067)        .74
Options forfeited                    (615,667)       2.24   (194,940)       1.34
                                    ---------    --------  ---------    --------
Outstanding, end of year            6,724,490    $    .94  3,039,875    $    .73
                                    =========    ========  =========    ========
Exercisable, end of year            6,671,240    $   1.06  2,739,306    $    .84
                                    =========    ========  =========    ========


                                      F-32
<PAGE>


The following table summarizes stock option information as of December 31, 2005:


                                         Options Outstanding

                     Number Outstanding    Weighted Average     Options Number
          Exercise       at Remaining         Contractual       Exercisable At
           Prices     December 31, 2005          Life          December 31, 2005

         $ .30                1,000,000                9.82           1,000,000

         $ .55                  162,659                2.27             162,659

         $ .66                  200,000                4.49             200,000

         $ .92                   13,500                4.49              13,500
         $ .97                1,429,375                2.32           1,429,375
         $1.00                3,002,000                9.02           3,002,000
        $1.135                  264,925                4.67             264,925
        $1.136                  221,796                 .25             221,796
         $1.20                   13,500                4.49              13,500
        $1.375                  250,000                7.75             250,000
        $1.378                    1,818                                   1,818
                                                        .96
         $1.38                      727                 .96                 727
         $2.43                   93,440                1.11              93,440
         $3.75                    6,000                4.49               6,000
         $4.00                   64,750                4.31              64,750
                              ---------                ----           ---------
Total                         6,724,490                2.99           6,724,490
                              =========                ====           ==========

A summary of stock warrant activity is as follows:

                                   December 31, 2005           December 31, 2004
                                               Weighted                Weighted
                                                Average                 Average
                                               Exercise                Exercise
                                  Shares          Price     Shares        Price

Outstanding, beginning of year    1,915,397       $1.06   1,450,397       $1.05
Warrants granted                  6,032,379         .63     465,000        1.10
Warrants exercised                       --          --          --          --
Warrants forfeited               (2,400,000)        .50          --          --
Warrants expired                         --          --          --          --
                                 ----------       -----   ---------       ------
Outstanding, end of year          5,547,776        0.78   1,915,397        1.06
                                 ==========       =====   =========       ======
Exercisable, end of year          5,547,776       $0.78   1,915,397       $1.06
                                 ==========       =====   =========       ======


The following table summarizes warrants information as of December 31, 2005:


                                      F-33
<PAGE>


                                     Warrants Outstanding

                   Number       Weighted Average    Weighted  Warrants Number
               Outstanding at      Remaining        Average    Exercisable at
   Exercise     December 31,      Contractual       Exercise     December 31,
    Prices          2005             Life            Price               2005

      $ 0.50          465,000               3.96      $ 0.50          465,000
      $ 0.65        1,378,445               4.87      $ 0.65        1,378,445
      $ 0.75        2,253,934               4.61      $ 0.75        2,253,934
      $ 0.97        1,232,208               6.67      $ 0.97        1,232,208
      $ 1.50          218,189               0.97      $ 1.50          218,189
               --------------   ----------------   ---------   --------------
                    5,547,776               4.93      $ 0.78        5,547,776
               ==============   ================   =========   ==============

During the year ended December 31, 2002, the Company issued warrants to purchase
1,026,840 shares of common stock at $.97 per share to a consultant for services
rendered, of which 400,000 were earned in 2002, and the remainder in 2003. The
Company recorded a charge to operations of approximately $473,000 for the fair
value of the warrants earned in 2002. For the year ended December 31, 2003, the
Company issued additional warrants to purchase 205,368 shares of common stock at
$.97 per share to another consultant for services rendered, all of which were
earned in 2003. The Company recorded a charge to operations of approximately
$236,000 for the fair value of the warrants earned in 2003. As of December 31,
2004, these warrants are fully vested and are exercisable through September 1,
2012.

