Unassociated Document

Myotech’s initial product will focus on the acute circulatory support market. This product is designed to resuscitate and sustain the circulation of patients who experience acute heart failure until they recover or can be treated with more definitive therapies. Approximately 260,000 (CDC, 2002) patients per year in the U.S. experience in-hospital cardiac arrest, and with the best treatments currently available, there is still an 80 percent mortality rate (Cardiopulmonary resusitiation of adults in the hospital: A report of 14,720 cardiac arrests from the national registry of Cardiopulmonary resuscitation, Peberdy, et al, Resuscitation, 2003). In addition, approximately 7.5% (67,200) (Cardiogenic Shock eMedicine, Sat Sharma, 2007) of the 896,000 patients who experience a heart attack in the U.S. each year have a complication known as cardiogenic shock, which has a 70 percent mortality rate (Cardiogenic Shock eMedicine, Sat Sharma, 2007) .

The potential patient population for the Company’s initial product application is therefore in excess of 300,000 patients in the U.S. alone. Patient populations outside the U.S. would double these numbers to over 600,000 patients per year. The large, poorly served patient population indicates a multibillion dollar total market opportunity for the first generation product.

MRI Related Technologies

Although there are many applications, management believes the most significant product opportunity for MRI image compatibility technologies is the coronary stent market, which is dominated by drug eluting stents. The stent market was estimated by Lehman Brothers Equity Research in its 2006 Medical Device Outlook to exceed $5.5 billion in 2006.

TECHNOLOGY

The Myotech CSS consists of a single-use polymeric cup that is designed to fit around the heart and is connected to an external electronic console. A pneumatically actuated inner membrane compresses and expands the heart, enabling the heart to restore normal blood flow to life-sustaining levels. In contrast to the complex and time-consuming installation of currently marketed circulatory assist devices such as ventricular assist devices (VADs), the Myotech CSS can be installed very rapidly, significantly improving clinical response in the vast and underserved acute resuscitation market. We believe the Myotech CSS will also offer the following competitive advantages:

Our device powers both the heart's ejecting (systolic) and filling (diastolic) cycles, for both the right and left ventricles. Current devices typically only provide systolic support to the left ventricle.

Our device does not come in contact with circulating blood, which significantly reduces the risks of clotting, stroke, internal bleeding, blood-borne infections or the need for repeat surgery - all of these are problems that are byproducts of existing circulatory support devices.

The CSS has the capability of being installed by a trained general surgeon, not just a cardiac specialist, so once our product is introduced, we anticipate that the CSS will be available at community hospitals, not just a limited number of transplant or specialized cardiac centers. This broader utility will enable the device to reach cardiac arrest patients where they present and to reach a much broader segment of the market.

The CSS can be produced in a range of sizes appropriate to treat a broad spectrum of patients, including women and children.

The Myotech CSS is designed to be a simpler, safer, and more broadly-effective product design that can be installed quickly and in more hospitals without the need for specialized cardiothoracic surgical facilities or personnel, combined with a lower total procedure cost compared to existing device therapies.

SALES AND MARKETING

Biophan's marketing efforts are focused on business-to-business sales of our technology. For the Myotech CSS, we are developing a complete medical system; however, it is our intention to develop relationships with distribution partners rather than to build a sales and marketing force to bring this product directly into hospitals ourselves. Leveraging market leaders with established sales and distribution channels will help to speed introduction and adoption of the Myotech CSS. For our MRI related technologies, our technology must be incorporated into products designed and manufactured by other companies, such as the stent market where our technology provides a competitive advantage, but represents only one important feature of a total system.

Since we are focused on working with the leaders in each market segment, the number of prospective partners we are focused on is limited to 25 to 30 medical device companies, which we are able to address with a small and experienced business development team.

COMPETITION

In the area of circulatory support, there are several manufacturers of circulatory support systems; however, they use different technologies and focus on different market segments. These manufacturers include Abiomed, Thoratec and World Heart in the ventricular assist device market, and Datascope and others in the intraortic balloon pump market. In the area of acute heart failure, where restoration of cardiac output is needed for an arrested heart, there are no circulatory systems known to the Company that can provide full systolic and diastolic support to an arrested heart without blood contact, such as we anticipate will be provided by the Myotech circulatory support system.

PPA Technologies AG, in Germany, is developing a device that provides non-blood contacting support for acute heart failure. They are at an early stage in the development of their product, and they are targeting a different group of physicians, focusing on the needs of interventional cardiologists while the Myotech CSS is initially focused on the needs of cardiothoracic and general surgeons. Myotech has executed a memorandum of understanding with PPA to explore potential relationships between the companies, including possible joint venture or merger opportunities. In addition, Corinnova, Inc. is an early stage company affiliated with Texas A&M University, that is also exploring direct compression technology; however, their product is at an earlier stage of development and they are focused on specifically treating congestive heart failure, which is a totally different patient population.

MRI Related Technologies

The Company holds patents on its non-invasive MRI compatible solutions, specifically the use of resonant circuits, inside stents or heart valves to enable imaging. Other companies have filed patents on alternative designs, but Biophan and its licensors have the only known patents on products that have successfully demonstrated visualizing inside stents and heart valves under MRI.

INTELLECTUAL PROPERTY

Biophan has aggressively protected its technologies with broad patent protection. Our total U.S. portfolio of patents owned as well as exclusively licensed include 49 issued patents and over 40 applications at various stages of examination at the U.S. Patent and Trademark Office. Presented below are summaries of some of the key patents and a brief summary of the technology covered.

Myotech holds several patent applications covering operational, diagnostic and therapeutic features of the Myotech CSS direct mechanical ventricular actuation technology. Myotech's first patent application "Sensor-Equipped and Algorithm-Controlled Direct Mechanical Ventricular Assist Device" has published worldwide; national filing has begun in Europe, Canada, Japan, China, and India. The second patent application "Therapeutic Agent Delivery Apparatus with Direct Mechanical Ventricular Assist Capability" has published in the US, and has been filed worldwide as a PCT. These applications are being followed by five Divisional and CIP applications. "Method and Apparatus for Minimally Invasive Direct Mechanical Ventricular Actuation", originally filed as a PCT, is currently under national filing in the US and the same foreign countries identified above.

Photonics

These patents cover systems, subsystems and components for implanted devices that utilize optical fiber technology instead of electrically conductive leads that cause thermal damage and other risks to implant patients being imaged under MRI.

Nanomagnetic Thin-Film Coatings

We hold patents and applications that relate to nanomagnetic coating applications on stents and other implants, specifically thin film circuits or coatings having similar behavior, that create resonant effects that offset or eliminate unwanted MRI-induced effects.

Biothermal Power Source

TE-Bio, LLC has licensed technology that will potentially reduce or eliminate the need to remove pacemakers or other implants simply to replace their aging batteries. Our technology harnesses the electrical power generated by small temperature gradients the body already produces. And we are working with NASA's Ames Center for Nanotechnology on new coatings to improve the efficiency of thermoelectric devices.

Pulse-width Cardiac Pacing

We hold a patent that teaches the stimulation of nerve tissue with less electrical power than is currently used in implantable devices, utilizing pulse-width modulation techniques used in many types of electrical control systems

Trademarks

The name "Biophan" is a registered trademark of the Company.

Employees

As of June 1, 2008, we had 11 full-time employees, 10 of whom are in the US and 1 of whom is in Europe.

Myotech has added several key consultants as team members, including John H. Bowers, who joined the organization as a consultant serving as a senior technologist on the engineering team, and Jeanne Lesniak, who joined the organization as a consultant to lead Myotech’s regulatory affairs team. In December 2007, James Goldberg joined Myotech as interim president with a four month consulting agreement to help develop the regulatory and engineering strategy and assemble the team to execute that strategy. Having successfully completed that assignment, Mr. Goldberg’s contract was not extended after the initial four month period and Mr. Lanzafame, Biophan's CEO, now serves as Myotech president.

AVAILABLE INFORMATION

Information about the Company's products and services, stockholder information, press releases, and filings with the Securities and Exchange Commission (SEC) can be found on the Company's website at www.biophan.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other SEC filings, and any amendments to such reports and filings, are made available, free of charge, on the Investor Relations section of such website as soon as reasonably practical after such material is filed with, or furnished to, the SEC.

ITEM 1A. RISK FACTORS

WE ARE A BUSINESS WITH A LIMITED OPERATING HISTORY AND ARE NOT LIKELY TO SUCCEED UNLESS WE CAN OVERCOME THE MANY OBSTACLES WE FACE.

We are an early-stage research and development company with limited prior business operations . We are presently engaged in the development of certain technologies for use with medical procedures and biomedical devices. Because of our limited operating history, you may not have adequate information on which you can base an evaluation of our business and prospects. To date, our efforts have been devoted primarily to the following:

organizational activities;

developing a business plan;

obtaining funding;

conducting research and working toward the ultimate successful development of our technologies;

aggressively patenting our intellectual property;

licensing technology from third parties related to our business; and

marketing to major biomedical device manufacturers.

In order to establish ourselves in the medical device market, we are dependent upon continued funding and the successful development and marketing of our products. You should be aware of the increased risks, uncertainties, difficulties, and expenses we face as a research and development company and that an investment in our common stock may be worthless if our business fails.

IF WE ARE UNABLE TO GENERATE SUFFICIENT REVENUES IN THE FUTURE, WE MAY NOT BE ABLE TO CONTINUE OUR BUSINESS.

We are still in our formative and development stage. As an investor, you should be aware of the difficulties, delays, and expenses normally encountered by an enterprise in its development stage, many of which are beyond our control, including unanticipated research and developmental expenses, employment costs, and administrative expenses. We cannot assure our investors that our proposed business plans as described in this prospectus will materialize or prove successful, or that we will ever be able to finalize development of our products or operate profitably. If we cannot operate profitably, you could lose your entire investment. As a result of the start-up nature of our business, initially we expect to sustain substantial operating expenses without generating significant revenues.

WE HAVE A HISTORY OF LOSSES AND A LARGE ACCUMULATED DEFICIT AND WE EXPECT FUTURE LOSSES THAT MAY CAUSE OUR STOCK PRICE TO DECLINE.

We are a development stage company and have incurred losses since we were formed. We incurred a net loss of $5,177,891 for the year ended February 29, 2008 and incurred cumulative losses since our inception on August 11, 1968 of $54,869,960. We currently have no products ready for commercialization, have generated revenue solely from licensing and sale of our intellectual property to third parties and expect to incur substantial net losses for the foreseeable future to further develop and commercialize our technology. We expect to continue to incur losses as we spend additional capital to develop and market our technologies and establish our infrastructure and organization to support anticipated operations. We cannot be certain whether we will ever earn a significant amount of revenues or profit, or, if we do, that we will be able to continue earning such revenues or profit. Also, our current financial condition may limit our ability to develop and ultimately market our technologies. Any of these factors could cause our stock price to decline and result in you losing a portion or all of your investment.

WE WILL NEED TO RAISE CAPITAL TO FUND OUR OPERATIONS, AND OUR FAILURE TO OBTAIN FUNDING WHEN NEEDED MAY FORCE US TO DELAY, REDUCE OR ELIMINATE OUR PRODUCT DEVELOPMENT EFFORTS.

Until we are capable of generating sufficient revenues from operations to fund our operations and our capital resources are sufficient to meet future requirements, we will have to raise funds to continue the development, commercialization, marketing and sale of our products.

We cannot be certain that funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct our business. If we are unable to raise additional capital if required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our products, obtain funds by entering into agreements on unattractive terms or restrict or cease our operations as a going concern.

THE INABILITY TO RETAIN AND ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS AND PLAN OF OPERATIONS.

We believe that our future success will depend on the abilities and continued service of certain of our senior management and executive officers, particularly our Chief Executive Officer and those persons involved in the research and development of our products. If we are unable to retain the services of these persons, or if we are unable to attract additional qualified employees, researchers, and consultants, we may be unable to successfully finalize and eventually market our medical devices and other products being developed, which will have a material adverse effect on our business.

OUR RESEARCH AND DEVELOPMENT EFFORTS MAY NOT RESULT IN COMMERCIALLY VIABLE PRODUCTS, WHICH COULD RESULT IN A DECLINE OF OUR STOCK PRICE AND A LOSS OF YOUR INVESTMENT.

Our technologies are in the development stage. Further research and development efforts will be required to develop these technologies to the point where they can be incorporated into commercially viable or salable products. We cannot assure you, however, that our planned programs will be accomplished in the order or in the time frame set forth. We reserve the right to modify the research and development program. We may not succeed in developing commercially viable products from our technologies. Also, certain of our research and development efforts are aimed at technology that will enable certain medical procedures and biomedical devices to become compatible with MRI diagnostics. If MRI diagnostics are replaced by the healthcare industry, our technology and products, if any, may become obsolete. If we are not successful in developing commercially viable products or if such products become obsolete, our ability to generate revenues from our technologies will be severely limited. This would result in the loss of all or part of your investment.

WE MAY NOT BE ABLE TO DEVELOP A MARKET FOR OUR TECHNOLOGY, WHICH WILL LIKELY CAUSE OUR STOCK PRICE TO DECLINE.

The demand and price for our technology and related products will be based upon the existence of markets for the technology and products and the markets for products of others, which may utilize our technology. The extent to which we may gain a share of our intended markets will depend, in part, upon the cost effectiveness and performance of our technology and products when compared to alternative technologies, which may be conventional or heretofore unknown. If the technology or products of other companies provide more cost-effective alternatives or otherwise outperform our technology or products, the demand for our technology or products may be adversely affected. Our success will be dependent upon market acceptance of our technology and related products. Failure of our technology to achieve and maintain meaningful levels of market acceptance would materially and adversely affect our business, financial condition, results of operations, and market penetration. This would likely cause our stock price to decline.

IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY IN THE COMPETITIVE MEDICAL DEVICE INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL SUFFER.

Our future success depends on our ability to compete effectively with manufacturers of medical devices, including major manufacturers of pacemakers and other implantable devices that may have internal development programs. We are an early-stage research and development company engaged exclusively in developing our initial technologies. Products using our technologies have not yet been commercialized and we have generated no material revenue from operations. As a result, we may have difficulty competing with larger, established medical device companies. Most of our potential competitors will be established, well-known companies that have:

substantially greater financial, technical and marketing resources;

larger customer bases;

better name recognition;

related product offerings; and

larger marketing areas.

