**UNITED
      STATES**


**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, 2006**
            **Commission
                file number: 0-27943**









**ADVANCED
      BIOPHOTONICS INC.**


(Exact
      name of small business issuer as specified


in
      its
      charter)




**Delaware**
            **11-3386214**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)**125
                Wilbur Place**
              **Bohemia,
                New York**
            **11716-2415**(Address
                of principal
              executive
                offices)
            (Zip
                Code)







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, 2006 were
      $0




The
      aggregate market value of the Common Stock held by non-affiliates of the issuer
      as of April 9, 2007 was $324,629




The
      number of shares outstanding of the issuer’s Common Stock as of April 9, 2007
      was 32,640,972 shares.




**DOCUMENTS
      INCORPORATED BY REFERENCE: NONE**




Transitional
      Small Business Disclosure Format (check one): Yes  ̈ No x















**ADVANCED
      BIOPHOTONICS INC.**




**2006
      FORM 10-KSB ANNUAL REPORT**




**TABLE
      OF CONTENTS**


PagePART
                  I
              
              
              3Item
                  1.
              Description
                  of Business
              
              3Item
                  2.
              Description
                  of Property
              
              15Item
                  3.
              Legal
                  Proceedings
              
              15Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              
              16PART
                  II
              
              
              17Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters.
              
              17Item
                  6.
              Management’s
                  Discussion and Analysis or Plan of Operation.
              
              25Item
                  7.
              Financial
                  Statements.
              
              47Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.
              
              47Item
                  8A.
              Controls
                  and Procedures.
              
              47Item
                  8B.
              Other
                  Information
              
              48PART
                  III
              
              
              49Item
                  9.****
              Directors,****Executive
                  Officers, Promoters and Control Persons: Compliance with Section
                  16(a) of
                  the Exchange Act
              
              49Item
                  10.
              Executive
                  Compensation
              
              55Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholders
              
              60Item
                  12.
              Certain
                  Relationships and Related Transactions
              
              63Item
                  13.
              Exhibits
              
              65Item
                  14.
              Principal
                  Accountant Fees and Services.
              
              72








**PART** **I**




Item1.Description
      of Business




**Overview**




Advanced
      BioPhotonics Inc. (the “Company”) formerly known as OmniCorder Technologies Inc.
      (“OmniCorder”), 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 ® 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 ® system
      assists physicians and researchers in differentiating between normal and
      abnormal tissues by detecting very small changes in perfusion. The
      BioScanIR ® 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® 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 ® System
      has also received CE mark approval permitting our sale of BioScanIR ® 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. The service associated with the use of the
          BioScanIR ® 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.
          To
          secure a CPT code which is issued by the American Medical Association,
          we need
          to build a history of claims submissions using the APC for the use of our
          system
          over a three year period beginning April 2005, in order to demonstrate
          the
          viability of the technology.


-3-




**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.




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 (“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. On September 5, 2006, we entered into an amendment
      to the securities purchase agreement to reduce the sale to an aggregate of
      $3,100,000 principal amount of secured convertible notes and an aggregate of
      3,100,000 warrants to purchase shares of common stock. On September 12, 2006,
      we
      entered into a Securities Purchase Agreement with the Purchasers for the sale
      of
      (i) $775,000 in secured convertible notes and (ii) warrants to purchase
      20,000,000 shares of our common stock. On October 31, 2006, we entered into
      a
      Securities Purchase Agreement with the Purchasers for the sale of (i) $2,000,000
      in secured convertible notes and (ii) warrants to purchase 40,000,000 shares
      of
      our common stock. The proceeds of the offering will be used support our
      commercialization activities for our BioScanIR(R) System and for working
      capital.




-4-





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
      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 acted as Lead Director through the 2006 Annual
      Meeting of Stockholders.




Mr.
      Anthony Lombardo, a director of privately-held OmniCorder since August 2003,
      and
      member of the our Board of Directors since January 2004 informed the Company
      that he would not stand for re-election at its annual stockholder meeting June
      26, 2006. There was no disagreement or dispute between us and Mr. Lombardo.
      Effective June 26, 2006, James Wavle was elected to our Board of
      Directors.





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 ® system,
          is an advanced digital infrared imaging device which is intended for use
          in
          biomedical imaging applications. The BioScanIR ® system
          measures minute changes in passively-emitted infrared radiation which are
          produced by tissue. These changes may be associated with abnormal blood
          flow
          potentially indicating the presence of tumors and vascular disease, and
          assists
          physicians and researchers in differentiating between normal and abnormal
          photonic emissions from tissue.


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
      BioScanIR ® 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 Kelvin
      degrees by the BioScanIR ® system
      and processed to provide precise information about subtle changes photonic
      emissions during in blood perfusion that may be caused by diseases.




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 ® 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.




-5-




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 evidence of the tumor’s presence.




In
      addition to its featured speed and thermal accuracy capabilities, the technology
      used in the BioScanIR ® system
      also benefits from being able to image without touching the patient’s body. The
      BioScanIR ® system
      is highly functional in the operating room environment. In surgical
      applications, BioScanIR ® 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 of 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 investigates the use of our DIRI ® 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 employs
          the
          our BioScanIR ® 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
          is
          being carried out by Dr. Terry Button an Associate Professor in the Department
          of Biomedical Engineering
          and Radiology at  Stony
          Brook University . The
          agreement was renewed in 2006 and can be continued for a period of up to
          four
          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.




Research
      and development expenditures were $1,166,403 and $1,898,015 in the years ended
      December 31, 2006 and 2005, respectively.





**Patents
      and Intellectual Property**




The
      BioScanIR ® system
      utilizes 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). This patented QWIP sensor is more sensitive than
      ones
      used previously for infrared breast cancer detection. The data collected by
      this
      sensor technology is 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 ® and
      DIRI ® .




-6-





**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 ® system
      is
      based. Our principal agreements are 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:




·
              Jet
                  Propulsion Laboratory;





·
            Center
                for Space Microelectronics Technology;





·
            NASA
                Office of Space Access and Technology; and





·
            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 April 9, 2007,
      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.





**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 ® analyzes
      radiation emitted by tissue surrounding cancerous tumors. We are required to
      pay
      Dr. Anbar a royalty of $300 for each commercial BioScanIR ® 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 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. This agreement was not renewed and expired
          on
          February 1, 2007. 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.


-7-





**AEG
      Infrarot-Module GmbH.** Our
      primary supplier for BioScanIR ® camera
      components is AEG Infrarot-Module GmbH, or AEG. We entered into a strategic
      contract with AEG to manufacture and market advanced infrared disease detection
      systems for biomedical applications. As part of the agreement, we have provided
      a non-exclusive technology license to AEG to utilize our licensed digital
      infrared QWIP technology. AEG has granted us the exclusive right to market
      AEG’s
      QWIP camera for a wide array of biomedical applications.




We
      have
      committed to purchase infrared camera systems and components from AEG for
      approximately U.S. $568,000 (430,500 euros) as of December 31, 2006. 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 several applications, before
      pursuing such alliances. See Pilot Site section below for updates in our
      clinical trials.





**Product
      Overview**




**How
      the BioScanIR** **®** **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 scan between 20 - 120 seconds.
      The BioScanIR(R) system consists of two modules:




·
            Data
                Acquisition - the QWIP camera and positioning
                system




·
            Data
                Processing - proprietary software and
                hardware




The
      camera is a commercially-built, modular, high precision instrument manufactured
      for our applications. For more information on this instrument, see
      "Manufacturing" below. The data collected by the BioScanIR® System is analyzed
      using our proprietary software and hardware, which processes the data according
      to our proprietary algorithms. The results of this analysis are provided to
      the
      clinician 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
      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. We did not solicit or apply for the 2005
      Product Leadership of the Year Award in the field of medical imaging for cancer
      and vascular diseases diagnosis. Frost & Sullivan does not accept
      applications or solicitations for the award. Best Practices research is used
      so
      that Frost & Sullivan may remain unbiased and grant the award based on their
      research and measurement criteria.





**Commercialization
      Strategy and Clinical Trials**




**Pilot
      Program** .
      We have
      completed clinical studies of the BioScanIR (R) technology in several market segments over the last several years, and we plan
      additional non-revenue generating clinical trials at prestigious medical
      centers. The BioScanIR (R) has been
      clinically tested at Harvard's Dana-Farber Cancer Institute (therapy
      monitoring), the Mayo Clinic (neurosurgical applications) and the State
      University of New York at Stony Brook (breast 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 in Germany (heart surgery), the Heidelberg Cancer Research Center in
      Germany (blood perfusion), the University of Bergamo Hospital in Italy
      ((neurosurgery), the Milan Tumor Institute, Italy (breast cancer detection)
      and
      the Karolinska Institute, Sweden (multiple applications).




-8-




Based
      on
      these earlier pilot programs, we undertook more rigorous clinical trials in
      several clinical areas. Furthermore, in the fourth quarter 2006, we decided
      to
      form a Medical Advisory Committee to analyze the results of the clinical trials
      and develop a set of recommendations to assist us in determining which clinical
      applications we should focus our limited resources on over the next year. In
      the
      first quarter 2007, appropriate members were identified, interviewed, and
      selected and a meeting of the Medical Advisory Committee convened in March
      2007.
      The Committee consisted of six independent physicians and one medical imaging
      researcher all from major U.S. medical institutions. The Committee was chaired
      by Dr. Michael Davis, the Chief Medical Officer and a member of our Board of
      Directors.


**Oncology
          Therapy Monitoring Applications.** We
          shipped the BioScanIR ® to the
          Cleveland Clinic, Ohio (breast cancer therapy monitoring), where the breast
          cancer therapy monitoring trial began in June 2005 and enrollment was completed
          in September 2006. All patients participating in our trial completed their
          chemotherapy treatments by December 31, 2006.
 Of
          the 33
          patients enrolled in the trial, five patients decided not to continue their
          participation in the trial. In addition, due to the departure of the principal
          investigator from the Cleveland Clinic, the results of six of the 28 patients
          who participated in the trial were not evaluated.  Of
          the 22
          patients evaluated in the trial, 21 patients were deemed by surgical or
          other
          clinical methods to have positively responded to their chemotherapy treatment
          and one patient was deemed as not responding to the chemotherapy
          treatment.


The
          primary endpoint of the trial was to determine if the BioScanIR ® could
          accurately predict whether the patient was responding to the chemotherapy
          treatments. In late 2006, we performed an internal review of the evaluated
          results and the results were then discussed with the physicians at Cleveland
          Clinic. Of the 22 patients whose results were evaluated, the
          BioScanIR ® accurately predicted response in 15 of 21 patients who were deemed as responding
          to the chemotherapy. The system also correctly predicted the lack of response
          in
          the one patient that was deemed as not responding to the chemotherapy.
          Therefore
          the overall level of agreement between the BioScanIR ® and the
          clinical findings was 16 out of 22 patients or 72.7%. The principle investigator
          at Cleveland Clinic indicated the standard prediction rate using conventional
          methods for adjunctive breast cancer therapy monitoring for patients in
          their
          practice was 92%.




While
      the
      results of the Cleveland Clinic trial showed promise for the technology in
      this
      area, the overall results indicate that the technology is not yet ready to
      be
      commercialized in this area. At the current stage of development, the BioScanIR®
system cannot yet sufficiently measure response changes in small tumors.
      Additional development and clinical trials would be necessary to prove out
      the
      technology for this application. There may be clinical uses in large tumors
      such
      as GIST and lymphoma, but we believe these are relatively small cancer markets
      (in the U.S., less than 60,000 cancers per year) and its use in this area would
      still require extensive clinical trials.




In
      March
      2007, once all patients had completed their chemotherapy sessions and the final
      results of the Cleveland Clinic trial were known, our Medical Advisory Committee
      met to review the findings of this trial. Based on the recommendations of that
      committee, we have decided not pursue oncology therapy monitoring applications
      at this time. This recommendation was reviewed and endorsed by our Board of
      Directors in April 2007.




**Reconstructive
      Surgery Applications.** In
      the
      first quarter 2006, we entered into a pilot site agreement with Yale University
      School of Medicine's Department of Surgery. Yale began to conduct a clinical
      trial 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 collected data relating to locating
      the
      perforator vessels in vivo. In the second quarter 2006 we entered into pilot
      site agreements with the Hospital of the University of Pennsylvania's Department
      of Surgery ("HUP") and The Dartmouth-Hitchcock Medical Center and Dartmouth
      Medical School Department of Surgery ("Dartmouth"). In August 2006 we entered
      into a pilot site agreement with Beth Israel Deaconess Medical
      Center  (“BIDMC”),  a
      teaching hospital of Harvard Medical School.




Under
      the
      clinical trial protocol, HUP, Dartmouth and BIDMC conducted the same clinical
      trial as Yale in the plastic and reconstructive surgery application. This
      multi-center clinical trial conducted at four pilot sites built upon an earlier
      study done at the University of Geneva in Switzerland in reconstructive surgery
      which was completed in the first quarter 2006. On October 9, 2006, after
      analyzing the initial results from the 33 patients in the clinical trials in
      reconstructive surgery applications, we announced that those clinical trial
      results did not meet the primary endpoint for a minimum of 85% sensitivity
      in
      predicting the locations of the major perforator arteries that are used in
      reconstructive surgery employing skin flaps. By December 2006, in an attempt
      to
      improve our sensitivity ,
      we
      completed several modifications to the BioScanIR® system’s hardware and software
      and resumed scanning in the reconstructive surgery application at BIDMC.
      We
      scanned five additional patients and the results were analyzed in the first
      quarter 2007. No significant improvement in sensitivity was noted.




-9-




In
      March
      2007, our Medical Advisory Committee met to review the findings of this trial.
      Based on the recommendations of that committee, we have decided to not pursue
      reconstructive surgery applications at this time. This recommendation was
      reviewed and endorsed by our Board of Directors in April 2007.





**Planned
      Clinical Trials.** In March
      2007, the Medical Advisory Committee recommended three clinical areas that
      we
      should pursue:





·
            **Pigmented
                Lesions of the Skin assessment (Melanoma).**Melanoma detection and assessment represents a large clinical problem
                and
                a disease state where the BioScanIR® system may readily measure and assess
                the primary photonic emissions of skin tumors. We are in the process
                of
                planning a clinical trial at a prestigious US based medical institution
                to
                be conducted later this year. The first results for this trial are
                anticipated to be available in the third quarter
                2007.





·
            **Adjunctive
                screening and detection of breast cancer**.
                The use of the BioScanIR® system as an adjunctive technique in breast
                cancer detection in certain age categories still holds great promise.
                This
                application may be particularly useful in younger women (under 50
                years of
                age) with dense breasts who are at increased risk for breast cancer.
                We
                will continue to support the current work being done at the State
                University of New York Stony Brook in this area. First results should
                be
                available in late 2007.





·
            **Assessment
                of peripheral perfusion.**The assessment of peripheral perfusion after tourniquet stress is
                a non
                invasive method of measuring peripheral outflow as a measure of systemic
                vascular disease. The current methods employ ultrasound techniques
                over
                which we may have significant benefits. We intend to organize a clinical
                trial to test the application later in 2007. Although, we could acquire
                a
                large number of cases in a relatively short period of time, it may
                take
                several months to obtain the approval of our protocol from an
                Institutional Review Board at a prestigious medical facility and
                we do not
                expect to have initial results until the end of 2007.





We
      intend
      to concentrate our efforts and pursue clinical trials in the above noted
      applications provided that we have sufficient funds to do so. These
      recommendations were reviewed and endorsed by our Board of Directors in April
      2007.




We
      continue to investigate other potential applications such as cardiac surgery. As
      of April
      9,
      2007 ,
      we had
      four fully functional prototype or commercial units installed in various U.S.
      medical institutions for testing and evaluation.




**Addressable
      Markets and Revenue Opportunities.** 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
                  millionMRIs:
              
              
              29.5
                  millionPETs
                  (nuclear medicine):
              
              
              34.5
                  millionX-rays:
              
              
              711
                  millionUltra-sounds:
              
              
              204
                  million





-10-




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 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.




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.




Currently,
      the BioScanIR (R) system
      has received FDA 510(k) clearance for adjunctive diagnostic screening. An
      adjunctive diagnostic screening examination is a test performed in conjunction
      with, but not as a replacement for, a primary screening examination in some
      a
      subset of the non-symptomatic population being screened, where the secondary
      screening test (adjunctive diagnostic screening exam) may further indicate
      the
      potential of the disease. The results can only be used in conjunction with
      the
      primary screening test. Final confirmation of disease is still determined by
      further diagnostic procedures. A primary screening examination is a test
      performed to indicate the presence of disease in a non-symptomatic population
      of
      patients who may be at statistical risk of developing the disease. Positive
      screening findings are usually confirmed or ruled out by further diagnostic
      procedures. Future plans would require us to file an additional new 510(k)
      for
      FDA clearance to broaden our scope of use of the system.




**Revenue
      Model.**We
      believe that initial revenues will come primarily from the sale of the
      BioScanIR®system
      in the applications noted above. Other customers such as imaging research
      organizations may purchase BioScanIR®systems
      for use in their own research programs. It is possible, however, that initial
      revenues in certain applications 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®system.
      Even if the initial source of revenue is the sale of the BioScanIR®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.





-11-




**Sales
      and Marketing.** 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.




**Clinical
      Studies and Efficacy** .
      Additional clinical studies in the USA are planned in our target markets as
      noted above. 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 results of
      the
      BioScanIR ® in key
      peer-reviewed publications.





In
      2006
      the BioScanIR ® system
      and technology was presented at several conferences. A poster presentation
      was
      submitted for the 29th Annual San Antonio Breast Cancer Symposium, December
      14 -
      17, 2006 in San Antonio, Texas, for “Dynamic infrared imaging- a real-time,
      non-invasive tool for monitoring tumor response to neoadjuvant therapy for
      breast cancer: an update”. There was an oral presentation, at the SPIE Defense
& Security Conference, 17-21, April, 2006, Orlando, FL, USA, Proc. SPIE,
      Vol. 6205, 2006 on “ *Application
      of DIRI* *®* *Dynamic Infrared Imaging in Reconstructive Surgery”. “Correlation of dynamic
      infrared imaging with radiologic and pathologic response for patients treated
      with primary systemic therapy for locally advanced breast
      cancer* ”,
      was
      reported in the Journal of Clinical Oncology, 2006 ASCO Annual Meeting
      Proceedings Part I. Vol 24, No. 18S (June 20 Supplement), 2006: 10696.
“ *Modeling
      of temperature mapping for quantitative dynamic infrared coronary angiography
      for intraoperative graft patency control”,* **** was
      reported in the **** Journal
      of Thoracic and Cardiovascular Surgery, 2006;131:1344-1351. A poster
      presentation “ *Imagerie
      infrarouge dynamique en chirurgie plastique”* ,
      was
      presented at Journnée des Jeune Plasticiens, (Young Plastic Surgeon's day '06),
      March 11, 2006, Paris, France.





In
      2005
      the BioScanIR ® 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 9 th 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
      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 55 th 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 ® 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 ® 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 ® system
      with that of PET imaging for applications involving cancer treatment.


-12-


**Regulatory
      Affairs and Milestones.** We
      believe that we have sufficient regulatory clearance to execute our initial
      business plan in the United States and Europe, however, additional supplemental
      FDA 510(k) filings may be necessary for therapy monitoring or other
      applications. 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." 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 in other applications. We believe that this supplemental filing
      will validate our clinical capabilities in these applications and create a
      potential barrier to entry for competitors.




**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.





**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 ® 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.




-13-




**Current
      Regulatory Status.** The FDA
      found that the BioScanIR ® 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 ® 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 ® system
      are likely to affect the use of this device. Use of the BioScanIR ® 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 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 ® 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 ® 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.




-14-




**Manufacturing**





We
      subcontract the manufacturing of components for our BioScanIR ® 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 ® is
      UL-certified.




**Employees**


As
          of
          April 9, 2007 we had a total of six full-time employees, and 3 additional
          outside consultants (part-time). Together, approximately five of these
          individuals are engaged in technology, research and product development,
          and
          four in management and finance. We have never experienced a work stoppage
          and
          believe our employee relations are very good.




**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. In addition, we lease office space in Mahwah, New Jersey under a
          6 month
          lease which will expire on May 30, 2007 at a monthly rental rate of
          approximately $2,900.




**Item** **3.**  **Legal
      Proceedings**




-15-




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 alleged 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 was seeking specific determination that he was 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 discovery. The Court did find
      that it is unlikely that Plaintiff could recover any deferred compensation
      prior
      to April 1, 1999. The parties completed discovery and a final pretrial
      conference was held on August 17, 2005. On June 5, 2006 we entered into a
      Settlement and Release Agreement ("Agreement") with our former Chief Financial
      Officer. The Agreement disposes of and resolves all disputes, claims, issues
      and
      differences between us.




The
      former CFO will receive the sum of $220,000 as a full and final settlement
      of
      the Action. ("Settlement Amount"). The Settlement Amount shall be paid as
      follows: (a) $30,000 was paid to counsel for the former CFO within five business
      days of the execution of this Agreement to be held in escrow until the filing
      of
      the dismissal. (b) the sum of $70,000 was paid to counsel for the former CFO
      on
      November 16, 2006 after the execution of the October 31, 2006 Security Purchase
      Agreement for the financing of $2,000,000 of gross proceeds, and (c) the
      additional sum of $120,000 shall be paid to the former CFO in twelve (12)
      monthly installments of $10,000, to be paid on the fifteenth (15 th )
      of each
      month beginning January 15, 2007.




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 terminated Mr. Fauci's previous employment agreement with us, provided
      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 expired in December 2006. Mr. Fauci was nominated
      at
      the 2005 and 2006 annual meetings of stockholders to continue as a board member
      per the settlement agreement. 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 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
      December 31, 2006 we paid Mr. Fauci in aggregate $320,000 as part of his
      consulting agreement. We owe Mr. Fauci $80,000 for the second year of this
      agreement. As of December 31, 2006, we have paid Mr. Fauci in aggregate $100,000
      as part of the payout schedule for his deferred officer's salary and currently
      owe him $525,000.





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.**




None




-16-





**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, 2005:First
                  Quarter
              
              $
              1.100
              
              $
              0.810Second
                  Quarter
              
              $
              1.000
              
              $
              0.540Third
                  Quarter
              
              $
              1.040
              
              $
              0.300Fourth
                  Quarter
              
              $
              0.400
              
              $
              0.160
  Year
                  Ending December 31, 2006:First
                  Quarter
              
              $
              0.380
              
              $
              0.170Second
                  Quarter
              
              $
              0.350
              
              $
              0.110Third
                  Quarter
              
              $
              0.365
              
              $
              0.105Fourth
                  Quarter
              
              $
              0.260
              
              $
              0.021Year
                  Ending December 31, 2007:First
                  Quarter
              
              $
              0.060
              
              $
              0.009Second
                  Quarter**
                  Through April 9, 2007
              
              $
              0.016
              
              $
              0.008





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
      April 9, 2007, there were 32,640,972 shares of Advanced BioPhotonic’s common
      stock outstanding with approximately 233 stockholders of record. The number
      of
      record holders was determined from the records of our transfer agent and does
      not include beneficial owners of common stock whose shares are held in the
      names
      of various security brokers, dealers, and registered clearing agencies. The
      transfer agent of our common stock is Corporate Stock Transfer, Denver,
      Colorado, (303) 282-4800.


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 April
        9, 2007,
        there were 35,317,972 shares of common stock issued and 32,640,972 outstanding,
        2,134,811 shares of series A preferred stock and 1,690,584 shares of series
        B
        preferred stock issued and outstanding. Further, as of April 9, 2007, we
        have
        the following shares of our common stock underlying outstanding securities:
        (i)
        7,943,935 shares underlying options issued pursuant to our 1998 and 2005
        stock
        option plans, and (ii)69,172,719 shares underlying stock purchase
        warrants.


-17-





**Dividends**




In
      January 2006, we inadvertently issued an additional 183,628 series A preferred
      shares and an additional 16,701 series B preferred shares in lieu of cash
      dividends than the holders were entitled to receive. On
      December 12, 2006, the Board of Directors voted to allow the stockholders to
      retain the additional shares of preferred stock that were issued as dividends.
      On December 12, 2006, the Board of Directors approved the payment of dividends
      in the series A and series B preferred stock to the holders of record of like
      stock as of December 15, 2006. On January 2, 2007 holders of series A preferred
      stock were issued 283,388 shares of series A preferred stock and holders of
      series B preferred stock were issued 357,157 shares of series B preferred stock
      as dividends. The dividend record date was December 15, 2006. The 10-day
      volume-weighted average price of our common stock was $0.047.





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





**Common
      Stock**





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.




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.





**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.




-18-





**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
          Capital 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. 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.
          Prior to the November 14, 2005 Securities Purchase agreement, 1 share of
          series
          A preferred stock converted into 2 shares of common stock. Anti-dilution
          provision was triggered on November 14, 2005, on January 4, 2006, on May
          10,
          2006 and on July 24, 2006 after each tranche of the Securities Purchase
          Agreement. The conversion price of the series A preferred stock was reduced
          to
          $0.44, $0.39, $0.36 and $0.34 per share, respectively. On September 12,
          2006,
          the Company entered into a new Securities Purchase Agreement with the purchasers
          which further triggered anti-dilution. On September 12, 2006, after the
          sale of
          $275,000 of securities, on October 4, 2006, after the sale of $250,000,
          on
          October 31, 2006, after the sales of $1,000,000 of securities and on November
          6,
          2006 after the sale of $250,000 of securities under the Securities Purchase
          Agreements, the conversion price of the series A preferred stock was reduced
          to
          $0.33, $0.31, $0.21 and $0.18 per share, respectively. The original investment
          price of $1.00 per share for the series A preferred stock is divided by
          the
          $0.18 per share and result in the conversion of 1 share of series A preferred
          stock into 5.56 shares of common stock. On February 23, 2007 after the
          sale of
          $1,000,000 of securities under the October 2006 Securities Purchase Agreements,
          the conversion price of the series A preferred stock was reduced to $0.11.
          The
          original investment price of $1.00 per share for the series A preferred
          stock is
          divided by the $0.11 per share and result in the conversion of 1 share
          of series
          A preferred stock into 9.09 shares of common stock for a total of 19,405,432
          shares of common stock.
 
 **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
          36
          months 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 Capital 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. On November 14, 2005, on September
          12, 2006 and on October 31, 2006 we entered Securities Purchase Agreements.
          Upon
          issuance of the notes in the Securities Purchase Agreements anti dilution
          was
          triggered reducing the conversion price of the series A preferred 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. The price was 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 which is the
          30-day
          volume-weighted average price of the Company’s common stock 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). At April 9, 2007, every 1 share of series A preferred stock
          held
          can be converted into 9.09 shares of common stock for a total of 19,405,432
          shares of common stock.


-19-




**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. We inadvertently issued an additional 183,628
      series A preferred dividend shares in lieu of cash dividends than the holders
      were entitled to receive. On December 12, 2006, the Board of Directors voted
      to
      allow the stockholders to retain the additional shares of preferred stock that
      were issued as dividends. On December 12, 2006, the Board of Directors approved
      the payment of dividends in series A preferred stock to the holders of record
      as
      of December 15, 2006. On January 2, 2007 holders of series A preferred stock
      were issued 283,388 shares of series A preferred stock as dividends.




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 Capital 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. The dividends issued on January 2, 2007 had 10-day volume-weighted
          average price of our common stock was $0.047.