The Company issued warrants to purchase 218,189 shares of its common stock to
lead investors in its December 19, 2003 Private Placement (Note 8). These
warrants were immediately exercisable at $1.50 per share through December 19,
2006.

The Company issued warrants to purchase 465,000 shares of its common stock to
investors in its December 14, 2004 Private Placement (Note 7). These warrants
were immediately exercisable at $1.10 per share through December 14, 2009. In
August 2005, the exercise price of the warrants was reduced to $0.50 per share
after the consummation of the rights offering pursuant to anti dilution
provision. In October 2005, the investors in the December 2004 private placement
received an additional 1,550,000 warrants to purchase the Company's common stock
with an exercise price of $0.75, which expire on August 9, 2010.

The Company issued warrants to purchase 703,934 shares of its common stock to
investors in its Proprietary Rights Offering August 10, 2005 (Note 8). These
warrants were immediately exercisable at $0.75 per share through August 9, 2010.

The Company issued warrants to purchase 1,000,000 shares of its common stock to
the Purchasers in the Securities Purchase Agreement on November 15, 2005 (Note
8). The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.65 per share. The Purchasers may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the Purchasers exercise the warrants on a cashless basis, then we will not
receive any proceeds. In addition, the exercise price of the warrants will be
adjusted in the event we issue common stock at a price below market, with the
exception of any securities issued as of the date of the warrants or issued in
connection with the secured convertible notes issued pursuant to the Securities
Purchase Agreement.

The Company issued warrants to purchase 378,445 shares of its common stock to
Axiom pursuant to an amended Finder's Fee Agreement on November 15, 2005 (Note
8). The warrants are exercisable into common stock at an exercise price of $0.65
per share for a period of five years from date of issuance. The number of
warrants issued was computed by dividing the total dollar investment by the
initial market price of (100% of the volume weighted average price of our common
stock for the five days prior to closing) multiplied by the 8% warrant coverage
as agreed. The initial market price was $0.211.



                                      F-34
<PAGE>


After the Company entered the Securities Purchase Agreement, and in following
the guidance of EITF 00-19, the Company classified its warrants issued, as a
liability recorded at fair value on November 14, 2005. (See Note 8 "Warrants").

NOTE 10 - License Agreements

Technology License Agreement

In 1997, and in connection with the formation of the Company, the founding
stockholders entered into an agreement pursuant to which the Company could
acquire the exclusive worldwide right to exploit technology related to the
detection of cancerous lesions by their effect on the periodic modification of
perfusion in the surrounding tissues (the "Technology"). In February 1998, the
Company funded the required research budget and in March 1998, issued 1,320,000
shares of previously reserved common stock to one of the founders, Dr. Michael
A. Anbar. The Company recorded the issuance of these shares at the historical
cost ($4,400) of the technology transferred from Dr. Anbar. The license, as
amended, required the Company to fund future research and development costs in
the amount of $495,000. The Company funded the first $110,000 of this obligation
in late 1997 with the balance paid in March 1998. The Company also entered into
a consulting agreement with a company controlled by this stockholder of the
Company. Under the terms of the agreement, the Company was contractually
obligated to pay a maximum of $26,000 for consulting services; $25,000 for
travel; and $50,000 for research supplies for a 12-month period. The Company
satisfied this entire obligation with a one-time $50,000 payment, which is
included in the $495,000 as discussed above. The Company also was obligated to
pay this shareholder a royalty of $300 for each device installed at a client's
site based only on installations at which the Company derives revenues from the
licensed technology. Effective February 1, 2005, the Company amended a
settlement agreement dated October 3, 2001, and entered into a two-year
consulting agreement with Dr. Anbar, founding scientist of the Company, which
provides for Dr. Anbar to advise management on the optimization of its
technology. The agreement awards Dr. Anbar $1,000 and 1,000 restricted shares of
common stock per day with a minimum consulting fee of $12,000 for the first
12-month period, as well as a grant of 250,000 additional restricted shares. As
part of this agreement, the Company will acquire one patent on complementary
technology developed and held by Dr. Anbar. The consulting agreement may be
extended at either party's option for an additional two-year term.