Companies such as Medtronic, Inc., Guidant Corporation, St. Jude Medical, Boston Scientific Corporation, and Johnson & Johnson are major, international providers of medical devices currently with limited compatibility for MRI. Because these companies may possibly develop MRI image compatibility solutions for their own product lines, they may ultimately be in competition with us. These companies represent a wide array of medical devices and products, technologies, and approaches. All of these companies have more resources than we do and, therefore, a greater opportunity to develop comparable products and bring those products to market more efficiently than we can. If we do not compete effectively with current and future competitors, our future growth and operating results will be adversely affected.

WE MAY NOT BE ABLE TO OBTAIN NECESSARY GOVERNMENT APPROVAL TO MARKET OUR TECHNOLOGY WHICH WILL LIKELY CAUSE OUR STOCK PRICE TO DECLINE AND OUR BUSINESS TO FAIL.

Our marketing partners must obtain the approval of the U.S. Food and Drug Administration in order to market our MRI image compatibility technology and Myotech CSS technology. If these approvals are not obtained, or are significantly delayed, our ability to generate revenues may be adversely affected and our development and marketing efforts inhibited. This would most likely cause our stock price to decline and result in the loss of all or part of your investment.

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND WE MAY INFRINGE THE PROPRIETARY RIGHTS OF OTHERS. OUR INABILITY TO PROTECT OUR RIGHTS COULD IMPAIR OUR BUSINESS AND CAUSE US TO INCUR SUBSTANTIAL EXPENSE TO ENFORCE OUR RIGHTS.

Proprietary rights are critically important to us. We currently have 49 issued U.S. patents and over 40 U.S. and international patents pending. Although we intend to aggressively pursue additional patent protection for our technologies as we continue to develop them, we cannot assure you that any additional patents will be issued. Although we will seek to defend our patents and to protect our other proprietary rights, our actions may be inadequate to protect our patents and other proprietary rights from infringement by others, or to prevent others from claiming infringement by us of their patents and other proprietary rights.

Policing unauthorized use of our technology is difficult, and some foreign laws do not provide the same level of protection as U.S. laws. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or patents that we may obtain, or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and have a material adverse effect on our future operating results.

FUTURE SALES OF OUR COMMON STOCK WOULD HAVE A DILUTIVE EFFECT ON CURRENT STOCKHOLDERS AND COULD ADVERSELY IMPACT THE MARKET PRICE FOR OUR COMMON STOCK.

Sales of a substantial number of shares of our common stock, or the perception that sales could occur, whether at the then current market price or below the then current market price, could adversely affect prevailing market prices for our common stock. For example, in connection with our issuance of $7,250,000 of senior secured amortizing convertible notes on October 12, 2006, of which $3,588,545 in principal is currently outstanding ,the holders of the notes may elect to convert the notes at any time into shares of our common stock at a price of $0.15 per share (the “Conversion Price”). Payments of interest and principal on the notes may be made, at our option, in cash or shares of our common stock registered for resale under the Securities Act, and if we elect to make payments on the notes in shares, those payments will be based on the lower of (i) the Conversion Price or (ii) 80% of the volume weighted trailing average price per share of our common stock for the 20 trading days ending 23 trading days prior to the date we make a payment. As additional consideration to the purchasers of the notes, we issued five-year warrants that currently permit the investors to purchase an aggregate of 18,034,830 shares of our common stock at an exercise price of $0.23 per share. As further consideration to the purchasers of the notes, we issued one-year warrants expiring May 7, 2008 to purchase up to 10,820,896 shares of our common stock at a price of $0.23 per share. If the purchasers elect to exercise this one-year warrant, they will also receive additional five-year warrants to purchase our common stock equal to the number of shares purchased under this one-year warrant, with 50% of the additional warrants having an exercise price of $0.85 per share and the remaining 50% of the additional five-year warrants having an exercise price of $0.92 per share. In addition, if we issue additional shares of our common stock for sale in future financings, our stockholders would experience additional dilution.

BECAUSE OUR CEO IS AN AFFILIATE OF OTHER ENTITIES WITH WHOM BIOPHAN HAS SIGNIFICANT BUSINESS RELATIONSHIPS, THERE MAY BE CONFLICTS OF INTEREST THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK.

John Lanzafame, our Chief Executive Officer, is on the Board of NaturalNano, Inc., the largest stockholder of which is Technology Innovations, LLC, which is a 57% equity member of Biomed Solutions, LLC, a company engaged in the business of identifying and acquiring technologies in the biomedical field for exploitation. Biomed holds an aggregate of $1,200,000 face amount of our convertible promissory note. NaturalNano has entered into a research and development agreement with us for drug eluting technology.

Because of the nature of our business and the business of these other entities, the relationships of Mr. Lanzafame with these other entities may give rise to conflicts of interest with respect to certain matters affecting us. Potential conflicts may not always be resolved in a manner that is favorable to us. We believe it is impossible to predict the precise circumstances under which future potential conflicts may arise and therefore intend to address potential conflicts on a case-by-case basis. Under Nevada law, directors have a fiduciary duty to act in good faith and with a view to the best interests of the corporation.

THE PRICE AND TRADING VOLUME OF OUR COMMON STOCK IS SUBJECT TO CERTAIN FACTORS BEYOND OUR CONTROL THAT MAY RESULT IN SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY INCREASES THE RISK THAT YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT OR ABOVE THE PRICE THAT YOU PAY FOR THE SHARES.

Factors beyond our control, that may cause our share price to fluctuate significantly include, but are not limited to, the following:

the development of a future market for our products;

changes in market valuations of similar companies;

announcement by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

additions or departures of key personnel; and

fluctuations in stock market price and volume.

Additionally, in recent years the stock market in general, and the OTCBB and technology stocks in particular, have experienced extreme price and volume fluctuations. In some cases these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stock price regardless of our operating performance. The historical trading of our common stock is not necessarily an indicator of how it will trade in the future and our trading price as of the date of this prospectus is not necessarily an indicator of what the trading price of our common stock might be in the future.

In the past, class action litigation has often been brought against companies following periods of volatility in the market price of those companies' common stock. If we become involved in this type of litigation in the future it could result in substantial costs and diversion of management attention and resources, which could have a further negative effect on your investment in our stock.

THERE IS NO ASSURANCE OF AN ESTABLISHED PUBLIC TRADING MARKET, WHICH WOULD ADVERSELY AFFECT THE ABILITY OF INVESTORS IN OUR COMPANY TO SELL THEIR SECURITIES IN THE PUBLIC MARKETS.

Although our common stock trades on the OTCBB, a regular trading market for our common stock may not be sustained in the future. The National Association of Securities Dealers (the “NASD”) limits quotation on the OTCBB to securities of issuers that are current in their reports filed with the SEC. If we fail to be current in the filing of our reports with the SEC, our common stock will not be able to be traded on the OTCBB. The OTCBB is an inter-dealer market that provides significantly less liquidity than a national securities exchange or automated quotation system. Quotes for stocks included on the OTCBB are not listed in the financial sections of newspapers as are those for stocks listed on national securities exchanges or automated quotation systems. Therefore, prices for securities traded solely on the OTCBB may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price. Market prices for our common stock may be influenced by a number of factors, including:

	·	the issuance of new equity securities;
	·	changes in interest rates;
	·	competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
	·	variations in quarterly operating results;
	·	change in financial estimates by securities analysts;
	·	the depth and liquidity of the market for our common stock;
	·	investor perceptions of our company and the technologies industries generally; and
	·	general economic and other national conditions.

OUR LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK.

The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our common stock is thus subject to volatility. In the absence of an active trading market:

	·	investors may have difficulty buying and selling or obtaining market quotations;
	·	market visibility for our common stock may be limited; and
	·	lack of visibility for our common stock may have a depressive effect on the market for our common stock.

OUR COMMON STOCK IS A "PENNY STOCK."

Our common stock is a “low-priced” security, or a penny stock, under rules promulgated under the Exchange Act. A stock could be considered to be a "penny stock" if it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it is NOT quoted on The NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a "penny stock" is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.

In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions probably decreases the willingness of broker-dealers to make a market in our common stock, decreases liquidity of our common stock and increases transaction costs for sales and purchases of our common stock as compared to other securities.

BROKER-DEALER REQUIREMENTS MAY AFFECT TRADING AND LIQUIDITY.

Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

FAILURE TO ACHIEVE AND MAINTAIN INTERNAL CONTROLS IN ACCORDANCE WITH SECTIONS 302 AND 404(A) OF THE SARBANES-OXLEY ACT OF 2002 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.

If we fail to maintain adequate internal controls or fail to implement required new or improved controls, as such control standards are modified, supplemented or amended from time to time; we may not be able to assert that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud. If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and there could be a material adverse effect on our stock price. We have examined and evaluated our internal control procedures, including controls over financial reporting to satisfy the requirements of Section 404(a) of the Sarbanes-Oxley Act, as required for our Annual Report on Form 10-K for the year ending February 29, 2008, and noted weaknesses that need to be addressed during the current reporting period in order for our internal controls to be effective. Failure to implement and maintain internal controls in accordance with sections 302 and 404(a) of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.

BECAUSE WE HAVE NO PLANS TO PAY DIVIDENDS ON OUR COMMON STOCK, STOCKHOLDERS MUST LOOK SOLELY TO APPRECIATION OF OUR COMMON STOCK TO REALIZE A GAIN ON THEIR INVESTMENTS.

We do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance the expansion of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including our business, financial condition, results of operations, capital requirements and investment opportunities. In addition, our senior credit facility limits the payment of dividends without the prior written consent of the lenders. Accordingly, stockholders must look solely to appreciation of our common stock to realize a gain on their investment. This appreciation may not occur.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our headquarters are located at 15 Schoen Place, Pittsford, New York 14534 with approximately 4,470 square feet of office space and approximately 1,000 square feet of laboratory space. Myotech also leases space at the same location with approximately 2,300 square feet of office space and approximately 1,000 square feet of laboratory space. Both leases for this facility extend to February 28, 2022, subject to our right to terminate at any time after January 31, 2009 upon 90 days' notice. For the lease years commencing March 1, 2007 and 2008, Biophan will pay an annual base rent of $89,558. The Myotech lease for the year commencing March 1, 2007 has an annual base rent of $10,000 and increases to an annual base rent of $50,000 for the year commencing March 1, 2008. Terms for Biophan and Myotech are the same for subsequent years. For each year commencing on March 1, 2009 and continuing through February 28, 2011, the base rent will increase by 5% over the previous year's rent. For each year commencing on March 1, 2011 and continuing through February 28, 2017, the base rent will increase by 3% over the previous year's rent. The landlord will be responsible for all real property taxes for the first 38 months of the lease term; thereafter, the landlord will absorb the first 3% of any increase in the real property taxes on the premises in which our facility is located and two-thirds of the remaining 97% of any such increase, while we will reimburse the landlord for our proportionate share (48%) of the remaining one-third of such 97%. We will bear our own gas, electric, water and other utility charges and our proportionate share of utility charges for the premises' interior common areas. We believe that this facility will be adequate for our current and anticipated future needs through the lease expiration date.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings and there are no material legal proceedings pending with respect to our property, except as noted below. We are not aware of any legal proceedings contemplated by any governmental authorities involving either us or our property. None of our directors, officers or affiliates is an adverse party in any legal proceedings involving us or our subsidiaries, or has an interest in any proceeding which is adverse to us or our subsidiaries.

On April 5, 2007, SBI Brightline LLC and SBI Brightline XI, LLC brought suit against us and Biomed Solutions, LLC in the Superior Court of Orange County, California. The suit alleges, among other things, that in September 2006 we entered into an agreement to terminate the Stock Purchase Agreement dated as of May 27, 2005 and amended on January 8, 2006, between us and SBI Brightline XI, LLC, and seeks unspecified monetary damages and an order by the Court deeming the Stock Purchase Agreement to be terminated. We believe the allegations made by SBI are without basis in fact and in response moved for dismissal of the complaint. The plaintiffs withdrew their complaint following our motion and filed an amended complaint containing nearly identical allegations, against which we likewise moved for dismissal. On November 5, 2007, we entered into a Settlement Agreement with SBI Brightline LLC, SBI Brightline XI LLC and Biomed Solutions, LLC, pursuant to which (i) a promissory note issued by the Company to Biomed Solutions, LLC, in the principal amount of $5,000,000, was reduced by $1,050,000, (ii) warrants to purchase 1,180,000 shares of common stock of the Company, issued to SBI Brightline XI, LLC, were terminated, (iii) the Stock Purchase Agreement dated as of May 27, 2005 and amended on January 8, 2006, between the Company and SBI Brightline XI, LLC was terminated, and (iv) the parties mutually released each other with respect to prior claims.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is listed on the OTC Bulletin Board under the symbol BIPH. The following table sets forth, for the fiscal quarters indicated, the high and low bid prices. These quotations reflect inter-dealer prices, without mark-up, mark-down or commission, and may not represent actual transactions.

Quarter Ended	High		Low
May 31, 2006	$	1.750	$	1.030
August 31, 2006	$	1.330	$	.640
November 30, 2006	$	.950	$	.400
February 28, 2007	$	.670	$	.400
May 31, 2007	$	.450	$	.190
August 31, 2007	$	.430	$	.120
November 30, 2007	$	.250	$	.070
February 29, 2008	$	.120	$	.040

HOLDERS

As of February 29, 2008, we had 119,128,504 shares of our common stock outstanding which were held by 237 stockholders of record and approximately 9,400 beneficial stockholders.

DIVIDEND POLICY

We have never paid cash dividends and have no plans to do so in the foreseeable future. Our future dividend policy will be determined by our Board of Directors and will depend upon a number of factors, including our financial condition and performance, our cash needs and expansion plans, income tax consequences, and the restrictions that applicable laws and our credit arrangements then impose.