**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.




-20-





**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 B preferred stock into common stock without any further payment
          thereof. 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
          Capital Market, or if not traded on such exchange or market, on the OTC
          Bulletin
          Board, is at least $2.20. 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. Prior to the November 14, 2005 Securities Purchase agreement,
          1 share of series B preferred stock converted into 1 share of common stock.
          Anti-dilution provision was triggered on November 14, 2005, on January
          4, 2006,
          on May 10, 2006 and on July 24, 2006 after each tranche of the Securities
          Purchase Agreement. The conversion price of the series B preferred stock
          was
          reduced to $0.44, $0.39, $0.36 and $0.34 per share, On September 12, 2006,
          the
          Company entered into a new Securities Purchase Agreement with the purchasers
          which further triggered anti-dilution. On September 12, 2006, after the
          sale of
          $275,000 of securities, on October 4, 2006, after the sale of $250,000,
          on
          October 31, 2006, after the sales of $1,000,000 of securities and on November
          6,
          2006 after the sale of $250,000 of securities under the Securities Purchase
          Agreements, the conversion price of the series B preferred stock was reduced
          further to $0.33, $0.31, $0.21 and $0.18 per share, respectively. The original
          investment price of $0.50 per share for the series B preferred stock is
          then
          divided by the $0.18 per share and result in the conversion of 1 share
          of series
          B preferred stock into 2.78 shares of common stock. On February 23, 2007
          after
          the sale of $1,000,000 of securities under the October 2006 Securities
          Purchase
          Agreements, the conversion price of the series B preferred stock was reduced
          to
          $0.11. The original investment price of $0.50 per share for the series
          B
          preferred stock is divided by the $0.11 per share and result in the conversion
          of 1 share of series B preferred stock into 4.55 shares of common stock
          for a
          total of 7,692,157 shares of common stock.


**Anti-dilution
      Provisions** .
      The
      conversion price of all the shares of series B 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 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, on September 12, 2006 and on October 31, 2006 we entered
        Securities Purchase Agreements. Upon issuance of the notes in the Securities
        Purchase Agreements anti dilution was triggered reducing the conversion price
        of
        the series B preferred 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. The price was 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 which is the 30-day volume-weighted average
        price of the Company’s common stock 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). At April 9, 2007, every
        1
        share of series B preferred stock held can be converted into 4.55 shares
        of
        common stockfor
        a
        total of 7,692,157 shares of common stock.






-21-




**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. We inadvertently issued an additional 16,701
      series B preferred dividend shares in lieu of cash dividends than the holders
      were entitled to receive. On December 12, 2006, the Board of Directors voted
      to
      allow the stockholders to retain the additional shares of preferred stock that
      were issued as dividends. On December 12, 2006, the Board of Directors approved
      the payment of dividends in series B preferred stock to the holders of record
      as
      of December 15, 2006. On January 2, 2007 holders of series B preferred stock
      were issued 357,152 shares of series B preferred stock as dividends.




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 Capital 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. The dividends issued on January 2, 2007 had 10-day volume-weighted
          average price of our common stock was $0.047.


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




-22-





**Equity
      Compensation Plan Information**


The
          following table provides information regarding the status of our existing
          equity
          compensation plans at December 31, 2006. It reflects the amendment to our
          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.


**Plan
                Category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in the second
                column)**Equity
                Compensation plans approved by security holders
            
            
            7,943,935
            
            $
            0.74
            
            
            5,149,445Equity
                Compensation plans not approved by security holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            7,943,935
            
            $
            0.74
            
            
            5,149,445




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 amendment to the 2005 Incentive Plan was
      approved by stockholders at our annual meeting on June 26, 2006. 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. As of
      December 31, 2006, options to purchase 4,520,555 shares of common stock were
      outstanding under the 2005 Plan at a weighted-average exercise price of $0.52,
      and options to purchase 3,423,380 shares of common stock were outstanding under
      the 1998 Plan at a weighted-average exercise price of $1.05.





**Unregistered
      Sales of Equity Securities**




On
      September 12, 2006, we entered into a new Securities Purchase Agreement with
      the
      Purchasers for the sale of (i) $775,000 in secured convertible notes and (ii)
      warrants to purchase 20,000,000 shares of the our common stock.


The
          secured convertible notes bear interest at 8%, unless our common stock
          is
          greater than $0.3125 per share for each trading day of a month, in which
          event
          no interest is payable during such month. Any
          interest not paid when due bear interest of 15% per annum from the date
          due
          until the same is paid. 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. At our option, in any month where
          the
          current stock price is below the Initial Market Price, which is $0.30,
          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 seven years from the date of issuance at a
      purchase price of $0.30 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 the 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.




-23-





Pursuant
      to the amended Finder's Fee Agreement, between us and Axiom, Axiom earned a
      finders fee of $50,375 in cash of which $17,875 was paid on September 18, 2006,
      $16,250 was paid on October 19, 2006 and $16,250 was paid in November 27, 2006.
      In addition, Axiom received five year warrants to purchase shares of our common
      stock at an exercise price of $0.65 per share, of which 108,216 were granted
      on
      September 12, 2006, 138,319 were granted on October 4, 2006 and 293,931 were
      granted on November 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 were issued
      pro rata upon each investment tranche. The initial market price was $0.203,
      $0.145 and $0.068 for the 1st tranche, 2nd tranche, and the final tranche,
      respectively.





On
      October 31, 2006, we entered into a new Securities Purchase Agreement with
      the
      Purchasers for the sale of (i) $2,000,000 in secured convertible notes; and
      (ii)
      warrants to purchase 40,000,000 shares of the Company’s common stock.


The
          secured convertible notes bear interest at 8%, unless our common stock
          is
          greater than $0.10 per share for each trading day of a month, in which
          event no
          interest is payable during such month. Any
          interest not paid when due shall bear interest of 15% per annum from the
          date
          due until the same is paid. 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. At our option, in any month where
          the
          current stock price is below the Initial Market Price,  we
          can
          pay the outstanding principal and interest due for that month and this
          will stay
          any conversions for that month. The
          term **“** Initial
          Market Price” means the volume weighted average price of the Common Stock for
          the five trading days immediately preceding the closing which was
          $0.069.


On
      each
      October 31, 2006 and February 23, 2007, the Purchasers received 20,000,000
      warrants. The warrants are exercisable until seven years from the date of
      issuance at a purchase price of $0.08 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 the November 8, 2005 amended Finder's Fee Agreement, between us and Axiom,
      Axiom will earn a finders fee of $130,000 in cash of which $65,000 is accrued
      in
      the year ended December 31, 2006 financial statement and $65,000 will be accrued
      in the quarter ended March 31, 2007 financial statement. In addition, Axiom
      will
      receive five year warrants to purchase shares of our common stock at an exercise
      price of $0.65 per share, of which 1,151,393 and 1,777,778 will be granted
      after
      April 9, 2007. 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 were issued pro rata upon each
      investment tranche. The initial market price was $0.069 and $0.045 for the
      1st
      tranche and final tranche, respectively




The
      Securities Purchase Agreements as described above, triggers 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 April 9, 2007, the
      triggering of the aforementioned anti dilution provisions of our series A and
      series B preferred stock will result in issuing an aggregate of 19,405,432
      and
      7,692,157 shares of common stock upon conversion, respectively.




-24-




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
          Capital 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
          301,423 shares of series A preferred stock convertible as dividends. The
          10 day
          volume-weighted average price of our common stock was $0.206. On January
          2, 2007
          holders of series A preferred stock were issued 283,388 shares of series
          A
          preferred stock convertible as dividends. The dividend record date was
          December
          15, 2006.The 10 day volume-weighted average price of our common stock was
          $0.047.
  Holders
          of our series B preferred stock are 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
          Capital 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
          of
          76,467 shares of series B preferred stock as dividends. The 10 day
          volume-weighted average price of our common stock was $0.206. On January
          2, 2007
          holders of series B preferred stock were issued 357,152 shares of series
          B
          preferred stock convertible as dividends. The dividend record date was
          December
          15, 2006.The 10 day volume-weighted average price of our common stock was
          $0.047.


*
      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 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.




-25-




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., 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 ® 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 (SFAS”) 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." 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.




-26-





We
      account for the fair value of options and warrants for non-employees in
      accordance with Emerging Issues Task Force Issue No. 96-18, "Accounting for
      Equity Instruments That Are Issued to Other Than Employees for Acquiring or
      in
      Conjunction with Selling, Goods or Services" ("EITF 96-18"), 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.




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS 123 (Revised 2004), "Share-Based Payment", ("SFAS 123 (R) "), using the
      modified-prospective-transition method. Prior to January 1, 2006, the Company's
      stock-based employee compensation plans were accounted for under the recognition
      and measurement provisions of APB No. 25, and related Interpretations, as
      permitted by SFAS 123. Except for one employee whose stock option grant had
      intrinsic value, the Company did not recognize stock-based compensation cost
      in
      its statement of operations for periods prior to January 1, 2006 as all other
      options granted had an exercise price equal to the market value of the
      underlying common stock on the date of grant. The compensation cost is measured
      on the date of 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.




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 SFAS 123(R ). 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 our President).




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. On September 5, 2006, we entered into an amendment to the securities
      purchase agreement to reduce the sale to an aggregate of $3,100,000 principal
      amount of secured convertible notes and an aggregate of 3,100,000 warrants
      to
      purchase shares of common stock. In September 2006 and in October 2006 we
      entered into securities purchase agreements for $750,000 and $2,000,000,
      respectively, of convertible notes and warrants exercisable into 40,000,000
      shares of common stock. 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 resulting 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.




-27-


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 years ended December 31, 2006 and 2005
      we
      recorded income of $584,006 and a charge of $323,189, respectively, 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.





**Revenue
      Model**


We
          believe that initial revenues will come primarily from the sale of the
          BioScanIR ® system
          for use in surgical and cancer applications. In addition, initial customers
          will
          likely include imaging research organizations that will purchase
          BioScanIR ® systems
          for use in their own research programs. It is possible, however, that initial
          revenues in certain applications 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 ® system.
          Even if the initial source of revenue is the sale of the BioScanIR ® 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.




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:




·
            Sale
                - We may sell BioScanIR®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.




·
            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.




·
            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.




-28-




BioScanIR ® 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.




**Results
      of Operations**




The
      following represents a summary of the results of operations for the years ended
      December 31, 2006 and 2005:




For
                the Years Ended
              December
                31,2006
            
            2005OPERATING
                EXPENSESResearch
                and development
            
            
            1,166,403
            
            
            1,898,015Selling,
                general and administrative
            
            
            2,528,124
            
            
            3,538,032Total
                Operating Expenses
            
            
            3,694,527
            
            
            5,436,047Operating
                Loss
            
            
            (3,694,527
            )
            
            (5,436,047
            )Change
                in fair value of non employee stock options, warrants and conversion
                options
            
            
            (584,006
            )
            
            323,189Interest
                and other expenses, net
            
            
            436,652
            
            
            22,257Registration
                rights penalties
            
            
            536,333
            
            
            —Net
                Loss
            
            
            (4,083,506
            )
            
            (5,781,493
            )Series
                A Convertible Preferred Stock beneficial conversion
                feature
            
            
            —
            
            
            703,128Series
                B Convertible Preferred Stock beneficial conversion
                feature
            
            
            —
            
            
            420,258Deemed
                Dividend on issuance of additional Series A Convertible Preferred
                Stock
                warrants
            
            
            —
            
            
            449,500Accumulated
                Dividend on Series A Convertible Preferred Stock
            
            
            77,143
            
            
            64,583Accumulated
                Dividend on Series B Convertible Preferred Stock
            
            
            50,081
            
            
            17,614Net
                loss attributable to common stockholders- basic and
                diluted
            
            $
            (4,210,730
            )
            $
            (7,436,576
            )Basic
                and diluted net loss per share
            
            $
            (0.14
            )
            $
            (0.25
            )Weighted
                average number of shares outstanding- basic and diluted
            
            
            30,757,104
            
            
            30,107,408





**Year
      ended December 31, 2006 compared to Year ended December 31, 2005**




**Net
      Loss** .
      The net
      loss for the year ended December 31, 2006 as compared to the net loss for the
      year ended December 31, 2005 decreased by $1,697,987 from $5,781,493 to
      $4,083,506. The net loss attributable to common stockholders decreased by
      $3,225,846 from $7,436,576 to $4,210,730. In 2005 there was 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 $26,401,475 since inception
      in
      1997.  During
      this period we have expended cash raised through various equity offerings,
      and
      issued stock, 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, the August 10,
      2005
      proprietary rights offering and the November 14, 2005, September 12, 2006 and
      October 31, 2006 Securities Purchase Agreements, which has enabled us to
      continue product development, conduct clinical trials, build our administrative
      organization and promote the sales and marketing of BioScanIR ® System.




-29-




**Research
      and Development Expenses** .
      Research and development expense decreased by $731,612, to $1,166,403 from
      $1,898,015, for the year ended December 31, 2006 as compared to the year ended
      December 31, 2005. Cash proceeds from private placements in 2003 and 2004,
      the
      2005 proprietary rights offering and the securities purchase agreement in 2005
      and 2006 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 non-cash 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 decrease for the year ended December 31, 2006 as compared
      to
      December 31, 2005 were:




Salaries
      and consulting expense decreased by $279,374 to $512,262 from $791,636. The
      decrease 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 a
      settlement agreement in February 2005. The fair value of the grant was $212,000.
      In 2006, recruitment expense decreased by $36,374 to $55,001 from $91,375.
      In
      2005 we incurred fees for the recruitment of our chief executive officer and
      general counsel compared to fees in 2006 for the recruitment of a new member
      of
      the Board of Directors.




In
      June
      2006, we signed a new lease for office space in New Jersey. This resulted in
      an
      increase of $20,661 for rent and utility expenses for the year ended December
      31, 2006 to $104,870 from $84,209 for the year ended December 31,
      2005.




Expenses
      related to quality and regulatory control increased by $80,425 to $116,009
      for
      the year ended December 31, 2006 from $35,584 in the year ended December 31,
      2005. In October 2005, we hired a consulting firm for quality, regulatory and
      clinical affairs. We terminated the contract in July 2006. Pilot site expenses
      decreased $29,396 to 51,917 from $81,313 in year ended December 31, 2006
      compared to year ended December 31, 2005. Postage and handling expense decreased
      by $10,516 to $13,367 for the year ended December 31, 2006 from $23,883 in
      the
      year ended December 31, 2005 due to less international shipments. During the
      year ended December 31, 2006 patent expenses decreased by $86,090 to $34,584
      from $120,674 in the year ended December 31, 2005. The decrease is attributable
      to four new patent applications filed in 2005 compared to none filed in 2006
      and
      the reduction of legal fees associated with patents by changing attorneys in
      2006.




We
      incurred $6,500 in license and permit costs for the year ended December 31,
      2006
      compared to $333,000 expensed for the year ended December 31, 2005, a decrease
      of $326,500 - most of which was due to the Lockheed Martin settlement and
      release. See Note 11, Litigation in the accompanying financial
      statements.




Depreciation
      expense decreased $49,330 to $84,008 for the year ended December 31, 2006 from
      $133,338 for the year ended December 31, 2005 as a result of some of our capital
      equipment being fully depreciated in 2005.




**Selling,
      General and Administrative Expenses (SG&A)** Selling,
      general and administrative expenses decreased by $1,009,908 to $2,528,124 from
      $3,538,032 for the year ended December 31, 2006 as compared to the year ended
      December 31, 2005.





A
      significant component of the decrease for the year ended December 31, 2006
      as
      compared to year ended December 31, 2005 was a non cash charge recorded of
      $600,000 for the fair value of warrants issued to Trilogy Capital Partners
      and
      fees of $62,664 paid to them in 2005. Trilogy was to implement a marketing
      program and assist in our business development and investor relations services.
      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 in the accompanying financial
      statements.




-30-




Our
      legal
      fees decreased $321,335 to $79,837 for the year ended December 31, 2006 from
      $401,172 for the year ended December 31, 2005 attributable to the settlement
      of
      an arbitration proceeding with our former CEO and litigation investigation
      with
      our former CFO and the changing of legal firms in 2006. Accounting fees
      increased $55,555 to $221,801 for the year ended December 31, 2006 from $166,246
      year ended December 31, 2005 due to the additional time spent on review of
      complex accounting transactions and review of additional disclosure for SFAS
      123(R) in 2006.




For
      the
      year ended December 31, 2006, business development consulting fees decreased
      by
      $127,678 to $267,041 from $394,719 for the year ended December 31, 2005. A
      significant portion of the decrease is attributable to the termination of the
      management consulting team that we hired in the interim period before hiring
      our
      new CEO  .
      For the
      year ended December 31, 2006 administrative consulting fees decreased $222,356
      to $6,474 from $228,830 for the year ended December 31, 2005. Most of the
      decrease is 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 $38,566 to $27,162 in fiscal
      2006 from $65,728 in fiscal 2005. The decrease is due to the termination of
      our
      International Business Development consultant. We recognized compensation
      expense of $309,369 for the year ended December 31, 2006 for stock options
      granted to our outside directors and employee under the fair value recognition
      provisions of SFAS 123 (R). We did not recognize stock-based compensation cost
      in our statement of operations prior to January 1, 2006.




Financing
      costs increased $75,439 to $200,546 for the year ended December 31, 2006 from
      $125,107 for the year ended December 31, 2005. The increase is related to the
      amortization of deferred financing costs related to the Securities Purchase
      Agreements we entered into on November 14, 2005, September 12, 2006, and October
      31, 2006.




Administrative
      and business development payroll, tax and related expenses decreased $144,374
      to
      $832,033 for the year ended December 31, 2006 from $976,407 for the year ended
      December 31, 2005. The decrease is attributable to reduction in administrative
      salaries to adjust for a settlement of an amount due to a former employee of
      $134,632.




For
      the
      year ended December 31, 2006, investor relations expenses was $181,253 compared
      to $49,542 for the year ended December 31, 2005. The $131,711 increase is due
      to
      $61,750 fair value of a stock grant awarded to the investor relations company
      we
      hired and the $10,000 monthly retainer fee we pay to them.




**Depreciation
      and Amortization Expense** .
      Depreciation and amortization expense, which is included in the results of
      operations, approximated $84,000 and $133,000 for the years ended December
      31,
      2006 and 2005, respectively. This primarily reflected depreciation expense
      associated with BioScanIR ® 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, 2006 and 2005.
        As
        of December 31, 2006 and 2005, we had net operating loss carryforwards of
        approximately $21,867,000 and $18,366,000. A full valuation allowance has
        been
        provided against the deferred tax asset of $9,495,000and
        $8,050,000 as of December 31, 2006 and 2005, 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, 2006 of $26,401,475 and cash flows used in operating
      activities during the development stage of $16,846,204. 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 of 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
      its
      common stock and warrants.




On
      December 14, 2004, we received gross proceeds of $1,550,000 in a completed
      a
      private placement of 1,550,000 shares of its Series A convertible preferred
      stock. (See Note 8 Series A Convertible Preferred Stock of the accompanying
      financial statements) We issued, for no additional consideration, to the
      investors in the private placement, five year warrants to purchase 465,000
      shares of our common stock at an exercise price of $1.10 per share which expire
      December 14, 2009. 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. 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
      our
      option, additional shares of series A convertible 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
      could
      receive an additional $1,395,000 if all of the warrants issued to the investors
      in the December 2004 private placement are exercised. There can be no assurance
      as to how many warrants will be exercised.




-31-




On
      August
      10, 2005, we consummated a subscription rights offering to our existing
      stockholders (See Note 8, Proprietary Rights Offering of the accompanying
      financial statements ). We
      distributed to holders of our common stock transferable subscription rights
      to
      purchase shares of its newly-created series B convertible preferred stock.
      At
      the closing of the subscription rights offering on August 10, 2005, we 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
      our option, additional shares of series B convertible preferred stock. The
      warrants have an exercise price of $0.75 per share and will expire August 10,
      2010.  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.




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 (“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 of the
      accompanying financial statements.) On September 5, 2006, we entered into an
      amendment to the Securities Purchase Agreement to reduce the sale to an
      aggregate of $3,100,000 principal amount of secured convertible notes and an
      aggregate of 3,100,000 warrants to purchase shares of common stock. At December
      31, 2006, the Purchasers have provided us with the $3,100,000 in
      proceeds.





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. Interest
      is to be paid quarterly. Any interest not paid when due bear interest of 15%
      per
      annum from the date due until the same is paid. 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
      full
      principal amount of the secured convertible notes is due upon a default under
      the terms of secured convertible notes. In addition, we granted the Purchasers
      a
      security interest in substantially all of our assets and intellectual property.
      We were 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 amendments on February 13, 2006, April 7,
      2006, June 5, 2006 and June 30, 2006. On August 17, 2006, we withdrew the
      Registration Statement. We filed a new registration statement on September
      13,
      2006 and amendments on December 8, 2006, January 11, 2007, February 8, 2007
      and
      February 13, 2007 in accordance with the September 5, 2006 amended Securities
      Purchase Agreement. The SEC declared the registration statement effective
      February 13, 2007. In the event that we breach any representation or warranty
      in
      the Securities Purchase Agreement, we will be required to pay liquidated damages
      in shares of our common stock or cash, at our election, in an amount equal
      to 2%
      of the outstanding principal amount of the secured convertible notes per month
      plus accrued and unpaid interest. Because the registration statement was not
      declared effective within 120 days from November 14, 2005, we have accrued
      liquidated damages to the Purchasers in the amount of 2% per month on the
      outstanding principal amount of the convertible debentures. At December 31,
      2006, we accrued approximately $536,000 in liquidated damages. We will continue
      to accrue liquidated damages on the shares underlying the convertible notes
      that
      were not registered under the February 14, 2007 Prospectus filed pursuant to
      Rule 424(b)(3) with the Securities and Exchange Commission.




-32-




The
      warrants are exercisable five years from the date of issuance at a purchase
      price of $0.65 per share. On November 15, 2005, the Purchasers received
      1,000,000 warrants, on January 4, 2006 the Purchasers received 1,000,000
      warrants, on May 10, 2006 the Purchasers received 600,000 warrants and on July
      24, 2006 the Purchasers received 500,000 warrants. There can be no assurance
      to
      how many, if any, of these warrants will be exercised.




Pursuant
      to the amended Finder's Fee Agreement, between us and Axiom Capital Management,
      Inc. (“Axiom”), Axiom will earn a finders fee of $201,500 in cash of which
      $65,000 was paid on November 16, 2005, $65,000 was paid on January 6, 2006,
      $39,000 was paid on May 12, 2006 and $32,500 was paid on August 1, 2006. In
      addition, Axiom received five year warrants to purchase shares of our common
      stock at an exercise price of $0.65 per share, of which 378,445 were granted
      on
      November 14, 2005, 395,310 were granted on January 6, 2006, 173,580 were granted
      on May 10, 2006 and 133,776 were granted on July 24, 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. Warrants were issued pro rata upon each
      investment tranche. The initial market price was $0.211, $0.202, $0.277 and
      $0.299 for the 1st tranche, 2nd tranche, 1 st advance
      and the final advance of the 3 rd tranche,
      respectively.




On
      September 12, 2006, we entered into a Securities Purchase Agreement with the
      Purchasers for the sale of (i) $775,000 in secured convertible notes and (ii)
      warrants to purchase 20,000,000 shares of our common stock. The Purchasers
      provided us with the funds in 3 tranches, $275,000 on September 12, 2006;
      $250,000 on October 4, 2006 and $250,000 on November 6, 2006.




The
      secured convertible notes bear interest at 8%, unless our common stock is
      greater than $0.3125 per share for each trading day of a month, in which event
      no interest is payable during such month. Any
      interest not paid when due bears interest of 15% per annum from the date due
      until the same is paid. 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. At our option, in any month where the
      current stock price is below the Initial Market Price, which is $0.30, we can
      pay the outstanding principal and interest due for that month and this will
      stay
      any conversions for that month.





The
      full
      principal amount of the secured convertible notes is due upon default under
      the
      terms of the secured convertible notes. In addition, we granted the Purchasers
      a
      security interest in substantially all of our assets and intellectual property.
      We are required to file a registration statement with the Securities and
      Exchange Commission within 30 days of, which will include the common stock
      underlying the secured convertible receipt
      of written demand of the Purchasers notes,
      and the warrants. If the registration statement is not declared effective within
      120 days from the date of filing, we are required to pay liquidated damages
      to
      the Purchasers. In the event that we breach any representation or warranty
      in
      the Securities Purchase Agreement, we are required to pay liquidated damages
      in
      shares of common stock or cash, at our election, 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 seven years from the date of issuance at a
      purchase price of $0.30 per share. There can be no assurance to how many, if
      any, of these warrants will be exercised.





Pursuant
      to the amended Finder's Fee Agreement, between us and Axiom, Axiom earned a
      finders fee of $50,375 in cash of which $17,875 was paid on September 18, 2006,
      $16,250 was paid on October 19, 2006 and $16,250 was November 27, 2006. In
      addition, Axiom received five year warrants to purchase shares of our common
      stock at an exercise price of $0.65 per share, of which 108,216 were granted
      on
      September 12, 2006, 138,319 were granted on October 4, 2006 and 293,931 were
      granted on November 6, 2006 (See Note 8). 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
      were
      issued pro rata upon each investment tranche. The initial market price was
      $0.203, $0.145 and $0.068 for the 1st tranche, 2nd tranche, and the final
      tranche, respectively.





-33-




On
          October 31, 2006, we entered into a new Securities Purchase Agreement with
          the
          Purchasers for the sale of (i) $2,000,000 in secured convertible notes;
          and (ii)
          warrants to purchase 40,000,000 shares of our common stock. The Purchasers
          provided us with the funds as follows:


·
            $1,000,000
                was disbursed on October 31, 2006;




·
            $1,000,000
                was disbursed on February 27,2007





The
      proceeds of the offering will be used support our commercialization activities for
      its BioScanIR ® System
      and for working capital.




The
      secured convertible notes bear interest at 8%, unless our common stock is
      greater than $0.10 per share for each trading day of a month, in which event
      no
      interest is payable during such month. Any
      interest not paid when due shall bear interest of 15% per annum from the date
      due until the same is paid. 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. At our option, in any month where the
      current stock price is below the Initial Market Price , we can pay
      the outstanding principal and interest due for that month and this will stay
      any
      conversions for that month. The
      term **“** Initial
      Market Price” means the volume weighted average price of the Common Stock for
      the five trading days immediately preceding the closing which was
      $0.069.





The
      full
      principal amount of the secured convertible notes is due upon default under
      the
      terms of secured convertible notes. In addition, we granted the Purchasers
      a
      security interest in substantially all of our assets and intellectual property.
      We are required to file a registration statement with the Securities and
      Exchange Commission within 30 days of receipt
      of written demand from the Purchasers ,
      which
      will include the common stock underlying the secured convertible notes, and
      the
      warrants. In the event that we breach any representation or warranty in the
      Securities Purchase Agreement, we are required to pay liquidated damages in
      shares or cash, at our 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 seven years from the date of issuance at a
      purchase price of $0.08 per share. There can be no assurance to how many, if
      any, of these warrants will be exercised.





Pursuant
      to the terms of the November 2005, September 2006 and October 2006 Securities
      Purchase Agreements, 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, we will not receive any
      proceeds.





Upon
      an
      issuance of shares of common stock below the market price, the exercise price
      of
      the warrants issued to the purchasers in the November 2005, September 2006
      and
      October 2006 Securities Purchase Agreements will be reduced accordingly with
      the
      exception of any securities issued in connection with the secured convertible
      notes issued pursuant to the Securities Purchase Agreements. The market price
      is
      determined by averaging the last reported sale prices for our shares of common
      stock for the five trading days immediately preceding such issuance as set
      forth
      on our principal trading market. The exercise price shall be determined by
      multiplying the exercise price in effect immediately prior to the dilutive
      issuance by a fraction. The numerator of the fraction is equal to the sum of
      the
      number of shares outstanding immediately prior to the offering plus the quotient
      of the amount of consideration received by us in connection with the issuance
      divided by the market price in effect immediately prior to the issuance. The
      denominator of such issuance shall be equal to the number of shares outstanding
      after the dilutive issuance.





The
      conversion price of the secured convertible notes and the exercise price of
      the
      warrants may be adjusted in certain circumstances such as if we pay a stock
      dividend, subdivide or combine outstanding shares of common stock into a greater
      or lesser number of shares, or takes such other action as would otherwise result
      in dilution of the selling stockholder's position.





The
      Purchasers have agreed to restrict their ability to convert their secured
      convertible notes or exercise their warrants and receive shares of 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.