Caltech License Agreement

In September 1997, the Company entered into an option agreement with Caltech,
which grants the Company the right to enter into an exclusive license to exploit
Caltech's infrared radiation detection technology in the field of detection of
infrared radiation for commercial medical applications. In addition, the Company
has the right to sublicense this technology. The Company is obligated to pay
Caltech a royalty based on revenues derived from licensed products and services
and from sublicenses. The Company issued Caltech 542,172 shares of its common
stock in connection with the license agreement. The license may be cancelled at
Caltech's option if it has not received minimum license fees of $10,000 in any
one-year period commencing June 30, 1999. The license continues in effect for as
long as the patent rights remain effective, which will be from 2018 to 2020,
depending on the relevant patent.

While in effect, the agreement requires that the Company pay 50% of all
attorneys' fees in connection with preparation, filing and prosecution, issuance
and maintenance of the licensed patent rights in the United States. The Company
is also obligated to pay 100% of patent costs in foreign jurisdictions.

The Lockheed Martin License Agreement

In September 1998, the Company entered into a license agreement with Lockheed
Martin Corporation ("Lockheed"), pursuant to which the Company initially granted
an exclusive license to exploit biomedical applications of certain enhanced
infrared detector technologies known as Enhanced Quantum Well Infrared
Photodetectors, or EQWIP. The EQWIP technology is protected by a patent owned by
Lockheed. In addition, the Company licensed the same rights with respect to
patent filings on the EQWIP technology in a number of foreign countries. At the
time the Company entered into the license agreement with Lockheed, it believed
that these technologies would enhance the sensitivity of the technology it
licensed from CalTech.



                                      F-35
<PAGE>


In order to maintain the exclusivity of the license, the Company was required to
meet certain milestones relating to royalty generation, development of markets
and territories and utilization of the EQWIP technology in certain percentages
of our installed base of diagnostic equipment. If the license agreement remained
exclusive and Lockheed provided a source of manufactured EQWIP detectors, the
Company agreed to pay Lockheed certain minimum royalties. The Company also
agreed to pay Lockheed royalties on revenues the Company derived from
utilization of the EQWIP technology. To date, no manufacturer has produced
EQWIPs and the Company has not utilized the EQWIP technology licensed from
Lockheed and, therefore, believed that the license was no longer exclusive and
that no minimum or other royalties were due to Lockheed.

In October 2004, Lockheed requested that the Company pay minimum royalties and
other amounts aggregating $2,500,000. (Note 11, Commitments and Contingencies,
Litigation).

On January 30, 2006, the Company paid Lockheed $225,000 and issued 500,000 ten
year warrants at an exercise price of $0.65 and a fair value of $94,500, as part
of a settlement agreement and mutual release which terminates the exclusive
license and definitive contract and releases the Company from any and all
claims, demands and obligations. (Note 11, Litigation). The Company does not
believe that the termination of the license granted under the agreement with
Lockheed will have a significant impact on its business. The Company has accrued
$323,000 as of December 31, 2005 in connection with this settlement.

NOTE 11 - Commitments and Contingencies

Purchase Commitments

The Company has committed to purchase infrared camera components from AEG
Infrarot-Module GmbH ("AIM") in the amount of 478,000 Euros or $564,040 (at the
current exchange rates) as of December 31, 2005. These components utilize QWIP
technology. The Company has the exclusive license for QWIP technology from
Caltech for biomedical applications.


Operating Lease Commitments

The Company leases facilities in Bohemia, New York for approximately 6,550
square feet of space which expires November 30, 2009.