EQUITY COMPENSATION PLANS

The following chart sets forth information regarding our equity compensation plans as of February 29, 2008:

Plan Category	Number of securities to be		Weighted average exercise		Number of securities
	issued upon exercise of		price of outstanding		remaining available for
	outstanding options,		options, warrants and		future issuance under
	warrants and rights		rights		equity compensation plans
					(excluding securities
					reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		15,503,891	$	0.59		71,046
Equity compensation plans not approved by security holders		-0-		-0-		-0-
Total		15,503,891	$	0.59		71,046

RECENT SALES OF UNREGISTERED SECURITIES

The following securities were issued or sold by Biophan during the year ended February 29, 2008, without registration under the Securities Act of 1933, and have been modified since previously reported on a quarterly report on Form 10-Q:

On October 11, 2006, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with 10 private investors led by Iroquois Master Fund Ltd ("Iroquois"). Pursuant to the Purchase Agreement, on October 12, 2006 we issued $7,250,000 of Senior Secured Convertible Notes (the "Notes") to the investors and received proceeds of $6,219,880 after paying estimated fees and expenses of $1,030,120 related to the transaction. The holders of the Notes may elect to convert the Notes at any time into shares of our common stock based upon a price of $0.67 per share (the "Conversion Price"). Interest on the outstanding principal amount under the Notes is payable quarterly at a rate equal to the six-month London InterBank Overnight Rate plus 500 basis points, with a minimum rate of 10% per annum and a maximum rate of 12% per annum, payable at our option in cash or shares of our common stock registered for resale under the Securities Act of 1933, as amended (the "Securities Act"). If we elect to make an interest payment in common stock, the number of shares issuable by us will be based upon the lower of (i) 90% of the 20-day trailing average volume weighted average price per share as reported on Bloomberg LP (the "VWAPS") or (ii) the Conversion Price. Principal on the Notes amortizes and payments are due in 33 equal monthly installments commencing four months following issuance of the Notes, and may be made at our option in cash or shares of our common stock registered for resale under the Securities Act. If we elect to make a principal payment in common stock, the number of shares issuable by us will be based upon the lower of (i) 87.5% of the 15-day trailing VWAPS prior to the principal payment date or (ii) the Conversion Price. Our obligations under the Notes are secured by a first priority security interest in substantially all of our assets pursuant to a Security Agreement dated as of October 11, 2006 among us, the investors and Iroquois, as agent for the investors (the "Security Agreement").

We further agreed to register for resale under the Securities Act the common stock issuable upon the exercise of the warrants and any shares of common stock we may issue to the holders of the Notes in connection with payments of interest and principal, or which we are obligated to issue upon any conversion of the Notes at the option of the holders.

On February 21, 2007, we entered into a Forbearance Agreement (the "Forbearance Agreement") with the investors pursuant to which the investors agreed that, during the period commencing on February 16, 2007 and ending on the earlier of (i) March 31, 2007 or (ii) the date on which any Termination Event (as defined in the Forbearance Agreement) first occurs (the "Forbearance Period"), they will forbear from exercising any and all of the rights and remedies which they may have against us or any of our assets under the Notes or the Purchase Agreement or at law or in equity as a result of any default under the Notes or as a result of the occurrence of certain events with respect to the Purchase Agreement. In exchange for entering into the Forbearance Agreement, we issued pro rata to the investors three-year warrants for the purchase of an aggregate of 60,000 shares of our common stock at an exercise price of $0.51 per share (the "Fee Warrants"). In consideration for a payment of $652,500 on October 9, 2007 all the existing defaults under the Notes or Purchase Agreement were remedied.

Upon the issuance of the Fee Warrants, the exercise prices of the five-year warrants issued to the investors pursuant to the Purchase Agreement (the "Original Warrants") for the purchase of an aggregate of 10,820,896 shares of our common stock were automatically adjusted from $0.81 per share and $0.89 per share, respectively, to $0.51 per share, and the number of shares of our common stock issuable upon exercise of the Original Warrants was automatically adjusted, proportionately, to an aggregate of 18,034,830 shares. In the Forbearance Agreement, the investors waived, with respect to the issuance of the Fee Warrants, application of similar anti-dilution adjustments contained in the Notes and in a third series of warrants for the purchase, on or before October 12, 2007, of an aggregate of 10,820,896 additional shares of our common stock at an exercise price of $0.67 per share (the "One Year Warrants"). C.E. Unterberg Towbin, which holds a warrant for the purchase of 865,672 shares of our common stock at an exercise price of $0.67 per share, issued to it in connection with its services as exclusive placement agent under the Purchase Agreement, separately agreed to waive, with respect to the issuance of the Fee Warrants, application of the anti-dilution provisions set forth in that warrant. The warrants and any shares issued upon exercise of warrants or any election to convert outstanding debt are exempt from registration pursuant to Sections 3(a)9 and 4(2) of the Securities Act.

On February 7, 2008, the Securities Purchase Agreement was amended further to, among other things, allow the Company to withdraw the Registration Statement on Form S-1 (SEC File Number 333-146930) which was filed with the Securities and Exchange Commission on October 25, 2007 on behalf of the Investors, without any liquidated damages or penalties or further obligations to file a registration statement in connection with any securities held by the Investors. While the Registration Statement was pending, in order to continue to satisfy its payment obligations to the Investors under the Agreement, the Company issued 11,869,235 shares of its common stock from November 30, 2007 through February 29, 2008. The shares were issued without registration under the Securities Act of 1933 in reliance on the exemption provided in Section 4(2) of such Act. In exchange, we agreed to change the definition of Market Price if the average for the 20 Trading Days ending immediately prior to the applicable Principal Payment Date is below $0.15 (the conversion price). Market Price will be calculated on 80% of the arithmetic average of the VWAP for each of the 20 Trading Days ending immediately prior to the applicable Principal Payment Date.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K.

Overview

We are a technology development and holding company with a strong focus on solving real-world technical challenges facing the medical device industry, focused on MRI compatible device, and cardiovascular and circulatory support devices. We currently have 49 issued U.S. patents and over 40 U.S. and international patents pending. We believe that a strong intellectual property portfolio is vital to our ability to achieve and maintain royalties and product sales to major industrial partners across our product lines.

We are continuing development of a new circulatory support device, the Myotech CSS, in our subsidiary with Myotech, LLC.

The following table presents the dollar amount and percentage of changes from period to period of the line-items included in our Consolidated Statements of Operations:

	Year Ended
	February 29, 2008			February 28, 2007			Increase (Decrease)			% Change			February 28, 2006			Increase (Decrease)			% Change
Revenues	$	11,685,684		$	989,529		$	10,696,155			1080.93	%	$	1,044,861		$	(55,332	)		-5.30	%
Operating expenses:
Research and development		4,234,932			7,190,975			(2,956,043	)		-41.11	%		6,829,142			361,833			5.30	%
General and administrative		5,030,558			6,824,945			(1,794,387	)		-26.29	%		8,451,886			(1,626,941	)		-19.25	%
Total Expenses		9,265,490			14,015,920			(4,750,430	)		-33.89	%		15,281,028			(1,265,108	)		-8.28	%

Operating income (loss)		2,420,194			(13,026,391	)		15,446,585			-118.55	%		(14,236,167	)		1,209,776			-8.50	%

Other income (expense)		(8,995,535	)		(6,721,659	)		2,273,876			-33.83	%		(854,376	)		5,867,283			-686.73	%
Loss from continuing operations before minority interest in Myotech, LLC		(6,575,341	)		(19,748,050	)		13,172,709			-66.70	%		(15,090,543	)		4,657,507			-30.86	%

Minority interest in Myotech, LLC		1,397,450			2,025,639			(628,189	)		-31.01	%		606,159			1,419,480			234.18	%

Net loss	$	(5,177,891	)	$	(17,722,411	)	$	(12,544,520	)		-70.78	%	$	(14,484,384	)	$	(3,238,027	)		22.36	%

Revenue

We currently derive revenue from license fees from Boston Scientific Scimed, payments from a technology transfer agreement with Medtronic, and operating revenues from our European subsidiary, consisting primarily of MRI-related testing and consulting services to medical device manufacturers.

Research and Development Expenses

Research and development expenses consist primarily of:

o salaries and related costs for our research and development employees at our U.S. and European sites;

o funding for various research projects, often employing the use of consulting scientists and engineers;

o legal fees to file, renew, and defend our patent estate; and

o license fees for access to certain patent technologies developed by others.

General and Administrative Expenses

General and administrative expenses consist primarily of:

o salaries and related costs of executives, administrative and marketing personnel;

o professional service costs;

o public / investor relations;

o travel and related costs; and

o occupancy and other overhead costs.

Stock-Based Compensation Expenses

Effective March 1, 2006, the Company adopted SFAS No. 123 (revised), "Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R), stock option grants to employees and directors were accounted for in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (the intrinsic value method) and the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." Accordingly, employee compensation expense was recognized only to the extent that the fair value of our common stock on the date of grant exceeded the stock option exercise price.

Under the modified prospective approach, SFAS 123(R) applies to new grants and to grants that were outstanding on February 28, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in fiscal 2007 includes compensation cost for all share-based payments granted prior to, but not yet vested as of February 28, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to February 28, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Prior periods were not restated to reflect the impact of adopting the new standard.

Comparison of the Years Ended February 29, 2008 and February 28, 2007

Revenues

Revenues for the year ended February 29, 2008 were $11,686,000 compared to $990,000 in 2007. The increase was due principally to the sale of intellectual property rights to Medtronic, Inc. ($11,000,000) and payments from a related technology transfer agreement with Medtronic ($75,000), license fees from Boston Scientific Scimed, Inc. (250,000), grant revenues ($100,000) and decreased operating revenues from our European subsidiary, which consisted primarily of MRI-related testing and consulting services to medical device manufacturers ($260,600). The Company anticipates revenues to be generated from grants, licensing and distribution deals, and related fees for the near future. The Company anticipates that it may begin to see revenues generated from medical devise sales of the Myotech CSS within the next 24 to 30 months, assuming regulatory approval.

Operating Expenses

Research and development expenses decreased by 41%, or $2,956,000. After factoring out an increase in non-cash charges relating to stock options expense ($150,000) however, expenses decreased by $3,106,000 or (43%). The decrease is attributable generally to our planned reductions in spending on our research and development projects, due to restructuring. The major areas of decreased expenses were Project Funding ($1,348,000), Consulting ($742,000), Patent Attorneys ($289,000), and Personnel ($470,000). The Company anticipates that its research and development expenditures for the coming year will decrease slightly for our early stage technologies, which will largely be paced by our grant and partnering activities, while expenditures on the development of the Myotech CSS will increase as the Company focuses more of its effort on preparation of the Myotech CSS for market launch. These expenditures are dependent on the Company having sufficient working capital to fund these activities.

General and Administrative

General and administrative expenses decreased by 26%, or $1,794,000. After factoring out an increase in non-cash charges relating to stock options expense ($18,000), expenses decreased by $1,775,971, or 30%. These decreases are attributable generally to our planned reductions in spending, due to restructuring. The major areas of decreased expenses were Public Relations ($738,000), Consulting ($321,500), Office Supplies and Expense ($288,000), Travel ($185,000) and Personnel ($77,000). The Company plans to maintain our general and administrative expenses at the lower levels achieved following our restructuring.

Other Income and Expense

The net increase in this category ($2,273,876) is primarily interest expense relating to the Senior Secured Convertible Notes ($4,132,000). This was offset by a decrease in the Fair Value Derivative Liability ($4,339,000) and the increase in liquidated damages ($652,500), both related to the Senior Secured Convertible Notes financing agreement in October 2006 and the amendments to that agreement in October 2007. Other components contributing to the net change in other income and expense was loss on extinguishment of debt ($2,509,000) offset by net miscellaneous income ($527,500). Due to the lower level of debt remaining on the note, the Company believes that the interest expenses related to Senior Secured Convertible Notes will decrease this coming year.

Minority Interest in Myotech LLC

The decrease in this line-item is a direct effect of allocating the decreased losses incurred by Myotech to the interest of the owners of Myotech other than Biophan and the reduction in ownership by minority shareholders in Myotech. This minority interest in the losses of Myotech will continue to decrease as the Company increases its planned equity ownership in Myotech to 75%.

Comparison of the Years Ended February 28, 2007 and 2006

Revenues

Revenues for the year ended February 28, 2007 were $990,000 compared to $1,045,000 in 2006. Our 2007 revenues pertain to $563,000 in license fees from our licensing agreement with Boston Scientific Scimed, Inc. and $427,000 from our MRI testing services and consulting fees in Biophan Europe.

Operating Expenses

Research and Development. These expenses primarily consist of the personnel-related, technical consulting, professional fees for patent attorneys, and license fees. For the year ended February 28, 2007, these expenses increased by 5.3%, or $362,000, to $7,191,000 compared to $6,829,000. Because we consolidated Myotech, LLC at November 30, 2005, the fourth quarter of 2006 included $443,000 of Myotech operational expenses and $344,000 of Myotech intangible assets amortization. We consolidated Myotech LLC as required by FIN 46(R). The most significant changes in this category of expenses include a decrease in non-cash stock option compensation expense of $1,500,000 due primarily to a 2006 expense of $1,948,000 of non-cash expense from the vesting of contingent stock options that vested upon the achievement of specified performance-based milestones, which was partially offset by $100,000 for additional professional staff and salary increases. In addition, we increased our funding of various research and development projects by $1,300,000 and we incurred $1,000,000 of increased non-cash patent amortization expense related to the Myotech intangible assets, which was partially offset by $600,000 of decreased spending for outside professional services related to licenses and patent maintenance.

General and Administrative.

General and administrative expenses include the costs of personnel-related expenses for the administrative, legal, finance, information technology, and communications functions. For the year ended February 28, 2007, these expenses declined by 19%, or $1,627,000 to $6,825,000 compared to $8,452,000 for 2006. Because we consolidated Myotech LLC at November 30, 2005, the fourth quarter of 2006 included $165,000 of Myotech operational expenses. We consolidated Myotech LLC for the fiscal year 2007. The most significant changes in this category of expenses include a decrease in non-cash stock option compensation expense of $1,700,000 due primarily to a 2006 expense of $ 2,296,000 of non-cash expense from the vesting of contingent stock options that vested upon the achievement of specified performance-based milestones, which was partially offset by $500,000 for additional professional staff and salary increases; increased outside professional services of $600,000 primarily related to audit, first-year Sarbanes Oxley compliance, and financial consulting. These cost increases were offset by decreased spending by $1,000,000 for other expenses.