-34-




At
          December 31, 2006, under the November 2005, September and October 2006
          Securities Purchase Agreements, we received an aggregate of $3,740,000
          net of
          fees and expenses.
 
 Pursuant
          to the November 8, 2005 amended Finder's Fee Agreement, between us and
          Axiom,
          Axiom will earn a finders fee of $130,000 in cash in which $65,000 for
          the
          1 st tranche
          has been accrued on our financial statement for the year ended December
          31, 2006
          and $65,000 will be accrued on our financial statement for the quarter
          ended
          March 31, 2007. In addition, Axiom will receive five year warrants to purchase
          shares of our common stock at an exercise price of $0.65 per share, of
          which
          1,151,393 and 1,777,778 will be granted after April 9, 2007. 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 were issued pro rata upon each investment tranche.
          The
          initial market price was $0.069 and $0.045 for the 1st tranche and final
          tranche, respectively.
 
 On
          November 15, 2006, we received a Notice of Conversion from the Purchasers
          and
          issued an aggregate of 307,831 shares of free-trading common stock pursuant
          to
          the requirements of Rule 144, as promulgated under the Securities Act of
          1933,
          as amended, which represents 1% of the our outstanding common stock. This
          is a
          partial conversion of the $3,100,000 notes we issued to the Purchasers
          under the
          November 2005 Securities Purchase Agreement. The conversion price was $.036
          per
          share for a total of $11,082.




As
      of
      December 31, 2006, we had
      cash
      balances and working capital deficit of $850,061 and $1,305,095, respectively,
      and total stockholders’ deficiency of $7,179,980. At April 9, 2007, we had
      approximately $969,000 in cash balances.




We
      have
      committed to purchase infrared camera components from AEG Infrarot-Module GmbH
      for approximately $568,000
      (430,500 euros) as of December
      31, 2006. These components utilize QWIP technology. We have the exclusive
      license for QWIP technology from the California Institute of Technology
      ("Caltech") for biomedical applications.




Management
      estimates that it will require additional cash resources during 2007, based
      upon
      its current operating plan and condition. We anticipate that our cash
      requirements to fund these activities as well as other operating or investing
      cash requirements over the next 4 months will be greater than our current cash
      on hand. If we are unable to obtain additional sufficient funds during the
      2 nd quarter
      2007, we will reduce the size of our organization and may be forced to reduce
      and/or curtail our production and operations, all of which could have a material
      adverse impact on our business prospects. We are 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
      us, and if available, on terms and conditions that are acceptable. In the event
      that we cannot raise additional capital and we default on the November 2005,
      September and October 2006 Securities Purchase Agreements, the investors could
      take a first priority security interest in all of our goods, inventory,
      contractual rights and general intangibles, receivables, documents, instruments,
      chattel paper, and intellectual property pursuant to executed a Security
      Agreement and an Intellectual Property Security Agreement. 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, all of which could
      have a material adverse impact on our business prospects. Our success depends
      upon many factors, including securing market acceptance for our products,
      obtaining adequate additional financing on acceptable terms, and its ability
      to
      roll out the BioScanIR ® 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 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.





-35-




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
      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 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 debt 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
          October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to the
          Application of Grant Date as Defined in FASB Statement No. 123(R)”, which
          provides clarification of the concept of mutual understanding between employer
          and employee with respect to the grant date of a share-based payment award.
          This
          FSP provides that a mutual understanding of the key terms and conditions
          of an
          award shall be presumed to exist on the date the award is approved by management
          if the recipient does not have the ability to negotiate the key terms and
          conditions of the award and those key terms and conditions will be communicated
          to the individual recipient within a relatively short time period after
          the date
          of approval. This guidance was applicable upon the initial adoption of
          SFAS
          123(R). The adoption of this pronouncement did not have an impact on our
          consolidated financial position, results of operations, or cash
          flows.




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. We are 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. We are currently evaluating
      the effect that adopting this statement will have on our financial position
      and
      results of operations.





-36-


In
          June
          2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
          Income Taxes - an interpretation of FASB Statement No. 109”. This Interpretation
          prescribes a recognition threshold and measurement attribute for the financial
          statement recognition and measurement of a tax position taken or expected
          to be
          taken in a tax return, and provides guidance on derecognition, classification,
          interest and penalties, accounting in interim periods, disclosure, and
          transition. This Interpretation is effective for fiscal years beginning
          after
          December 15, 2006. We are assessing the impact of this Interpretation on
          our
          financial statements, but do not expect it to have a material effect.
 
 In
          September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
          ("SFAS
          157"). SFAS 157 defines fair value, establishes a framework for measuring
          fair
          value in generally accepted accounting principles, and expands disclosures
          about
          fair value measurements. It codifies the definitions of fair value included
          in
          other authoritative literature; clarifies and, in some cases, expands on
          the
          guidance for implementing fair value measurements; and increases the level
          of
          disclosure required for fair value measurements. Although SFAS 157 applies
          to
          (and amends) the provisions of existing authoritative literature, it does
          not,
          of itself, require any new fair value measurements, nor does it establish
          valuation standards. SFAS 157 is effective for financial statements issued
          for
          fiscal years beginning after November 15, 2007, and interim periods within
          those
          fiscal years.  We will evaluate the impact of adopting SFAS 157 but do not
          expect that it will have a material impact on the our consolidated financial
          position, results of operations or cash flows.
 
 In
          September 2006, the staff of the Securities and Exchange Commission issued
          Staff
          Accounting Bulletin No. 108 ("SAB 108") which provides interpretive guidance
          on
          how the effects of the carryover or reversal of prior year misstatements
          should
          be considered in quantifying a current year misstatement. SAB 108 becomes
          effective in the first fiscal year ending after November 15, 2006.
          Adoption of SAB 108 is not expected to have a material impact on our
          consolidated financial position, results of operations or cash
          flows.
  In
          February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
          Financial Assets and Financial Liabilities" (SFAS 159). Under the provisions
          of
          SFAS 159, Companies may choose to account for eligible financial instruments,
          warranties and insurance contracts at fair value on a contract-by-contract
          basis. Changes in fair value will be recognized in earnings each reporting
          period. SFAS 159 is effective for financial statements issued for fiscal
          years
          beginning after November 15, 2007, and interim periods within those fiscal
          years. We
          are required
          to and plans to adopt the provisions of SFAS 159 beginning in the first
          quarter
          of 2008. The We
          are currently assessing the impact of the adoption of SFAS 159.




In
      December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2,
      Accounting for Registration Payment Arrangements. This FSP specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, Accounting for Contingencies. This FSP further clarifies that
      a
      financial instrument subject to a registration payment arrangement should be
      accounted for in accordance with other applicable GAAP without regard to the
      contingent obligation to transfer consideration pursuant to the registration
      payment arrangement. This FSP amends various authoritative literature notably
      FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
      Activities, FASB Statement No. 150, Accounting for Certain Financial Instruments
      with Characteristics of both Liabilities and Equity, and FASB Interpretation
      No.
      45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
      Indirect Guarantees of Indebtedness of Others.


This
          FSP
          is effective immediately for registration payment arrangements and the
          financial
          instruments subject to those arrangements that are entered into or modified
          subsequent to December 21, 2006. For registration payment arrangements
          and
          financial instruments subject to those arrangements that were entered into
          prior
          to December 21, 2006, the guidance in the FSP is effective for financial
          statements issued for fiscal years beginning after December 15, 2006, and
          interim periods within those fiscal years. We
          are in the
          process of determining the effect, if any, the adoption of this FSP will
          have on
          our consolidated financial statements.


-37-




In
      November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF 06-6”). EITF 06-6 addresses the modification of a convertible debt
      instrument that changes the fair value of an embedded conversion option and
      the
      subsequent recognition of interest expense for the associated debt instrument
      when the modification does not result in a debt extinguishment pursuant to
      EITF
      96-19 , “Debtor’s Accounting for a Modification or Exchange of Debt
      Instruments,”. The consensus should be applied to modifications or exchanges of
      debt instruments occurring in interim or annual periods beginning after November
      29, 2006. We do not expect the adoption of EITF 06-6 to have a material impact
      on our consolidated financial position, results of operations or cash flows.




In
          November 2006, the FASB ratified EITF Issue No. 06-7, Issuer’s Accounting for a
          Previously Bifurcated Conversion Option in a Convertible Debt Instrument
          When
          the Conversion Option No Longer Meets the Bifurcation Criteria in FASB
          Statement
          No. 133, Accounting for Derivative Instruments and Hedging Activities (“EITF
          06-7”). At the time of issuance, an embedded conversion option in a convertible
          debt instrument may be required to be bifurcated from the debt instrument
          and
          accounted for separately by the issuer as a derivative under FAS 133, based
          on
          the application of EITF 00-19. Subsequent to the issuance of the convertible
          debt, facts may change and cause the embedded conversion option to no longer
          meet the conditions for separate accounting as a derivative instrument,
          such as
          when the bifurcated instrument meets the conditions of Issue 00-19 to be
          classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
          option previously accounted for as a derivative under FAS 133 no longer
          meets
          the bifurcation criteria under that standard, an issuer shall disclose
          a
          description of the principal changes causing the embedded conversion option
          to
          no longer require bifurcation under FAS 133 and the amount of the liability
          for
          the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
          applied to all previously bifurcated conversion options in convertible
          debt
          instruments that no longer meet the bifurcation criteria in FAS 133 in
          interim
          or annual periods beginning after December 15, 2006, regardless of whether
          the
          debt instrument was entered into prior or subsequent to the effective date
          of
          EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for
          which
          financial statements have not yet been issued. We
          are currently evaluating the impact of this guidance on our consolidated financial
          position, results of operations or cash flows.


**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.**




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, 2006 and 2005, we had net losses attributable to common
      stockholders of $4,210,730 and $7,436,576, respectively. We cannot give any
      assurance that we will ever generate significant revenue or have
      profits.




In
      addition, we will require additional capital commitments during 2007 to sustain
      our operations. We are 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 us, and if available,
      on terms and conditions that are acceptable. We will need to raise funds in
      2007
      through public or private financings, or from other sources. We anticipate
      that
      our cash requirements to fund these activities as well as other operating or
      investing cash requirements over the next 4 months will be greater than our
      current cash on hand. If we are unable to obtain additional sufficient funds
      during the 2 nd quarter
      2007, we will reduce the size of our organization and may be forced to reduce
      and/or curtail our production and operations, all of which could have a material
      adverse impact on our business prospects . In
      the
      event that we cannot raise additional capital and we default on the November
      2005, September and October 2006 Securities Purchase Agreements, the investors
      could take a first priority security interest in all of our goods, inventory,
      contractual rights and general intangibles, receivables, documents, instruments,
      chattel paper, and intellectual property pursuant to executed a Security
      Agreement and an Intellectual Property Security Agreement. 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, all of which could
      have a material adverse impact on our business prospects. 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.




-38-




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 ® 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 ® 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** **®** **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 ® system.
      Our ability to generate revenue from the licensing of our BioScanIR ® 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.




-39-




**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.




**Existing
      and newly-developed technologies may compete with our** **BioScanIR** **®** **system, potentially making** **BioScanIR** **®** **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 ® system,
      although several new companies are developing technologies aimed at the same
      market niche as the BioScanIR ® 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. We
      have
      obtained $2.0 million of product liability insurance coverage, at our current
      annual premiums of approximately $35,000. 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.




-40-




**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.**




Even
      if
      BioScanIR ® 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 ® ,
      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 ® 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. As of December 31, 2006, we committed to purchase approximately
      430,500 Euros (or approximately $568,000 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 2006, we
      incurred a small loss of $671 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 ® 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.




-41-




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.





**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.**




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:





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





· 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:





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





-42-




· 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:





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





· 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.




**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 51.7% 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.


**Oue
      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. At December 31, 2006 we had 1,851,423
          shares of series A preferred stock and 1,333,432 shares of series B preferred
          stock convertible. As of April 9, 2007 we had 2,134,811 shares of series
          A
          preferred stock convertible into 19,405,432 shares of common stock and
          1,690,584
          shares of series B preferred stock convertible into 7,692,157 shares of
          common
          stock . 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.**




As
      of
      April 9, 2007, we had 35,317,972 shares of common stock issued and 32,640,972
      shares outstanding, secured convertible notes outstanding that may be converted
      into an estimated 1,108,188,972 shares of common stock at current market prices,
      inclusive of the underlying secured convertible notes in the aggregate principal
      amount of $3,076,238 issued pursuant to our November 2005 Securities Purchase
      Agreement, in the aggregate principal amount of $775,000 issued pursuant to
      our
      September 2006 Securities Purchase Agreement and underlying secured convertible
      notes in the aggregate principal amount of $2,000,000 issued pursuant to our
      October 2006 Securities Purchase Agreement. As of April 9, 2007, there were
      2,134,841 shares of series A preferred stock convertible into 19,405,432 shares
      of common stock and 1,690,584 shares of series B preferred stock convertible
      into 7,692,157 shares of common stock issued and outstanding. Further, as of
      April 9, 2007, we have the following shares of our common stock underlying
      outstanding securities: (i) 7,943,935 shares underlying options issued pursuant
      to our 1998 and 2005 stock option plans, and (ii) 69,172,719 shares underlying
      stock purchase warrants. 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.





-43-




**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 $5,851,238 secured
      convertible notes (excluding accrued interest), based on market prices $0.0088,
      50% and 75% below the market price, as of April 9, 2007 of $0.0088.


%
                  Below Market
              
              Price
                  Per Share
              
              Discount
                  of 40%
              
              Number
                  of Shares Issuable25%
              
              $
              .0066
              
              $
              .0040
              
              
              1,477,585,29550%
              
              $
              .0044
              
              $
              .0026
              
              
              2,216,377,94375%
              
              $
              .0022
              
              $
              .0013
              
              
              4,432,755,886




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.





**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
      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. At April 9, 2006, AJW Partners, LLC, AJW Qualified
      Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC have
      converted an aggregate of $23,762 in convertible notes and were issued 1,857,831
      shares of our common stock.




**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
      os 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. On
      September 5, 2006 we amended the Securities Purchase Agreement to reduce the
      sale to an aggregate of $3,100,000 principal amount of secured convertible
      notes. On September 12, 2006 and on October 31, 2006, we entered into Securities
      Purchase Agreements for the sale of an aggregate of $775,000 and $2,000,000
      respectively, principal amount of secured convertible notes. All of the
      aforementioned 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. 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.





-44-




**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 goods,
      inventory contractual rights and general intangibles, receivables, documents,
      instruments, chattel paper, and intellectual property.**




In
      connection with the Securities Purchase Agreement we entered into in November
      2005 and as amended on September 5, 2006, together with the Securities Purchase
      Agreements we entered into on September 12, 2006 and on October 31, 2006, we
      executed a Security Agreement and an Intellectual Property Security Agreement
      on
      said dates 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 Series 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. On
      September 5, 2006 we amended the Securities Purchase Agreement to reduce the
      sale to an aggregate of $3,100,000 principal amount of secured convertible
      notes. On September 12, 2006 and on October 31, 2006, we entered into Securities
      Purchase Agreements for the sale of an aggregate of $775,000 and $2,000,000,
      respectively, principal amount of secured convertible notes. The agreements
      provide 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 non-employee stock
      options, or have the ability to sell equity securities in future
      periods.




-45-




**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, each of which were amended
      on September 5, 2006, if we did not have a registration statement registering
      200% of 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, until the registration
      statement is declared effective. For example, if we are required to pay
      liquidated damages for the issued and outstanding secured convertible notes
      on
      December 31, 2006, we will be required to pay approximately $536,000 (2.0%
      per
      month of the $3,100,000 of secured convertible notes outstanding for 12 months).
      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.




**We
      may not be able to register all of the shares underlying our secured convertible
      notes and warrants issued under our November 2005 and September and October
      2006
      Securities Purchase Agreements which will cause us to accrue liquidated damages
      and be held in default of the agreements whuch would require us to raise
      additional funds or curtail or cease operations**




As
      of
      April 9, 2007, we had 35,317,972 shares of common stock issued and 32,640,972
      shares outstanding, secured convertible notes outstanding that may be converted
      into an estimated 1,108,188,972 shares of common stock at current market prices
      underlying secured convertible notes in the aggregate principal amount of
      $3,076,238 issued pursuant to our November 2005 Securities Purchase Agreement,
      underlying secured convertible notes in the aggregate principal amount of
      $775,000 issued pursuant to our September 2006 Securities Purchase Agreement
      and
      underlying secured convertible notes in the aggregate principal amount of
      $2,000,000 issued pursuant to our October 2006 Securities Purchase Agreement.
      As
      of April 9, 2007, we had outstanding warrants to purchase 63,100,000 shares
      of
      common stock, underlying warrants issued pursuant to our November 2005
      Securities Purchase Agreement , September 2006 Securities Purchase Agreement
      and
      October 2006 Securities Purchase Agreement. On February 14, 2007 we filed a
      Prospectus pursuant to Rule 424(b)(3) registering 6,000,000 shares of our common
      stock for the November 2005 Securities Purchase Agreement which is only a
      portion of the shares we are obligated to register for the secured notes, and
      did not include any shares underlying the warrants which we issued pursuant
      to
      said Purchase Agreement. In addition, we are obligated to register all of the
      aforementioned additional shares of common stock underlying our secured
      convertible notes and warrants which we sold pursuant to the September and
      October 2006 Securities Purchase Agreements upon written demand from the selling
      stockholders.




Any
      future registration statement which will be filed by us on behalf of the selling
      stockholders will be made in reliance upon Rule 415(a)(1) promulgated under
      the
      Securities Act of 1933, as amended. That rule permits delayed and continuous
      offerings and sales of securities if those offerings meet several requirements,
      including that the securities are offered and sold by or on behalf persons
      other
      than the issuer or its affiliates. As a result, Rule 415 may not be available
      for the registration of those shares.




Registration
      of 6,000,000 shares for resale by the selling stockholders in our February
      14,
      2007 prospectus, file no. 333-137288 represented approximately 19.3% of the
      total issued and outstanding shares of common stock. If Rule 415 is not
      available to register all of the shares underlying our secured convertible
      notes
      and warrants which we sold pursuant to our November 2005 Securities Purchase
      Agreement, and the shares underlying our secured notes and warrants which we
      sold pursuant to our September and October 2006 Securities Purchase Agreements
      upon written demand from the selling stockholders, we will accrue further
      liquidated damages under our November 2005 agreement and begin to accrue
      liquidated damages under our September and October agreements, each in the
      amount of 2.0% per month of the face amount of the issued and outstanding
      secured convertible notes. In addition, we may be held in default of each of
      the
      agreements, which may require us to repay the secured convertible notes or
      the
      investors could commence legal action against us and foreclose on all of our
      assets to recover the amounts due. The payment of liquidated damages and
      repayment of the amounts due under all of the notes will result in depleting
      our
      working capital and we may be required to seek additional funding to satisfy
      such payment, or curtail or cease operations.




-46-


**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 PAO 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, 2006 and 2005, 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
      2006,
      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, 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.




-47-




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, 2006 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.




-48-


**PART** **III**




**Item
      9** .  **Directors,**  **Executive
      Officers, Promoters , Control Persons and Corporate Governance; 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 April 9, 2007, 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.


Name
              
              Age
              
              PositionDenis
                  A. O'Connor
              
              54
              
              Director
                  and President and Chief Executive OfficerKevin
                  J. Healy
              
              45
              
              General
                  CounselRobert
                  P. Ellis
              
              56
              
              Senior
                  Vice President, Business DevelopmentMarek
                  Pawlowski, Ph.D.
              
              55
              
              Vice
                  President - Product DevelopmentCelia
                  I. Schiffner
              
              51
              
              ControllerMark
                  A. Fauci
              
              47
              
              DirectorJoseph
                  T. Casey
              
              75
              
              DirectorMichael
                  A. Davis, M.D., D.Sc.
              
              63
              
              DirectorJed
                  Schutz
              
              47
              
              DirectorWilliam
                  J. Wagner
              
              56
              
              Director





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.




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.




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 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.




-49-





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.




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.




Mark
      A.
      Fauci - Director. Mr. Fauci is our founder and has, since privately-held
      OmniCorder's incorporation in 1997, served as a director. He served as our
      President and Chief Executive Officer since privately-held OmniCorder's
      incorporation until December 2004. 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.




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.




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.




-50-


Michael
      A. Davis, M.D., D.Sc. - Director. Dr. Davis has been a member of our Board
      of
      Directors since December 14, 2004. 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.




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.




On
            April
            9, 2007, James Wavle informed us that he was voluntarily resigning
            his position
            from our Board of Directors for
            personal reasons, effective immediately. There was no disagreement or
            dispute
            between us and Mr. Wavle which led to his resignation.


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




· 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;




· 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;




· 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;




· approving
      the scope of the
      financial audit;




· requiring
      the rotation of
      the lead audit partner;




· consulting
      regarding the
      completeness of our financial statements;




· reviewing
      changes in
      accounting principles;




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




-51-




· 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;




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




· meeting
      with our internal
      auditor on a regular basis;




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




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




The
      Audit
      Committee conducted eleven formal meeting and conferred on an informal basis
      on
      numerous occasions in 2006.




**Compensation
          Committee** **.**
          The Board has a Compensation Committee which is comprised of one non-employee
          director, Mr. Jed Schutz. As a member of the Compensation Committee, Mr.
          Schutz
          is independent as defined in Section 121(A) of the American Stock Exchange's
          listing standards. The composition of this committee will be reviewed at
          the
          next Board of Directors meeting. 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:


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




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




· 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;




· together
      with management,
      surveying the amount and types of executive compensation paid by comparable
      companies, and engaging consultants as necessary to assist them;




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




· 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;




· 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;




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




· 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;




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




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




-52-


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.




**Nominations
      and Governance Committee** .
      The
      Board has a Nominations and Governance Committee which is comprised of two
      non-employee directors. Dr. Michael Davis (Chairman) and Mr. Joseph Casey.
      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:




· 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;




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




· 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;




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




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




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




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




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




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




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




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




The
      Corporate Nominations and Governance 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:




· the
      nominee's
      independence;




-53-


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




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




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




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




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




· any
      potential conflicts of
      interest involving the nominee; and




· 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.





**Director
      Compensation**




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. 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.
      These options vest in equal installments over three years. Each grant of options
      was made to each person for their service to our company during 2005, and was
      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, our Compensation Committee of the Board of Directors
          approved
          accelerating the vesting of approximately 2.9 million stock options outstanding
          under our stock plans and granted 1,000,000 options to our President which
          vest
          immediately. 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 our President).
  On
          March
          14, 2006, we granted 30,000 stock options to purchase 30,000 shares of
          our
          common stock from our 2005 Incentive Plan to each of our outside Board
          of
          Directors in lieu of cash payment for their participation, attendance at
          meetings and service to us 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 our common stock from our 2005 Incentive Plan for their service to us
          in
          2006. The 10-year stock options vest immediately and have an exercise price
          of
          $0.24 per share. Our audit committee chairperson will receive 30,000 stock
          options to purchase 30,000 shares of our common stock at an exercise price
          of
          $0.24 per share from our 2005 Incentive Plan. On September 18, 2006 we
          granted
          160,555 stock options to purchase 160,555 shares of our common stock from
          its
          2005 Incentive Plan an individual who was appointed to the Board of Directors
          at
          the June 26, 2006 annual meeting. Of the 160,555 stock options granted,
          there
          were 150,000 stock options for his service to our company in 2006 and 10,555
          stock options in lieu of cash payment for his participation, attendance at
          meetings and service to our company from June 26, 2006 to September 30,
          2006.
          The 10 year stock options vest immediately and have an exercise price of
          $0.28
          per share. SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
          requires that we 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.


-54-


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 us. Effective December 31, 2005, the Executive Committee was
          disbanded in keeping with the long term strategic plan to reorganize and
          restructure our Board. In 2006, we paid $20,000 to Synergy Consulting Group
          .


**Indebtedness
      of Executive Officers and Directors**





No
      executive officer, director or any member of these individuals' immediate
      families or any corporation or 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, 2006, and Forms 5 and amendments thereto furnished to us
      with
      respect to the fiscal year ended December 31, 2006, we believe that during
      the
      year ended December 31, 2006, 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 and equity awards granted by us for years ended December 31, 2006
      and
      2005 to our Chief Executive Officer and our most highly compensated officers
      other than the Chief Executive Officer at December 31, 2006.





-55-





**SUMMARY
      COMPENSATION TABLE**




Name
                  & Principal Position
              
              Year
              
              Salary
                  ($) (9)
              
              Bonus
                  ($)
              
              Stock
                  Awards($)
              
              Option
                  Awards ($)(10)
              
              Non-Equity
                  Incentive Plan Compensation ($)
              
              Change
                  in Pension Value and Non-Qualified Deferred Compensation Earnings
                  ($)
              
              All
                  Other Compensation ($)
              
              Total
                  ($)Denis
                  O'ConnorPresident
                  and Chief Executive
              
              
              2005
              
              
              171,000
              
              
              55,0000
              
              
              —
              
              
              1,412,890
              
              
              —
              
              
              —
              
              
              —
              
              
              1,639,390Officer
                  (1)
              
              
              2006
              
              
              246,996
              
              
              28,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              274,996Robert
                  EllisSenior
                  Vice President,
              
              
              2005
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Business
                  Development(2)
              
              
              2006
              
              
              171,634
              
              
              —
              
              
              —
              
              
              54,273
              
              
              —
              
              
              —
              
              
              —
              
              
              231,743Marek
                  Pawlowski, Ph.DVice
                  President - Product
              
              
              2005
              
              
              112,600
              
              
              —
              
              
              —
              
              
              9,100
              
              
              —
              
              
              —
              
              
              —
              
              
              121,700Development
                  (3)
              
              
              2006
              
              
              148,750
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              148,750Kevin
                  Healy
              
              
              2005
              
              
              93,462
              
              
              —
              
              
              —
              
              
              130,000
              
              
              —
              
              
              —
              
              
              —
              
              
              223,462General
                  Counsel(4)
              
              
              2006
              
              
              193,846
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              193,846Celia
                  Schiffner
              
              
              2005
              
              
              90,231
              
              
              —
              
              
              —
              
              
              9,100
              
              
              —
              
              
              —
              
              
              —
              
              
              99,331Controller
                  (5)
              
              
              2006
              
              
              121,577
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              121,577Mihai
                  DimancescuVice
                  President - Medical
              
              
              2005
              
              
              149,000
              
              
              —
              
              
              —
              
              
              18,200
              
              
              —
              
              
              —
              
              
              —
              
              
              167,200Affairs
                  (6)
              
              
              2006
              
              
              23,192
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              23,192Loring
                  D. Andersen
              
              
              2005
              
              
              83,000
              
              
              —
              
              
              —
              
              
              27,300
              
              
              —
              
              
              —
              
              
              —
              
              
              110,300Vice
                  President - Market Development(7)
              
              
              2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Anne
                  Marie FieldsVice
                  President - Corporate
              
              
              2005
              
              
              53,500
              
              
              —
              
              
              —
              
              
              13,650
              
              
              —
              
              
              —
              
              
              —
              
              
              67,150Communications
                  & Business Strategy (8)
              
              
              2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —




(1)
                Mr. O'Connor joined our company on March 23, 2005. In 2006, all employees
                were asked to defer part of their salaries. The 2006 salary includes
                $225,000 that was paid and $21,996 that was deferred. Mr. O'Connor's
                other
                compensation is the executive 2004 bonus ($55,000) the company agreed
                to
                pay in as per his employment agreement. On March 14, 2006 the Board
                of
                Directors approved a performance bonus of $28,000 in accordance with
                Mr.
                O'Connor's employment agreement. The payment will be deferred until
                such
                time the CEO in his sole discretion, determines the Company's financial
                situation supports such payment. Mr. O’Connor was granted 852,000 options
                and 1,000,000 options during 2005. These awards had a fair value
                of
                $698,640 and $310,000, respectively, on the dates of
                grant




-56-




(2)
                Robert Ellis joined our Company January 9, 2006. In 2006, all employees
                were asked to defer part of their salaries. The 2006 salary includes
                $159,519 that was paid and $12,115 that was deferred. Mr. Ellis was
                granted 667,000 stock options during 2006. These awards had a fair
                value
                of $124,062 on the date of grant.
              