Future annual minimum lease payments under noncancelable operating leases and
arrangements as of December 31, 2005 are as follows:

    For the Year Ending
        December 31,                   Amount
            2006                          60,500
            2007                          62,800
            2008                          65,100
            2009                          61,800
                                     -----------
           Total                     $   250,200
                                     ===========

Rent expense charged to operations for the years ended December 31, 2005 and
December 31, 2004 and for period February 7, 1997 (inception) to December 31,
2005 amounted to $66,364, $60,590 and $248,613, respectively.

Litigation

In September 1998, the Company entered into a license agreement with Lockheed,
pursuant to which the Company was initially granted an exclusive license to
exploit biomedical applications of certain enhanced infrared detector
technologies known as Enhanced Quantum Well Infrared Photodetectors, or EQWIP.
The Company believed that these technologies would enhance the sensitivity of
the technology it licensed from CalTech. The Company has not utilized the EQWIP
technology licensed from Lockheed.



                                      F-36
<PAGE>


In a letter dated October 12, 2004 and in subsequent correspondence, Lockheed
advised the Company that it believed that minimum royalties and other amounts
aggregating approximately $2,500,000 were owed to Lockheed pursuant to the
license agreement and demanded payment of such sum. In a letter dated November
1, 2004, Lockheed notified the Company that, in its view, the Company was in
default under certain of the provisions of the license agreement and, unless
such conditions were remedied within 60 days thereafter, Lockheed would regard
the license agreement as cancelled and terminated. The Company responded to
Lockheed that, among other reasons, no sums are due to Lockheed from the
Company, the license agreement by its terms had become a non-exclusive license
requiring no minimum or other royalties be paid and that Lockheed failed to
perform certain of its obligations provided by the license agreement. Although
the Company believed that it has no current monetary obligations to Lockheed
pursuant to the license agreement or otherwise, Lockheed believed that royalties
were due and had demanded payment.. The Company had conducted exploratory
discussions with Lockheed regarding terms for a potential settlement of this
matter in order to avoid these potential substantial litigation costs and other
professional fees.

On January 30, 2006, the Company paid Lockheed $225,000 and issued 500,000 ten
year warrants at an exercise price of $0.65 and fair value of $94,500 as part of
a settlement agreement and mutual release which terminates the exclusive license
and definitive contract and releases the Company from any and all claims,
demands and obligations. The Company does not believe that the loss the license
with Lockheed will have a significant impact on us. The Company accrued $323,000
in connection with this settlement at December 31, 2005.

On March 8, 2003, the Company's former Chief Financial Officer ("CFO") filed a
declaratory judgment action against the Company in the US District Court for the
District of New Jersey. The complaint alleges that while serving as both a
director and CFO, he was awarded stock options to purchase 2,538,324 shares of
common stock. He is seeking specific determination that he is entitled to these
options, as well as approximately $462,000 in deferred salary.

On July 23, 2004, the Court granted, in part, the Company's motion to dismiss.
The Court dismissed claims relating to 2,501,328 stock options, which were to
expire in April 2005, as unripe for adjudication. The Court found that a
justiciable dispute existed with respect to 36,966 options which expired on
April 1, 2004. The Company moved to dismiss the deferred salary claim based on
an arbitration provision in the CFO's employment agreement. The Court declined
to dismiss the deferred salary claim, but ordered the parties to conduct limited
discovery on the validity of the employment agreement and revisit the issue on
summary judgment.

On February 15, 2005, the Company moved for partial summary judgment on the
CFO's deferred salary claim. By Order dated March 23, 2005, the Court denied the
Company's motion, but allowed the Company to renew its motion at the close of
discovery. The Court did find that it is unlikely that the CFO could recover any
deferred compensation prior to April 1, 1999. The parties have recently
completed discovery and a final pretrial conference was held on August 17, 2005.
The Company is in negotiation with the former CFO to reach a settlement
agreement.

While the ultimate outcome of this matter cannot presently be determined with
certainty, according to the Company's counsel, Greenberg Traurig, LLP, the
remaining claims are without merit, and the Company intends to vigorously defend
the claims in this lawsuit. The Company believes that its provision for such in
the accompanying financial statements is adequate at December 31, 2005.