Other Income (Expense)

Interest Expense. We incurred interest expense amounting to approximately $4,304,000 for the year February 28, 2007 compared to $1,141,000 of expense for the year ended February 28, 2006. The increased expense (non-cash) is attributed to $2,300,000 in interest under provisions of the $7,250,000 Senior Secured Convertible Notes held by Iroquois Master Fund Ltd and other investors; the write-off of $1,100,000 of the remaining unamortized discount on a note to Biomed Solutions, LLC; and approximately $900,000 of interest payable on borrowings under lines of credit with Biomed Solutions, LLC.

Change in Fair Value of Warrant Liability. We adjusted this liability of $10,494,000 primarily related to the Senior Secured Convertible Notes at February 28, 2007, or a decrease in expense of $5,318,000 from our initial recording of this derivative liability of $15,309,000 at the closing date of October 12, 2006.

Loss on Extinguishment of Debt. We incurred a loss on the extinguishment of the note (non-cash) to Biomed Solutions, LLC due to the substantial amendment to the note to Biomed, amounting to $670,000.

Minority Interest in Myotech LLC.

The loss of $2,026,000 is a pro rata share of the loss incurred by Myotech, LLC attributable to minority interests for the year ended February 28, 2007. The loss of $606,000 is the pro rata share of the loss incurred by Myotech from November 30, 2005 (date of acquisition) through February 28, 2006. As further described under the heading "Business Combinations" in the "Notes to Consolidated Financial Statements" the Company held a 43.7% interest in Myotech LLC, valued on our balance sheet at February 28, 2007 at $12,687,000, which required consolidation as a variable interest entity since the Company was deemed to be the primary beneficiary in the relationship with Myotech.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, The FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 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. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 in the first quarter of fiscal 2008. See Note 19 to the consolidated financial statements for additional information regarding the impact of adopting the provisions of FIN 48 and the related disclosures.

In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, on December 14, 2007, the FASB issued proposed FSP FAS 157-b which would delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This proposed FSP partially defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The Company is currently evaluating the impact of adoption of FAS 157 on our consolidated financial position, results of operations or cash flows.

In December 2006, the FASB issued Staff Position No. EITF 00-19-2. This FSP addresses an issuer's accounting for registration payment arrangements and specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with FASB No. 5. The guidance in this FSP amends FASB Statements 133 and 150 and FASB Interpretation No. 45 to include scope exceptions for registration payment arrangements. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006. The Company adopted this EITF in the first quarter of 2007 in connection with the issuance of the Senior Secured Convertible Notes and related warrants. See Note 10, "Senior Secured Convertible Notes" in the accompanying financial statements.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159 permits companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. The standard also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are permited to adopt SFAS No. 159 on March 1, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 159, if any, on our financial position, results of operations and cash flows.

In June 2007, the Financial Accounting Standards Board ratified EITF Issue No. 07-3, which clarifies the method and timing for recognition of nonrefundable advance payments for goods and services to be used or rendered in future research and development activities pursuant to an executory contractual arrangement. In particular, it addresses whether nonrefundable advance payments for goods or services that will be used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. The consensus in this Issue is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. The Company does not expect the adoption of this Issue to have a material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the accounting for and reporting of business combinations and non-controlling (minority) interests in consolidated financial statements. Statement Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS Nos. 141(R) and SFAS 160 will be applied prospectively to business combinations with an acquisition date after the effective date. The adoption of SFAS Nos. 141(R) and 160 are expected to have a impact on the Company’s financial statements for current and future subsidiary investments.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

Revenue Recognition

We earn and recognize revenue under development agreements when the phase of the agreement to which amounts relate is completed and we have no further performance obligation. Completion is determined by the attainment of specified milestones including a written progress report. Advance fees received on such agreements are deferred until recognized.

We recognize initial license fees over the term of the related agreement. Revenue related to a performance milestone is recognized upon the achievement of the milestone, as defined in the respective agreements.

We also recognize revenues from testing services and consulting fees as services are performed.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BIOPHAN TECHNOLOGIES, INC.

FINANCIAL STATEMENTS

CONTENTS

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Financial Statements:
Balance Sheets	F-4
Statements of Operations	F-5
Statements of Stockholders' Equity (Deficiency)	F-6
Statements of Cash Flows	F-10

Notes to Consolidated Financial Statements	F-13

F-1

Reports of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Biophan Technologies, Inc

We have audited the consolidated balance sheets of Biophan Technologies, Inc. and Subsidiaries (a development stage company) as of February 29, 2008, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for year ended February 29, 2008, and the amounts in the cumulative column in the consolidated statements of operations, stockholders’ equity (deficiency) and cash flows from March 1, 2007 to February 29, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Biophan Technologies, Inc. and Subsidiaries as of February 29, 2008, and the results of their operations and their cash flows for the year ended February 29, 2008, in conformity with United States generally accepted accounting principles. Additionally, the amounts included in the cumulative column in the consolidated statements of operations and cash flows for the period from March 1, 2007 to February 29, 2008 are fairly presented, in all material respects, in conformity with United States generally accepted accounting principles.

The financial statements of Biophan Technologies, Inc. and Subsidiaries as of February 28, 2007, and for the year then ended were audited by other auditors. As described in Note 19, the Company adjusted the components and balances of its deferred tax assets and liabilities, valuation allowance and income tax rate reconciliation. We audited the adjustments that were applied to restate the disclosures for income taxes. In our opinion, such adjustments are appropriate and properly applied. However, we were not engaged to audit, review or apply any procedures to the February 28, 2007 financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the February 28, 2007 financial statements taken as a whole.

/s/ Freed, Maxick & Battaglia, CPAs, PC.

Buffalo, New York

June 13, 2008

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Biophan Technologies, Inc.

We have audited, before the effects of the adjustments for the correction of the error described in Note 19, the consolidated balance sheet of Biophan Technologies, Inc. and Subsidiaries (a development stage company) as of February 28, 2007, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows for the year then ended, and the amounts in the cumulative column in the consolidated statements of operations, stockholders' deficiency, and cash flows for the period from March 1, 2000 to February 28, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, except for the error described in Note 19, the 2007 consolidated financial statements present fairly, in all material respects, the financial position of Biophan Technologies, Inc. and Subsidiaries as of February 28, 2007, and the results of its operations and its cash flows for the year then ended in conformity with United States generally accepted accounting principles. Additionally, the amounts included in the cumulative column in the consolidated statements of operations and cash flows for the period from March 1, 2000 to February 28, 2007 are fairly presented, in all material respects, in conformity with United States generally accepted accounting principles.

We were not engaged to audit, review, or apply any procedures to the adjustments for the correction of the error described in Note 19 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Freed Maxick & Battaglia, CPAs, P.C.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 17 to the consolidated financial statements, effective March 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

GOLDSTEIN GOLUB KESSLER LLP

New York, New York

May 4, 2007

F-3

The accompanying notes should be read in conjunction with the consolidated financial statements

CONSOLIDATED BALANCE SHEETS

	February 29,			February 28,
	2008			2007
ASSETS

Current assets:
Cash and cash equivalents	$	6,970,205		$	2,418,551
Accounts receivable		114,566			21,448
Prepaid expenses		103,212			166,171
Other current assets		44,437			25,350
Total current assets		7,232,420			2,631,520
Property and equipment, net		309,692			418,362
Other assets:
Intangible assets, net of amortization:
Myotech, LLC		17,120,242			23,074,028
Other		1,320,128			1,322,777
Deferred financing costs, net of amortization of $683,283 and $186,350, respectively		848,927			1,345,860
Investment in New Scale Technologies, Inc.		—			100,000
Deposits		206			3,704
		19,289,503			25,846,369
Total assets	$	26,831,615		$	28,896,251
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
Current portion of capital lease obligation	$	10,885		$	7,445
Current portion of senior secured convertible notes payable, net of discount of $1,297,913 and $2,183,580, respectively		1,428,251			672,481
Accounts payable and accrued expenses		1,110,680			1,942,033
Note payable		58,864			78,007
Line of credit - former related party		1,200,000			4,430,000
Due to related parties		126,717			80,280
Deferred revenue		208,333			208,333
Total current liabilities		4,143,730			7,418,579
Long-term debt:
Capital lease obligation		14,795			19,604
Senior secured convertible notes payable, net of discount of $853,599 and $3,359,354		345,628			1,034,585
Fair value of warrant liability		—			10,494,006
Total liabilities		4,504,153			18,966,774

Minority interest		7,053,950			13,139,882

Stockholders' equity:
Common stock, $.005 par value:
Authorized, 250,000,000 and 125,000,000 shares, respectively
Issued, 119,128,504 and 83,431,699
shares, respectively		595,643			417,158
Additional paid-in capital		78,015,527			54,532,204
		78,611,170			54,949,362
Less treasury stock, 4,923,080 shares		(8,467,698	)		(8,467,698	)
		70,143,472			46,481,664
Deficit accumulated during the development stage		(54,869,960	)		(49,692,069	)
Total stockholders' equity (deficiency)		15,273,512			(3,210,405	)
Total liabilities and stockholders'
equity	$	26,831,615		$	28,896,251

F-4

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

							Period from August
	Year Ended			Year Ended			1, 1968 (date of
	February 29,			February 28,			inception) to
	2008			2007			February 29, 2008
Revenues:
Sale of intellectual property	$	11,000,000		$	—		$	11,000,000
Development payments		75,000			—			375,000
License fees		250,000			562,500			1,291,666
Grant revenues		100,000			—			100,000
Testing services and
consulting fees		260,684			427,029			1 ,028,408
		11,685,684			989,529			13,795,074
Operating expenses:
Research and development		4,234,932			7,190,975			24,445,326
General and administrative		5,030,558			6,824,945			29,796,875
Write-down of intellectual
property rights		—			—			530,000
		9,265,490			14,015,920			54,772,201
Operating profit (loss)		2,420,194			(13,026,391	)		(40,977,127	)
Other income (expense):
Interest income		144,478			82,224			355,850
Interest expense		(10,421,552	)		(4,303,543	)		(17,596,884	)
Additional expense related to
warrants		—			(7,304,105	)		(7,304,105	)
Change in fair value of warrant
liability		4,339,214			5,318,064			9,657,278
Liquidated damages		(652,500	)		—			(652,500	)
Gain on sale of investment		337,250			—			337,250
Loss on extinguishment of debt		(3,189,187	)		(670,053	)		(3,859,240	)
Other income		446,762			161,196			1,300,155
Other expense		—			(5,442	)		(70,528	)
		(8,995,535	)		(6,721,659	)		(17,832,724	)
Loss from continuing operations
before minority interest in
subsidiaries		(6,575,341	)		(19,748,050	)		(58,809,851	)
Minority interest in
subsidiaries		1,397,450			2,025,639			4,029,248
Loss from continuing operations		(5,177,891	)		(17,722,411	)		(54,780,603	)
Loss from discontinued operations		—			—			(89,357	)
Net loss		(5,177,891	)		(17,722,411	)	$	(54,869,960	)
Loss per common share - basic
and diluted	$	(.06	)	$	(0.23	)
Weighted average shares
outstanding		92,182,931			77,864,738

The accompanying notes should be read in conjunction with the consolidated financial statements

F-5

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 29, 2008

													Deficit
													Accumulated
	Number						Additional				Stock		During the			Stockholders'
	of Shares			Common			Paid-in		Treasury		Subscription		Development			Equity
	Outstanding			Stock			Capital		Stock		Receivable		Stage			(Deficiency)
1969-1993 - 382,130 shares issued for
services for $.05 per share		382,130		$	1,911		$	17,196		—		—		—		$	19,107
1970 - 1,405,000 shares issued for
mining rights for $.05 per share		1,405,000			7,025			63,225		—		—		—			70,250
Net loss from inception through
February 28, 1998		—			—			—		—		—		(89,357	)		(89,357	)
Balance at February 28, 1998		1,787,130			8,936			80,421		—		—		(89,357	)		—
1999 - 10,000 shares issued for
services for $.05 per share		10,000			50			450		—		—		—			500
1999 - 1,000,000 shares issued for
services for $.005 per share		1,000,000			5,000			—		—		—		—			5,000
Net loss for the year ended
February 28, 1999		—			—			—		—		—		(5,500	)		(5,500	)
Balance at February 28, 1999		2,797,130			13,986			80,871		—		—		(94,857	)		—
2000 - 1,000,200 shares issued
for services for $.005 per share		1,000,200			5,001			—		—		—		—			5,001
Net loss for the year ended
February 29, 2000		—			—			—		—		—		(5,001	)		(5,001	)
Balance at February 29, 2000		3,797,330			18,987			80,871		—		—		(99,858	)		—
2000 - 250,000 shares issued for
services for $.005 per share		250,000			1,250			—		—		—		—			1,250
2000 - Expenses paid by stockholder								2,640		—		—		—			2,640
2000 - 10,759,101 shares issued for
acquisition of Antisense Technology, Inc		10,759,101			53,795			121,205		—		—		—			175,000
2000 - 10,759,101 shares issued for
cash for $.005 per share		10,759,101			53,796			121,204		—		—		—			175,000
Net loss for the year ended
February 28, 2001		—			—			—		—		—		(729,130	)		(729,130	)
Balance at February 28, 2001		25,565,532			127,828			325,920		—		—		(828,988	)		(375,240	)
2001 - 2,399,750 shares issued for
cash for $1.00 per share		2,399,750			11,999			2,387,751		—		—		—			2,399,750
2001 - 468,823 shares issued for interest		468,823			2,344			466,479		—		—		—			468,823
2001 - Redemption of 200,000 shares		(200,000	)		(1,000	)				—		—		—			(1,000	)