              (3)
                In 2006, all employees were asked to defer part of their salaries.
                The
                2006 salary includes $137,981 that was paid and $10,769 that was
                deferred.
                Dr. Pawlowski was granted 10,000 stock options during 2005. These
                awards
                had a fair value of $9,100 on the date of grant.(4)
                Mr. Healy joined our company on June 20, 2005. In 2006, all employees
                were
                asked to defer part of their salaries. The 2006 salary includes $180,000
                that was paid and $13,846 that was deferred. Mr. Healy was granted
                200,000
                stock options during 2005. These awards had a fair value of $130,100
                on
                the date of grant.
              
              (5)
                In 2006, all employees were asked to defer part of their salaries.
                The
                2006 salary includes $110,808 that was paid and $10,769 that was
                deferred.
                Ms. Schiffner was granted 10,000 stock options during 2005. These
                awards
                had a fair value of $9,100 on the date of grant.(6)
                Dr. Dimancescu ceased being an employee of our company effective
                May 2,
                2006. Dr. Dimancescu was granted 20,000 stock options during 2005.
                These
                awards had a fair value of $18,200 on the date of grant. They were
                forfeited unexercised.(7)
                Mr. Andersen ceased being an employee of our company effective September
                9, 2005. Mr. Andersen was granted 30,000 stock options during 2005.
                These
                awards had a fair value of $27,300 on the date of grant. They were
                forfeited unexercised.(8)
                Ms. Fields ceased being an employee of our company effective June
                30,
                2005. Ms. Fields was granted 15,000 stock options during 2005. These
                awards had a fair value of $13,650 on the date of grant. They were
                forfeited unexercised.




(9)
        Due
        to the financial condition of our employees were asked to defer up to 55%
        of their bi-weekly salary beginning September 4, 2006 through October 31,
        2006.
        After we signed the October 31, 2006 Securities Purchase Agreement, all
        employees were restored to their full salaries except for Denis O’Connor, who
        continues to defer approx $2,100 per month. The deferred salaries remain
        an
        obligation of the Company and have been accrued and will be paid to the
        employees when (1) the employee leaves our company, (2) we enter a new
        financing agreement of $2 million or greater or (3) we wind-up operations.




(10
        )
        Compensation cost recognized in financial statements associated with stock
        option awards in 2006. For our valuation assumptions, see Note 9 in the
        accompanying financial statements. In 2005, as permitted under SFAS No. 148,
        “Accounting for Stock-Based Compensation - Transition and Disclosure”, which was
        an amendment of SFAS No. 123, we elected to continue to follow the intrinsic
        value method in accounting for its stock-based employee compensation
        arrangements as defined by APB No. 25, and related interpretations including
        FASB Interpretation No.44, “Accounting for Certain Transactions Involving Stock
        Compensation”, an interpretation of APB No.25. No stock-based employee
        compensation cost was reflected in operations in 2005, as all options granted
        under those plans had an exercise price equal to the market value of the
        underlying common stock on the date of grant. We illustrated the effect on
        net loss and net loss per share as if the we had applied the fair value
        recognition provisions of SFAS No. 123 to stock-based employee compensation
        on a
        pro-forma basis, see Note 9 - Stock Based Compensation, in the accompanying
        financial statements.





-57-




**OUTSTANDING
      EQUITY AWARDS AT DECEMBER 31, 2006**




The
      following table sets forth information with respect to outstanding equity awards
      at December 31, 2006 granted under our 1998 Stock Option Plan and 2005 Incentive
      Plan to the named executive officers.


Option
                  Awards
              
              Stock
                  AwardsName
              
              Number
                of
                Securities
                Underlying
                Unexercised
                Options
                (#)
                Exercisable
              
              Number
                of
                Securities
                Underlying
                Unexercised
                Options
                (#)
                Unexercisable
              
              Equity
                Incentive
                Plan
                Awards:
                Number
                of
                Securities
                  Underlying
                Unexercised
                Unearned
                Options
                (#)
              
              Option
                Exercise
                Price
                ($)
              
              Option
                Expiration
                Date
              
              Number
                of
                  Shares
                or
                  Units
                of
                  Stock
                That
                  Have
                Not
                Vested
                (#)
              
              Market
                Value
                  of
                Shares
                  or
                Units
                  of
                Stock
                That
                  Have
                Not
                Vested
                ($)
              
              Equity
                Incentive
                Plan
                  Awards:
                Number
                of
                Unearned
                Shares,
                Units
                  or
                Other
                  Rights
                That
                  Have
                Not
                Vested
                (#)
              
              Equity
                  Incentive
                Plan
                  Awards:Market
                  or Payout
                Value
                of
                Unearned
                Shares,
                Units
                  or
                Other
                Rights
                That
                  Have
                Not
                Vested
                ($)Denis
                  O'Connor
              
              
              852,000
              
              
              -
              
              
              -
              
              
              1.00
              
              
              3/23/2015
              
              
              -
              
              
              -
              
              
              -
              
              
              -President
                  and Chief Executive
              
              
              825,000
              
              
              -
              
              
              -
              
              
              1.00
              
              
              6/7/2015
              
              
              -
              
              
              -
              
              
              -
              
              
              -Officer
                  (1)
              
              
              1,000,000
              
              
              -
              
              
              -
              
              
              0.30
              
              
              10/26/2015
              
              
              -
              
              
              -
              
              
              -
              
              
              -Robert
                  EllisSenior
                  Vice President,Business
                  Development(2)
              
              
              166,750
              
              
              500,250
              
              
              -
              
              
              0.30
              
              
              3/14/2011
              
              
              -
              
              
              -
              
              
              -
              
              
              -Marek
                  Pawlowski, Ph.D
              
              
              87,281
              
              
              -
              
              
              -
              
              
              0.974
              
              
              11/18/2007
              
              
              -
              
              
              -
              
              
              -
              
              
              -Vice
                  President - Product
              
              
              8,728
              
              
              -
              
              
              -
              
              
              0.974
              
              
              12/12/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -Development
              
              
              10,000
              
              
              -
              
              
              -
              
              
              1.00
              
              
              2/14/2010
              
              
              -
              
              
              -
              
              
              -
              
              
              -Kevin
                  Healy
              
              
              200,000
              
              
              -
              
              
              -
              
              
              0.66
              
              
              6/27/2010
              
              
              -
              
              
              -
              
              
              -
              
              
              -General
                  Counsel(3)Celia
                  Schiffner
              
              
              9,375
              
              
              -
              
              
              -
              
              
              4.00
              
              
              4/29/2009
              
              
              -
              
              
              -
              
              
              -
              
              
              -Controller
              
              
              10,000
              
              
              -
              
              
              -
              
              
              1.00
              
              
              2/14/2010
              
              
              -
              
              
              -
              
              
              -
              
              
              -Mihai
                  DimancescuVice
                  President - MedicalAffairs
                  (4)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Loring
                  D. AndersenVice
                  President -Market
                  Development (5)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Anne
                  Marie Fields
              
              
              5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              10/31/2007
              
              
              -
              
              
              -
              
              
              -
              
              
              -Vice
                  President - Corporate
              
              
              5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              11/30/2007
              
              
              -
              
              
              -
              
              
              -
              
              
              -Communications
                  & Business
              
              
              5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              12/31/2007
              
              
              -
              
              
              -
              
              
              -
              
              
              -Strategy
                  (6)
              
              
              5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              1/31/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              2/28/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              3/31/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              4/30/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              5/31/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              6/30/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              7/31/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              8/1/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              9/1/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              10/1/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              11/1/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -5,134
              
              
              -
              
              
              -
              
              
              0.974
              
              
              12/1/2008
              
              
              -
              
              
              -
              
              
              -
              
              
              -




(1)
                Mr. O'Connor joined our company on March 23, 2005. Options totaling
                852,000 were granted from our 1998 Stock Option Plan and 1,825,000
                were
                granted from our 2005 Incentive
                Plan.




-58-




(2)
                Robert Ellis joined our Company January 9, 2006. Options were granted
                from
                our 2005 Incentive Plan.(3)
                Mr. Healy joined our company on June 20, 2005. Options were granted
                from
                our 2005 Incentive Plan.(4)
                Dr. Dimancescu ceased being an employee of our company effective
                May 2,
                2006. Options were granted from our 1998 Stock Option
                Plan.(5)
                Mr. Andersen ceased being an employee of our company effective September
                9, 2005. Options were granted from our 1998 Stock Option
                Plan.(6)
                Ms. Fields ceased being an employee of our company effective June
                30,
                2005. Options were granted from our 1998 Stock Option
                Plan.




**Director
      Compensation**




The
      following table sets forth with respect to the named director, compensation
      information inclusive of equity awards and payments made in the year end
      December 31, 2006. All option awards were granted from our 2005 Incentive
      Plan.





Name
              
              Fees
                  Earned or Paid in Cash
              
              Stock
                  Awards
              
              Option
                Awards
              
              Non-Equity
                  Incentive Plan Compensation
              
              Change
                  in Pension Value and Nonqualified Deferred Compensation Earnings
              
              All
                  Other Compensation
              
              Total($)
              
              ($)
              
              ($)
              
              ($)
              
              
              
              ($)
              
              ($)Jed
                  Schutz
              
              
              -
              
              
              -
              
              
              37,800
              
              
              -
              
              
              -
              
              
              -
              
              
              37,800Anthony
                  Lombardo
              
              
              -
              
              
              -
              
              
              37,800
              
              
              -
              
              
              -
              
              
              -
              
              
              37,800Marc
                  Fauci (1)
              
              
              -
              
              
              -
              
              
              37,800
              
              
              -
              
              
              -
              
              
              179,996
              
              
              37,800Joseph
                  Casey
              
              
              -
              
              
              -
              
              
              37,800
              
              
              -
              
              
              -
              
              
              -
              
              
              37,800Michael
                  Davis (2)
              
              
              -
              
              
              -
              
              
              37,800
              
              
              -
              
              
              -
              
              
              20,000
              
              
              37,800William
                  Wagner
              
              
              -
              
              
              -
              
              
              44,100
              
              
              -
              
              
              -
              
              
              -
              
              
              44,100James
                  Wavle (3)
              
              
              -
              
              
              -
              
              
              21,996
              
              
              -
              
              
              -
              
              
              -
              
              
              21,996




(1)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 entered into a consulting agreement
                  with Mr.
                  Fauci. 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
                  e xchange
                  for consulting fees of $200,000 per year during the term of
                  the agreement which expires December 2006. The agreement also provides
                  for
                  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.




In
                2006, we paid Mr. Fauci $119,996 for the consulting agreement and
                $60,000
                for his deferred accrued salary.(2)
                Dr. Michael Davis was paid $20,000 to Synergy Consulting Group (an
                entity
                which the director controls) for his medical advisory service to
                our
                Company.




(3)
                  Mr. Wavle informed us that he was voluntarily resigning hisposition from our Board of Directorsfor
                  personal reasons, effective April 9, 2007. There was no disagreement
                  or
                  dispute between Mr. Wavle and the Company which led to his
                  resignation.




-59-




**Item** **11.**  **Security
      Ownership of Certain Beneficial Owners and Management**




The
      following table sets forth, as of April 9, 2007, the number of and percent
      of
      the Company's common stock beneficially owned by:




·
              all
                  directors and nominees, naming
                  them,




·
            our
                executive officers,




·
            our
                directors and executive officers as a group, without naming them,
                and




·
            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 April 9, 2007, 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 April 9, 2007, have been exercised and converted.




-60-


NAME
                    AND ADDRESS OF BENEFICIAL OWNER
                
                AMOUNT
                    BENEFICIALLY OWNED (1)
                
                PERCENT
                    OF CLASS (1)Mark
                    A. FauciCommon
                    Stock
                
                
                9,029,883(2
                )
                
                25.2
                %Jed
                    SchutzCommon
                    Stock
                
                
                3,351,443(3
                )
                
                7.6
                %Series
                    A Preferred
                
                
                3,129,905(3
                )
                
                8.9
                %Series
                    B Preferred
                
                
                610,992(3
                )
                
                1.7
                %Marek
                    Pawlowski, Ph.D.Common
                    Stock
                
                
                106,009(8
                )
                
                *Celia
                    I. SchiffnerCommon
                    Stock
                
                
                19,375(8
                )
                
                *Loring
                    D. AndersenCommon
                    Stock
                
                
                0(13
                )
                
                *Mihai
                    DimancescuCommon
                    Stock
                
                
                0(13
                )
                
                *Kevin
                    J. HealyCommon
                    Stock
                
                
                200,000(10
                )
                
                *Michael
                    A. Davis, M.D., D.ScCommon
                    Stock
                
                
                385,000(4
                )
                
                1.1
                %Series
                    B Preferred
                
                
                61,097(4
                )
                
                *George
                    BenedictCommon
                    Stock
                
                
                1,487,344(11
                )
                
                3.9
                %Series
                    A Preferred
                
                
                1,251,966(11
                )
                
                3.5
                %Series
                    B Preferred
                
                
                610,992(11
                )
                
                1.7
                %Joseph
                    T. CaseyCommon
                    Stock
                
                
                1,500,080(5
                )
                
                3.7
                %Series
                    A Preferred
                
                
                3,129,905(5
                )
                
                8.9
                %Series
                    B Preferred
                
                
                916,484(5
                )
                
                2.6
                %Anthony
                    A. LombardoCommon
                    Stock
                
                
                426,744(6
                )
                
                1.3
                %William
                    J. WagnerCommon
                    Stock
                
                
                602,948(7
                )
                
                1.7
                %Denis
                    O'ConnorCommon
                    Stock
                
                
                2,677,000(9
                )
                
                7.0
                %Ann
                    Marie FieldsCommon
                    Stock
                
                
                77,013(14
                )
                
                *Robert
                    EllisCommon
                    Stock
                
                
                333,500(10
                )
                
                *James
                    WavleCommon
                    Stock
                
                
                160,555(15
                )
                
                *Columbia
                    Ventures Corp.Common
                    Stock
                
                
                691,990(12
                )
                
                1.6
                %Series
                    A Preferred
                
                
                6,259,828(12
                )
                
                17.8
                %Series
                    B Preferred
                
                
                513,713(12
                )
                
                1.5
                %All
                    executive officers and directors as a group (10 persons)Common
                    Stock
                
                
                18,205,238(16
                )
                
                6.1
                %Series
                    A Preferred
                
                
                6,259,810(16
                )
                
                12.4
                %Series
                    B Preferred
                
                
                1,588,573(16
                )
                
                3.2
                %Total:
                
                
                26,053,621(16
                )
                
                51.7
                %




*Less
      than one percent.




-61-




(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
      April 9, 2007, 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 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)
      3,129,905 shares of our common stock issuable upon the conversion of shares
      of
      series A preferred stock and (iv) 610,992 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) 61,097 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) 3,129,905 shares of our common stock issuable
      upon
      the conversion of shares of series A preferred stock; and (iv) 916,484 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 which are currently
      exercisable.




-62-




(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 which are
      currently exercisable; (iii)1,251,966 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) 610,992 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) 6,259,828shares of our common stock issuable upon the
      conversion of shares of series A preferred stock purchased in our December
      2004
      private placement; (ii) 513,713 shares of our common stock issuable upon the
      conversion of shares of series B preferred stock purchased in our August 2005
      Rights Offering; (iii) 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. Dr.
      Dimancescu ceased being an employee of our company May 2, 2006. These 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)
          James Wavle resigned from our Board of Directors on April 9, 2007. The
          shares
          represent options granted under the 2005 Incentive Compensation Plan which
          are
          currently exercisable.


(16)
      Includes shares held in aggregate of current officers and directors of (i)
      10,999,015 shares of our common stock; (ii) 6,259,810 shares of our common
      stock
      issuable upon the conversion of shares of series A preferred stock purchased
      in
      our December 2004 private placement;(iii)1,588,573 shares of our common stock
      issuable upon the conversion of shares of series B preferred stock purchased
      in
      our August 2005 Rights Offering; (iv) 1,618,148 shares of our common stock
      issuable upon exercise of stock options granted under the 1998 Stock Option
      Plan
      and 3,869,055 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, and Director
      Independence.**




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. This option agreement was
      amended and supplemented by the amendments thereto dated July 23, 1997 and
      September 13, 1997, and the letter agreement dated March 19, 1998. These
      agreements comprise of the license agreement. 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 December 29, 2006, Dr. Anbar has not received any
      compensation under this agreement. The Anbar patent expires in January 2015.




In
      February 2001, Dr Anbar sent us a Notice of Termination concerning the license
      agreement. In April 2001, we brought an action to enjoin Dr. Anbar and his
      agents from terminating, attempting to terminate, or otherwise interfering
      with
      the exclusive license granted under the license agreement. Dr. Anbar
      counterclaimed that we breached the license agreement by defaulting on our
      obligations. On October 3, 2001 we entered into a Settlement Agreement with
      Dr.
      Anbar pursuant to which the parties agreed to settle and dispose of the action,
      the answer and the counterclaims, without the admission of liability on either
      side. In addition, the parties agreed that the license agreement, as described
      above, would remain in full force and effect and that Dr. Anbar would withdraw
      his notice of termination of the license agreement. On February 17, 2005, we
      and
      Dr. Anbar amended the settlement agreement to provide for our grant of 250,000
      shares of our common stock. In addition, Dr. Anbar agreed to assign all of
      his
      right, title and interest in the patent "Acquisition of Mental Stress Monitoring
      Technology Patent" (United States Paten 5,771,261).




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, 2006 we have paid Dr. Anbar $22,400 and granted 262,000 shares
      of restricted stock under this agreement.




-63-




Investors
      in our August 2005 rights offering included three members of our board of
      directors, Jed Schutz, Joseph T. Casey and Michael Davis and a former director
      George Benedict. Mr. Schutz and Mr. Benedict each 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
      January 3, 2006, we issued shares of our series A and series B convertible
      preferred stock as dividends in-kind to the holders of our series A and B
      convertible preferred stock. Dividends were payable to holders of record as
      they
      appear in the stockholder records of our company at the close of business on
      the
      applicable record date, which was December 15, 2005. Joseph Casey, as co-trustee
      for the Casey Living Trust, and Jed Schutz each received 48,616 shares of series
      A convertible preferred stock as dividends. Our former director, George Benedict
      received 19,447 shares of series A convertible preferred stock as dividends.
      Joseph Casey, as co-trustee for the Casey Living Trust was issued 8,869 shares
      of series B preferred stock as dividends. Jed Schutz and George Benedict each
      received 5,913 shares and Michael Davis received 591 shares of series B
      preferred stock as dividends.




On
      January 2, 2007, we issued shares of our series A and series B convertible
      preferred stock as dividends in-kind to the holders of our series A and B
      convertible preferred stock. Dividends were payable to holders of record as
      they
      appear in the stockholder records of our company at the close of business on
      the
      applicable record date, which was December 15, 2006. Joseph Casey, as co-trustee
      for the Casey Living Trust, and Jed Schutz each received 45,708 shares of series
      A convertible preferred stock as dividends. Our former director, George Benedict
      received 18,283 shares of series A convertible preferred stock as dividends.
      Joseph Casey, as co-trustee for the Casey Living Trust was issued 42,556 shares
      of series B preferred stock as dividends. Jed Schutz and George Benedict each
      received 28,371 shares and Michael Davis received 2,837 shares of series B
      preferred stock as dividends.




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.




-64-




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 was nominated
      at
      the 2005 and 2006 annual meetings of stockholders to continue as a board member
      pursuant to the settlement agreement. 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 early October 2005. This amount is payable at the rate
      of
      $10,000 per month for the initial 12 months and $20,000 per month thereafter.
      As
      of December 31, 2006, we paid $420,000 to Mr. Fauci of which $320,000 was for
      consulting as per agreement and $100,000 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 us. 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,
      we
      offered Dr. Davis a consulting contract whereby he will provide medical and
      scientific expertise to us. Dr, Davis will be compensated $5,000 per month
      for
      his consulting services. This agreement was amended in May 2006. Dr. Davis'
      compensation was reduced to $2,500 per month during June, July and August 2006.
      In October 2006 this agreement was amended to increase Dr. Davis’s compensation
      to $4,000 per month.




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.**


Exhibit
                  No.
              
              Description2.1
              
              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)
  -65-
  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)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.
                  (11)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.
                    (9)
  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)
  -66-
 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)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)10.36
              
              Finder's
                  Fee Agreement dated as of July 25, 2005 by and between Advanced
                  BioPhotonics Inc. and Trilogy Capital Partners, Inc.
                  (12)10.37
              
              Letter
                  of Engagement dated as of September 14, 2005 by and between Advanced
                  BioPhotonics Inc. and Trilogy Capital Partners, Inc.
                  (12)10.38
              
              Consulting
                  Agreement dated as of July 14, 2005 by and between Advanced BioPhotonics
                  Inc. and Trilogy Capital Partners, Inc. (12)10.39
              
              Letter
                  Agreement dated as of July 14, 2005 by and between Advanced BioPhotonics
                  Inc. and Trilogy Capital Partners, Inc. (13)10.40
              
              Settlement
                  Agreement and Mutual Release dated as of January 18, 2006 between
                  the
                  Company and Lockheed Martin
                  Corporation.(13)
  -67-
  10.41
              
              Settlement
                  Agreement and Mutual Release by and between the Company and Kevin
                  McQuade.(13)10.42
              
              Consulting
                  Agreement dated as of January 1, 2006 by and between Advanced BioPhotonics
                  Inc. and Dr. Michael A. Davis. (14)10.43
              
              Amendment
                  to the Consulting Agreement dated as of May 10, 2006 by and between
                  Advanced BioPhotonics Inc. and Dr. Michael A. Davis.
                  (14)10.44
              
              Schedule
                  4(d) to the Securities Purchase Agreement dated as of 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.(14)


10.45
              
              Amendment
                  No. 1 to the Securities Purchase Agreement dated as September 5,
                  2006 by
                  and among Advanced BioPhotonics, Inc. and AJW Offshore, Ltd., AJW
                  Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
                  Partners II, LLC.(15)10.45
              
              Amendment
                  No. 1 to the Registration Rights Agreement dated as September 5,
                  2006 by
                  and among Advanced BioPhotonics, Inc. and AJW Offshore, Ltd., AJW
                  Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
                  Partners II, LLC.(15)10.46
              
              Securities
                  Purchase Agreement dated as of September 12, 2006 by and between
                  Advanced
                  BioPhotonics, Inc. and AJW Offshore, Ltd., AJW Qualified Partners,
                  LLC,
                  AJW Partners, LLC and New Millennium Capital Partners II, LLC
                  (16)10.47
              
              Callable
                  Secured Convertible Note issued to AJW Offshore, Ltd., dated September
                  12,
                  2006. (16)10.48
              
              Callable
                  Secured Convertible Note issued to AJW Qualified Partners, LLC,
                  dated
                  September 12, 2006. (16)10.49
              
              Callable
                  Secured Convertible Note issued to AJW Partners, LLC, dated September
                  12,
                  2006. (16)10.50
              
              Callable
                  Secured Convertible Note issued to New Millennium Capital Partners
                  II,
                  LLC, dated September 12, 2006. (16)10.51
              
              Stock
                  Purchase Warrant issued to AJW Qualified Partners, LLC, dated September
                  12, 2006. (16)10.52
              
              Stock
                  Purchase Warrant issued to AJW Offshore, Ltd., dated September
                  12, 2006.
                  (16)10.53
              
              Stock
                  Purchase Warrant issued to AJW Partners, LLC, dated September 12,
                  2006.
                  (16)10.54
              
              Stock
                  Purchase Warrant issued to New Millennium Capital Partners II,
                  LLC, dated
                  September 12, 2006. (16)10.55
              
              Registration
                  Rights Agreement dated as of September 12, 2006 by and between
                  Advanced
                  BioPhotonics, Inc. and AJW Offshore, Ltd., AJW Qualified Partners,
                  LLC,
                  AJW Partners, LLC and New Millennium Capital Partners II, LLC.
                  (16)10.56
              
              Security
                  Agreement dated as of September 12, 2006 by and between Advanced
                  BioPhotonics, Inc. and AJW Offshore, Ltd., AJW Qualified Partners,
                  LLC,
                  AJW Partners, LLC and New Millennium Capital Partners II, LLC.
                  (16)10.57
              
              Security
                  Agreement dated as of September 12, 2006 by and between Advanced
                  BioPhotonics, Inc. and AJW Offshore, Ltd., AJW Qualified Partners,
                  LLC,
                  AJW Partners, LLC and New Millennium Capital Partners II, LLC
                  (16)
  -68-
  10.58
              
              Intellectual
                  Property Security Agreement dated as of September 12, 2006 by and
                  between
                  Advanced BioPhotonics, Inc. and AJW Offshore, Ltd., AJW Qualified
                  Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners
                  II,
                  LLC (16)10.59
              
              Escrow
                  Agreement dated as of September 12, 2006 by and between Advanced
                  BioPhotonics, Inc., Denis O’Connor and AJW Offshore, Ltd., AJW Qualified
                  Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners
                  II,
                  LLC (16)




10.60
            
            Securities
                Purchase Agreement, dated October 31, 2006, by and among Advanced
                BioPhotonics, Inc. and AJW Offshore, Ltd., AJW Qualified Partners,
                LLC,
                AJW Partners, LLC and New Millennium Capital Partners II, LLC.
                (17)10.61
            
            Callable
                Secured Convertible Note issued to AJW Offshore, Ltd., dated October
                31,
                2006. (17)10.62
            
            Callable
                Secured Convertible Note issued to AJW Qualified Partners, LLC, dated
                October 31, 2006. (17)10.63
            
            Callable
                Secured Convertible Note issued to AJW Partners, LLC, dated October
                31,
                2006. (17)10.64
            
            Callable
                Secured Convertible Note issued to New Millennium Capital Partners
                II,
                LLC, dated October 31, 2006. (17)10.65
            
            Stock
                Purchase Warrant issued to AJW Offshore, Ltd., dated October 31,
                2006.
                (17)10.66
            
            Stock
                Purchase Warrant issued to AJW Qualified Partners, LLC, dated October
                31,
                2006. (17)10.67
            
            Stock
                Purchase Warrant issued to AJW Partners, LLC, dated October 31, 2006.
                (17)10.68
            
            Stock
                Purchase Warrant issued to New Millennium Capital Partners II, LLC,
                dated
                October 31, 2006. (17)10.69
            
            Registration
                Rights Agreement, dated as of October 31, 2006, by and among Advanced
                BioPhotonics, Inc., AJW Offshore, Ltd., AJW Qualified Partners, LLC,
                AJW
                Partners, LLC and New Millennium Capital Partners II, LLC.
                (17)




10.70
                
                Addendum
                    to the Finder’s Fee Agreement dated as of November 8, 2005 by and between
                    Advanced BioPhotonics, Inc. and Axiom Capital Management, Inc.
                    (18)10.71
                
                Waiver
                    Letter dated as of December 8, 2006 by and among Advanced BioPhotonics,
                    Inc. and AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW
                    Partners,
                    LLC and New Millennium Capital Partners II, LLC.
                    (18)
  23.2
              
              Consent
                  of Marcum & Kliegman
                  LLP.*


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).*


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)
  -69-
  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.(6)





*
      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.




(12)
      Incorporated by reference from the exhibits filed with the registration
      statement on Form SB-2/A filed on April 7, 2006.




(13)
      Incorporated by reference from the exhibits filed with the registration
      statement on Form SB-2/A filed on June 5, 2006.




(14)
      Incorporated by reference from the exhibits filed with the registration
      statement on Form SB-2/A filed on June 30, 2006.




(15)
      Incorporated by reference from the exhibits filed with the registration
      statement on Form SB-2 filed on September 13, 2006.




(16)
      Incorporated by reference from the exhibits filed with the Current Report on
      Form 8-K filed on September 15, 2006.