The Company is not a party to any other pending or threatened legal proceedings.


Employment and Consulting Agreements

On March 4, 2005, the Company announced the appointment of Denis A. O'Connor as
its new President and CEO, effective March 23, 2005. Mr. O'Connor was also
appointed to the Company's Board of Directors on March 7, 2005. The Company has
entered into an employment agreement with Mr. O'Connor, with a two-year term
expiring in March 2007, with an option to renew for one additional year. The
employment agreement provides that Mr. O'Connor will receive a fixed salary at
an annual rate of $225,000. The Company also agreed to issue to Mr. O'Connor,
upon commencement of employment, stock options to purchase an aggregate of
852,000 shares of the Company's common stock of the Company at an exercise price
of $1.00 per share, with 27,000 shares vesting immediately and the remaining
825,000 shares vesting in three equal installments on the first, second and
third anniversary of the commencement of employment. The Company also issued
options to purchase an additional 825,000 shares of our common stock at an
exercise price of $1.00 per share from the 2005 Incentive Plan, vesting in three
equal installments on the first, second and third anniversary of the
commencement of employment. The Company is also obligated to pay Mr. O'Connor
the balance of his prior employment contract bonus of $55,000 if unpaid as a
result of his change of employment. The Company paid the $55,000 bonus to Mr.
O'Connor in two equal installments, April 2005 and January 2006. Finally, based
upon the attainment of specified performance goals determined by our
Compensation Committee and Mr. O'Connor, the Company agreed to pay Mr. O'Connor
(1) up to $28,000 at the end of each of our fiscal years during the term of the
agreement, and (2) at the end of our second and each subsequent fiscal year
during the term of the agreement, options to purchase up to 27,000 shares of the
Company's common stock at an exercise price equal to the market price of the
Company's common stock on the date of grant, vesting in three equal installments
on the first, second and third anniversary of the date of grant. All stock
options described above are exercisable for a ten-year period from the date of
grant.



                                      F-37
<PAGE>


On March 9, 2005, in settlement of an arbitration proceeding arising from the
December 13, 2004 termination of his employment agreement as President and CEO,
the Company announced that it entered into a Consulting Agreement with Mark A.
Fauci. Mr. Fauci remains a member of the Board of Directors. The agreement,
which terminates Mr. Fauci's previous employment agreement with the Company,
provides that Mr. Fauci will perform consulting services for the Company for a
retroactive two-year period in exchange for consulting fees of $200,000 per year
during the term of the agreement which expires December 2006. Mr. Fauci will be
nominated at the next two annual meetings of shareholders to continue as a Board
member. The agreement also provides for a three-year payout schedule of the
Company's obligation to pay Mr. Fauci's deferred accrued salary under his
previous employment agreement, in the amount of $625,000. Those payments
commenced on October 1, 2005. This amount is payable at the rate of $10,000 per
month for the initial 12 months and $20,000 per month thereafter.

Effective February 1, 2005, the Company amended a settlement agreement dated
October 3, 2001, and entered into a two-year consulting agreement with Dr.
Michael A. Anbar, founding scientist of the Company, which provides for Dr.
Anbar to advise management on the optimization of its technology. The agreement
awards Dr. Anbar $1,000 and 1,000 restricted shares of common stock per day with
a minimum fee of $12,000 for the first twelve month period as well as a grant of
250,000 additional restricted shares. As part of this agreement, the Company
will acquire one patent on complementary technology developed and held by Dr.
Anbar. The consulting agreement may be extended at either party's option for
additional two-year terms.