CONTINUED ON FOLLOWING PAGE

F-6

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 29, 2008

												Deficit
												Accumulated
	Number				Additional					Stock		During the			Stockholders'
	of Shares		Common		Paid-in			Treasury		Subscription		Development			Equity
	Outstanding		Stock		Capital			Stock		Receivable		Stage			(Deficiency)
2001 - 1,315,334 shares issued upon
conversion of bridge loans at $.75
per share		1,315,334		6,576		979,924			—		—		—			986,500
2001 - Offering costs associated with
share issuances for cash		—		—		(254,467	)		—		—		—			(254,467	)
2002 - Grant of stock options for services		—		—		702,800			—		—		—			702,800
Net loss for the year ended
February 28, 2002		—		—		—			—		—		(3,705,917	)		(3,705,917	)
Balance at February 28, 2002		29,549,439		147,747		4,608,407			—		—		(4,534,905	)		221,249
2002 - Shares issued for cash for
$.34 per share		993,886		4,969		337,461			—		—		—			342,430
2002 - Shares issued for cash for
$.15 per share		1,192,874		5,964		167,002			—		—		—			172,966
2002 to 2003 - Shares issued for cash for
$.25 per share		5,541,100		27,706		1,357,569			—		—		—			1,385,275
2002 to 2003 - Shares issued as commissions
on offerings		357,394		1,787		(1,787	)		—		—		—			—
2002 to 2003 Cash commissions on offerings		—		—		(119,488	)		—		—		—			(119,488	)
Offering costs		—		—		(45,644	)		—		—		—			(45,644	)
Grant of stock options for services		—		—		485,000			—		—		—			485,000
Intrinsic value of beneficial conversion
feature of note payable and MRI liability		—		—		800,000			—		—		—			800,000
Net loss for the year ended
February 28, 2003		—		—		—			—		—		(3,438,252	)		(3,438,252	)
Balance at February 28, 2003		37,634,693		188,173		7,588,520			—		—		(7,973,157	)		(196,464	)
2003 - Shares issued upon conversion of
related party loans at $.14 per share		1,268,621		6,343		177,607			—		—		—			183,950
2003 - Shares issued upon conversion of
stockholder loan plus accrued interest
at $.20 per share		775,000		3,875		151,693			—		—		—			155,568
2003 - Shares issued for cash pursuant to
equity line of credit at prices from
$.11 to $.23 per share		3,325,757		16,629		474,561			—		—		—			491,190
2003 - Shares issued for option exercises
at $.14 per share		3,000,000		15,000		412,847			—		—		—			427,847

CONTINUED ON FOLLOWING PAGE

F-7

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 29, 2008

												Deficit
												Accumulated
	Number				Additional					Stock		During the			Stockholders'
	of Shares		Common		Paid-in			Treasury		Subscription		Development			Equity
	Outstanding		Stock		Capital			Stock		Receivable		Stage			(Deficiency)
2004 - Shares issued for warrant exercises
at $.25 and $.50 per share		995,940		4,980		327,864			—		—		—			332,844
2004 - Shares issued for cash pursuant to
stock purchase agreement at prices from
$.15 to $.40 per share		11,000,000		55,000		2,845,000			—		—		—			2,900,000
2004 - Shares issued upon conversion of
related party loans at $.10 per share		7,945,000		39,725		754,775			—		—		—			794,500
Offering costs		—		—		(209,528	)		—		—		—			(209,528	)
Grant of stock options for the year		—		—		565,000			—		—		—			565,000
Beneficial conversion
feature of note payable		—		—		250,950			—		—		—			250,950
Net loss for the year ended February 29, 2004		—		—		—			—		—		(3,718,570	)		(3,718,570	)
Balance at February 29, 2004		65,945,011		329,725		13,339,289			—		—		(11,691,727	)		1,977,287
2004 - Shares issued for option exercise
at $.32 per share		70,000		350		22,050			—		—		—			22,400
2004 - Shares issued for option exercise
at $.50 per share		24,999		125		12,375			—		—		—			12,500
2004 - Shares issued upon exercise of
warrants at $.25 per share		868,700		4,343		212,832			—		—		—			217,175
2004 - Shares issued upon exercise of
warrants at $.50 per share		926,700		4,634		458,716			—		—		—			463,350
2004 - Shares issued upon exercise of
warrants at $1.00 per share		108,375		542		107,833			—		—		—			108,375
2004 - Shares issued upon cashless exercise
of warrants		74,047		370		(370	)		—		—		—			—
2004 - 2005 - Shares issued for cash pursuant
to stock purchase agreement at prices from
$.60 to $.70 per share		6,000,000		30,000		3,870,000			—		—		—			3,900,000
2005 - Restricted shares issued in connection
with employment agreements at
$1.34 per share		200,000		1,000		267,000			—		—		—			268,000
2005 - Restricted shares issued in
connection with acquisition of Biophan
Europe at $1.34 per share		100,000		500		133,500			—		—		—			134,000
Offering costs		—		—		(41,998	)		—		—		—			(41,998	)

CONTINUED ON FOLLOWING PAGE

F-8

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 29, 2008

	Number of Shares Outstanding			Common Stock		Additional Paid-in Capital			Treasury Stock			Stock Subscription Receivable			Deficit Accumulated During the Development Stage			Stockholders' Equity(Deficiency)
Grant of stock options for services	-			-		201,000			-			-			-			201,000
Section 16(b) short swing profits	-			-		400,725			-			-			-			400,725
Stock subscription receivable	-			-		-			-			(150,000	)		-			(150,000	)
Net loss for the year ended February 28, 2005	-			-		-			-			-			(5,793,547	)		(5,793,547	)
Balance at February 28, 2005	74,317,832			371,589		18,982,952			-			(150,000	)		(17,485,274	)		1,719,267
2005 - Shares issued for option
exercise at $.50 per share	74,998			375		66,206			-			-			-			66,581
2005 - Shares issued for option
exercise at $.67 per share	12,500			63		8,312			-			-			-			8,375
2005 - Shares issued for option
exercise at $1.00 per share	136,667			683		106,901			-			-			-			107,584
2005 - Shares issued upon exercise of
warrants at $.16 per share	54,054			270		8,379			-			-			-			8,649
2005 - Shares issued upon exercise of
warrants at $.39 per share	12,500			62		4,813			-			-			-			4,875
2005 - Shares issued upon exercise of
warrants at $.41 per share	17,520			88		7,095			-			-			-			7,183
2006 - Restricted shares issued in
connection with acquisition of
Biophan Europe at $1.34 per share	100,000			500		133,500			-			-			-			134,000
2005 - Shares issued for acquisition
of minority interest in Myotech,
LLC at $1.72 per share	4,923,080			24,615		8,443,083			-			-			-			8,467,698
2005 - Treasury shares	(4,923,080	)		-		8,467,698			(8,467,698	)		-			-			-
2006 - Shares issued pursuant to
investment agreement with Boston
Scientific at $3.02 per share	1,653,193			8,266		4,991,734			-			-			-			5,000,000
2006 - 22,000 Restricted shares
issued for services at $1.72 per
share	22,000			110		37,730			-			-			-			37,840
2006 - Shares issued upon conversion
of related party loans at $2.12 per
share	480,899			2,405		1,017,101			-			-			-			1,019,506
Beneficial conversion feature of
note payable	-			-		2,395,485			-			-			-			2,395,485
Stock options issued for services	-			-		4,609,778			-			-			-			4,609,778
Section 16(b) short swing profits	-			-		295,362			-			-			-			295,362
Stock subscription receivable	-			-		-			-			150,000			-			150,000
Net loss for the year ended
February 28, 2006	-			-		-			-			-			(14,484,384	)		(14,484,384	)
Balance at February 28, 2006	76,882,163			409,026		49,576,129			(8,467,698	)		-			(31,969,658	)		9,547,799
Shares issued for option exercises
in the range of $.18 to $.67 per
share	38,956			195		12,984			-			-			-			13,179
Shares issued for cash pursuant to
stock purchase agreement with SBI at $2.00 per share	1,587,500			7,937		3,167,063			-			-			-			3,175,000
Extinguishment of debt on related
party notes payable	-			-		670,053			-			-			-			670,053
Allocation of beneficial conversion
feature of related party notes
payable	-			-		417,070			-			-			-			417,070
Allocation of proceeds to warrants	-			-		7,250,000			-			-			-			7,250,000
Reclassification of warrants	-			-		(8,005,875	)		-			-			-			(8,005,875	)
Stock options expense	-			-		1,444,780			-			-			-			1,444,780
Net loss for the year ended
February 28, 2007	-			-		-			-			-			(17,722,411	)		(17,722,411	)
Balance at February 28, 2007	78,508,619		$	417,158	$	54,532,204		$	(8,467,698	)	$	-		$	(49,692,069	)	$	(3,210,405	)
Shares issued for principal and
interest on convertible notes	30,434,578			152,173		3,511,693			-			-			-			3,663,866
Shares issued for services	1,716,109			8,581		248,773			-			-			-			257,354
Line of credit conversion	3,546,118			17,731		2,358,168			-			-			-			2,375,899
Stock option expense	-			-		1,312,901			-			-			-			1,312,101
Fair value warrant liability	-			-		6,154,792			-			-			-			6,154,792
Gain on forgiveness of debt	-			-		1,050,000			-			-			-			1,050,000
Loss on extinguishment of debt	-			-		3,189,187			-			-			-			3,189,187
Beneficial conversion
feature of senior secured convertible notes	-			-		3,021,197			-			-			-			3,021,197
Allocation of proceeds to warrants	-			-		2,636,612			-			-			-			2,636,612
Net loss for the year ended
February 29, 2008	-			-		-			-			-			(5,177,891	)		(5,177,891	)
Balance at February 29, 2008	114,205,424		$	595,643	$	78,015,527		$	(8,467,698	)	$	-		$	(54,869,960	)	$	15,273,512

The accompanying notes should be read in conjunction with the consolidated financial statements

F-9

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

							Period from
							August 1,
							Year Ended 1968 (date of
	Year Ended			Year Ended			inception) to
	February 29,			February 28,			February 29,
	2008			2007			2008
Cash flows from operating activities:
Net loss	$	(5,177,891	)	$	(17,722,411	)	$	(54,869,960	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of intangible assets		1,338,883			1,458,045			3,202,369
Amortization of deferred financing costs		496,933			186,350			683,283
Depreciation and amortization		141,856			95,368			376,658
Loss on disposal of equipment		7,082			9,094			17,681
Gain on sale of investment		(337,250	)		-			(337,250	)
Non-cash charge related to warrants		-			7,304,105			7,304,105
Change in fair value of warrant liability		(4,339,214	)		(5,318,064	)		(9,657,278	)
Realized and unrealized losses on marketable
securities		-			-			66,948
Loss on extinguishment of debt		3,189,187			670,053			3,859,240
Amortization of discount on senior secured convertible notes		6,028,035			1,707,066			8,786,051
Write -down of intellectual property rights		-			-			530,000
Amortization of discount on payable to related
party		-			1,740,991			2,887,555
Issuance of common stock for services		257,354			-			664,302
Fair value of beneficial conversion feature of debt		3,021,197			-			3,021,197
Issuance of common stock for interest		922,375			-			1,422,702
Grant of stock options for services		1,312,901			1,444,780			9,321,259
Expenses paid by stockholder		--			-			2,640
Change in investment in subsidiary, net		79,070			-			79,070
Minority interest		(1,397,450	)		(2,049,227	)		(3,983,293	)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(93,118	)		148,610			(107,066	)
(Increase) decrease in due from related parties		-			4,801			(59,300	)
(Increase) decrease in prepaid expenses		62,959			(18,968	)		(103,212	)
(Increase) decrease in other current assets		(19,087	)		55,698			(3,099	)
(Increase) decrease in deposits		3,498			2,345			2,043
Increase (decrease) in accounts payable and
accrued expenses		(831,353	)		750,221			550,674
Increase (decrease) in due to related parties		46,437			53,732			83,221
Increase (decrease) in deferred revenues		-			(312,500	)		208,333
Net cash provided by (used in) operating activities		4,712,404			(9,789,911	)		(26,051,127	)

The accompanying notes should be read in conjunction with the consolidated financial statements

F-10

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

							Period from
							August 1
							1968 (date of
	Year Ended			Year Ended			inception) to
	February 29,			February 28,			February 29,
	2008			2007			2008
Cash flows from investing activities:
Purchases of property and equipment		(40,273	)		(369,434	)		(644,917	)
Sales of marketable securities		-			-			2,369,270
Purchase of investment		-			-			(100,000	)
Proceeds from sale of investment		437,250			-			437,250
Acquisition costs of intangible assets		(150,000	)		-			(616,583	)
Cash paid for investment in Myotech,
net of cash received of $19,408		-			-			(280,594	)
Cash paid for acquisition of Biophan Europe,
net of cash received of $107,956		-			-			(258,874	)
Purchases of marketable securities		-			-			(2,436,218	)
Net cash provided by (used in) investing activities		246,977			(369,434	)		(1,530,666	)
Cash flows from financing activities:
Proceeds of bridge loans		-			-			986,500
Loan from stockholder		-			-			143,570
Line of credit borrowing from related party		-			3,130,000			7,980,950
Line of credit payments		-			(1,500,000	)		(2,072,500	)
Proceeds of convertible notes payable		-			7,250,000			7,250,000
Proceeds (payments) on debt and notes payable		(406,358	)		62,121			(528,351	)
Payments of capital lease obligation, net		(1,369	)		-			(1,369	)
Proceeds from sales of capital stock		-			3,175,000			19,438,849
Exercise of options		-			13,179			658,467
Exercise of warrants		-			-			1,142,451
Swing profits		-			-			696,087
Deferred financing costs		-			(1,030,120	)		(1,030,120	)
Deferred equity placement costs		-			-			(112,536	)
Net cash provided by (used in) financing activities		(407,727	)		11,100,180			34,551,998
Net increase in cash and equivalents		4,551,654			940,835			6,970,205
Cash and equivalents, beginning		2,418,551			1,477,716			--
Cash and equivalents, ending	$	6,970,205		$	2,418,551		$	6,970,205

CONTINUED ON FOLLOWING PAGE

F-11

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

					Period from
					August 1,
					1968 (date of
	Year Ended		Year Ended		inception) to
	February 29,		February 28,		February 29,
	2008		2007		2008
Supplemental schedule of cash paid for:
Interest	$	206,249	$	30,000	$	246,049
Supplemental schedule of non-cash investing and
financing activities:
Allocation of proceeds from line of credit - related party
to beneficial conversion feature and warrants	$	-	$	417,070	$	2,812,555
Allocation of proceeds from notes payable and warrants	$	-	$	7,250,000	$	7,250,000
Change in fair value of warrants reclassified from equity
to warrants liability	$	-	$	755,876	$	755,876
Capital lease obligation	$	7,186	$	27,049	$	34,235
Change in fair value of derivative liability	$	6,154,792	$	-	$	6,154,792
Discount on senior secured convertible notes	$	2,636,612	$	-	$	2,636,612
Forgiveness of debt - line of credit	$	1,050,000	$	-	$	1,050,000
Issuance of common stock upon conversion
of line of credit loans	$	2,180,000	$	-	$	4,158,450
Issuance of common stock for principal payments
for senior secured convertible notes	$	2,937,394	$	-	$	2,937,394
Issuance of common stock for the acquisition of
initial 35% interest in Myotech, LLC	$	-	$	-	$	8,467,698
Issuance of common stock in satisfaction
of accounts payable	$	168,854	$	-	$	302,854
Liabilities assumed in conjunction with acquisition of 51%
interest in Biophan Europe and certain intellectual
property rights	$	-	$	-	$	178,384
Issuance of common stock upon conversion
of bridge loans	$	-	$	-	$	1,142,068
Acquisition of intellectual property	$	-	$	-	$	425,000
Intellectual property acquired through issuance of
capital stock and assumption of related party payable	$	-	$	-	$	175,000

The accompanying notes should be read in conjunction with the consolidated financial statements

F-12

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION:

The consolidated financial statements include the accounts of Biophan Technologies, Inc. ("Biophan"), its wholly owned subsidiaries, LTR Antisense Technology, Inc.("Antisense") and Nanolution, LLC, formerly MRIC Drug Delivery Systems, LLC, ("Nanolution"), its majority owned subsidiaries Biophan Europe GmbH ("Biophan Europe"), formerly aMRIs GmbH, TE Bio LLC ("TE Bio"), and Myotech, LLC ("Myotech"), collectively referred to as the "Company". All significant inter-company accounts and transactions have been eliminated in consolidation.