-70-




(17)
      Incorporated by reference from the exhibits filed with the Current Report on
      Form 8-K filed on November 3, 2006.




(18)
        Incorporated by reference from the exhibits filed
        with the amended Registration Statement on Form SB-2/A filed on January 11,
        2007.




-71-


**Item** **14.**  **Principal
      Accountant Fees and Services.**




**Audit
      Fees**




The
      aggregate fees billable to us by Marcum & Kliegman LLP during 2006 and 2005
      for the audits of our annual financial statements for the fiscal years’ review
      of our financial statements included in our Forms 10-QSB and review of
      registration statements totaled approximately $317,000 and $241,000.




**Audit-Related
      Fees**




There
      were no audit-related fees during 2006 and 2005 billed to us by Marcum &
Kliegman LLP.




**Tax
      Fees**




We
      incurred fees of $5,000
      and $12,000 ,
      respectively 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, 2006 and 2005.




**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.




-72-


**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:
                April 12, 2007
              By:
              /s/
                Denis A. O’ConnorDenis
                A. O’ConnorPresident
                and
                Chief Executive Officer


By:
            /s/
              Celia I. SchiffnerCelia
              I. SchiffnerController
              (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
              
              DIRECTOR
                  AND PRESIDENT AND
              
              April
                  12 , 2007DENIS
                    A. O'CONNOR
              
              CHIEF
                      EXECUTIVE OFFICER
                    (PRINCIPAL
                      EXECUTIVE OFFICER)/S/
                  CELIA I. SCHIFFNER
              
              CONTROLLER
              
              April
                  12, 2007CELIA
                  I. SCHIFFNER
              
              (PRINCIPAL
                  FINANCIAL OFFICER)/S/
                  MICHAEL A. DAVIS
              
              DIRECTOR
              
              April
                  12, 2007MICHAEL
                  A. DAVIS, M.D., D.SC./S/
                  JED SCHUTZ
              
              DIRECTOR
              
              April
                  12, 2007JED
                  SCHUTZ/S/
                  JOSEPH T. CASEY
              
              DIRECTOR
              
              April
                  12, 2007JOSEPH
                  T. CASEY/S/
                  WILLIAM J. WAGNER
              
              DIRECTOR
              
              April
                  12 , 2007WILLIAM
                  J. WAGNERDIRECTOR
              
              April
                  12, 2007MARK
                  A. FAUCI







**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, 2006 and 2005, and


the
      Period From February 7, 1997 (Inception) to December 31, 2006





**ADVANCED
      BIOPHOTONICS INC.**




(A
      Development Stage Enterprise)


CONTENTSPageReport
                  of Independent Registered Public Accounting Firm
              
              F-1FINANCIAL
                  STATEMENTSBalance
                  Sheet - December 31, 2006 and 2005
              
              F-2
                  - F-3Statements
                  of Operations - For the Years Ended December 31, 2006 and 2005,
                  and For
                  the Period From February 7, 1997 (Inception) to December 31,
                  2006
              
              F-4Statement
                  of Stockholders’ Deficiency - For the Years Ended December 31, 2006 and
                  2005, and For the Period From February 7, 1997 (Inception) to December
                  31,
                  2006
              
              F-5
                    - F-6Statements
                  of Cash Flows - For the Years Ended December 31, 2006 and 2005,
                  and For
                  the Period From February 7, 1997 (Inception) to December 31,
                  2006
              
              F-7
                    - F-9NOTES
                  TO FINANCIAL STATEMENTS
              
              F-10
                    - F-51









Report
      of Independent Registered Public Accounting Firm




To
      the
      Audit Committee of the Board of Directors and Stockholders


Advanced
      BioPhotonics Inc.




We
      have
      audited the accompanying balance sheets of Advanced BioPhotonics Inc. (the
      “Company”) (A Development Stage Enterprise) as of December 31, 2006 and 2005 and
      the related statements of operations, stockholders’ deficiency, and cash flows
      for the years ended December 31, 2006 and 2005, and for the period from February
      7, 1997 (inception) to December 31, 2006. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our 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. (A
      Development Stage Enterprise) as of December 31, 2006 and 2005 and the results
      of its operations and its cash flows for the years ended December 31, 2006
      and
      2005, and for the period from February 7, 1997 (inception) to December 31,
      2006,
      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
      $26,401,475, and cash flows used in operating activities of $16,846,204 during
      the development stage, which commenced on February 7, 1997 through December
      31,
      2006. 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


April
        9,
        2007




F-1


Advanced
                BioPhotonics Inc.
              (A
                Development Stage Enterprise)
              
              BALANCE
                SHEETS




December
                31, 2006
            
            December
                31, 2005CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            850,061
            
            $
            868,363Prepaid
                expenses and other current assets
            
            
            243,682
            
            
            207,589Total
                Current Assets
            
            
            1,093,743
            
            
            1,075,952Property
                and equipment, net
            
            
            178,528
            
            
            176,827Other
                assets:Equipment
                deposits
            
            
            232,977
            
            
            257,983Deferred
                financing costs, net
            
            
            690,379
            
            
            220,962Security
                deposits
            
            
            15,062
            
            
            9,662TOTAL
                ASSETS
            
            $
            2,210,689
            
            $
            1,741,386





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




F-2




Advanced
                BioPhotonics Inc.
              (A
                Development Stage Enterprise)
              
              BALANCE
                SHEETS




LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCY




December
                31, 2006
            
            December
                31, 2005CURRENT
                LIABILITIESNotes
                payable
            
            $
            119,901
            
            $
            152,512Accounts
                payable and accrued expenses
            
            
            582,023
            
            
            426,326Professional
                fees payable
            
            
            213,981
            
            
            242,171Accrued
                license fees
            
            
            —
            
            
            323,000Accrued
                registration rights penalties
            
            
            536,333
            
            
            —Accrued
                interest payable
            
            
            257,797
            
            
            19,665Accrued
                settlement with former officers
            
            
            450,000
            
            
            504,632Deferred
                employees compensation
            
            
            116,668
            
            
            —Dividends
                payable
            
            
            122,135
            
            
            77,729Total
                Current Liabilities
            
            
            2,398,838
            
            
            1,746,035Convertible
                debentures(net of debt discount $ 4,324,341 and $758,171,
                respectively)
            
            
            539,578
            
            
            241,829Detachable
                warrants
            
            
            1,654,336
            
            
            878,708Non
                employee stock options
            
            
            9,548
            
            
            104,483Conversion
                option on convertible debentures
            
            
            4,400,688
            
            
            891,892Conversion
                option on series A convertible preferred stock
            
            
            125,585
            
            
            602,387Conversion
                option on series B convertible preferred stock
            
            
            67,096
            
            
            251,293Accrued
                settlement with former officers
            
            
            195,000
            
            
            435,000Total
                Long Term Liabilities
            
            
            6,991,831
            
            
            3,405,592Total
                Liabilities
            
            
            9,390,669
            
            
            5,151,627COMMITMENTS
              AND CONTINGENCIESSTOCKHOLDERS’
                DEFICIENCYSeries
                A Convertible preferred stock, $.01 par value, 3,000,000 shares
                authorized; 1,851,423 and 1,550,000 shares issued and outstanding,
                respectively, liquidation preference $1,851,423 and $1,550,000,
                respectively
            
            
            18,514
            
            
            15,500Series
                B Convertible preferred stock, $.01 par value, 7,000,000 shares
                authorized; 1,333,432 and 1,293,202 shares issued and outstanding,
                respectively, liquidation preference $666,716 and $646,601,
                respectively
            
            
            13,335
            
            
            12,932Common
                stock, $.001 par value; 200,000,000 shares authorized; 33,767,972
                issued
                and 31,090,972 outstanding in 2006 and 33,072,772 shares issued and
                30,395,772 outstanding in 2005 respectively
            
            
            33,767
            
            
            33,073Additional
                paid-in capital
            
            
            19,158,556
            
            
            18,848,900Deficit
                accumulated during the development stage
            
            
            (26,401,475
            )
            
            (22,317,969
            )Treasury
                stock, at cost, 2,677,000 shares issued
            
            
            (2,677
            )
            
            (2,677
            )Total
                Stockholders’ Deficiency
            
            
            (7,179,980
            )
            
            (3,410,241
            )TOTAL
                LIABILITIES ANDSTOCKHOLDERS’
                DEFICIENCY
            
            $
            2,210,689
            
            $
            1,741,386




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




F-3


Advanced
                BioPhotonics Inc.
              (A
                Development Stage Enterprise)
              
              STATEMENTS
                OF OPERATIONS




For
                  the Years Ended
                December
                  31,
              
              Cumulative
                  For the Period From February 7, 1997 (inception) through December
                  31,2006
              
              2005
              
              2006DEVELOPMENT
                  REVENUES
              
              $
              —
              
              $
              —
              
              $
              69,800DEVELOPMENT
                  COSTS
              
              
              —
              
              
              —
              
              
              20,000GROSS
                  PROFIT
              
              
              —
              
              
              —
              
              
              49,800OPERATING
                  EXPENSESResearch
                  and development
              
              
              1,166,403
              
              
              1,898,015
              
              
              9,885,626Selling,
                  general and administrative
              
              
              2,528,124
              
              
              3,538,032
              
              
              12,205,264Related
                  party legal expense
              
              
              —
              
              
              —
              
              
              544,881Write-off
                  of public offering costs
              
              
              —
              
              
              —
              
              
              501,992TOTAL
                  OPERATING EXPENSES
              
              
              3,694,527
              
              
              5,436,047
              
              
              23,137,763OPERATING
                  LOSS
              
              
              (3,694,527
              )
              
              (5,436,047
              )
              
              (23,087,963
              )OTHER
                  (INCOME) EXPENSEChange
                  in fair value of non employee stock options, warrants and conversion
                  options
              
              
              (584,006
              )
              
              323,189
              
              
              (260,817
              )Registration
                  rights penalties
              
              
              536,333
              
              
              —
              
              
              536,333Interest
                  and other expenses, net
              
              
              436,652
              
              
              22,257
              
              
              1,456,489NET
                  LOSS
              
              
              (4,083,506
              )
              
              (5,781,493
              )
              
              (24,819,968
              )Series
                  A Convertible Preferred Stock beneficial conversion
                  feature
              
              
              —
              
              
              703,128
              
              
              1,161,249Series
                  B Convertible Preferred Stock beneficial conversion
                  feature
              
              
              —
              
              
              420,258
              
              
              420,258Deemed
                  dividend on issuance of additional Series A Convertible Preferred
                  Stock
                  Warrants
              
              
              —
              
              
              449,500
              
              
              449,500Accumulated
                  Dividends on Series A Convertible Preferred Stock
              
              
              77,143
              
              
              64,583
              
              
              141,726Accumulated
                  Dividends on Series B Convertible Preferred Stock
              
              
              50,081
              
              
              17,614
              
              
              67,695NET
                  LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS-BASIC AND DILUTED
              
              $
              (4,210,730
              )
              $
              (7,436,576
              )
              $
              (27,060,396
              )Basic
                  and diluted net loss per share
              
              $
              (0.14
              )
              $
              (0.25
              )Weighted
                  average number of shares outstanding
              
              
              30,757,104
              
              
              30,107,408





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





F-4


Advanced
                BioPhotonics Inc.
              (A
                Development Stage Enterprise)
              
              STATEMENT
                OF STOCKHOLDERS’ (DEFICIENCY) / EQUITY
              For
                the Period February 7, 1997 (Inception) Through December 31,
                2006




DeficitAccumulatedSeries
                    A
                
                Series
                    B
                
                
                
                DuringCommon
                
                Treasury
                
                Preferred
                
                Preferred
                
                Additional
                
                the
                
                StockStock
                
                Stock
                
                Stock
                
                Stock
                
                Paid-in-
                
                Development
                
                SubscriptionShares
                
                Amount
                
                Shares
                
                Amount
                
                Shares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Stage
                
                Receivable
                
                TotalIssuance
                    of common stock to founders
                
                
                10,301,259
                
                $
                10,301
                
                
                —
                
                
                —
                
                
                —
                
                $
                —
                
                
                —
                
                
                —
                
                $
                6,419
                
                $
                —
                
                $
                (15,070
                )
                $
                1,650Sale
                      of common stock at $.55 per share,net
                    of expenses of $35,164
                
                
                361,437
                
                
                361
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                164,469
                
                
                —
                
                
                —
                
                
                164,830Issuance
                      of common stock warrants torelated
                    party for legal services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                75,000
                
                
                —
                
                
                —
                
                
                75,000Sale
                    of common stock warrants to related party
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                40,000
                
                
                —
                
                
                (30,000
                )
                
                10,000Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (168,516
                )
                
                —
                
                
                (168,516
                )Balance
                    at December 31, 1997
                
                
                10,662,696
                
                
                10,662
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                285,888
                
                
                (168,516
                )
                
                (45,070
                )
                
                82,964Issuance
                    of common stock to founders
                
                
                2,710,858
                
                
                2,711
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,689
                
                
                —
                
                
                —
                
                
                4,400Sale
                      of common stock at $.55 per share,net
                    of expenses of $62,900
                
                
                885,539
                
                
                886
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                426,209
                
                
                —
                
                
                —
                
                
                427,095Issuance
                      of common stock for researchand
                    development
                
                
                271,086
                
                
                271
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                149,729
                
                
                —
                
                
                —
                
                
                150,000Issuance
                      of common stock warrants torelated
                    party for legal services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                20,000
                
                
                —
                
                
                —
                
                
                20,000Cash
                    received from sale of common stock warrant
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                30,000
                
                
                30,000Issuance
                      of common stock warrants inconnection
                    with sale of bridge notes
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                329,625
                
                
                —
                
                
                —
                
                
                329,625Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,594,054
                )
                
                —
                
                
                (1,594,054
                )Balance
                    at December 31, 1998
                
                
                14,530,179
                
                
                14,530
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,213,140
                
                
                (1,762,570
                )
                
                (15,070
                )
                
                (549,970
                )Conversion
                    of bridge notes into common stock
                
                
                1,433,015
                
                
                1,433
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                789,192
                
                
                —
                
                
                —
                
                
                790,625Issuance
                      of common stock for researchand
                    development
                
                
                135,543
                
                
                136
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                74,864
                
                
                —
                
                
                —
                
                
                75,000Sale
                    of common stock at $1.14 per share
                
                
                945,282
                
                
                945
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,073,055
                
                
                —
                
                
                —
                
                
                1,074,000Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,547,973
                )
                
                —
                
                
                (1,547,973
                )Balance
                    at December 31, 1999
                
                
                17,044,019
                
                $
                17,044
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                $
                3,150,251
                
                $
                (3,310,543
                )
                $
                (15,070
                )
                $
                (158,318
                )


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





F-5


Advanced
                  BioPhotonics Inc.(A
                  Development Stage Enterprise)STATEMENT
                  OF STOCKHOLDERS' EQUITY (DEFICIENCY), ContinuedFor
                  the period from February 7, 1997 (inception) through December
                  31,2006
  DeficitAccumulatedDuringCommon
              
              Treasury
              
              Series
                  A
              
              Series
                  B
              
              Additional
              
              the
              
              StockStock
              
              Stock
              
              Preferred
                  Stock
              
              Preferred
                  Stock
              
              Paid-in-
              
              Development
              
              SubscriptionShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Stage
              
              Receivable
              
              TotalIssuance
                    of common stock for researchanddevelopment
              
              
              135,543
              
              $
              136
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              $
              74,864
              
              $
              —
              
              $
              —
              
              $
              75,000Issuance
                    of common stock forservices
                  rendered
              
              
              8,810
              
              
              9
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              10,001
              
              
              —
              
              
              —
              
              
              10,010Sale
                    of common stock at $1.14 and $1.38 pershare
                    for691,269
                    and 924,156shares,
                    respectively
              
              
              1,615,425
              
              
              1,615
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,058,786
              
              
              —
              
              
              —
              
              
              2,060,401——Issuance
                    of stock options and warrantsfor
                    services rendered
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              51,357
              
              
              —
              
              
              —
              
              
              51,357Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,446,203
              )
              
              —
              
              
              (1,446,203
              )Balance
                  at December 31, 2000
              
              
              18,803,797
              
              
              18,804
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,345,259
              
              
              (4,756,746
              )
              
              (15,070
              )
              
              592,247Issuance
                    of common stock forservices
                  rendered
              
              
              12,322
              
              
              12
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              29,988
              
              
              —
              
              
              —
              
              
              30,000Sale
                  of common stock at $2.44 per share
              
              
              164,294
              
              
              164
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              399,836
              
              
              —
              
              
              —
              
              
              400,000Issuance
                  of stock options and warrants for
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —services
                  rendered
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              21,012
              
              
              —
              
              
              —
              
              
              21,012—Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,675,158
              )
              
              —
              
              
              (1,675,158
              )Balance
                  at December 31, 2001
              
              
              18,980,413
              
              
              18,980
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,796,095
              
              
              (6,431,904
              )
              
              (15,070
              )
              
              (631,899
              )Issuance
                  of common stock inaccordance
                  with anti-dilution provisions
              
              
              164,294
              
              
              164
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (164
              )
              
              —
              
              
              —
              
              
              —Sale
                  of common stock at $1.22 and $.97 pershare
                  for 102,684 and 385,065 shares, respectively
              
              
              487,749
              
              
              488
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              499,512
              
              
              —
              
              
              —
              
              
              500,000Issuance
                  of stock options and warrantsfor
                  services rendered
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              595,188
              
              
              —
              
              
              —
              
              
              595,188Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,511,997
              )
              
              —
              
              
              (1,511,997
              )Balance
                  at December 31, 2002
              
              
              19,632,456
              
              
              19,632
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              6,890,631
              
              
              (7,943,901
              )
              
              (15,070
              )
              
              (1,048,708
              )
  F-6
 Advanced
                    BioPhotonics Inc.(A
                    Development Stage Enterprise)STATEMENT
                    OF STOCKHOLDERS' EQUITY (DEFICIENCY), ContinuedFor
                    the period from February 7, 1997 (inception) through December
                    31,2006
 DeficitAccumulatedDuringCommon
                    
                    Treasury
                    
                    Series
                        A
                    
                    Series
                        B
                    
                    Additional
                    
                    the
                    
                    StockStock
                    
                    Stock
                    
                    Preferred
                        Stock
                    
                    Preferred
                        Stock
                    
                    Paid-in-
                    
                    Development
                    
                    SubscriptionShares
                    
                    Amount
                    
                    Shares
                    
                    Amount
                    
                    Shares
                    
                    Amount
                    
                    Shares
                    
                    Amount
                    
                    Capital
                    
                    Stage
                    
                    Receivable
                    
                    Total
 Elimination
                  of subscription receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (15,070
              )
              
              
              
              
              15,070
              
              
              —Sale
                  of common stock at $.97 per share
              
              
              1,317,849
              
              
              1,318
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,282,084
              
              
              —
              
              
              —
              
              
              1,283,402Issuance
                  of stock options and warrantsfor
                  services rendered
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              691,377
              
              
              
              
              
              
              
              
              691,377Issuance
                  of common stock in accordance with
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —antidilution
                  provisions
              
              
              107,821
              
              
              108
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (108
              )
              
              
              
              
              
              
              
              ——Exercise
                  of warrants
              
              
              480,274
              
              
              480
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (480
              )
              
              
              
              
              
              
              
              —Issuance
                  of common shares to shareholders of company acquired in reverse
                  acquisition
              
              
              1,133,600
              
              
              1,134
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,134
              )
              
              
              
              
              
              
              
              —Net
                  assets acquired in reverse acquistion
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              20,584
              
              
              
              
              
              
              
              
              20,584Sale
                  of common stock for cash at $1.375 per share, net
              
              
              5,486,027
              
              
              5,486
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              6,702,924
              
              
              
              
              
              
              
              
              6,708,410Conversion
                  of Bridge Loan at $1.375 per share
              
              
              200,000
              
              
              200
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              274,800
              
              
              
              
              
              
              
              
              275,000Issuance
                  of common stock for offering services
              
              
              1,212,073
              
              
              1,212
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,212
              )
              
              
              
              
              
              
              
              —Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,375,919
              )
              
              —
              
              
              (2,375,919
              )Balance
                  at December 31, 2003
              
              
              29,570,100
              
              $
              29,570
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              $
              15,844,396
              
              $
              (10,319,820
              )
              $
              —
              
              $
              5,554,146Issuance
                  of stock options and warrantsfor
                  services rendered
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              53,156
              
              
              
              
              
              
              
              
              53,156Issuance
                  of stock granted for servicesrendered
              
              
              15,000
              
              
              15
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              43,485
              
              
              
              
              
              
              
              
              43,500Sale
                  of preferred stock at $1.00 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,550,000
              
              
              15,500
              
              
              —
              
              
              —
              
              
              1,534,500
              
              
              
              
              
              
              
              
              1,550,000Seriers
                  A Convertible
                  Preferred Stockbeneficial
                  conversion feature
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              458,121
              
              
              (458,121
              )
              
              
              
              
              -Costs
                  incurred asssociated with sale of stock andreverse
                  acquisition
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (101,711
              )
              
              
              
              
              
              
              
              (101,711
              )Costs
                  incurred asssociated with sale of Series Apreferred
                  stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (31,072
              )
              
              
              
              
              
              
              
              (31,072
              )Exercise
                  of options
              
              
              76,101
              
              
              76
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              41,924
              
              
              
              
              
              
              
              
              42,000Exercise
                  of options (cashless)
              
              
              27,388
              
              
              27
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (27
              )
              
              
              
              
              
              
              
              -Adjustment
                  of Sale of common stock for cash at $1.375 per share, net
                  (Unaudited)
              
              
              7,300
              
              
              7
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (7
              )Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,635,149
              )
              
              
              
              
              (4,635,149
              )—
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Balance
                  at December 31, 2004
              
              
              29,695,889
              
              
              29,695
              
              
              —
              
              
              —
              
              
              1,550,000
              
              
              15,500
              
              
              —
              
              
              —
              
              
              17,842,765
              
              
              (15,413,090
              )
              
              —
              
              
              2,474,870
  F-7
 Advanced
                    BioPhotonics Inc.(A
                    Development Stage Enterprise)STATEMENT
                    OF STOCKHOLDERS' EQUITY (DEFICIENCY), ContinuedFor
                    the period from February 7, 1997 (inception) through December
                    31,2006
 DeficitAccumulatedDuringCommon
                  
                  Treasury
                  
                  Series
                      A
                  
                  Series
                      B
                  
                  Additional
                  
                  the
                  
                  StockStock
                  
                  Stock
                  
                  Preferred
                      Stock
                  
                  Preferred
                      Stock
                  
                  Paid-in-
                  
                  Development
                  
                  SubscriptionShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Capital
                  
                  Stage
                  
                  Receivable
                  
                  Total
 Exercise
                  of options
              
              
              5,218
              
              
              6
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,875
              
              
              —
              
              
              —
              
              
              2,881Issuance
                  of common stock for
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —services
                  rendered
              
              
              580,000
              
              
              580
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              409,920
              
              
              —
              
              
              —
              
              
              410,500Issuance
                  of warrants for services rendered
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              600,000
              
              
              —
              
              
              —
              
              
              600,000Amortization
                  of deferred stock compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              85,096
              
              
              —
              
              
              —
              
              
              85,096Preferred
                  stock dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —Sale
                  of Series B preferred stock at $0.50 per share
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,407,867
              
              
              14079
              
              
              689,854
              
              
              —
              
              
              —
              
              
              703,933Seriers
                  B Convertible Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —beneficial
                  conversion feature
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              420,258
              
              
              (420,258
              )
              
              —
              
              
              —Seriers
                  A Convertible Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —beneficial
                  conversion feature
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              703,128
              
              
              (703,128
              )
              
              
              
              
              —Costs
                  incurred asssociated with sale of Series B
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —preferred
                  stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (212,245
              )
              
              
              
              
              
              
              
              (212,245
              )Conversion
                  of Seriers B Convertible Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —to
                  common stock
              
              
              114,665
              
              
              115
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (114,665
              )
              
              (1,147
              )
              
              1,032
              
              
              —
              
              
              —
              
              
              —Issuance
                  of Treasury Stock
              
              
              2,677,000
              
              
              2,677
              
              
              (2,677,000
              )
              
              (2,677
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              —Series
                  A Convertible Preferred Stock issued as in-kind dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (62,000
              )
              
              —
              
              
              
              
              
              (62,000
              )Series
                  B Convertible Preferred Stock issued as in-kind dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,729
              )
              
              
              
              
              
              
              
              (15,729
              )Deemed
                  Dividend
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (449,500
              )
              
              0
              
              
              
              
              
              (449,500
              )Reclass
                  conversion option- Series A convertiblepreferred
                  stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (586,182
              )
              
              
              
              
              
              
              
              (586,182
              )Reclass
                  conversion option- Series B convertible
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —preferred
                  stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (244,533
              )
              
              
              
              
              
              
              
              (244,533
              )Reclass
                  anti dilution warrants to liabilty
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              449,500
              
              
              
              
              
              
              
              
              449,500Reclass
                  non-employee options to liability
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (104,927
              )
              
              
              
              
              
              
              
              (104,927
              )Reclass
                  detachable warrants to liability
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (636,412
              )
              
              
              
              
              
              
              
              (636,412
              )Costs
                  incurred asssociated with convertible note financing
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (44,000
              )
              
              
              
              
              
              
              
              (44,000
              )—Net
                  Loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,781,493
              )
              
              
              
              
              (5,781,493
              )Balance
                  at December 31, 2005
              
              
              33,072,772
              
              
              33,073
              
              
              (2,677,000
              )
              
              (2,677
              )
              
              1,550,000
              
              
              15,500
              
              
              1,293,202
              
              
              12,932
              
              
              18,848,900
              
              
              (22,317,969
              )
              
              —
              
              
              (3,410,241
              )Issuance
                  of dividends on series A ConvertiblePreferred
                  Stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              301,423
              
              
              3,014
              
              
              
              
              
              
              
              
              (3,014
              )
              
              —
              
              
              —
              
              
              —Issuance
                  of dividends on series B ConvertiblePreferred
                  Stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              76,467
              
              
              765
              
              
              (765
              )
              
              —
              
              
              —
              
              
              —Stock
                  option compensation expense
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              336,549
              
              
              —
              
              
              —
              
              
              336,549Issuance
                  of common stock forservices
                  rendered
              
              
              337,000
              
              
              337
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              63,693
              
              
              —
              
              
              —
              
              
              64,030Conversion
                  of convertible debenture to common stock
              
              
              307,831
              
              
              307
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              10,774
              
              
              —
              
              
              —
              
              
              11,081Reclass
                  conversion option of convertible debentureto
                  equity
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              15,084
              
              
              —
              
              
              —
              
              
              15,084Conversion
                  of Seriers B Convertible Preferred Stockto
                  common stock
              
              
              50369
              
              
              50
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (36,237
              )
              
              (362
              )
              
              312
              
              
              —
              
              
              —
              
              
              —Reclass
                  conversion option- Series B convertiblepreferred
                  stock to equity
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              9158
              
              
              —
              
              
              —
              
              
              9,158Series
                  A Convertible Preferred Stock issued as in-kind dividend
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (74,057
              )
              
              —
              
              
              —
              
              
              (74,057
              )Series
                  B Convertible Preferred Stock issued as in-kind dividend
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (48,078
              )
              
              —
              
              
              —
              
              
              (48,078
              )Net
                  Loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,083,506
              )
              
              —
              
              
              (4,083,506
              )Balance
                  at December 31, 2006
              
              
              33,767,972
              
              
              33,767
              
              
              (2,677,000
              )
              
              (2,677
              )
              
              1,851,423
              
              
              18,514
              
              
              1,333,432
              
              
              13,335
              
              
              19,158,556
              
              
              (26,401,475
              )
              
              —
              
              
              (7,179,980
              )






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




F-8





Advanced
                BioPhotonics Inc.
              (A
                Development Stage Enterprise)
              
              STATEMENTS
                OF CASH FLOWS




For
                  the Years Ended
                December
                  31,
              