The following table summarizes the aggregate commitments under employment and
related agreement obligations at December 31, 2005:


                                                Aggregate
                                               Commitment
                                               ----------
    Year ending December 31, 2006                 575,000
    Year ending December 31, 2007                 291,500
    Year ending December 31, 2008                 195,000
                                               ----------
               Totals                          $1,061,500
                                               ==========


NOTE 12 - Related Party Transactions

 Among the purchasers of the Company's series A convertible preferred stock were
Jed Schutz, George Benedict and Joseph T. Casey, each of whom is a director of
the Company. Mr. Schutz purchased 250,000 shares of series A convertible
preferred stock for a purchase price of $250,000, and was issued warrants to
purchase 75,000 shares of common stock. Mr. Benedict purchased 100,000 shares of
series A convertible preferred stock for a purchase price of $100,000, and was
issued warrants to purchase 30,000 shares of common stock. Mr. Casey purchased
250,000 shares of series A convertible preferred stock for a purchase price of
$250,000, and was issued warrants to purchase 75,000 shares of common stock. The
purchase price of the shares was determined with reference to the then current
market price of the Company's common stock. In October 2005, each investor in
the December 2004 private placement, as anti dilution protection, received
additional five year warrants to purchase the Company's common stock at an
exercise price of $0.75 per share which if unexercised will expire on August 9,
2010. Mr. Schutz and Mr. Casey each received 250,000 additional warrants. Mr.
Benedict received 100,000 additional warrants. Effective December 31, 2005,
George Benedict voluntarily resigned from his position from the Company's Board
of Directors.



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<PAGE>


Among the purchasers of the Company's series B convertible preferred stock were
Jed Schutz, Joseph T. Casey and Dr. Michael Davis, each of whom is a director of
the Company. Mr. Schutz purchased 100,000 shares of series B convertible
preferred stock for a purchase price of $50,000, and issued warrants to purchase
50,000 shares of common stock. Mr. Casey purchased 150,000 shares of series B
convertible preferred stock for a purchase price of $75,000, and was issued
warrants to purchase 75,000 shares of common stock. Dr. Davis purchased 10,000
shares of series B convertible preferred stock for a purchase price of $5,000,
and was issued warrants to purchase 5,000 shares of common stock.

On March 9, 2005, in settlement of an arbitration proceeding arising from the
December 13, 2004 termination of his employment agreement as President and Chief
Executive Officer, the Company entered into a consulting agreement with Mark A.
Fauci, a member of our board of directors. The agreement, which terminates Mr.
Fauci's previous employment with the Company, provides that Mr. Fauci will
perform consulting services for the Company for a retroactive two-year period in
exchange for consulting fees of $200,000 per year during the term of the
agreement which expires December 2006. Mr. Fauci will be nominated at the next
two annual meetings of stockholders to continue as a board member. The agreement
also provides for a three-year payout schedule of the obligation to pay Mr.
Fauci's deferred accrued salary under his previous employment agreement, in the
amount of $625,000. Those payments commenced on October 1, 2005. This amount is
payable at the rate of $10,000 per month for the initial 12 months and $20,000
per month thereafter.

The Company purchases all of its insurance policies with the exception of
employee health insurance, from a company in which a member of its Board of
Directors is the Chairman. Insurance premiums paid in fiscal 2005 and 2004
approximated $241,000 and $239,000, respectively. Effective December 31, 2005,
this board member, voluntarily resigned from his position from the Company's
Board of Directors.


The Company's Chairman of the Board, Hon. Joseph F. Lisa, currently serves as
counsel in the intellectual property department of the New York office of
Greenberg Traurig, LLP, an international law firm. In the year ended December
31, 2005 and 2004, Greenberg Traurig LLP billed the Company approximately
$677,200 and $570,300, respectively for legal services rendered. Effective
December 31, 2005, Joseph Lisa voluntarily resigned from his position from the
Company's Board of Directors.