COMPANY HISTORY:

The Company was incorporated under the laws of the State of Idaho on August 1, 1968 and on January 12, 2000, changed its domicile to Nevada by merging into a Nevada corporation, and on July 19, 2001, changed its name to Biophan Technologies, Inc. From the inception of the current line of business on December 1, 2000, the Company has not generated any material revenues and operating profits from its planned principal business activities. Therefore, the Company is in the development stage and will remain so until the realization of significant revenues and operating profits. The Company's ability to continue in business is dependent upon maintaining sufficient financing or attaining future profitable operations.

PRINCIPAL BUSINESS ACTIVITIES:

The Company's primary mission is to develop and commercially exploit technologies for improving the performance of medical devices manufactured by third party companies, including the creation, protection and sale of intellectual property. The Company possesses technologies for enabling biomedical devices, both implantable and those used in diagnostic and interventional procedures, to be safe and image compatible with MRI (magnetic resonance imaging). The Company is also developing and marketing a system for generating power for implantable devices from body heat, and a series of implantable devices including MRI-visible vascular implants such as a vena cava filter, a heart valve and an occluder for the treatment of atrial septal defects, a hole in the wall separating the left and right chambers of the heart. The Company's first licensee for several of these technologies was Boston Scientific (NYSE: BSX). The Company is also a majority owner of Myotech (accounted for as a variable interest entity prior to October 2, 2007) the developer of the Myotech CSS, a circulatory support system that does not contact circulating blood and utilizes technology that the Company believes has the potential to become a standard of care for treating acute heart failure including sudden cardiac arrest.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At times throughout the year, the Company has balances on account in excess of insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash and cash equivalents.

F-13

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACCOUNTS RECEIVABLE

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company has historically experienced insignificant amounts of bad debt. Accordingly, the Company has determined that an allowance for doubtful allowance is not required.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. Leasehold improvements are amortized over the lesser of the assets' useful lives or the remaining term of the lease.

The estimated useful lives for significant property and equipment categories are as follows:

Computers			5 years
Furniture and equipment			5 to 7 years
Internet website			7 years
Leasehold improvements			15 years

INTANGIBLE ASSETS

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. An estimate of the asset’s fair value is based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is tested at least annually for impairment using a two-step process. The first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. SFAS No. 142 requires that indefinite-lived intangible assets be tested for impairment using a one-step process, which consists of a comparison of the fair value to the carrying value of the intangible asset. Such intangible assets are deemed to be impaired if their net book value exceeds their estimated fair value.

All other intangible assets are evaluated for impairment in accordance with SFAS No. 144 as described above.

The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge. At February 29, 2008 the Company has determined that no impairment of intangible assets exist.

INCOME TAXES

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply when the differences are expected to be realized. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization of the deferred income tax asset is dependent on generating sufficient taxable income in future years. The Company has recorded a 100% valuation allowance against net deferred tax assets due to uncertainty of their ultimate realization (see Note 19).

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 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. The Company adopted FIN 48 effective March 1, 2007. Refer to Note 19 for a discussion regarding the impact of adopting FIN48 on the Company's financial statements. It is the Company policy to charge interest and penalties incurred on the underpayment of income taxes to interest expense and other expense, respectively. The Company has open tax years beginning in fiscal years ended February 28, 2005 through February 29, 2008. The Company is currently being audited by certain state tax authorities for the 2006 tax year.

LOSS PER SHARE

Basic loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share gives effect to dilutive options, warrants and other potential common stock outstanding during the period. Potential common stock has not been included in the computation of diluted loss per share, as the effect would be antidilutive. If the Company had generated earnings during the year ended February 29, 2008, approximately 451,673 common stock equivalent shares would have been added to the weighted average shares outstanding. These additional shares represent the assumed exercise of common stock options and warrants whose exercise price is less than the average fair value of the Company’s stock during the period. The proceeds of the exercise are assumed to be used to purchase common shares for treasury and the incremental shares are added to the weighted average shares outstanding.

REGISTRATION RIGHTS AGREEMENT

In December 2006, the FASB issued Staff Position No. EITF 00-19-2 ("FSP"). This FSP addresses an issuer's accounting for registration payment arrangements and specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with FASB No. 5. The guidance in this FSP amends FASB Statements 133 and 150 and FASB Interpretation No. 45 to include scope exceptions for registration payment arrangements. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2006. The Company has adopted this FSP as it pertains to the issuance of the Senior Secured Convertible Notes and related warrants (see Note 10).

F-14

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

STOCK OPTION PLANS

On March 1, 2006 the Company adopted the fair value based method of accounting prescribed in FASB Statement of Financial Accounting Standards No. 123R (Share-Based Payment) for its employee stock option plans (see Note 17).

REVENUE RECOGNITION:

The Company earns and recognizes revenue under development agreements when the phase of the agreement to which amounts relate is completed and the Company has no further performance obligation. Completion is determined by the attainment of specified milestones, such as a written progress report. Advance fees received on such agreements are deferred until recognized.

The Company recognizes initial license fees over the term of the related agreement. Revenue related to a performance milestone is recognized upon the achievement of the milestone, as defined in the respective agreements.

The Company recognizes revenues from testing services and consulting fees as services are performed.

ADVERTISING

The Company expenses advertising as incurred. These amounts were not significant for the periods presented.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity. Based on variable interest rates and the borrowing rates currently available to the Company for loans similar to its current and long term debt, the fair value approximates its carrying amount.

ESTIMATES

Preparing the Company's financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect 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 periods. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, The FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 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. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 in the first quarter of fiscal 2008. See Note 19 for additional information regarding the impact of adopting the provisions of FIN 48 and the related disclosures.

In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, on December 14, 2007, the FASB issued proposed FSP FAS 157-b which would delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This proposed FSP partially defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The Company is currently evaluating the impact of adoption of FIN 157 on our financial position, result of operations and cash flows.

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

2. BUSINESS COMBINATIONS

F-15

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Effective November 30, 2005, we entered into a Securities Purchase Agreement for the acquisition of an initial 35% interest in Myotech, LLC ("Myotech"), a New York limited liability company, whereby we exchanged 4,923,080 shares of our common stock, par value $.005, for 3,768,488 Class A (voting) units of Myotech.

Based upon the terms of the Securities Purchase Agreement, we were obligated to purchase for cash consideration of $2.225 million an additional 811,037 Class A units and could have elected to acquire up to an additional 3,563,097 Class A units for further cash consideration of up to $9.775 million, over a 24-month period, which would have resulted in the Company owning a majority interest in Myotech. Through October 1, 2007, Biophan provided an aggregate of $4,636,040 of additional funding in exchange for 1,682,234 newly issued Class A units of Myotech, which raised our ownership percentage to 44.1%.

On October 2, 2007, we entered into a revised Securities Purchase Agreement with Myotech pursuant to which the Company agreed to purchase from Myotech an additional 15,496,547 Class A membership units for an aggregate purchase price of $3,200,000. Prior to the execution of the Agreement, Biophan owned 5,408,194 Class A membership units. Upon execution of the Agreement, Biophan purchased an additional 9,316,547 Class A membership units upon the payment of an aggregate initial purchase price of $1,200,000 bringing our ownership percentage as of November 30, 2007 to 68.02%. Thereafter, upon the satisfaction of certain conditions, Biophan will purchase an additional 6,180,000 Class A membership units for a purchase price of $2,000,000, which will increase our ownership percentage to approximately 75%. The increase in our equity interest for consideration of $1,200,000 was at a per-unit price that was less than the then book value per unit. This excess of the book value over the cost, or negative goodwill, in the amount of $4,697,552 was allocated to reduce the stated value of the Myotech intellectual property in consolidation.

Subsequent to February 29, 2008, Myotech has satisfied the conditions to begin the next phase of funding and to date we have funded $400,000 of the $2,000,000.

F-16

Prior to our obtaining a majority interest, it had been determined Myotech was a Variable Interest Entity within the meaning of FIN 46(R) and the Company is the primary beneficiary (as defined in FIN 46(R)). Consequently, the financial statements of Myotech have been consolidated with our consolidated financial statements for all periods ending on or after November 30, 2005, the date of our initial investment in Myotech.

The following is selected financial data for Myotech, LLC:

	For the			For the
	Year Ended			Year Ended
	February 29, 2008			February 28, 2007
Total current assets	$	392,069		$	338,548
Intangible assets, net of amortization		17,120,242			23,074,028
Other assets		123,077			196,915
Total assets	$	17,635,388			23,609,491
Current liabilities	$	170,909		$	352,072
Equity		17,464,479			23,257,419
	$	17,635,388		$	23,609,491
Net loss from operations	$	(2,878,583	)	$	(4,163,326	)

The following are commitments made by Myotech:

Myotech entered into a consulting agreement with Peer Portner, a director of Myotech. Mr. Portner receives $10,000 per month for advisory services at the Program, Management and Board level. This agreement expires November 14, 2008 and may be terminated with a 60-day notice. Renewal is dependent on mutual written consent.

Myotech has a research and development agreement with Wright State University (WSU) that provides for quarterly payments of $37,500 to WSU. This agreement expires July 30, 2009 and may be terminated with a 60 day written notice.

F-17

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. PREPAID EXPENSES:

Prepaid expenses consist of the following:

	February 29,		February 28,
	2008		2007
Prepaid insurance	$	35,828	$	36,812
Prepaid legal fees		33,600		30,000
Prepaid license fees - related company		-		10,000
Prepaid rent		-		22,492
Prepaid royalties - related company		-		35,000
Prepaid interest		29,784		-
Other		4,000		31,867
	$	103,212	$	166,171

4. PROPERTY AND EQUIPMENT:

Property and equipment, at cost, consists of the following:

	February 29,			February 28,
	2008			2007
Furniture and Equipment	$	369,015		$	349,298
Computers		128,374			143,543
Internet Website		54,159			54,159
Leasehold Improvements		80,478			75,700
		632,026			622,700
Less accumulated depreciation		(322,334	)		(204,338	)
	$	309,692		$	418,362

Property and equipment includes amounts acquired under capital leases of $7,186 and $27,049 at February 29, 2008 and February 28, 2007, respectively, with accumulated depreciation of approximately $6,847 and $5,400, respectively.

Depreciation and amortization expense for the years ended February 29, 2008 and February 28, amounted to $141,856 and $95,368 respectively. Depreciation expense for the period from August 1, 1968 (date of inception) to February 29, 2008 was $376,658.

5. INTANGIBLE ASSETS:

Certain intellectual property rights were acquired on December 1, 2000 in connection with the merger that established the Company in its present form. These rights were sold on October 2, 2007 for $11,000,000 to Medtronic Corp (See Note 13). Additional intangible assets were acquired on February 24, 2005 in connection with the acquisition of Biophan-Europe, on November 30, 2005 in connection with the investment in Myotech, LLC and on December 26, 2007 in connection with the Nanoset, LLC agreement. Such rights encompass the utilization of new proprietary technology to prevent implantable cardiac pacemakers and other critical and life-sustaining medical devices from being affected by MRI and other equipment using magnetic fields, radio waves and similar forms of electromagnetic interference and the development of a cardiac assist device. These assets are being amortized over the estimated 14.5 to 18 year economic lives of the underlying patents and core technology. Estimated amortization expense for the next five years is approximately $1,176,000 per year.

Amortization expense for the years ended February 29, 2008 and February 28, 2007 was $1,338,883 and $1,458,045 respectively. Amortization expense for the period from August 1, 1968 (date of inception) to February 29, 2008 was $3,202,369.

F-18

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. INVESTMENT:

The investment in New Scale Technologies, Inc. at February 28, 2007 represents a 10% investment in its common stock, a non-public company, stated at cost. During the year ended February 29, 2008 the Company sold its investment and realized a gain on the sale of $337,250.

7. LINE OF CREDIT AGREEMENTS:

On May 27, 2005, we entered into a Line of Credit Agreement with Biomed Solutions, LLC, at the time a related party, whereby Biomed agreed to provide a line of credit facility of up to $2 million. Upon Mr. Weiner's resignation on October 3, 2007 Biomed was no longer deemed a related party. Borrowings under the line bear interest at 8% per annum, are payable on demand and are convertible at Biomed's election into the Company's common stock at 90% of the average closing price for the 20 trading days preceding the date of borrowings under the line. In June 2005, the Company borrowed the entire $2 million under the line in two separate draws of $1 million each. In accordance with the agreement, Biomed received warrants to purchase 500,000 shares of the Company's common stock at an exercise price of 110% of the average closing price for the 20 trading days preceding the date of execution of the credit agreement. The Company recorded a discount on the borrowings of $958,160 due to the beneficial conversion feature of the note as well as for the value of the warrants which was valued utilizing the Black-Scholes Option Pricing Model. The discount was amortized as additional interest expense over the term of the note. In August 2005, Biomed elected to convert $1 million of the note plus accrued interest into 480,899 shares of common stock at which time the remaining discount related to the $1 million portion of the loan was fully expensed. On October 7, 2005, we repaid $500,000 of principal and all accrued interest on the loan. The balance of borrowings on the line was $500,000 at February 29, 2008 and February 28, 2007.