              Cumulative
                For
                  the Period
                from
                  February 7, 1997 (inception) through
                December
                  31,2006
              
              2005
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (4,083,506
              )
              $
              (5,781,493
              )
              $
              (24,819,968
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              84,008
              
              
              133,338
              
              
              980,544Loss
                  on disposal of net assets
              
              
              —
              
              
              —
              
              
              20,584Unrealized
                  loss from foreign currency transactions
              
              
              —
              
              
              —
              
              
              19,271Warrants
                  issued to related party for legal services
              
              
              —
              
              
              —
              
              
              95,000Warrants
                  and stock options compensation expense
              
              
              336,549
              
              
              685,096
              
              
              2,517,245Issuance
                  of common stock for services provided
              
              
              64,030
              
              
              410,500
              
              
              774,530Amortization
                  of original issue discount
              
              
              —
              
              
              —
              
              
              329,625Amortization
                  of deferred financing costs
              
              
              200,546
              
              
              9,607
              
              
              398,278Amortization
                  of debt discount on convertible debentures
              
              
              218,031
              
              
              14,779
              
              
              232,810Write
                  off of deferred offering costs
              
              
              —
              
              
              37,000
              
              
              37,000Change
                  in fair value of non-employee stock options, warrants and conversion
                  options
              
              
              (584,006
              )
              
              323,189
              
              
              (260,817
              )Changes
                  in operating assets and liabilities:Prepaid
                  expenses and other current assets
              
              
              163,743
              
              
              169,617
              
              
              318,835Other
                  assets
              
              
              (5,400
              )
              
              8,038
              
              
              (149,307
              )Accounts
                  payable and accrued expenses
              
              
              136,032
              
              
              101,671
              
              
              915,284Professional
                  fees payable
              
              
              (8,190
              )
              
              83,109
              
              
              74,919Accrued
                  license fees
              
              
              (228,500
              )
              
              323,000
              
              
              94,500Accrued
                  interest payable
              
              
              257,797
              
              
              19,665
              
              
              277,462Accrrued
                  employee compensation
              
              
              116,668
              
              
              —
              
              
              116,668Accrued
                  registration rights penalties
              
              
              536,333
              
              
              —
              
              
              536,333Accrued
                  settlement with former officers
              
              
              (294,632
              )
              
              (46,923
              )
              
              645,000NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (3,090,497
              )
              
              (3,509,807
              )
              
              (16,846,204
              )CASH
                  FLOWS USED IN INVESTINGACTIVITIESPurchases
                  of property and equipment
              
              
              (60,704
              )
              
              (165,163
              )
              
              (1,294,809
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from (costs of) issuance of common stock
              
              
              —
              
              
              —
              
              
              12,522,477




F-9




For
                the Years Ended
              December
                31,
            
            Cumulative
              For
                the Period
              from
                February 7, 1997 (inception) through
              December
                31,2006
            
            2005
            
            2006Net
                proceeds from issuance of Series A preferred stock
            
            
            —
            
            
            —
            
            
            1,518,928Net
                proceeds from issuance of Series B preferred stock
            
            
            —
            
            
            491,688
            
            
            491,688Proceeds
                from issuance of warrants
            
            
            —
            
            
            —
            
            
            40,000Proceeds
                from options exercised
            
            
            —
            
            
            2,880
            
            
            44,880Issuance
                of bridge note payable
            
            
            —
            
            
            —
            
            
            1,025,000Payment
                of deferred financing costs
            
            
            (374,654
            )
            
            (65,000
            )
            
            (587,154
            )Proceeds
                from convertible debenture, net
            
            
            3,740,000
            
            
            895,000
            
            
            4,635,000Repayment
                of notes payable
            
            
            (232,447
            )
            
            (184,947
            )
            
            (699,745
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            3,132,899
            
            
            1,139,621
            
            
            18,991,074NET
                (DECREASE) INCREASE IN CASH
            
            
            (18,302
            )
            
            (2,535,349
            )
            
            850,061CASH
                AND CASH EQUIVALENTS -Beginning
            
            
            868,363
            
            
            3,403,712
            
            
            —CASH
                AND CASH EQUIVALENTS —Ending
            
            $
            850,061
            
            $
            868,363
            
            $
            850,061SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the periods for:Interest
            
            $
            6,501
            
            $
            5,457
            
            $
            975,996Income
                Taxes
            
            $
            —
            
            $
            —
            
            $
            4,509Non
                cash investing and financing activities:Conversion
                of bridge notes
            
            $
            —
            
            $
            —
            
            $
            1,065,625Conversion
                of accounts payable to notes payable
            
            $
            —
            
            $
            —
            
            $
            237,861Insurance
                premiums financed using a note
            
            $
            199,836
            
            
            171,576
            
            $
            745,247Cashless
                exercise of stock options resulting the issuance of 27,399 shares
                of
                common stock.
            
            $
            —
            
            $
            —
            
            $
            27Issuance
                of collateral shares in Company’s name
            
            $
            —
            
            $
            2,677
            
            $
            2,677Beneficial
                conversion charge attributable to Series A preferred stock
            
            $
            —
            
            $
            1,161,249
            
            $
            1,161,249Beneficial
                conversion charge attributable to Series B preferred stock
            
            $
            —
            
            $
            420,258
            
            $
            420,258Deemed
                dividend onissuance of warrants to series A preferred
                stockholders
            
            $
            —
            
            $
            449,500
            
            $
            449,500Dividends
                accrued on preferred stock
            
            $
            122,135
            
            $
            77,729
            
            $
            199,864Settlement
                of accrued dividend by issuance of preferred stock
            
            $
            77,729
            
            
            —
            
            $
            77,729




F-10




For
                the Years Ended
              December
                31,
            
            Cumulative
              For
                the Period
              from
                February 7, 1997 (inception) through
              December
                31,2006
            
            2005
            
            2006Recovery
                of Trilogy warrants
            
            $
            —
            
            $
            44,000
            
            $
            44,000Conversion
                option liability on the convertible debenture
            
            $
            3,488,980
            
            $
            612,903
            
            $
            4,101,883Reclassification
                of conversion option liability on convertible preferred
                stock
            
            $
            (9,158
            )
            $
            830,715
            
            $
            821,557Reclassification
                of non-employee stock option
            
            
            —
            
            $
            104,927
            
            $
            104,927Detachable
                warrants liability —convertible debenture
            
            $
            5,371,733
            
            $
            160,047
            
            $
            5,531,780Reclassification
                of detachable warrants
            
            
            —
            
            $
            636,412
            
            $
            636,412Warrants
                issued to settle license fee
            
            $
            94,500
            
            
            —
            
            $
            94,500Detachable
                warrants issued as deferred financing costs
            
            $
            180,309
            
            $
            60,570
            
            $
            240,879Reclassification
                of conversion option on debenture to equity
            
            $
            (15,084
            )
            
            —
            
            $
            (
                15,084
            )Conversion
                of debenture to common stock
            
            $
            11,082
            
            
            —
            
            $
            11,082





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




F-11




Advanced
      BioPhotonics Inc.


(A
      Development Stage Enterprise)




Notes
      to
      the Financial Statements





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® System (“System”).




In
      December 1999, the Company received FDA Section 510(k) market clearance, which
      permits marketing, throughout the United States, of the BioScanIR ® 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 ® System
      throughout the European Union (“EU”). The
      CE
      marking (an acronym for the French "Conformite Europeenne") certifies that
      a
      product has met EU health, safety, and environmental requirements, which ensure
      consumer safety. The
      Company believes that it will generate revenues from the sale of licenses 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. To secure a CPT code which is issued by the American
      Medical Association, the Company would need to build a history of claims
      submissions using the APC for the use of its system over a three year period
      beginning April 2005, in order to demonstrate the viability of the technology.
      The service associated with the use of the BioScanIR ® system
      has been assigned APC Code 1502 and HCPCS Code C9723. At December 31, 2006,
      the
      Company had not submitted any claims using the APC code.




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.




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




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.




F-12




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 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 ® 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, 2006 of $26,401,475 and cash flows
      used
      in operating activities during the development stage of $16,846,204. 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.




On
      December 14, 2004, the Company received gross proceeds of $1,550,000 in a
      completed a private placement of 1,550,000 shares of its Series A convertible
      preferred stock. (See Note 8 Series A Convertible Preferred Stock) The Company
      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. 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. 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. 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 could receive an additional $1,395,000 if all of the warrants issued
      to
      the investors in the December 2004 private placement are exercised. There can
      be
      no assurance as to how many warrants will be exercised.




F-13




On
      August
      10, 2005, the Company consummated a subscription rights offering to existing
      stockholders of the Company. (See Note 8, Proprietary Rights
      Offering ) The
      Company distributed to holders of its common stock transferable subscription
      rights to purchase shares of its newly-created series B convertible preferred
      stock. 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. The warrants have an exercise price of $0.75 per
      share and will expire August 10, 2010.  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.





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. The agreement expired on November 7,
      2006.




On
      November 14, 2005, the Company entered into a Securities Purchase Agreement
      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) warrants to purchase 4,000,000
      shares of our common stock. (See Note 7, Securities Purchase Agreement.) On
      September 5, 2006, the Company entered into an amendment to the Securities
      Purchase Agreement to reduce the sale to an aggregate of $3,100,000 principal
      amount of secured convertible notes and an aggregate of 3,100,000 warrants
      to
      purchase shares of common stock. At September 30, 2006, the Purchasers have
      provided the $3,100,000 in proceeds to the Company.





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. Interest
      is to be paid quarterly. Any interest not paid when due bear interest of 15%
      per
      annum from the date due until the same is paid. 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
      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
      amendments on February 13, 2006, April 7, 2006, June 5, 2006 and June 30, 2006.
      On August 17, 2006, the Company withdrew the Registration Statement. The Company
      filed a new registration statement on September 13, 2006, with amendments filed
      December 8, 2006, January 11, 2007, February 8, 2007 and February 13, 2007
      in
      accordance with the September 5, 2006 amended Securities Purchase Agreement.
      The
      SEC declared the registration statement effective February 13, 2007. Because
      the
      registration statement had not been declared effective within 120 days from
      November 14, 2005, the Company accrued liquidated damages to the Purchasers
      in
      the amount of 2% per month on the outstanding principal amount of the
      convertible debentures in shares of common stock 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. As
      of
      December 31, 2006, the Company has accrued approximately $536,000 in liquidated
      damages.




F-14




The
      warrants are exercisable until five years from the date of issuance at a
      purchase price of $0.65 per share. On November 15, 2005, the Purchasers received
      1,000,000 warrants, on January 4, 2006 the Purchasers received 1,000,000
      warrants, on May 10, 2006 the Purchasers received 600,000 warrants and on July
      24, 2006 the Purchasers received 500,000 warrants. There can be no assurance
      to
      how many, if any, of these warrants will be exercised. 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.




Pursuant
      to the amended Finder's Fee Agreement, between Axiom and the Company, Axiom
      earned a finders fee of $201,500 in cash of which $65,000 was paid on November
      16, 2005, $65,000 was paid on January 6, 2006, $39,000 was paid on May 12,
      2006
      and $32,500 was paid on August 1, 2006. In addition, Axiom has received 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,
      395,310 were granted on January 4, 2006, 173,580 were granted on May 10, 2006
      and 133,776 were granted on July 24, 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. Warrants will be issued pro rata upon each investment tranche. The
      initial market price was $0.211, $0.202, $0.277 and $0.299 for the 1st tranche,
      2nd tranche, 1 st advance
      and the final advance of the 3 rd tranche,
      respectively.




On
      September 12, 2006, the Company entered into a Securities Purchase Agreement
      with the Purchasers for the sale of (i) $775,000 in secured convertible notes
      and (ii) warrants to purchase 20,000,000 shares of the Company’s common stock.




The
      Purchasers provided the Company with the funds as follows:





·
            $275,000
                was disbursed on September 12, 2006;




·
            $250,000
                was disbursed on October 4, 2006 and




·
            $250,000
                was disbursed on November 6, 2006.




The
      secured convertible notes bear interest at 8%, unless our common stock is
      greater than $0.3125 per share for each trading day of a month, in which event
      no interest is payable during such month. Any
      interest not paid when due bear interest of 15% per annum from the date due
      until the same is paid. 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. At the Company’s option, in any month
      where the current stock price is below the Initial Market Price, which is $0.30,
      the Company can pay the outstanding principal and interest due for that month
      and this will stay any conversions for that month.





The
      full
      principal amount of the secured convertible notes is due upon a default under
      the terms of the secured convertible notes. In addition, the Company granted
      the
      Purchasers a security interest in substantially all of the Company’s assets and
      intellectual property. The Company is required to file a registration statement
      with the Securities and Exchange Commission within 30 days of receipt
      of written demand of the Purchasers , **** which
      will include the common stock underlying the secured convertible notes, and
      the
      warrants. If the registration statement is not declared effective within 120
      days from the date of filing, the Company is required to pay liquidated damages
      to the Purchasers. In the event that the Company breaches any representation
      or
      warranty in the Securities Purchase Agreement, the Company is required to pay
      liquidated damages in shares of common stock or cash, at it’s election, an
      amount equal to 2% of the outstanding principal amount of the secured
      convertible notes per month plus accrued and unpaid interest.




F-15





The
      warrants are exercisable until seven years from the date of issuance at a
      purchase price of $0.30 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.





Upon
      an
      issuance of shares of common stock below the market price, the exercise price
      of
      the warrants will be reduced accordingly 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
      market price is determined by averaging the last reported sale prices for the
      Company shares of common stock for the five trading days immediately preceding
      such issuance as set forth on the Company’s principal trading market. The
      exercise price shall be determined by multiplying the exercise price in effect
      immediately prior to the dilutive issuance by a fraction. The numerator of
      the
      fraction is equal to the sum of the number of shares outstanding immediately
      prior to the offering plus the quotient of the amount of consideration received
      in connection with the issuance divided by the market price in effect
      immediately prior to the issuance. The denominator of such issuance shall be
      equal to the number of shares outstanding after the dilutive issuance.





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 takes such other action as would
      otherwise result in dilution of the selling stockholder's position.





The
      Purchasers have agreed to restrict their ability to convert their secured
      convertible notes or exercise their warrants and receive shares of 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.





Pursuant
      to the amended Finder's Fee Agreement, between Axiom and the Company, Axiom
      earned a finders fee of $50,375 in cash of which $17,875 was paid on September
      18, 2006, $16,250 was paid on October 19, 2006 and $16,250 was paid on November
      27, 2006. In addition, Axiom has received five year warrants to purchase shares
      of the Company’s common stock at an exercise price of $0.65 per share, of which
      108,216 were granted on September 12, 2006, 138,319 were granted on October
      4,
      2006 and 293,931 were granted on November 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. Warrants were issued pro rata upon each investment tranche. The
      initial market price was $0.203, $0.145 and $0.068 for the 1st tranche, 2nd
      tranche, and the final tranche, respectively.





On
      October 31, 2006, the Company entered into a new Securities Purchase Agreement
      with the Purchasers for the sale of (i) $2,000,000 in secured convertible notes;
      and (ii) warrants to purchase 40,000,000 shares of the Company’s common stock.





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





·
            $1,000,000
                was disbursed on October 31, 2006;




·
            $1,000,000
                was disbursed on February 27, 2007





The
      proceeds of the offering will be used support the Company’s commercialization
      activities for
      its BioScanIR ® System
      and for working capital.




F-16




The
      secured convertible notes bear interest at 8%, unless the Company’s common stock
      is greater than $0.10 per share for each trading day of a month, in which event
      no interest is payable during such month. Any
      interest not paid when due shall bear interest of 15% per annum from the date
      due until the same is paid. 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. At the Company’s option, in any month
      where the current stock price is below the Initial Market Price, t he
      Company can pay the outstanding principal and interest due for that month and
      this will stay any conversions for that month. The
      term **“** Initial
      Market Price” means the volume weighted average price of the Common Stock for
      the five trading days immediately preceding the closing which was
      $0.069.





The
      full
      principal amount of the secured convertible notes are 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 the Company’s assets and
      intellectual property. The Company is required to file a registration statement
      with the Securities and Exchange Commission within 30 days of receipt
      of written demand of the Purchasers ,
      which
      will include the common stock underlying the secured convertible notes, and
      the
      warrants. In the event that the Company breaches any representation or warranty
      in the Securities Purchase Agreement, the Company is required to pay liquidated
      damages in shares or cash, at the Company’s 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 seven years from the date of issuance at a
      purchase price of $0.08 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.





Upon
      an
      issuance of shares of common stock below the market price, the exercise price
      of
      the warrants will be reduced accordingly 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
      market price is determined by averaging the last reported sale prices for the
      Company’s shares of common stock for the five trading days immediately preceding
      such issuance as set forth on the Company’s principal trading market. The
      exercise price shall be determined by multiplying the exercise price in effect
      immediately prior to the dilutive issuance by a fraction. The numerator of
      the
      fraction is equal to the sum of the number of shares outstanding immediately
      prior to the offering plus the quotient of the amount of consideration received
      by us in connection with the issuance divided by the market price in effect
      immediately prior to the issuance. The denominator of such issuance shall be
      equal to the number of shares outstanding after the dilutive issuance.





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 takes such other action as would
      otherwise result in dilution of the selling stockholder's position.





The
      Purchasers have agreed to restrict their ability to convert their secured
      convertible notes or exercise their warrants and receive shares of 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.




Pursuant
      to the November 8, 2005 amended Finder's Fee Agreement, between the Company
      and
      Axiom, Axiom will earn a finders fee of $130,000 in cash in which $65,000 for
      the 1 st tranche
      has been accrued on our financial statement for the year ended December 31,
      2006
      and $65,000 will be accrued on our financial statement for the quarter ended
      March 31, 2007. 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 1,151,393 and 1,777,778 will be granted after April 9, 2007. 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 were issued pro rata upon each investment tranche. The
      initial market price was $0.069 and $0.045 for the 1st tranche and final
      tranche, respectively.




F-17





On
      November 15, 2006, the Company received a Notice of Conversion from the
      Purchasers and issued an aggregate of 307,831 shares of free-trading common
      stock pursuant to the requirements of Rule 144, as promulgated under the
      Securities Act of 1933, as amended, which represents 1% of the Company’s
      outstanding common stock. This is a partial conversion of the $3,100,000 notes
      the Company has issued to the Purchasers under the November 2005 Securities
      Purchase Agreement. The conversion price was $.036 per share for a total of
      $11,081.





From
      January 1, 2007 through April 9, 2007, the Company received Notices of
      Conversion from the Purchasers and issued 1,550,000 shares of free-trading
      common stock pursuant to the Company’s February 14, 2007 Prospectus filed
      pursuant to Rule 424(b)(3) with the Securities and Exchange Commission, relating
      to the resale by the selling shareholders (the purchasers) of up to 6,000,000
      shares of its common stock underlying a portion of the secured convertible
      notes
      in a principal amount of $3,100,000 from the November 14, 2005 Securities
      Purchase Agreement. The aggregate dollar amount for these conversions was
      $12,680.




As
      of
      December 31, 2006, the Company had cash balances and working capital deficit
      of
      $850,061 and $1,305,095, respectively, and total stockholders’ deficiency of
      $7,179,980. At April 9, 2007, the Company had approximately $969,000 in cash
      balances (unaudited).




The
      Company has committed to purchase infrared camera components from AEG
      Infrarot-Module GmbH for approximately $568,000
      (430,500 euros) as of December
      31, 2006. These components utilize Quantum
      Well Infrared Photodetectors (“QWIP”)
      technology. The Company has the exclusive license for QWIP technology from
      the
      California Institute of Technology ("Caltech") for biomedical applications.





Management
      estimates that the Company will require additional cash resources during 2007,
      based upon its current operating plan and condition. The Company anticipates
      that its cash requirements to fund these activities as well as other operating
      or investing cash requirements over the next 4 months will be greater than
      its
      current cash on hand. 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. If the Company is unable
      to obtain sufficient funds during the 2 nd quarter
      2007, the Company will further reduce the size of its organization and may
      be
      forced to reduce and/or curtail its production and operations, all of which
      could have a material adverse impact on its business prospects. In the event
      that the Company cannot raise additional capital and the Company defaults on
      the
      November 2005, September and October 2006 Securities Purchase Agreements, the
      investors could take a first priority security interest in all of its goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, chattel paper, and intellectual property pursuant to executed
      a
      Security Agreement and an Intellectual Property Security Agreement. The
      Investors have the right to take possession of the collateral, to operate the
      Company’s 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, all of which could have a material adverse impact on the Company’s
      business prospects. The Company’s success 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 ® 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
      Company does not currently have any additional off-balance sheet arrangements
      that have or are reasonably likely to have a current or future effect on its
      financial condition, changes in financial condition, revenues or expenses,
      results of operations, liquidity, capital expenditures or capital resources
      that
      are material to its stockholders.





F-18




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, fair value of stock based compensation 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, 2006 the uninsured cash balance at one bank was approximately
      $750,000.




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, September 2006 and October 2006, the Company entered into
      Securities Purchase Agreements 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 of Emerging Issues Task Force Issue No. 19 (“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 7 & 8).




F-19




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, remaining contractual life
      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 years ended December 31,
      2006 and 2005, the Company recorded a $584,006 gain and $323,289 charge
      respectively, as a result of the change in fair value of these derivative
      instruments as follows:





Year
              
              YearEnded
              
              EndedDecember
                  31, 2006
              
              December
                  31, 2005Conversion
                  option on convertible debenture (see Note 7)
              
              $
              5,185,731
              
              $
              278,889Conversion
                  option on Series A convertible preferred stock (see Note
                  8)
              
              
              (611,839
              )
              
              16,205Conversion
                  option on Series B convertible preferred stock (see Note
                  8)
              
              
              (192,080
              )
              
              6,760Detachable
                  warrants (see Note 8)
              
              
              (4,870,913
              )
              
              21,779Non
                  employee stock options (see Note 9)
              
              
              (94,905
              )
              
              (444
              )Total
                  (gain) / charge
              
              $
              (584,006
              )
              $
              323,189




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.




F-20




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.




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 ® 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 incurred a transaction loss of $671
      for
      the year ended December 31, 2006 and none for the year ended December 31, 2005.
      The Company had $19,942 resulting from foreign currency transactions included
      in
      interest and other expenses for the period from February 7, 1997 (inception)
      to
      December 31, 2006 in the accompanying financial statements.




F-21




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, 2006:Warrants
                  to purchase common stock
              
              
              49,172,719Options
                  to purchase common stock
              
              
              7,943,935Series
                  A convertible preferred stock
              
              
              10,293,912Series
                  B convertible preferred stock
              
              
              3,706,941Convertible
                  debenture:
              
              
              267,248,242338,365,749Total
                  potential common shares as of April 9, 2007:Common
                  shares issued January 1, 2007 through April 9, 2007
              
              
              1,550,000Warrants
                  to purchase common stock
              
              
              72,101,890Options
                  to purchase common stock
              
              
              7,943,935Series
                  A convertible preferred stock
              
              
              19,405,432Series
                  B convertible preferred stock
              
              
              7,692,157Convertible
                  debenture:
              
              
              1,108,188,9721,216,882,386




Stock-Based
      Compensation




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004),
“Share-Based Payment”, (“SFAS 123 (R)”), using the
      modified-prospective-transition method. As a result, the Company’s net loss
      before taxes for the year ended December 31, 2006 was $340,735 ($0.01 per share)
      lower than if it had continued to account for share-based compensation under
      the
      Accounting Principles Board (“APB”) opinion No. 25. “Accounting for Stock Issued
      to Employees” (“APB 25”). As of December 31, 2006 there was $98,302 of total
      unrecognized compensation related to stock options granted which is expected
      to
      be recognized over an approximate 2.25 year period.





Prior
      to
      January 1, 2006, the Company’s stock-based employee compensation plans were
      accounted for under the recognition and measurement provisions of APB No. 25,
      and related Interpretations, as permitted by Financial Accounting Standards
      Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,
      (“SFAS No. 123”). Except for one employee whose stock option grant had intrinsic
      value, the Company did not recognize stock-based compensation cost in its
      statement of operations for periods prior to January 1, 2006 as all other
      options granted had an exercise price equal to the market value of the
      underlying common stock on the date of grant. However, compensation expense
      was
      recognized under APB 25 for certain options granted to non-employees of the
      Company based upon the intrinsic value (the difference between the exercise
      price on the date of grant and the deemed fair value of the common
      stock.




F-22





For
      the
      year ending December 31, 2005, as permitted under SFAS No. 148, “Accounting for
      Stock-Based Compensation - Transition an Disclosure”, which was amended SFAS No.
      123, the Company elected to continue to follow intrinsic value method in
      accounting for its stock-based employee compensation arrangements as defined
      by
      APB No. 25, and related interpretations including FASB Interpretation No.44,
      “Accounting for Certain Transactions Involving Stock Compensation”, an
      interpretation of APB No.25. No stock-based employee compensation cost is
      reflected in operations, as all options granted under those plans had an
      exercise price equal to the market value of the underlying common stock on
      the
      date of grant. The following table illustrates the effect on net loss and net
      loss per share as if the Company had applied the fair value recognition
      provisions of SFAS No. 123 to stock-based employee
      compensation.




SFAS
      No.
      123R required the Company to expense stock options based on grant date fair
      value in its financial statements. In 2006, the Company recognized compensation
      expense for the stock options ratably over the vesting period. 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 2005 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:




For
                the Year Ended December 31, 2005Net
                loss attributable to common stockholders - basic and
                diluted
            
            $
            (7,436,576
            )Add:Stock
                based employee compensation expense included in net loss
            
            
            18,000Deduct:Total
                stock-based employee compensation expense determined under fair
                value-based method for all awards
            
            
            (2,912,157
            )Pro
                forma net loss attributable to common stockholders
            
            $
            (10,330,733
            )Basic
                and diluted net loss per share as reported
            
            $
            (0.25
            )Basic
                and diluted pro forma net loss per share
            
            $
            (0.34
            )





For
      the
      year ended December 31, 2005 the fair value of the Company’s common stock
      options was estimated on the date of grant using the Black-Scholes
      option-pricing model with the following assumptions: (1) expected volatility
      of
      126.14%-135.80%, (2) risk-free interest rates of 3.66%-4.18% and (3) expected
      lives of 5 - 10 years. 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 was estimated at
      $0.83.




For
      the
      year ended December 31, 2006 the fair value of the Company’s common stock
      options was estimated on the date of grant using the Black-Scholes
      option-pricing model with the following assumptions: (1) expected volatility
      of (131.12%
      - 131.47%), ,
      (2)
      risk-free interest rates of 4.68%-4.79% and (3) expected lives of (3.5
      -
      5.0 years) .
      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, 2006 was estimated at $0.26.




F-23




Impact
      of Recently Issued Accounting Standards




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. The adoption of SFAS 154 did not have a material effect 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 the Company’s financial position or results
      of operations in future periods.





In
      October 2005, the FASB issued FASB Staff Position (“FSP”) FAS 123(R)-2,
“Practical Accommodation to the Application of Grant Date as Defined in FASB
      Statement No. 123(R)”, which provides clarification of the concept of mutual
      understanding between employer and employee with respect to the grant date
      of a
      share-based payment award. This FSP provides that a mutual understanding of
      the
      key terms and conditions of an award shall be presumed to exist on the date
      the
      award is approved by management if the recipient does not have the ability
      to
      negotiate the key terms and conditions of the award and those key terms and
      conditions will be communicated to the individual recipient within a relatively
      short time period after the date of approval. This guidance was applicable
      upon
      the initial adoption of SFAS 123(R). The adoption of this pronouncement did
      not
      have an impact on the Company's financial position, results of operations,
      or
      cash flows.





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.




In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109”. This Interpretation
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return, and provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. This Interpretation is effective for fiscal years beginning after
      December 15, 2006. The Company is assessing the impact of this Interpretation
      on
      its financial statements, but does not expect it to have a material effect.