Under a Guaranty and Pledge Agreement entered into on November 14, 2005, the
Company's President and Chief Executive Officer, agreed (i) to unconditionally
guarantee the timely and full satisfaction of all obligations, whether matured
or unmatured, now or hereafter existing or created and becoming due and payable
to the Purchasers , their successors, endorsees, transferees or assigns under
the Securities Purchase Agreement and other transaction documents to the extent
of 2,677,000 shares of the Company's common stock issued in the Company's name,
and (ii) to grant to ,their successors, endorsees, transferees or assigns a
security interest in the 2,677,000 shares, as collateral security for such
obligations.

During 2005, Dr. Michael Davis, the Chairperson of the Executive Committee of
the Board of Directors was compensated $95,000 for his service in this role to
the Company. By unanimous consent of the Board of Directors on December 13,
2005, the Executive Committee was disbanded effective December 31, 2005 in
keeping with the long term strategic plan to reorganize and restructure our
Board. The Company offered Dr. Davis a new consulting contract in January 2006,
whereby he will provide medical and scientific expertise for the Company. The
terms of the contract have not yet been finalized.


                                      F-39
<PAGE>


NOTE 13 - Public Offering Costs

The Company discontinued its efforts to pursue an initial public offering in
April 1999. The Company expensed $501,992 of costs incurred in connection with
its proposed initial public offering in the year ended December 31, 1998.

NOTE 14 - Subsequent Events

On January 3, 2006, the Company issued shares of its series A and series B
convertible preferred stock as dividends in-kind to the holders of its series A
and B convertible preferred stock. Dividends were payable to holders of record
as they appear in the stockholder records of the Company at the close of
business on the applicable record date, which was December 15, 2005.

Holders of our series A preferred stock are entitled to receive a cumulative
dividend of 4% per year, payable annually in cash or, at the Company's option,
in additional shares of series A preferred stock (computed on the basis of the
10-day volume-weighted average price of its common stock on the American Stock
Exchange or Nasdaq SmallCap Market or, if not traded on such exchange or market,
on the OTC Bulletin Board). Holders of series A preferred stock were issued
301,423 shares of series A preferred stock convertible The Company inadvertently
issued an additional 183,628 series A preferred dividend shares in lieu of cash
dividends than the holders were required to receive. The Company intends to send
a notice letter to the holders requesting the shareholders return the
certificates and thereafter the Company will issue an aggregate of 117,795
series A preferred dividend shares. The 10 day volume-weighted average price of
our common stock was $0.206.

Holders of our series B preferred stock are entitled to receive a cumulative
dividend of 7% per year, payable annually in cash or, at the Company's option,
in additional shares of series B preferred stock (computed on the basis of the
10-day volume-weighted average price of its common stock on the American Stock
Exchange or Nasdaq SmallCap Market or, if not traded on such exchange or market,
on the OTC Bulletin Board). The holders of series B preferred stock were issued
of 76,467 shares of series B preferred stock. The Company inadvertently issued
an additional 16,701 series B preferred dividend shares in lieu of cash
dividends than the holders were required to receive. The Company intends to send
a notice letter to the holders requesting the shareholders return the
certificates and thereafter the Company will issue an aggregate of 59,766 series
B preferred dividend shares. The 10 day volume-weighted average price of our
common stock was $0.206.

On January 4, 2006, the Company received $1 million in gross proceeds that was
payable upon our filing of a registration statement with the Securities and
Exchange Commission ("SEC") in connection with the Company's November 14, 2005,
Securities Purchase Agreement with the Purchasers which registers shares of our
common stock underlying (i) $4,000,000 in secured convertible notes and (ii)
warrants to purchase 4,000,000 shares of the Company's common stock. In
connection with this second closing, the Company issued an aggregate of
$1,000,000 principal amount secured convertible promissory notes and warrants to
purchase 1,000,000 shares of common stock. Upon receipt of proceeds in the 2nd
tranche of the Securities Purchase Agreement, the Company paid Axiom $65,000 and
issued 395,310 five year warrants a to puchase shares of the Company's common
stock at an exercise price of $0.65.