On January 24, 2006, we entered into an additional Line of Credit Agreement (the "Line of Credit Agreement") with Biomed Solutions, LLC, pursuant to which Biomed committed to make advances to us, in an aggregate amount of up to $5,000,000. Amounts borrowed bear interest at the rate of 8% per annum, and principal and interest were convertible into shares of our Common Stock at the rate of $1.46 per share. Biomed's obligation to lend to us under the Line of Credit Agreement expired on June 30, 2007, on which date the entire amount borrowed by us (and not converted into shares of our Common Stock) became due and payable. In connection with the establishment of the credit facility, we issued to Biomed a warrant to purchase up to 1,198,630 shares of our Common Stock at an exercise price of $1.89 per share. The Company recorded a discount on the borrowings of $1,678,425 due to the beneficial conversion feature of the note as well as for the value of the warrant.

On October 11, 2006, in connection with our Securities Purchase Agreement dated October 11, 2006 with Iroquois Master Fund Ltd and other private investors (the "Purchase Agreement"), we amended our January 24, 2006 Line of Credit Agreement (the "Biomed Line of Credit Agreement") with Biomed and the Convertible Promissory Note in the original principal amount of $5,000,000 issued by us to Biomed on January 24, 2006 pursuant to the Biomed Line of Credit Agreement (the "$5,000,000 Biomed Note"). The amendment reduced the price at which the $5,000,000 Biomed Note is convertible into shares of our Common Stock from $1.46 per share to a conversion price of $0.67. In connection with the Purchase Agreement, we also entered into a Subordination and Standstill Agreement (the "Subordination Agreement") with Biomed and the investors who are parties to the Purchase Agreement, pursuant to which Biomed agreed (i) to subordinate its rights to payment under the $5,000,000 Biomed Note and the Convertible Promissory Note in the original principal amount of $2,000,000 issued by us to Biomed on May 27, 2005 to the rights of the investors under the Notes and (ii) to convert the entire outstanding amount of principal and interest due under the $5,000,000 Biomed Note in excess of $700,000 into shares of our common stock upon the effectiveness of an amendment to our Articles of Incorporation to increase the number of our authorized shares which was effective May 9, 2007. On July 19, 2007, Biomed converted $2,180,000 of principal and $195,899 of accrued interest into a total of 3,546,118 shares of our common stock leaving a balance outstanding at August 31, 2007 of $1,750,000. On November 5, 2007, Biophan and Biomed entered into a Settlement Agreement with SBI to settle all claims, causes of action and disputes between and among them. As a result of SBI’s forgiveness of Biomed’s debt, Biomed forgave $1,050,000 of the Biophan’s Line of Credit leaving a balance outstanding of $700,000 as of February 29, 2008 and $3,930,000 at February 28, 2007. This forgiveness of debt by Biomed, a stockholder of the Company, was recorded as a credit to additional paid-in capital in stockholders’ equity.

The fair value of the notes is not readily determinable as there is a limited market for such related party debt.

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consist of the following:

	February 29,		February 28,
	2008		2007
Accounts payable	$	499,118	$	1,010,060
Bonuses - Biophan-Europe		85,911		75,000
Accrued payroll and related expenses		99,057		152,395
Accounting fees		8,320		75,000
Consulting fees		-		30,000
Interest payable		331,548		504,078
Other		86,727		95,500
	$	1,110,681	$	1,942,033

F-19

BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. CAPITAL LEASE OBLIGATION:

The Company leases equipment under capital leases that expire in 2010. These leases require monthly payments totaling $1,223 including interest at 14.75% and 19.34% per annum.

Future minimum lease payments required under the capital lease are as follows:

Year Ending
February 28,	Amount
2009	$	14,680
2010		14,680
2011		1,813
	$	31,173
Less amount representing interest		(5,493	)
		25,680
Less current maturities		(10,885	)
Long-term debt, less maturities	$	14,795

10. SENIOR SECURED CONVERTIBLE NOTES:

On October 11, 2006, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with 10 private investors led by Iroquois Master Fund Ltd ("Iroquois"). Pursuant to the Purchase Agreement, on October 12, 2006 we issued $7,250,000 of Senior Secured Convertible Notes (the "Notes") to the investors and received proceeds of $6,219,880 after paying estimated fees and expenses of $1,030,120 related to the transaction. The holders of the Notes may elect to convert the Notes at any time into shares of our common stock based upon a price of $0.67 per share (the "Conversion Price"). Interest on the outstanding principal amount under the Notes is payable quarterly at a rate equal to the six-month London InterBank Overnight Rate plus 500 basis points, with a minimum rate of 10% per annum and a maximum rate of 12% per annum, payable at our option in cash or shares of our common stock registered for resale under the Securities Act of 1933, as amended (the "Securities Act"). If we elect to make principal or interest payments in common stock, the number of shares issuable by us will be based upon the lower of (i) 90% of the 20-day trailing average volume weighted average price per share as reported on Bloomberg LP (the "VWAPS") or (ii) the Conversion Price. Principal on the Notes amortizes and payments are due in 33 equal monthly installments commencing four months following issuance of the Notes, and may be made at our option in cash or shares of our common stock registered for resale under the Securities Act. If we elect to make an interest payment in common stock, the number of shares issuable by us will be based upon the lower of (i) 90% of the 20-day trailing average volume weighted average price per share as reported on Bloomberg LP (the "VWAPS") or (ii) the Conversion Price. Our obligations under the Notes are secured by a first priority security interest in substantially all of our assets pursuant to a Security Agreement dated as of October 11, 2006 among us, the investors and Iroquois, as agent for the investors (the "Security Agreement"). The scheduled maturity date of the notes is October 2009.

F-20

As further consideration to the investors, we issued to the investors one-year warrants to purchase an aggregate of 10,820,896 shares of our common stock at a price of $0.67 per share. If the investors had elected to exercise these one-year warrants, they would have received additional five-year warrants to purchase the shares of our common stock equal to the number of shares purchased under the one-year warrants, with 50% of the additional warrants having an exercise price of 115% of the per share purchase price, and the remaining 50% of the additional five-year warrants having an exercise price of 125% of the per share purchase price. These one year warrants expire May 7, 2008. We also issued to the investors five-year warrants to purchase an aggregate of 10,820,896 shares of our common stock. The first five-year warrants allowed for the purchase of 5,410,448 shares of our common stock at an exercise price of $0.81 per share, and the second five-year warrants allowed for the purchase of 5,410,448 shares of our common stock at an exercise price of $0.89 per share. The warrants contain anti-dilution protection that, should we issue equity or equity-linked securities at a price per common share below the exercise price of the five-year warrants, it will automatically adjust the exercise price of the warrants to the price at which we issue such equity or equity-linked securities. The total fair value of the warrants was $14,554,105 which was calculated utilizing the Black-Scholes Option Pricing Model. The Company recorded a discount on the Notes of $7,250,000 for the fair value of the related warrants. The excess of the fair value of the warrants over the carrying value of the notes, which amounted to $7,304,105, was recognized as additional expense related to warrants in the statement of operations for the year ended February 28, 2007. The discount on the Notes is being amortized over the life of the Notes using the effective interest method. The discount amortization for the year ended February 29, 2008 and February 28, 2007 amounted to $3,200,692 and $1,707,066, respectively and is included in interest expense in the accompanying statements of operations.

On February 21, 2007, we entered into a Forbearance Agreement (the "Forbearance Agreement") with the investors pursuant to which the investors agreed that, during the period commencing on February 16, 2007 and ending on the earlier of(i) March 31, 2007 or (ii) the date on which any Termination Event (as defined in the Forbearance Agreement) first occurs (the "Forbearance Period"), they will forbear from exercising any and all of the rights and remedies which they may have against us or any of our assets under the Notes or the Purchase Agreement or at law or in equity as a result of any default under the Notes or as a result of the occurrence of certain events with respect to the Purchase Agreement. In exchange for entering into the Forbearance Agreement, we issued pro rata to the investors three-year warrants for the purchase of an aggregate of 60,000 shares of our common stock at an exercise price of $0.51 per share (the "Fee Warrants"). The warrants were valued at $19,980, utilizing the Black-Scholes Option Pricing Model and charged to expense. In consideration for a payment of $652,500 on October 9, 2007 all the existing defaults under the Notes or Purchase Agreement were waived.

Upon the issuance of the Fee Warrants, the exercise prices of the five-year warrants issued to the investors pursuant to the Purchase Agreement (the "Original Warrants") for the purchase of an aggregate of 10,820,896 shares of our common stock were automatically adjusted from $0.81 per share and $0.89 per share, respectively, to $0.51 per share, and the number of shares of our common stock issuable upon exercise of the Original Warrants was automatically adjusted, proportionately, to an aggregate of 18,034,830 shares. In the Forbearance Agreement, the investors waived, with respect to the issuance of the Fee Warrants, application of similar anti-dilution adjustments contained in the Notes and in a third series of warrants for the purchase, on or before October 12, 2007, of an aggregate of 10,820,896 additional shares of our common stock at an exercise price of $0.67 per share (the "One Year Warrants"). C.E. Unterberg Towbin, which holds a warrant for the purchase of 865,672 shares of our common stock at an exercise price of $0.67 per share, issued to it in connection with its services as exclusive placement agent under the Purchase Agreement, separately agreed to waive, with respect to the issuance of the Fee Warrants, application of the anti-dilution provisions set forth in that warrant. Because the anti-dilution adjustment to the Original Warrants is accounted for as a modification of the Original Warrants, we recorded an expense in the amount of $5,318,064 for this modification in the period ended February 28, 2007.

On October 3, 2007, we entered into Amendment No. 1 to the Securities Purchase Agreement, Senior Secured Convertible Notes, Warrants and Security Agreement with the independent private investors. Pursuant to the Amendment, we agreed to amend the Notes to provide that even if we elect to make a monthly installment payment in cash, the holder will have the right to request payment in common stock of the Company. In addition, the Conversion Price was reduced to $0.15. As of February 29, 2008 2,440,000 shares have been converted at $0.15. The Amendment also amended the warrants to reduce the exercise prices of the various warrants to $0.23. In exchange for the foregoing, the investors released certain intellectual property for the Security Agreement, allowing the Company to transfer and sell such intellectual property. Further, in the Amendment, we agreed to certain spending covenants in connection with the proceeds we received from the sale of the intellectual property under the Intellectual Property Assignment Agreement dated as of August 6, 2007 by and between Biophan and Medtronic, Inc. For accounting purposes, these amendments as they pertain to to re-pricing of the convertible debt and warrants, have been treated as an extinguishment of the old debt. Accordingly, the remaining unamortized discount on the old debt of $3,352,581 was written off, a loss on extinguishment of $3,189,187 on the old debt was recognized, and a new discount in the amount of $2,636,612 was recorded. In addition, a beneficial conversion charge to interest expense was recorded in the amount of $3,021,197.

Future maturity of the senior secured convertible notes and the debt discount amortization subsequent to fiscal 2008 will be:

Year Ending February 28,	Debt		Amortization
2009	$	2,726,164	$	1,297,913
2010		1,199,227		853,599
Total	$	3,925,391	$	2,151,512

11. FAIR VALUE OF WARRANT LIABILITY

In accordance with the guidance provided by EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock, we recorded a liability of $10,157,937 for the fair value of the warrants related to the Senior Secured Convertible Notes at February 28, 2007 in order to provide for the possibility that we would not be able to comply with the registration rights of the lenders as contained in the Securities Purchase Agreement because we did not have sufficient available authorized shares to execute a potential conversion of the Notes and related warrants and thus we would be required to settle the contract in cash. In addition, since we did not have sufficient available authorized shares to execute a potential conversion of other outstanding warrants, if requested to do so by the grantees, we could be required to settle any conversion requests in cash. Therefore, we reclassified warrants with an approximate value of $756,000 from equity to the warrant liability. The fair value of this amount was $336,069 and was determined utilizing the Black-Scholes Option Pricing Model at February 28, 2007. The Company obtained stockholder approval to increase the authorized shares at a Special Meeting held on May 8, 2007. The total fair value of derivative liability, in the amount of $10,494,006 was recorded at February 28, 2007, and was adjusted by $4,339,214 to $6,154,792 at May 8, 2007 resulting in a net non-cash income adjustment of that amount. The balance of the liability of $6,154,792 was then reclassified to additional paid-in capital.

The warrants subject to the Stand-Still Agreement were not reclassified because they are not exercisable until the increase in the number of authorized shares and the investors have agreed not to require a cash settlement in the event the number of authorized shares is not increased.

As noted above, the fair value of the derivative liability pertaining to the warrants related to the Senior Secured Convertible Notes is volatile. Several factors and underlying assumptions are included in the Black-Scholes model to derive the fair value of the warrants. The factors and the assumptions are as follows:

1. Number of warrants: varies from time to time dependent upon current period grants, conversions, forfeitures, and expirations,

2. Term to expiration: expiration dates vary by grant and currently range from 1-5 years,

3. Market price at the valuation date: $0.70/share at October 12, 2006; $0.41/share at February 28, 2007,

4. Exercise price of the warrants: varies by grant,

5. Dividend yield - assumed to be zero,

6. Interest rate - we use the US Federal Reserve - "Treasury constant maturities rates" at the measurement date matched to the maturities of the warrants. The rates change over time and the maturities of the warrants change over time.

7. Company stock price volatility on a look-back basis as a proxy for expected future volatility in stock price. We use the look-back approach because the stock has a relatively short trading history as a publicly traded security.

While most of these factors changed during the period of October 12, 2006 to February 28, 2007, the most significant factor impacting the change in fair value were the change in stock price and the repricing of the original warrants to $0.51 per share as further described in Note 10.