F-24





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
      157"). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements. It codifies the definitions of fair value included
      in
      other authoritative literature; clarifies and, in some cases, expands on the
      guidance for implementing fair value measurements; and increases the level
      of
      disclosure required for fair value measurements. Although SFAS 157 applies
      to
      (and amends) the provisions of existing authoritative literature, it does not,
      of itself, require any new fair value measurements, nor does it establish
      valuation standards. SFAS 157 is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years.  The Company will evaluate the impact of adopting SFAS 157
      but does not expect that it will have a material impact on the Company's
      consolidated financial position, results of operations or cash
      flows.





In
      September 2006, the staff of the Securities and Exchange Commission issued
      Staff
      Accounting Bulletin No. 108 ("SAB 108") which provides interpretive guidance
      on
      how the effects of the carryover or reversal of prior year misstatements should
      be considered in quantifying a current year misstatement. SAB 108 becomes
      effective in the first fiscal year ending after November 15, 2006.
      Adoption of SAB 108 did not have a material impact on the Company's consolidated
      financial position, results of operations or cash flows.





In
      December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2,
      Accounting for Registration Payment Arrangements. This FSP specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, Accounting for Contingencies. This FSP further clarifies that
      a
      financial instrument subject to a registration payment arrangement should be
      accounted for in accordance with other applicable GAAP without regard to the
      contingent obligation to transfer consideration pursuant to the registration
      payment arrangement. This FSP amends various authoritative literature notably
      FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
      Activities, FASB Statement No. 150, Accounting for Certain Financial Instruments
      with Characteristics of both Liabilities and Equity, and FASB Interpretation
      No.
      45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
      Indirect Guarantees of Indebtedness of Others.





This
      FSP
      is effective immediately for registration payment arrangements and the financial
      instruments subject to those arrangements that are entered into or modified
      subsequent to December 21, 2006. For registration payment arrangements and
      financial instruments subject to those arrangements that were entered into
      prior
      to December 21, 2006, the guidance in the FSP is effective for financial
      statements issued for fiscal years beginning after December 15, 2006, and
      interim periods within those fiscal years. The Company is in the process of
      determining the effect, if any, the adoption of this FSP will have on its
      consolidated financial statements.




In
      November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s
      Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF 06-6”). EITF 06-6 addresses the modification of a convertible debt
      instrument that changes the fair value of an embedded conversion option and
      the
      subsequent recognition of interest expense for the associated debt instrument
      when the modification does not result in a debt extinguishment pursuant to
      EITF
      96-19 , “Debtor’s Accounting for a Modification or Exchange of Debt
      Instruments,”. The consensus should be applied to modifications or exchanges of
      debt instruments occurring in interim or annual periods beginning after November
      29, 2006. We do not expect the adoption of EITF 06-6 to have a material impact
      on our consolidated financial position, results of operations or cash flows.




In
      November 2006, the FASB ratified EITF Issue No. 06-7, Issuer’s Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities (“EITF
      06-7”). At the time of issuance, an embedded conversion option in a convertible
      debt instrument may be required to be bifurcated from the debt instrument and
      accounted for separately by the issuer as a derivative under FAS 133, based
      on
      the application of EITF 00-19. Subsequent to the issuance of the convertible
      debt, facts may change and cause the embedded conversion option to no longer
      meet the conditions for separate accounting as a derivative instrument, such
      as
      when the bifurcated instrument meets the conditions of Issue 00-19 to be
      classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
      option previously accounted for as a derivative under FAS 133 no longer meets
      the bifurcation criteria under that standard, an issuer shall disclose a
      description of the principal changes causing the embedded conversion option
      to
      no longer require bifurcation under FAS 133 and the amount of the liability
      for
      the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
      applied to all previously bifurcated conversion options in convertible debt
      instruments that no longer meet the bifurcation criteria in FAS 133 in interim
      or annual periods beginning after December 15, 2006, regardless of whether
      the
      debt instrument was entered into prior or subsequent to the effective date
      of
      EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
      financial statements have not yet been issued. The Company is currently
      evaluating the impact of this guidance on our consolidated financial position,
      results of operations or cash flows.





F-25




In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities" (SFAS 159). Under the provisions
      of
      SFAS 159, Companies may choose to account for eligible financial instruments,
      warranties and insurance contracts at fair value on a contract-by-contract
      basis. Changes in fair value will be recognized in earnings each reporting
      period. SFAS 159 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. The Company is required to and plans to adopt the provisions of SFAS
      159
      beginning in the first quarter of 2008. The Company is currently assessing
      the
      impact of the adoption of SFAS 159.




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 because of their short nature.




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
                31,2006
            
            2005Research
                and development equipment
            
            $
            886,540
            
            $
            800,831Office
                equipment
            
            
            73,905
            
            
            73,905Furniture
                and fixtures
            
            
            26,804
            
            
            26,804Leasehold
                Improvements
            
            
            21,075
            
            
            21,0751,008,324
            
            
            922,615Less:
                accumulated depreciation andAmortization
            
            
            829,796
            
            
            745,788$
            178,528
            
            $
            176,827




F-26





Depreciation
      and amortization expenses charged to operations for the years ended December
      31,
      2006 and 2005 and for the period February 7, 1997 (inception) to December 31,
      2006 was $84,008, $133,338 and $980,544, respectively.




NOTE
      4 - Notes
      Payable




The
      Company financed its annual insurance premiums over a five month period in
      2006
      and a nine-month period in 2005 with one financing Company. The notes payable
      balances at December 31, 2006 and 2005 were $119,901 and $152,512, respectively.
      The balance as of December 31, 2006 is due in monthly installments approximating
      $40,000 including interest at the rate of 8.75 % per annum through March 2007.




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, 2006
              
              December
                  31, 2005Deferred
                  tax assets(liabilities):Net
                  operating loss carryforward
              
              $
              8,747,000
              
              $
              7,346,000Property
                  and equipment
              
              
              27,000
              
              
              25,000Accrued
                  expenses
              
              
              341,000
              
              
              412,000Stock
                  based compensation
              
              
              380,000
              
              
              267,000Valuation
                  allowance
              
              
              (9,495,000
              )
              
              (8,050,000
              )Net
                  Deferred Tax Asset
              
              $
              —
              
              $
              —





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





2019
            
            $
            2,746,0002020
            
            
            1,467,0002021
            
            
            1,688,0002022
            
            
            1,260,0002023
            
            
            1,607,0002024
            
            
            4,867,0002025
            
            
            4,731,0002026
            
            
            3,501,000$
            21,867,000





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 EndedDecember
                  31,2006
              
              2005Tax
                  provision at statutory rate
              
              
              (34
              %)
              
              (34
              %)Non
                  deductible expenses
              
              
              4
              %
              
              3
              %State
                  tax benefit
              
              
              (5
              %)
              
              (5
              %)Other
              
              
              0
              %
              
              (2
              %)Change
                  in valuation allowance for net deferred tax assets
              
              
              35
              %
              
              38
              %0
              %
              
              0
              %





F-27




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




Years
                Ended December 31,2006
            
            2005Beginning
                Balance
            
            $
            8,050,000
            
            $
            5,854,000Change
                in Allowance
            
            
            1,445,000
            
            
            2,196,000Ending
                Balance
            
            $
            9,495,000
            
            $
            8,050,000




As
      of
      December 31, 2006, the Company has net operating loss carryforwards of
      $21,867,000 available to offset future taxable income. These carryforwards
      will
      expire at various dates through 2026. 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 - Settlement
      of Officers’ Salaries




Settlement
      of officers' salaries, current and non-current, represent the settlement amounts
      for payroll deferred by the former Chief Executive Officer ("CEO") and former
      Chief Financial Officer ("CFO"), which aggregated $645,000 and $939,632 at
      December 31, 2006 and, 2005, respectively. (See Note 11, Litigation).





NOTE
      7 - Securities
      Purchase Agreement




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 the Company’s common stock. As of
      July 25, 2006, the Purchasers provided the Company $3,100,000 of the $4,000,000.
      On September 5, 2006, the Company entered into an amendment to the Securities
      Purchase Agreement to reduce the sale to an aggregate of $3,100,000 principal
      amount of secured convertible notes and an aggregate of 3,100,000 warrants
      to
      purchase shares of common stock.




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. Interest is to be paid
      quarterly. Any interest not paid when due bear interest of 15% per annum from
      the date due until the same is paid. 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 and was 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 issuable upon conversion of
      the
      notes and the number of shares issuable upon exercise of the warrants. The
      Company filed a registration statement on December 22, 2005 and an amended
      registration statement on February 13, 2006, April 7, 2006, June
      5,
      2006 and June 30, 2006 .
      The
      registration statement was withdrawn on August 17, 2006. The Company filed
      a new
      registration statement for the amended Securities Purchase Agreement on
      September 13, 2006 in which, pursuant
      to the amendment to the Registration Rights Agreement dated as of September
      5,
      2006, the selling stockholders and the Company agreed that it would register
      an
      aggregate of up to 30% of its outstanding shares of common stock underlying
      the
      secured convertible notes. The Company filed an amended registration statement
      to reduce the number of shares to 6,000,000 on December 8, 2006, January 11,
      2007 February 8, 2007 and February 13, 2007. The SEC declared the registration
      statement effective February 13, 2007.




F-28




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 Capital 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.




Since
      the
      registration statement exceeded the 120 day time requirement to be declared
      effective, the Company accrued approximately $536,000 in liquidated damages
      as
      of December 31, 2006.




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.




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. On
      January 4, 2006 in the 2 nd tranche
      of $1,000,000 of convertible notes and warrants for 1,000,000 shares of common
      stock, the fair value of the conversion option on the date of issuance of the
      notes was $851,852 and the fair value of the warrants on the date of issuance
      was $157,000. Since the fair value of the conversion option and warrant exceeded
      the face value of the convertible notes, the Company recorded a $8,852 charge
      which is included in the statement of operations in change of fair value of
      non-employee stock options, warrants and conversion options during the year
      ended December 31, 2006. The convertible note was recorded at the residual
      value
      of $0. On May 10, 2006, in the advance of the 3 rd tranche
      of $600,000 of convertible notes and warrants for 600,000 shares of common
      stock, the fair value of the conversion option on the date of issuance of the
      note was $400,000 and the fair value of the warrants on the date of issuance
      was
      $109,200. As such the convertible notes were recorded on the date of issuance
      at
      the residual value of $90,800. On July 24, 2006 in the final advance of the
      3 rd tranche
      of $500,000 of convertible notes and warrants for 500,000 shares of common
      stock, the fair value of the conversion option on the date of issuance of the
      notes was $586,957 and the fair value of the warrants on the date of issuance
      was $122,897. Since the fair value of the conversion option and warrant exceeded
      the face value of the convertible notes, the Company recorded a $209,854 charge
      which was included in the statement of operations in change of fair value of
      non-employee stock options, warrants and conversion options during the year
      ended December 31, 2006. The convertible note will be recorded at the residual
      value of $0. 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.




F-29




On
      September 12, 2006, the Company entered into a Securities Purchase Agreement
      with the Purchasers for the sale of (i) $775,000 in secured convertible notes
      and (ii) warrants to purchase 20,000,000 shares of the Company’s common stock.




The
      Purchasers provided the Company with the funds as follows:





·
            $275,000
                was disbursed on September 12, 2006;


·
            $250,000
                was disbursed on October 4, 2006 and


·
            $250,000
                was disbursed on November 6, 2006.




The
      secured convertible notes bear interest at 8%, unless the Company’s common stock
      is greater than $0.3125 per share for each trading day of a month, in which
      event no interest is payable during such month. Any
      interest not paid when due bear interest of 15% per annum from the date due
      until the same is paid. 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 which is $0.30, the Company can pay the outstanding
      principal and interest due for that month and this will stay any conversions
      for
      that month.





The
      Company is required to file a registration statement with the Securities and
      Exchange Commission within 30 days of **** receipt
      of written demand of the Purchasers ,
      which
      will include the common stock underlying the secured convertible notes, and
      the
      warrants. If the registration statement is not declared effective within 120
      days from the date of filing, the Company is required to pay liquidated damages
      to the Purchasers. In the event that the Company breaches any representation
      or
      warranty in the Securities Purchase Agreement, the Company is required to pay
      liquidated damages in shares of common stock or cash, at the Company’s 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 seven years from the date of issuance at a
      purchase price of $0.30 per share. The warrants shares carry the same
      registration rights as the shares underlying the convertible notes.




In
      connection with the closing on September 12, 2006 of the first tranche of
      $275,000 of convertible notes and warrants for 20,000,000 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
      options on the date of issuance of the notes was $207,456 for September 12,
      2006, $402,174 on October 4, 2006 and $290,541 on November 6, 2006. The fair
      value of the warrants on the date of issuance was $3,662,522. Since the fair
      value of the conversion option and warrant exceeded the face value of the
      convertible notes, the Company recorded a $3,594,978 charge which is included
      in
      the statement of operations in change of fair value of non-employee stock
      options, warrants and conversion options during the year ended December 31,
      2006. In the 2 nd and
      3 rd tranche,
      on October 4, 2006 and November 6 2006 the fair value of the conversion option
      exceeded the face value of the convertible notes. The Company recorded charges
      of $152,174 and $40,541 respectively, which was included in the statement of
      operations in change of fair value of non-employee stock options, warrants
      and
      conversion options during the year ended December 31, 2006. The convertible
      notes were recorded at the residual value of $0. 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.




F-30




On
      October 31, 2006, the Company entered into a new Securities Purchase Agreement
      with the Purchasers for the sale of (i) $2,000,000 in secured convertible notes;
      and (ii) warrants to purchase 40,000,000 shares of the Company’s common stock.




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





·
            $1,000,000
                was disbursed on October 31, 2006;


·
            $1,000,000
                was disbursed on February 27, 2007.





The
      secured convertible notes bear interest at 8%, unless the Company’s common stock
      is greater than $0.10 per share for each trading day of a month, in which event
      no interest is payable during such month. Any
      interest not paid when due shall bear interest of 15% per annum from the date
      due until the same is paid. 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, t he
      Company can pay the outstanding principal and interest due for that month and
      this will stay any conversions for that month. The
      term **“** Initial
      Market Price” means the volume weighted average price of the Common Stock for
      the five trading days immediately preceding the closing which was
      $0.069.





The
      Company is required to file a registration statement with the Securities and
      Exchange Commission within 30 days of receipt
      of written demand of the Purchasers ,
      which
      will include the common stock underlying the secured convertible notes, and
      the
      warrants. In the event that the Company breaches any representation or warranty
      in the Securities Purchase Agreement, the Company is required to pay liquidated
      damages in shares or cash, at the Company’s 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 seven years from the date of issuance at a
      purchase price of $0.08 per share. The warrants shares carry the same
      registration rights as the shares underlying the convertible notes.




In
      connection with the October 31, 2006 Securities Purchase Agreement, 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 options on the date of issuance
      of
      the notes was $750,000 on October 31, 2006 and $2,000,000 on February 23, 2007.
      The fair value of the warrants on the date of issuance was $1,320,000 and
      $840,000 respectively. On October 31, 2006 the fair value of the conversion
      options and warrants exceeded the face value of the convertible notes; the
      Company recorded a $1,070,000 charge which is included in the statement of
      operations in change of fair value of non-employee stock options, warrants
      and
      conversion options during the year ended December 31, 2006. On February 23,
      2007, the fair value of the conversion options and warrants exceeded the face
      value of the convertible notes and the Company will record a $1,840,000 charge
      in the statement of operations in change of fair value of non-employee stock
      options, warrants and conversion options in the 1 st quarter
      2007. The convertible notes were recorded at the residual value of $0. 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.




Pursuant
      to the November 14, 2005, September 12, 2006 and October 31, 2006 Securities
      Purchase Agreements, 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.




F-31





Upon
      an
      issuance of shares of common stock below the market price, the exercise price
      of
      the warrants will be reduced accordingly 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 Agreements. The
      market price is determined by averaging the last reported sale prices for the
      Company’s shares of common stock for the five trading days immediately preceding
      such issuance as set forth on the Company’s principal trading market. The
      exercise price shall be determined by multiplying the exercise price in effect
      immediately prior to the dilutive issuance by a fraction. The numerator of
      the
      fraction is equal to the sum of the number of shares outstanding immediately
      prior to the offering plus the quotient of the amount of consideration received
      by us in connection with the issuance divided by the market price in effect
      immediately prior to the issuance. The denominator of such issuance shall be
      equal to the number of shares outstanding after the dilutive issuance.





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 takes such other action as would
      otherwise result in dilution of the selling stockholder's position.





Under
      the
      terms of the November 2005, September 2006 and October 2006 Securities Purchase
      Agreements, the full principal amount of the secured convertible notes are
      due
      upon a default under the terms of secured convertible notes. Events of default
      include:





1.
            The
                Company fails to pay the principal or interest on convertible
                note.





2.
            The
                Company fails to issue shares of its common stock to the purchasers
                upon
                notice of conversion.





3.
            The
                Company fails to timely file Registration statement in accordance
                with the
                terms of the note.





4.
            The
                Company breaches any material covenant contained in the Securities
                Purchase Agreements.





5.
            Breach
                of representations or warranties by the Company which result in a
                material
                adverse effect on therights of the purchasers.




6.
            The
                Company grants a security interest of its assets to another entitiy
                or
                creditor.





7.
            Any
                judgment filed against the Company for more than $50,000 will remain
                unbonded unless agreed toby
                the purchasers.





8.
            Bankruptcy,
                insolvency reorganization or liquidation filed by or against the
                Company.





9.
              The
                  Company fails to maintain the listing of its common stock on at
                  least one
                  of the OTCBB or anequivalent
                  replacement exchange, the Nasdaq National Market, the Nasdaq Capital
                  Market, the NewYork
                  Stock Exchange, or the American Stock
                  Exchange.




In
      addition, the Company granted the Purchasers a security interest in
      substantially all of the Company’s assets and intellectual property. In the
      event that the Company defaults on the November 2005, September and October
      2006
      Securities Purchase Agreements, the investors could take a first priority
      security interest in all of the Company’s goods, inventory, contractual rights
      and general intangibles, receivables, documents, instruments, chattel paper,
      and
      intellectual property pursuant to executed a Security Agreement and an
      Intellectual Property Security Agreement. The Investors have the right to take
      possession of the collateral, to operate the Company’s 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, all of which could
      have a material adverse impact on the Company’s business prospects.




The
      Purchasers have agreed to restrict their ability to convert their secured
      convertible notes or exercise their warrants and receive shares of 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.





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 price ($0.04), applicable
        volatility rates (140.46% - 172.89%), remaining contractual life (2.96 yrs.-
        9.0
        years) and the period close risk free interest rate for the instruments expected
        remaining life (4.60% - 4.82%) 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 for the years ended December 31, 2006 and 2005 was a charge
        of
        $5,185,731 and $278,889, respectively.




F-32





As
      of
      December 31, 2006, the secured convertible notes issued pursuant to the
      Securities Purchase Agreements mature as follows:




For
                  the Year Ending
              
              NoteDecember
                  31,
              
              Amount2008
              
              $
              988,9192009
              
              
              3,875,000Total
              
              $
              4,863,919




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.




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.




F-33




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.




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 issued 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 price 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 fiscal 2005. As a result of the issuance of the secured
      convertible notes and warrants under the November 14, 2005, September 12, 2006
      and the October 31, 2006 Securities Purchase Agreements, the series A preferred
      stock conversion price was reduced pursuant to the anti-dilution clause of
      the
      certificate of designation.




F-34




Prior
      to
      the November 14, 2005 Securities Purchase agreement, 1 share of series A
      preferred stock converted into 2 shares of common stock. With each tranche
      of
      the November 2005 Securities purchase Agreement, anti-dilution provision was
      triggered on November 14, 2005, January 4, 2006, May 10, 2006 and July 24,
      2006
      reducing the conversion price of the series A preferred stock to $0.44, $0.39,
      $0.36 and $0.34 per share respectively.  On
      September 12, 2006 and October 31, 2006, the Company entered into new Securities
      Purchase Agreements with the purchasers which further triggered anti-dilution.
      On September 12, 2006, October 4, 2006, October 31, 2006, and November 6, 2006,
      the conversion price of the series A preferred stock was reduced further to
      $0.33, $.31, $0.21 and $0.18 per share, respectively. The original investment
      price of $1.00 per share for the series A preferred stock is divided by the
      $0.18 per share and result in the conversion of every 1 share of series A
      preferred stock held can be converted into 5.56 shares of common stock for
      a
      total of 10,293,912 shares of common stock. On
      February 23, 2007, the conversion price of the series A preferred stock was
      reduced further to $0.11 per share. The original investment price of $1.00
      per
      share for the series A preferred stock is divided by the $0.11 per share and
      result in the conversion of every 1 share of series A preferred stock held
      can
      be converted into 9.09 shares of common stock for
      a
      total of 19,405,432 shares of common stock. The
      conversion price of the Series A preferred stock was adjusted based on a
      calculation as set forth in the certificate of designation. The price was
      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 which is the 30-day volume-weighted
      average price of the Company’s common stock 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).




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 Capital 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. The 10-day volume-weighted average price
        of
        our common stock was $0.206. The Company inadvertently issued an additional
        183,869 series A preferred dividend shares in lieu of cash dividends than
        the
        holders were required to receive. On December 12, 2006, the Board of Directors
        voted to allow the stockholders to retain the additional shares of preferred
        stock that were issued as dividends. On December 12, 2006, the Board of
        Directors approved the payment of dividends in series A preferred stock to
        the
        holders of record as of December 15, 2006. On January 2, 2007 holders of
        series
        A preferred stock were issued 283,388 shares of series A preferred stock
        as
        dividends. The 10 day volume-weighted average price of our common stock was
        $0.047.





The
      Company reviewed the provisions of SFAS 133 to determine if derivative
      accounting was required for the embedded conversion option in the series A
      preferred stock and whether that conversion option should be bifurcated from
      the
      preferred stock instrument. The Company analyzed the embedded conversion option
      following the guidance of EITF 00-19 to determine if the conversion option
      should be recorded as equity or a liability at the date of issuance of the
      preferred stock pursuant to the scope exception of paragraph 11(a) of SFAS
      133.
      The Company concluded that the embedded conversion option met all the
      requirements under EITF 00-19 on the date of issuance to be recorded as an
      equity instrument.




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
      4)
      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. Additionally, since the
      preferred stock does not embody a claim to a residual interest in the Company,
      it was determined to be more akin to a debt instrument as defined in SFAS133.
      As
      such, the Company determined that the conversion option should be bifurcated
      from the preferred stock instrument. Under the guidance of EITF 00-19, share
      settlement of the series A convertible preferred stock could no longer be
      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. In January 2006, the Company recorded the
      embedded conversion option in the dividend shares as a derivative liability
      at
      fair value of $135,037. Excess of fair value over the dividend payable of
      $60,600 was recorded as a charge of $74,437 in the statement of operation in
      change of fair value of non-employee stock options, warrants and conversion
      options during the year ended December 31, 2006. The Company re-measured the
      fair value of the embedded conversion option and recorded a gain of $611,839
      and
      $16,205 for the change in fair value for the years ended December 31, 2006
      and
      2005, respectively, in its statement of operations. The fair value of the Series
      A conversion option was $125,586 and $602,387 at December 31, 2006 and 2005
      respectively. 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 ($0.04),
      applicable volatility rates (172.99%), remaining contractual life (0.95 years)
      and the period close risk free interest rate for the instruments remaining
      contractual life (5.00%).




F-35





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 into shares 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 fiscal 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 the Company’s common stock issuable pursuant to
      the conversion terms on the date of issuance. As a result of the issuance of
      the
      secured convertible notes and warrants under the November 14, 2005, September
      12, 2006 and the October 31, 2006 Securities Purchase Agreements, the series
      B
      preferred stock conversion price was reduced pursuant to the anti-dilution
      clause of the certificate of designation.




Prior
      to
      the November 14, 2005 Securities Purchase agreement, 1 share of series B
      preferred stock converted into 1 shares of common stock. With each tranche
      of
      the November 2005 Securities purchase Agreement, anti-dilution provision was
      triggered on November 14, 2005, January 4, 2006, May 10, 2006 and July 24,
      2006
      reducing the conversion price of the series B preferred stock to $0.44, $0.39,
      $0.36 and $0.34 per share respectively.  On
      September 12, 2006 and October 31, 2006, the Company entered into new Securities
      Purchase Agreements with the purchasers which further triggered anti-dilution.
      On September 12, 2006, October 4, 2006, October 31, 2006, and November 6, 2006,
      the conversion price of the series B preferred stock was reduced further to
      $0.33, $.31, $0.21 and $0.18 per share, respectively. The original investment
      price of $0.50 per share for the series B preferred stock is divided by the
      $0.18 per share and result in the conversion of every 1 share of series B
      preferred stock held can be converted into 2.78 shares of common stock for
      a
      total of 3,706,964 shares of common stock. On February 23, 2007, the conversion
      price of the series B preferred stock was reduced further to $0.11 per share.
      The original investment price of $0.50 per share for the series B preferred
      stock is divided by the $0.11 per share and result in the conversion of every
      1
      share of series B preferred stock held can be converted into 4.55 shares of
      common stock for a total of 7,692,157 shares of common stock. The conversion
      price of the Series B preferred stock was adjusted based on a calculation as
      set
      forth in the certificate of designation. The price was 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 which is the 30-day volume-weighted average
      price of the Company’s common stock 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).





F-36




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 Capital 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. On December 12, 2006, the Board
        of
        Directors voted to allow the stockholders to retain the additional shares
        of
        preferred stock that were issued as dividends. On December 12, 2006, the
        Board
        of Directors approved the payment of dividends in series B preferred stock
        to
        the holders of record as of December 15, 2006. On January 2, 2007 holders
        of
        series B preferred stock were issued 357,152 shares of series B preferred
        stock
        as dividends. The 10 day volume-weighted average price of our common stock
        was
        $0.047.





The
      Company reviewed the provisions of SFAS 133 to determine if derivative
      accounting was required for the embedded conversion option in the series B
      preferred stock and whether that conversion option should be bifurcated from
      the
      preferred stock instrument. The Company analyzed the embedded conversion option
      following the guidance of EITF 00-19 to determine if the conversion option
      should be recorded as equity or a liability at the date of issuance of the
      preferred stock pursuant to the scope exception of paragraph 11(a) of SFAS
      133.
      The Company concluded that the embedded conversion option met all the
      requirements under EITF 00-19 on the date of issuance to be recorded as an
      equity instrument.




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 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. Additionally, since the
      preferred stock does not embody a claim to a residual interest in the Company,
      it was determined to be more akin to a debt instrument as defined in SFAS133.
      As
      such, the Company determined that the conversion option should be bifurcated
      from the preferred stock instrument. Under the guidance of EITF 00-19, share
      settlement of the series B convertible preferred stock could no longer be
      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 re-measured the fair value of the
      embedded conversion option and recorded a gain of $192,168 and $6,790 for the
      change in fair value for the years ended December 31, 2006 and 2005,
      respectively, in its statement of operations. The fair value of the Series
      B
      conversion option is $67,096 and $251,293 December 31, 2006 and 2005,
      respectively. 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 ($0.04),
      applicable volatility rates (161.62%), remaining contractual life (1.61 years)
      and the period close risk free interest rate for the instruments remaining
      contractual life (4.82%).




In
      January 2006, the Company recorded the embedded conversion option in the
      dividend shares as a derivative liability at fair value of $17,129. In June
      2006, 36,237 series B preferred shares were converted into 50,369 shares of
      common stock. Under the guidance of EITF 00-19, the Company re-measured the
      conversion option of these shares and reclassified the conversion liability
      of
      $9,158 to equity.




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.




F-37




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 10, 2010. 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 which expire on August 10, 2010.




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 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.. 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 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 rights, 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 $93,000
      related to this settlement as of December 31, 2006 with
      $42,000 allocated to the recovery of warrants.