On January 9, 2006, Company hired Robert P. Ellis as the Company's Senior Vice
President, Business Development. On March 14, 2006, the Board of Directors
granted Mr. Ellis 667,000 stock options to purchase 667,000 shares of the
Company's common stock at an exercise price of $0.30 per share. The 667,000
stock options vest over a three year period with 25% vesting immediately and the
balance vesting equally over each remaining year. In aggregate, the fair value
of the stock options issued to Mr. Ellis was $137,402 on the date of the grant
and will be recorded as a compensation charge ratably as the options vest in
accordance with SFAS 123(R).


                                      F-40
<PAGE>


On January 30, 2006, Company entered into a settlement agreement and mutual
release ("Settlement Agreement") with Lockheed. The Settlement Agreement
terminates the Exclusive License Agreement concerning Enhanced Quantum Well
Infrared Photodetector technology the Company and Lockheed entered into on
September 29, 1998 ("License Agreement") and Definitive Contract No. 6249801
concerning the fabrication of Focal Plan Arrays that the Company and Lockheed
entered into on June 24, 1998 (the "Definitive Contract"). Under the terms of
the Settlement Agreement the Company agreed to pay a one-time, fully paid up
license fee of $225,000 to Lockheed and the Company also agreed to issue 500,000
warrants to Lockheed, with each such warrant entitling Lockheed to purchase from
the Company, at any time prior to the expiration date (as defined below), one
share of the Company's common stock for $0.65 per share; such warrants shall
expire on December 28, 2015 ("Expiration Date"). In consideration for this
settlement payment, Lockheed has agreed to release the Company and terminate all
prior agreements and understandings between Lockheed and the Company, including
but not limited to any and all claims which relate to, arise from, or are in any
manner connected to: (i) the License Agreement; (ii) the Definitive Contract; or
(iii) any claimed license fees or other monetary consideration, whether accrued
or not. In addition, the Company agreed to cease using any of the EQWIP
technology that was the subject of the patents referenced in the License
Agreement. The Company does not believe that the loss the license granted under
the agreement with Lockheed will have a significant impact on it. The fair value
of the warrants issued in the settlement was $94,500 on the date of the grant.

On February 13, 2006, the Company entered into a letter of agreement (the
"Agreement") with The Investor Relations Group, Inc. ("IRG"). Under the
Agreement IRG will provide investor relations services for the Company. In
consideration for its services, the Company will pay IRG $10,000 per month. In
addition, the Company delivered 325,000 restricted shares of its common stock to
IRG with a fair value of $61,750 on the date of the grant. These shares will be
restricted for a period of two years from the date of execution of the
Agreement.

On February 13, 2006, the Company issued 12,000 shares of its restricted stock
to Dr. Michael Anbar as part of the February 2005 two-year consulting agreement
with the fair value of $2,280 on the date of grant. The stock is compensation
for Dr. Anbar's work with senior management, to provide support and assistance
in order to advance our commercialization strategy, expand our clinical
applications and enhance new product development efforts.


On March 14, 2006 the Company granted 30,000 stock options to purchase 30,000
shares of its common stock from its 2005 Incentive Plan to each of its outside
Board of Directors in lieu of cash payment for their participation, attendance
at meetings and service to the Company for the first nine months of 2006. These
10 year stock options vest immediately and have an exercise price of $0.24 per
share. Each outside director was also granted 150,000 stock options to purchase
shares of common stock from the Company's 2005 Incentive Plan for their service
to the Company in 2006. The 10 year stock options vest immediately and have an
exercise price of $0.24 per share. The Company's audit committee chairperson
will receive 30,000 stock options to purchase 30,000 shares of its common stock
at an exercise price of $0.24 per share from the Company's 2005 Incentive Plan.
In aggregate the 1,110,000 options granted to the outside members of the Board
of Directors had a fair value of $258,630 on the date of the grant. The fair
value of the options will be recorded as a compensation charge in the first
quarter of 2006 in accordance with SFAS 123(R).



                                      F-41
<PAGE>