F-21

12. STOCKHOLDERS' EQUITY:

On February 5, 2004 the Company entered into a stock purchase agreement with SBI Brightline Consulting, LLC ("SBI") that obligated SBI to purchase, upon the Company's election, up to 17,750,000 shares of common stock for an aggregate purchase price of $25 million. Only 6,000,000 shares covered by this stock purchase agreement were registered for resale. SBI was not obligated to purchase the remaining shares covered by the stock purchase agreement unless and until the Company had registered the resale of such shares by SBI. During the year ended February 28, 2005, the Company elected to sell the 6,000,000 shares to SBI for an aggregate of $3,900,000. On May 27, 2005, this stock purchase agreement was cancelled and a new agreement was executed with SBI. The agreement provided a $30 million fixed price financing for up to 10,000,000 shares at prices ranging from $2 to $4 a share. The sales of stock were required be taken in tranches of 1 million shares each and the financing agreement required the shares to be registered for resale by SBI. There were no resets, warrants, finder's fees or commissions associated with this financing transaction. Registration of the shares for resale by SBI was effective on May 18, 2006. The Company elected to put the first tranche of 1 million shares at $2 per share on May 23, 2006 and received the entire proceeds. The Company elected to put the second tranche of 1 million shares at $2 per share on July 21, 2006. Under this second tranche, only $1,175,000 was received to date and only 587,500 additional shares were issued to SBI. On October 11, 2006, the Company elected to put the entire remaining tranches, at a weighted average price of $2.60 per share, to SBI. SBI failed to meet its obligation to purchase these shares and the Company did not issue the shares.

On April 5, 2007, SBI Brightline LLC and SBI Brightline XI, LLC brought suit against us and Biomed Solutions, LLC in the Superior Court of Orange County, California, related to the above transactions.On November 5, 2007, we entered into a Settlement Agreement with SBI Brightline LLC, SBI Brightline XI LLC and Biomed Solutions, LLC, pursuant to which (i) a promissory note issued by the Company to Biomed Solutions, LLC, in the principal amount of $5,000,000, was reduced by $1,050,000, (ii) warrants to purchase 1,180,000 shares of common stock of the Company, issued to SBI Brightline XI, LLC, were terminated, (iii) the Stock Purchase Agreement dated as of May 27, 2005 and amended on January 8, 2006, between the Company and SBI Brightline XI, LLC was terminated, and (iv) the parties mutually released each other with respect to prior claims.

F-22

During the years ended February 29, 2008 and February 28, 2007, the Company issued no shares of stock upon the exercise of warrants. As of February 29, 2008 and February 28, 2007 warrants to purchase 73,836,319 and 33,229,318 shares of our common stock were outstanding, respectively. The exercise prices for these warrants range from $.15 per share to $2.49 per share, and the weighted-average exercise price for all of the outstanding warrants is $.263 per share. In addition, during the years ended February 29, 2008 and February 28, 2007, -0- and 38,956 shares of stock were issued upon the exercise of options for total proceeds of $0 and $13,179, respectively.

Also, during the year ended February 29, 2008 the Company issued shares for various uses:

23,966,808 shares of stock for payment of $2,937,394 of principal related to the Senior Secured Convertible Notes.

6,467,770 shares of stock for payment of $726,472 of interest related to the Senior Secured Convertible Notes.

3,546,118 shares were issued in settlement of principal and interest in the amount of $2,375,899 related to the related party line of credit.

1,716,109 shares valued at $257,354 were issued for accounts payable and certain services.

Additional paid-in capital was further increased by $1,312,901 and $1,444,780 related to stock options issued for services and recorded as compensation expense during the years ended February 29, 2008 and February 28, 2007 respectively.

13. SALE OF INTELLECTUAL PROPERTY:

On October 4, 2007, we entered into a Patent Assignment Agreement with Medtronic, Inc., a Minnesota corporation, pursuant to which we agreed to transfer and sell to Medtronic all of our interest in and to certain intellectual property owned by us for an aggregate purchase price of $11,000,000, which closed on October 5, 2007. The Company expensed $60,667 of net book value related to the capitalized value of the intellectual property sold and is included as a component of research and development expense.

14. RESEARCH AND DEVELOPMENT COSTS:

Expenditures for research activities relating to intellectual property development and improvement are charged to expense as incurred. Such expenditures amounted to $4,234,932 and $7,190,975 for the years ended February 29, 2008 and February 28, 2007, respectively.

15. COMMITMENTS:

Lease Obligation

The Company was obligated under an operating lease for office space originally expiring January 30, 2008, which the Company had the right to terminate upon ninety days prior written notice to the landlord. The notice of termination was given to the landlord and the Company continued on a month-to-month basis until it vacated the premises on February 9, 2007. The Company has entered into new operating leases for office space commencing March 2007 and expiring February 28, 2022, subject to our right to terminate at any time after January 31, 2009 upon 90 days notice.

The following is a schedule of future minimum rental payments, included annual increases, required under the operating lease agreements assuming continued renewal through the expiration date of February 2022:

Year Ending
February 28,	Amount
2009		136,228
2010		146,536
2011		153,866
2012		158,472
2013		163,226
Thereafter		1,927,339
	$	2,685,667

Rent expense, net of subrentals, charged to operations under these operating lease aggregated $94,776 and $113,161 for the years ended February 29, 2008 and February 28, 2007, respectively. Rent expense, net of subrentals, charged to operations for the period from August 1, 1968 (Date of Inception) to February 29, 2008 was $463,402.

Cooperative Research and Development Agreement (CRADA):

In March 2006, the Company entered into a Cooperative Research and Development Agreement (CRADA) with the Food and Drug Administration to evaluate the safety of medical implants in the presence of electromagnetic fields from magnetic resonance imaging for a term of 2.5 years. Pursuant to the Agreement, the Company is committed to a total of $187,500 of which $150,000 has been paid at February 29, 2008.

F-23

The Company is obligated under two license or royalty agreements for patents that expire at various dates through 2021. These agreements may be terminated by the Company with 60 days written notice. Aggregate minimum future payments over the remaining life of the patents under these agreements total $1,255,000. License/royalty expense charged to operations was $331,290 and $152,410 for the years ended February 29, 2008 and February 28, 2007, respectively.

License Agreements

Employment Agreements

Biophan has employment agreements with its executive officers that renew annually unless terminated by either party. Such agreements, which have been revised from time to time, provide for minimum salary levels, adjusted annually for cost-of-living changes, as well as for incentive bonuses that are payable if specified management goals are attained.

Also, Biophan Europe has an employment agreement with a key employee that expires on February 24, 2009. This agreement provides for base salaries, bonuses based on attaining certain milestones, a restricted stock grant and stock options. The aggregate commitment for future base salaries at February 29, 2008, excluding bonuses and other awards approximates $60,000.

16. RELATED PARTY TRANSACTIONS:

The Company had affiliations with two entities, Biomed and Technology Innovations ("TI") that were related by virtue of common senior management personnel and stock ownership. During the years ended February 29, 2008 and February 28, 2007, the Company charged Biomed and TI for services of certain Company personnel. The total of these charges was $91,939 and $197,362, respectively. The Company also charges Biomed and TI for expenses allocable to and paid on their behalf. During the years ended February 29, 2008 and February 28, 2007, expenses paid by the Company on their behalf was approximately $85,445 and $175,220, respectively. At February 29, 2008 and February 28, 2007, the combined balance due from these related parties was $34,625 and $16,301, respectively. The amounts do not bear interest and the Company received payment within forty-five days. Upon Mr. Weiner’s resignation on October 3, 2007, Biomed and Technology Innovations were no longer deemed related parties. Any billings for expenditures paid on their behalf are now included in trade accounts receivable.

During the years ended February 29, 2008 and February 28, 2007, the Company was billed $40,173 and $35,290, respectively, for legal services provided by Bramson & Pressman of which Robert S. Bramson, a former director of the Company, is a partner. Mr. Bramson resigned July 18, 2006.

Steven Katz & Associates, Inc. of which Steven Katz, a former director of the Company is an owner, billed the Company $-0-, and $183,500 during the years ended February 29, 2008 and February 28, 2007, respectively, for consulting services. Mr. Katz resigned March 9, 2007.

Katan Associates, Inc. of which Stan Yakatan, a director of the Company is an owner, billed the Company $30,000 during the year ended February 29, 2008 for consulting services.

Wood and Company CPA, PC of which Robert J. Wood, the Chief Financial Officer of the Company is an owner, billed the Company $98,000 during the year ended February 29, 2008 for consulting services.

17. STOCK-BASED COMPENSATION PLANS:

The Company accounts for stock-based compensation in accordance with SFAS No. 123R, "Share-Based Payment," using the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company recognized expense under SFAS No. 123R in the amount of $1,312,901 and $1,444,780 for the years ended February 29, 2008 and February 28, 2007, respectively. The related impact on basic and diluted earnings per share for the years ended February 29, 2008 and February 28, 2007 was a reduction of $.014 and $.015, respectively. The impacts on the Company's cash flow for 2008 were not material.

F-24

The Company’s stock incentive plans consist of the Biophan Technologies, Inc. 2001 Stock Option Plan and Biophan Technologies, Inc. 2006 Incentive Stock Plan (the "Plans") which are shareholder approved. In March 2008, the Board of Directors approved and adopted the 2008 Incentive Stock Plan reserving 7,000,000 which has not yet been approved by stockholders. The Plans provide for the grant of incentive and non-qualified stock options to selected employees, and the grant of non-qualified options and other stock-based awards to selected consultants and to directors and advisory board members. The Plans are administered by the Compensation Committee of the Board and authorizes the grant of options or restricted stock awards for 13,000,000 shares under the 2001 Plan, 7,500,000 shares under the 2006 Plan and 10,000,000 shares under the 2008 Plan. The Compensation Committee determines which eligible individuals are to receive options or other awards under the Plans, the terms and conditions of those awards, the applicable vesting schedule, the option price and term for any granted options, and all other terms and conditions governing the option grants and other awards made under the Plans. The Company tends to fund exercised options with previously unissued shares. Non-employee directors also receive periodic restricted stock grants pursuant to the automatic grant program in effect for them under the 2008 Plan. Some of the Company's outstanding option agreements contain performance milestones as a condition for vesting. In accordance with Statement of Accounting Standard No. 123(r), "Share Based Payments," the Compensation Committee periodically evaluates the probability these milestones will be met and records compensation expense when it is determined that the condition is probable of being satisfied. In March 2008, 600,000 shares of restricted stock were awarded to non-employee directors.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company's stock, management's estimate of implied volatility of the Company's stock, and other factors. The expected term of options granted is derived from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that options granted are expected to be outstanding. The risk-free rate is calculated using the U.S. Treasury yield curve, and is based on the expected term of the option. The Company uses historical data to estimate forfeitures.

The Black-Scholes option pricing model was used with the following weighted-average assumptions for options issued in each year:

	For the Year Ended
	2008	2007
Weighted-average risk-free interest rate	4.7%	4.9% *
Risk-free interest rates	2.3% -4.8%	4.5% - 5.4%
Weighted-average expected option lives	7.95 years	6.14 years *
Expected option lives	4 - 8 years	4 - 8 years
Weighted-average volatility	86.67%	109.06% *
Expected volatilities	75.2% - 166.5%	71.% - 122%
Weighted-average expected dividend yield	0.0%	0.0% *
Expected dividend yields	0.0%	0.0%

*Unaudited

Further information relating to stock options is as follows:

			Weighted
		Weighted	Average
	Number	Average	Remaining
	of	Exercise	Contract
	Shares	Price	Life (years)
Outstanding options at 2/28/06	9,594,020	$0.95
Granted	354,997	$0.96
Exercised	(38,956)	$0.34
Forfeited/expired	(481,999)	$0.48
Outstanding options at 2/28/07	9,428,062	$0.96
Granted	7,027,328	$0.28
Exercised	-	$0.00
Forfeited/expired	(951,499)	$1.50
Outstanding options at 2/29/08	15,503,891	$0.59	7.38

Exercisable on February 28, 2007	7,433,479
Exercisable on February 29, 2008	13,562,224

F-25

The following table summarizes information about stock options as of February 29, 2008:

	Outstanding			Exercisable
		Wt'd Average
		Remaining	Wt'd Average		Wt'd Average
Range of Exercise Prices	Options	Contractual Term	Exercise Price	Options	Exercise Price
$.01 - $1.00	13,530,868	6.57	$0.46	12,052,118	$0.45
$1.01 - $2.00	1,643,023	6.04	$1.60	1,330,106	$1.62
$2.01 - $3.00	330,000	4.00	$2.72	180,000	$2.82
	15,503,891			13,562,224

The following table summarizes our non-vested stock option activity for the year ended February 29, 2008

Non-vested stock option activity
		Wt'd Avg Grant-Date
	No of Shares	Fair Value
Non-vested stock options at 2/28/07	1,994,583	$0.62
Granted	668,750	$0.21
Vested	(457,083)	$0.76
Forfeited/expired	(264,583)	$1.30
Non-vested stock options at 2/28/08	1,941,667	$0.73

At February 29, 2008, shares available for future stock option grants to employees and others under our 2001 Stock Option Plan and our 2006 Incentive Stock Plan were 44,480 and 26,566, respectively. At February 28, 2007, shares available for future stock option grants to employees and other under our 2001 Stock Option Plan and our 2006 Incentive Stock Plan were 597,981 and 7,265,003, respectively.

The options have contractual terms ranging from five to ten years. The aggregate intrinsic value of shares outstanding and exercisable was $302,550 and $302,550, respectively at February 28, 2007, and $0 and $0 at February 29, 2008 as the market price of the Company's common stock was below the weighted-average exercise price of options. Total intrinsic value of options exercised was $0 and $17,223 for the years ended February 29, 2008 and February 28, 2007, respectively.

The weighted-average fair value per option granted in 2008 and 2007 was $0.09 and $.83, respectively.

As of February 29, 2008 approximately $152,000 of total unrecognized compensation cost related to unvested options. The cost is expected to be recognized over a weighted-average period of 5.51 years.

18. 401(K) SAVINGS PLAN

The Company maintains a tax-qualified retirement plan that provides all eligible employees with an opportunity to save for retirement on a tax-advantaged basis. Under the 401(k) Plan, participants may elect to defer a portion of their compensation on a pre-tax basis and have it contributed to the Plan subject to applicable annual Internal Revenue Code limits. Pre-tax contributions are allocated to each participant's individual account and are then invested in selected investment alternatives according to the participants' directions. Employee elective deferrals are 100% vested at all times. The 401(k) Plan provides for matching contributions to be made by the Company which vests immediately. As a tax-qualified retirement plan, contributions to the 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) Plan and all contributions are deductible by the Company when made. In addition, the Plan provides for discretionary contributions as determined by the board of directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants.

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