F-38





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 the Company’s 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, on January 4, 2006 the Purchasers received 1,000,000 warrants, on
      May
      10, 2006 the Purchasers received 600,000 warrants and on July 25, 2005 the
      Purchasers received 500,000 warrants. On
      September 5, 2006, the Company entered into an amendment to the Securities
      Purchase Agreement to reduce the sale to an aggregate of $3,100,000 principal
      amount of secured convertible notes and an aggregate of 3,100,000 warrants
      to
      purchase shares of common stock.




Pursuant
      to an amended Finder's Fee Agreement, between Axiom and the Company, Axiom
      received five year warrants to purchase 378,445, 395,310, 173,580 and 133,776
      shares of our common stock at an exercise price of $0.65 per share on November
      14, 2005, January 4, 2006, May 10, 2006 and July 24, 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, $0.202, $0.277 and $0.299 for the first
      tranche, second tranche, and the first and final advance of the third tranche,
      respectively. The
      Company recorded the fair value of the warrants as deferred financing costs
      and
      amortizes the expense on a straight line basis over the term of the
      loan.




On
      September 12, 2006, the Company entered into a new Securities Purchase Agreement
      with the Purchasers for the sale of (i) $775,000 in secured convertible notes
      and (ii) warrants to purchase 20,000,000 shares of the Company’s common stock.




The
      warrants are exercisable until seven years from the date of issuance at a
      purchase price of $0.30 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.





Upon
      an
      issuance of shares of common stock below the market price, the exercise price
      of
      the warrants will be reduced accordingly 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
      market price is determined by averaging the last reported sale prices for our
      shares of common stock for the five trading days immediately preceding such
      issuance as set forth on the Company’s principal trading market. The exercise
      price shall be determined by multiplying the exercise price in effect
      immediately prior to the dilutive issuance by a fraction. The numerator of
      the
      fraction is equal to the sum of the number of shares outstanding immediately
      prior to the offering plus the quotient of the amount of consideration received
      by us in connection with the issuance divided by the market price in effect
      immediately prior to the issuance. The denominator of such issuance shall be
      equal to the number of shares outstanding after the dilutive issuance.





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 takes such other action as would
      otherwise result in dilution of the selling stockholder's position.





The
      Purchasers have agreed to restrict their ability to convert their secured
      convertible notes or exercise their warrants and receive shares of 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.




F-39





Pursuant
      to the amended Finder's Fee Agreement, between Axiom and the Company, Axiom
      will
      earn a finders fee of $50,375 in cash of which $17,875 was paid on September
      18,
      2006, $16,250 was paid on October 19, 2006 and $16,250 will be paid in November
      2006. In addition, Axiom has received five year warrants to purchase shares
      of
      the Company’s common stock at an exercise price of $0.65 per share, of which
      108,216 were granted on September 12, 2006, 138,319 were granted on October
      4,
      2006 and 293,931 were granted on November 6, 2006. (see Note 7). 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 were issued pro rata upon each investment tranche. The
      initial market price was $0.203, $0.145 and $0.068 for the 1st tranche, 2nd
      tranche, and the final tranche, respectively. The Company recorded the fair
      value of the warrants as deferred financing costs and amortizes the expense
      on a
      straight line basis over the term of the loan.





On
      October 31, 2006, the Company entered into a new Securities Purchase Agreement
      with the Purchasers for the sale of (i) $2,000,000 in secured convertible notes
      and (ii) warrants to purchase 40,000,000 shares of the Company’s common stock.




The
      warrants are issued pro rata upon each investment tranche.  On
      each
      October 31, 2006 and February 23, 2007 the Purchasers received 20,000,000
      warrants. The
      warrants are exercisable until seven years from the date of issuance at a
      purchase price of $0.08 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.





Upon
      an
      issuance of shares of common stock below the market price, the exercise price
      of
      the warrants will be reduced accordingly 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
      market price is determined by averaging the last reported sale prices for the
      Company’s shares of common stock for the five trading days immediately preceding
      such issuance as set forth on the Company’s principal trading market. The
      exercise price shall be determined by multiplying the exercise price in effect
      immediately prior to the dilutive issuance by a fraction. The numerator of
      the
      fraction is equal to the sum of the number of shares outstanding immediately
      prior to the offering plus the quotient of the amount of consideration received
      by us in connection with the issuance divided by the market price in effect
      immediately prior to the issuance. The denominator of such issuance shall be
      equal to the number of shares outstanding after the dilutive issuance.





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 takes such other action as would
      otherwise result in dilution of the selling stockholder's position.





The
      Purchasers have agreed to restrict their ability to convert their secured
      convertible notes or exercise their warrants and receive shares of 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.





Pursuant
      to the November 8, 2005 amended Finder's Fee Agreement, between the Company
      and
      Axiom, Axiom will earn a finders fee of $130,000 in cash in which $65,000 for
      the 1 st tranche
      has been accrued on our financial statement for the year ended December 31,
      2006
      and $65,000 will be accrued on our financial statement for the quarter ended
      March 31, 2007. 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 1,151,393 and 1,777,778 will be granted after April 9, 2007. 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 were issued pro rata upon each investment tranche. The
      initial market price was $0.069and $0.045 for the 1st tranche and final tranche,
      respectively. The Company recorded the fair value of the warrants as deferred
      financing costs and amortizes the expense on a straight line basis over the
      term
      of the loan.




F-40




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, the 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. In January 2006, the warrants
      issued to both the Purchasers and Axiom in connection with the 2 nd tranche
      was recorded as liabilities at their fair values on the date of issuance of
      $157,000 and $62,064, respectively. On May 10, 2006, the warrants issued to
      both
      the Purchasers and Axiom in connection with the advance of the 3rd tranche
      was
      recorded as liabilities at their fair values on the date of issuance of $109,200
      and $31,592, respectively. On July 24, 2006, the warrants issued to both the
      Purchasers and Axiom in connection with the final advance of the 3rd tranche
      was
      recorded as liabilities at their fair values on the date of issuance of $122,879
      and $32,909, respectively. In connection with the September 12, 2006 Securities
      Purchase Agreement the warrants issued to both the Purchasers and Axiom in
      connection with the 1st tranche were recorded as liabilities at their fair
      values on the date of issuance of $3,662,522 and $16,882, respectively. On
      October 4, 2006 and November 6, 2006, the warrants issued Axiom in connection
      with the 2 nd and 3rd
      tranche were recorded as liabilities at their fair values on the date of
      issuance of $19,226 and $17,636, respectively. In connection with the October
      31, 2006 Securities Purchase Agreement the warrants issued to the Purchasers
      were recorded as liabilities at their fair values on the date of issuance of
      $1,320,000.




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 be
      considered within their control. The Company reclassified these other warrants
      to a liability based on the fair value on November 14, 2005 of $636,412. The
      Company will re-measure the fair value of the warrants at the end of each
      reporting period and record the change in fair value in its statement of
      operations.





On
      January 30, 2006, Company entered into a settlement agreement and mutual release
      (“Settlement Agreement”) with Lockheed Martin (“Lockheed”). (See Note 11 -
      Litigation) Under the terms of the Settlement Agreement, the Company agreed
      to
      issue 500,000 warrants to Lockheed, with each such warrant entitling Lockheed
      to
      purchase from the Company, at any time prior to December 28, 2015, one share
      of
      the Company’s common stock at $0.65 per share. Because
      of the convertible debentures issued in connection with the November 14, 2005
      Securities Purchase Agreement (See Note 7), the Company might not have
      sufficient authorized shares in the future to settle exercises of these issued
      warrants. Under the guidance of EITF 00-19, the Company classified these
      warrants as liability based on their fair value of $94,500 on the date of grant.




The
      Company re-measured the fair value of all its issued warrants at December 31,
      2006. The change in fair value for the years ended December 31, 2006 and 2005,
      were gains of $4,870,913 and $21,779, respectively. The change of fair value
      is
      reported in the Company’s statement of operations. The fair value of the
      warrants was $1,654,337 and $878,708 at December 31, 2006 and 2005,
      respectively. 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 ($0.04), remaining
      contractual life (from .01 - 9.00 years), applicable volatility rates (140.46%
      -
      172.89%) and the period close risk free interest rate for the instruments
      remaining contractual life (4.70% - 4.75%).




As
      of
      December 31, 2006 and 2005, the Company had warrants outstanding to purchase
      an
      aggregate of 49,172,719 and 5,547,776 common shares respectively.




F-41





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, 2006 and 2005, under
      the
      1998 stock option plan, options
      to purchase 3,423,380 and 3,841,493 shares of common stock were outstanding,
      respectively. 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.




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. On
      June
      26, 2006, our stockholders approved to amend the 2005 Plan to increase the
      number of grants available under the Plan from 5,000,000 to
      10,000,000.




As
      of December
      31, 2006
      4,850,555 awards have been granted under the 2005 Plan, of which 330,000 were
      restricted stock grants and 4,520,555 were stock option grants. 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 options. 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 $233,100 on the date of the grant. On the same date, the Board
      of
      Directors granted the Company’s Senior Vice President stock options to purchase
      667,000 shares of the Company’s common stock at an exercise price of $0.30 per
      share. The stock option vests 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 the Company’s Senior
      Vice President was $124,062 on the date of the grant. On September 18, 2006,
      the
      Company granted stock options to purchase 160,555 shares of its common stock
      to
      an individual who was appointed to the Board of Directors at the June 26, 2006
      annual meeting. Of the stock options granted, the stock option execisable into
      150,000 shares of its common stock for his service to the Company in 2006 and
      the stock option exercisable into 10,555 shares of its common stock in lieu
      of
      cash payment for his participation, attendance at meetings and service to the
      Company from June 26, 2006 to September 30, 2006. The 10-year stock options
      vest
      immediately and have an exercise price of $0.28 per share. The fair value of
      the
      options on the date of grant was $21,996. The fair value of the option grants
      have been recorded as a compensation charge in accordance with SFAS 123(R). The
      Company used the Black Scholes Valuation model to determine fair value. For
      the
      2006 grants, the significant assumptions used include the closing price of
      the
      Company's common stock on the date of grant ($0.16 - $0.24), applicable
      volatility rates (131.12% - 131.47%), expected life (3.5 - 5.0 years) and the
      period close risk free interest rate for the instruments expected life
      (4.680%-4.79%).




F-42




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 re-measured the fair value of the non-employee stock options. For the
      years ended December 31, 2006 and 2005, a gain of $94,935 and $444,
      respectively, was recorded as a change in fair value in its statement of
      operations. The fair value of the Company's non-employee stock options was
      $9,548 and $104,483 at December 31, 2006 and 2005, respectively. 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 ($0.04), applicable volatility rates (139.87% - 182.89%),
      remaining contractual life (0.01 -3.67 years) and the period close risk free
      interest rate for the instruments remaining contractual life (4.74%-5.00%).




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




December
                31, 2006
            
            December
                31, 2005Weighted
            
            
            
            Weighted
            
            
            
            Weighted
            
            
            
            WeightedAverage
            
            Aggregate
            
            Average
            
            
            
            Average
            
            Aggregate
            
            AverageExercise
            
            Intrinsic
            
            Grant
                Date
            
            
            
            Exercise
            
            Intrinsic
            
            Grant
                DateShares
            
            Price
            
            Value
            
            Fair
                Value
            
            Shares
            
            Price
            
            Value
            
            Fair
                ValueOutstanding,
                beginning of year
            
            
            6,724,490
            
            $
            0.94
            
            
            —
            
            
            —
            
            
            3,039,875
            
            $
            0.73
            
            
            —
            
            
            —Options
                granted
            
            
            1,937,555
            
            
            0.26
            
            
            —
            
            
            0.20
            
            
            4,305,500
            
            
            0.83
            
            
            —
            
            
            0.27Options
                exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,218
            )
            
            0.55
            
            
            —
            
            
            —Options
                forfeited
            
            
            (718,110
            )
            
            1.29
            
            
            —
            
            
            —
            
            
            (615,667
            )
            
            2.24
            
            
            —
            
            
            —Outstanding,
                end of year
            
            
            7,943,935
            
            $
            0.74
            
            
            
            
            
            
            
            
            6,724,490
            
            $
            0.94Exercisable,
                end of year
            
            
            7,409,248
            
            $
            0.77
            
            
            
            
            
            
            
            
            6,671,240
            
            $
            1.06





F-43




The
      following table summarizes stock option information as of December 31,
      2006:




Weighted
                Average
            
            Number
                Outstanding
            
            Weighted
                Average
            
            OptionsExercise
            
            at
                December 31,
            
            Remaining
            
            No.
                ExercisablePrices
            
            2006
            
            Contractual
                life
            
            12/31/06$
                0.24
            
            
            1,110,000
            
            
            9.21
            
            
            1,110,000$
                0.28
            
            
            160,555
            
            
            9.72
            
            
            160,555$
                0.30
            
            
            667,000
            
            
            4.20
            
            
            166,750$
                0.30
            
            
            1,000,000
            
            
            8.82
            
            
            1,000,000$
                0.55
            
            
            162,659
            
            
            1.27
            
            
            162,659$
                0.66
            
            
            200,000
            
            
            3.49
            
            
            200,000$
                0.92
            
            
            13,500
            
            
            3.49
            
            
            13,500$
                0.97
            
            
            1,379,527
            
            
            1.32
            
            
            1,379,527$
                1.000
            
            
            2,654,500
            
            
            8.06
            
            
            2,623,250$
                1.13
            
            
            264,925
            
            
            3.67
            
            
            264,925$
                1.200
            
            
            13,500
            
            
            3.49
            
            
            13,500$
                1.375
            
            
            250,000
            
            
            6.75
            
            
            250,000$
                2.43
            
            
            24,644
            
            
            0.25
            
            
            24,644$
                3.75
            
            
            6,000
            
            
            3.49
            
            
            6,000$
                4.00
            
            
            37,125
            
            
            4.05
            
            
            33,9387,943,935
            
            
            3.89
            
            
            7,409,248





The
      following tables summarize unvested stock option information as of December
      31,
      2006:




Weighted-
                  AverageExerciseNonvested
                  Shares
              
              Shares
              
              PriceNonvested,
                  January 1, 2006
              
              
              53,250
              
              $
              1.36Granted
              
              
              1,937,555
              
              $
              0.26Vested
              
              
              1,456,118
              
              $
              0.25Forfeited
              
              
              —
              
              
              —Nonvested,
                  December 31. 2006
              
              
              534,687
              
              $
              0.36




F-44




**Number
                Outstanding**
            
            **Weighted
                Average**
            
            **Unvested****Exercise**
            
            **at
                December 31**
            
            **Remaining**
            
            **Options****Prices**
            
            **2006**
            
            **Contractual
                life**
            
            **12/31/06**$0.30
            
            
            667,000
            
            
            4.20
            
            
            500,250$1.00
            
            
            62,500
            
            
            3.13
            
            
            31,249$4.00
            
            
            12,750
            
            
            2.33
            
            
            3,188742,250
            
            
            2.90
            
            
            534,687




A
      summary
      of stock warrant activity is as follows:




December
                31, 2006
            
            December
                31, 2005Weighted
            
            
            
            WeightedAverage
            
            
            
            AverageExercise
            
            
            
            ExerciseShares
            
            Price
            
            Shares
            
            PriceOutstanding,
                beginning of year
            
            
            5,547,776
            
            $
            0.78
            
            
            1,915,397
            
            $
            1.06Warrants
                granted
            
            
            43,843,132
            
            
            0.23
            
            
            6,032,379
            
            
            .63Warrants
                exercised
            
            
            (218,189
            )
            
            1.50
            
            
            —
            
            
            —Warrants
                forfeited
            
            
            —
            
            
            —
            
            
            (2,400,000
            )
            
            .50Warrants
                expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding,
                end of year
            
            
            49,172,719
            
            $
            0.29
            
            
            5,547,776
            
            $
            0.78Exercisable,
                end of year
            
            
            49,172,719
            
            $
            0.29
            
            
            5,547,776
            
            $
            0.78





The
      following table summarizes warrants information as of December 31,
      2006:




Warrants
                OutstandingNumber
                Outstanding
            
            Weighted
                Average
            
            Weighted
            
            Warrants
              Number
                Exercisableat
            
            Remaining
            
            Average
            
            atExercise
            
            December
                31,
            
            Contractual
            
            Exercise
            
            December
                31,Prices
            
            2006
            
            Life
            
            Price
            
            2006$0.08
            
            
            20,000,000
            
            
            6.84
            
            $
            0.08
            
            
            20,000,000$0.30
            
            
            20,000,000
            
            
            6.70
            
            $
            0.30
            
            
            20,000,000$0.50
            
            
            465,000
            
            
            2.96
            
            $
            0.50
            
            
            465,000$0.65
            
            
            3,843,132
            
            
            4.93
            
            $
            0.65
            
            
            3,843,132$0.65
            
            
            1,378,445
            
            
            3.87
            
            $
            0.65
            
            
            1,378,445$0.75
            
            
            1,550,000
            
            
            3.61
            
            $
            0.75
            
            
            1,550,000$0.75
            
            
            703,934
            
            
            3.61
            
            $
            0.75
            
            
            703,934$0.97
            
            
            1,232,208
            
            
            5.67
            
            $
            0.97
            
            
            1,232,20849,172,719
            
            
            6.34
            
            $
            0.29
            
            
            49,172,719





F-45




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 warran ts
      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 Decembe r
      19,
      2003 Private Placement (Note 8). These warrants were immediately exercisable
      at
      $1.50 per share through December 19, 2006. These warrants expired
      unexercised.




The
      Company issued warrants to purchase 465,000 shares of its common stock to
      investors in its December 14, 2004 Private Placement (Note 8). 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 are immediately exercisable at $0.75 per share through August 9,
      2010.




The
      Company issued warrants to purchase an aggregate of 3,100,000 shares of its
      common stock to the Purchasers in the Securities Purchase Agreement with each
      investment tranche on November 15, 2005, January 4, 2006, May 10, 2006 and
      July
      24, 2006. 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, 395,310, 173,580, and 133,776
      shares of its common stock to Axiom pursuant to an amended Finder's Fee
      Agreement on November 15, 2005, January 4, 2006, May 10, 2006 and July 24,
      2006,
      respectively. 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, $0.202, $0.277 and
      $0.299 for the first, second, third and final tranche respectively.





On
      September 12, 2006, the Company entered into a new Securities Purchase Agreement
      with the Purchasers and issued warrants to purchase 20,000,000 shares of the
      Company’s common stock. The warrants are exercisable until seven years from the
      date of issuance at a purchase price of $0.30 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.




F-46




Pursuant
      to the amended Finder's Fee Agreement, between Axiom and the Company, Axiom
      received five year warrants to purchase shares of the Company’s common stock at
      an exercise price of $0.65 per share, of which 108,216 were granted on September
      12, 2006, 138,319 were granted on October 4, 2006 and 293,931 were granted
      on
      November 6, 2006. (see Note 9). 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
      were
      issued pro rata upon each investment tranche. The initial market price was
      $0.203, $0.145 and $0.068 for the 1st tranche, 2nd tranche, and the final
      tranche, respectively.





On
      October 31, 2006, the Company entered into a new Securities Purchase Agreement
      with the Purchasers and issued warrants to purchase 20,000,000 shares of the
      Company’s common stock. On February 23, 2007, upon receiving the closing of the
      final tranche of $1,000,000 of the October 31, 2006 Securities Purchase
      Agreement, the Company issued the Purchasers warrants to purchase 20,000,000
      shares of the Company’s common stock. The warrants are exercisable until seven
      years from the date of issuance at a purchase price of $0.08 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.




After
      the
      Company entered the Securities Purchase Agreement, and in following the guidance
      of EITF 00-19, the Company reclassified all of its warrants issued, as a
      liability recorded at fair value on November 14, 2005. (See Note 8 “Warrants”).
      All subsequent issuances are recorded as a derivative liability at their
      respective fair values on date of grant. The Company will remeasure the
      fair
      value at the end of each reporting period and record the change in fair value
      in
      its statement of operation.




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.
      On
      February 13, 2006, in accordance with the 2005 amended settlement agreement,
      the
      Company issued 12,000 restricted shares of its common stock to Dr. Anbar. The
      fair value of the stock was $2,280 on the date of grant. 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.




F-47




**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
      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. 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.




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, Commitments and Contingencies, 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.
      In
      accordance with the provisions of EITF 00-19, the warrants were recorded as
      a
      liability at fair value on the date of grant. The Company will re-measure the
      fair value at the end of each recording period and record the change in fair
      value in its statement of operation.




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 430,500 Euros or $568,000 (at the
      current exchange rates) as of December 31, 2006. These components utilize QWIP
      technology. The Company has the exclusive license for QWIP technology from
      Caltech for biomedical applications.





F-48




Operating
      Lease Commitments




The
      Company leases facilities in Bohemia, New York for approximately 6,550 square
      feet of space which expires November 30, 2009. In addition, the Company leases
      office space in Mahwah, New Jersey under a 6 month lease which will expire
      on
      May 30, 2007 at a monthly rental rate of approximately $2,900.




Future
      annual minimum lease payments under noncancelable operating leases and
      arrangements as of December 31, 2006 are as follows:




For
                the Year EndingDecember
                31,
            
            Amount2007
            
            
            74,4002008
            
            
            65,1002009
            
            
            61,800Total
            
            $
            201,300


Rent
      expense charged to operations for the years ended December 31, 2006 and December
      31, 2005 and for period February 7, 1997 (inception) to December 31, 2006
      amounted to $86,253, $66,364 and $334,866, 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. 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 had 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, Company entered into the Settlement Agreement with Lockheed.
      The Settlement Agreement terminates the Exclusive License Agreement concerning
      EQWIP 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 December 28, 2015, one share of the Company’s
      common stock for $0.65 per share. 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 of 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.




F-49




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 completed discovery
      and a final pretrial conference was held on August 17, 2005. On June 5, 2006
      we
      entered into a Settlement and Release Agreement (“Agreement”) with our former
      Chief Financial Officer. T he
      Agreement disposes of and resolves all disputes, claims, issues and differences
      between us.




The
      former CFO will receive the sum of $220,000 as a full and final settlement
      of
      the Action. (“Settlement Amount”). The Settlement Amount shall be paid as
      follows: (a) $30,000 was paid to counsel for the former CFO within five business
      days of the execution of this Agreement to be held in escrow until the filing
      of
      the dismissal. (b) the sum of $70,000 was paid to counsel for the former CFO
      on
      November 16, 2006 after the execution of the October 31, 2006 Security Purchase
      Agreement for the financing of $2,000,000 of gross proceeds, and (c) the
      additional sum of $120,000 shall be paid to the former CFO in twelve (12)
      monthly installments of $10,000, to be paid on the fifteenth (15 th )
      of each
      month beginning January 15, 2007.




The
      Company is not aware of any other pending or threatened legal proceedings.




Employment
      and Consulting Agreements




On
      February 13, 2006, the Company entered into a letter of agreement with The
      Investor Relations Group, Inc. (“IRG”). Under the Agreement, on a month-to-month
      basis, IRG will provide investor relations services for the Company. In
      consideration for its services, the Company will pay IRG $10,000 per month.
      The
      Company terminated this agreement October 31, 2006. In addition, the Company
      delivered 325,000 restricted shares of the Company’s common stock to IRG. These
      shares will be restricted for a period of two years from the date of execution
      of the Agreement. The restricted shares had a fair value of $61,750 on the
      date
      of grant. The Company recorded the expense of the restricted stock at its fair
      value in its statement of operation.




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. On March 14, 2006 the Board of Directors **** approved
      a performance bonus of $28,000 in accordance with Mr. O’Connor’s employment
      agreement. The payment will be deferred until such time the CEO in his sole
      discretion, determines the Company’s financial situation supports such payment.
      In September 2006, all employees were asked to defer part of their salaries
      due
      to the Company’s declining financial position. After the Company entered the
      October 31, 2006 Securities Purchase Agreement, all employees began to receive
      their full compensation except for Mr. O’Connor who continues to defer
      approximately $2,100 per month. At December 31, 2006 the Company had recorded
      deferred compensation of $116,668 of which $21,996 was for Mr. O’Connor.




F-50




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. As of December
      31, 2006 the Company owed Mr. Fauci $80,000 in consulting fees and $525,000
      for
      the settlement of deferred accrued salary.




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. On February 13, 2006 in accordance with the 2005
      amended settlement agreement, the Company issued 12,000 restricted shares of
      its
      common stock to Dr. Anbar. The fair value of the stock was $2,280 on the date
      of
      grant. 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 as of December 31, 2006:




Aggregate
                CommitmentYear
                ending December 31, 2007
            
            
            461,500Year
                ending December 31, 2008
            
            
            195,000Totals
            
            $
            656,500




NOTE
      12 - Related
      Party Transactions




Among
      the
      purchasers of the Company's series A convertible preferred stock were Jed Schutz
      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. 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. A former director, George 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 at an exercise price of
      $0.50. Mr. Benedict resigned from the Company’s board effective December 31,
      2005. 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.




F-51




Among
      the
      purchasers of the Company's series B convertible preferred stock were Jed
      Schutz, Joseph T. Casey, Dr. Michael Davis, each of whom is a director of the
      Company and former director George Benedict. Mr. Schutz and Mr. Benedict each
      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
      January 3, 2006 the Company issued shares of 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. Joseph Casey, as co-trustee
      for the Casey Living Trust, and Jed Schutz each received 48,616 shares of series
      A convertible preferred stock as dividends. The Company’s former director,
      George Benedict received 19,447 shares of series A convertible preferred stock
      as dividends. Joseph Casey, as co-trustee for the Casey Living Trust was issued
      8,869 shares of series B preferred stock as dividends. Jed Schutz and George
      Benedict each received 5,913 shares and Michael Davis received 591 shares of
      series B preferred stock as dividends.




On
      January 2, 2007 the Company issued shares of 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, 2006. Joseph Casey, as co-trustee
      for the Casey Living Trust, and Jed Schutz each received 45,708 shares of series
      A convertible preferred stock as dividends. The Company’s former director,
      George Benedict received 18,283 shares of series A convertible preferred stock
      as dividends. Joseph Casey, as co-trustee for the Casey Living Trust was issued
      42,556 shares of series B preferred stock as dividends. Jed Schutz and George
      Benedict each received 28,371 shares and Michael Davis received 2,827 shares
      of
      series B preferred stock as dividends.




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 the 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. As of December 31, 2006 the Company paid Mr. Fauci
      $320,000 for consulting fees and $100,000 for settlement of deferred
      salary.




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.




F-52




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. Dr, Davis will
      be
      compensated $5,000 per month for his consulting services. This agreement was
      amended in May 2006. Dr. Davis’ compensation was reduced to $2,500 per month for
      June through September 2006. As of October 1, 2006 the agreement was amended
      and
      Dr. Davis’ compensation was increased to $4,000 per month. In the year ended
      December 31, 2006, the Company paid Dr. Davis $20,000.




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
      February 18, 2007, David Wright informed the Company that he was voluntarily
      resigning as the Company’s Vice President of Operations to pursue other
      opportunities, effective immediately.





On
        February 14, 2007, the Company filed a Prospectus pursuant to Rule 424(b)(3)
        with the Securities and Exchange Commission, relating to the resale by the
        selling shareholders (the purchasers) of up to 6,000,000 shares of its common
        stock underlying a portion of the secured convertible notes in a principal
        amount of $3,100,000 from the November 14, 2005 Securities Purchase Agreement.
        In accordance with the October 31, 2006 Securities Purchase Agreement, the
        purchasers disbursed $1,000,000 in the final tranche to the Company on February
        27, 2007. From January 1, 2007 through April 9, 2007, the purchasers have
        converted an aggregate of $12,680 of the principal amount of the debenture
        for a
        total of 1,550,000 shares of common stock underlying the converted notes.
        As of
        April 9, 2007 the Company owes the purchasers an aggregate $5,851,238 of
        which
        $3,076,238 is for the November 2005 Securities Purchase Agreement, $775,000
        is
        for the September 2006 Securities Purchase Agreement, and $2,000,000 is for
        the
        October 2006 Securities Purchase Agreement.




On
        April
        9, 2007, James Wavle informed the Company that he was voluntarily resigning
        his position
        from the Company’s Board of Directors for
        personal reasons, effective immediately.




F-53