S-1 1 v090776_s1.htm
As filed with the Securities and Exchange Commission on October 25, 2007
Registration No. 333-_____

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 


FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 

 
BIOPHAN TECHNOLOGIES, INC.
(Name of small business issuer in its charter)

 
3841
 
82-0507874
(State or other Jurisdiction of
Incorporation or Organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification No.)

15 Schoen Place
Pittsford, New York 14534
(585) 267-4800
(Address and telephone number of principal executive offices and principal place of business)

John F. Lanzafame
Biophan Technologies, Inc.
15 Schoen Place
Pittsford, New York 14534
(585) 267-4800
(Name, address and telephone number of agent for service)

Copies to:
Gregory Sichenzia, Esq.
Yoel Goldfeder, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway, 32nd Flr.
New York, New York 10006
(212) 930-9700
(212) 930-9725 (fax)

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
 

 
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: x

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

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

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

2


CALCULATION OF REGISTRATION FEE

Title of each class of
securities to be
registered
 
Number of
Shares to be registered
 
Proposed
maximum
offering
price per
share
 
Proposed
maximum
aggregate
offering price
 
Amount of registration fee
 
Common Stock, $0.005 par value
   
38,102,868
 
$
0.145
(1)
$
5,524,916
(1)
$
169.61
(2)

(1)
Computed in accordance with Rule 457(c) under the Securities Act of 1933(the "Securities Act"), solely for the purpose of calculating the registration fee, and based on the average of the high and low prices of the Common Stock of the Registrant as reported on October 22, 2007 on the NASDAQ OTC Bulletin Board.

(2)
Computed in accordance with Section 6(b) under the Securities Act, solely for the purpose of calculating the registration fee.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.

3


The information in this Prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement is filed with the Securities and Exchange Commission and becomes effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 25, 2007

BIOPHAN TECHNOLOGIES, INC.
38,102,868 Shares of
Common Stock

This prospectus relates to the sale of38,102,868 shares of our common stock that may be sold from time to time by the selling stockholders named herein.
 
This offering is not being underwritten. The selling stockholders may offer the shares through public or private transactions at the market price for our common stock at the time of the sale, a price related to the market price, a negotiated price or such other prices as the selling stockholders determine from time to time. See "Plan of Distribution" beginning on page 56.

All of the net proceeds from the sale of these shares of common stock will go to the selling stockholders. We will not receive any proceeds from sales of these shares. We will bear the costs relating to the registration of these shares.
 
Our common stock is quoted on the OTC Bulletin Board under the symbol "BIPH". On October 22, 2007, the last reported sale price on the OTC Bulletin Board for our common stock was $0.15 per share.
 
You should read this prospectus carefully before you invest.
 
Investing in these securities involves substantial risks. See "Risk Factors" beginning on page 8.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is ________, 2007.

4


Table of Contents

 
Page
Prospectus Summary
6
Risk Factors
8
Forward-Looking Statements
12
Use of Proceeds
12
Dividend Policy
12
Selected Consolidated Financial Data
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
Business
26
Management
34
Beneficial Ownership of Common Stock by Directors, Officers and Principal Stockholders
48
Certain Relationships and Related Party Transactions
50
Transactions with Selling Stockholders
51
Selling Stockholders
53
Plan of Distribution
56
Description of Capital Stock
57
Legal Matters
59
Experts
59
Where You Can Find More Information
59
Index to Consolidated Financial Statements
61

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

5


PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors" beginning on page 8, and the consolidated financial statements and notes to those consolidated financial statements, before making an investment decision.

BIOPHAN TECHNOLOGIES, INC.

Our Corporate Information

We were incorporated in the State of Idaho on August 1, 1968, under the name Idaho Copper and Gold, Inc. On February 9, 1999, we changed our name to Idaho Technical, Inc. On January 24, 2000, we changed our domicile to Nevada by merging into our wholly-owned Nevada subsidiary. We began our current line of business on December 1, 2000. On December 1, 2000, we changed our name to GreatBio Technologies, Inc. and on July 19, 2001, we changed our name to Biophan Technologies, Inc.

From inception through August 31, 2007, we have incurred cumulative net losses of $53,423,577. Since December 1, 2000, we have relied almost entirely on sales of our securities and loans to fund our operations.

Our principal executive offices are located at 15 Schoen Place, Pittsford, New York 14534 and our telephone number is (585) 267-4800.

The Offering
 
Securities offered by the Selling Shareholders
 
38,102,868 shares
     
Common stock to be outstanding after the offering 
 
141,226,524 shares *
     
Use of proceeds 
 
We will not receive any proceeds from the sale of shares by the selling stockholders.
     
Risk Factors 
 
 
You should read the "Risk Factors" section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock.
     
OTC Bulletin Board symbol 
 
“BIPH”

The number of shares of our common stock to be outstanding following this offering is based on 103,123,656 shares of our common stock outstanding as of October 22, 2007, and assumes the conversion of an aggregate face amount of $5,287,756 of our outstanding Senior Secured Convertible Notes due October 11, 2009 into an aggregate of 35,251,707 shares of common stock to be sold by selling stockholders in this offering and (ii) the issuance of 2,851,161 shares of common stock in payment of interest to accrue under the Notes during their term, and to be sold by the selling stockholders in this offering and excludes (i) the exercise of outstanding options under our incentive stock compensation plans, (ii) the issuance of any shares of our common stock to SBI Brightline XI, LLC pursuant to the Stock Purchase Agreement dated as of May 27, 2005 (as amended), and (iii) the exercise of any other options, warrants or other rights to acquire shares of our common stock by any person or entity (including the selling stockholders).

* Includes 4,923,080 shares of our common stock held by Myotech, LLC. Because we have consolidated our financial statements with those of Myotech in accordance with FASB Interpretation No. 46 (Revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46(R)"), these shares are carried as treasury shares on our Consolidated Balance Sheets as of February 28, 2007 and August 31, 2007 and the Consolidated Statement of Stockholders' Equity as of February 28, 2007. However, because we did not have direct control over the voting or disposition of the shares held by Myotech, these shares are treated as issued and outstanding shares throughout this prospectus except (i) in the section entitled "Selected Financial Data" on page 12 and (ii) in the Financial Statements beginning on page F-1.

6


SUMMARY CONSOLIDATED FINANCIAL DATA 

The tables below summarize our consolidated statements of operations for the six months ended August 31, 2007 and 2006 (Unaudited), and for the years ended February 28, 2007, 2006 and 2005 (Audited) and our consolidated balance sheet data as of February 28, 2007 and 2006 (Audited) and August 31, 2007 (Unaudited). The summary data as of and for the six months ended August 31, 2007 and 2006 (Unaudited) and the summary data as of and for the years ended February 28, 2007 and 2006 (Audited) are derived from our consolidated financial statements and related notes, which are included elsewhere in this prospectus. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of our financial position and results of operations for these periods. You should read the following information together with the more detailed information contained in “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
                     
   
 
Year Ended February 28,
 
Six Months Ended
August 31,
 
 
 
 
2007
 
2006
 
2005
 
 
2007
 
 
2006
 
 
Revenues:
                     
Development payments
 
$
-
 
$
225,000
 
$
-
 
$
-
 
$
-
 
License fees
   
562,500
   
479,166
   
-
   
125,000
   
437,500
 
Grant revenues
   
-
   
-
   
-
   
75,000
   
-
 
Testing services and consulting fees
   
427,029
   
340,695
   
-
   
132,351
   
217,521
 
     
989,529
   
1,044,861
   
-
   
332,351
   
655,021
 
                                 
Operating expenses:
                               
Research and development
   
7,190,975
   
6,829,142
   
2,629,980
   
2,817,784
   
4,529,921
 
General and administrative
   
6,824,945
   
8,451,886
   
3,337,185
   
3,290,423
   
3,659,625
 
     
14,015,920
   
15,281,028
   
5,967,165
   
6,108,207
   
8,189,546
 
                                 
Operating loss
   
(13,026,391
)
 
(14,236,167
)
 
(5,967,165
)
 
(5,775,856
)
 
(7,534,525
)
                                 
Other income(expense):
                               
Interest income
   
82,224
   
70,701
   
11,869
   
20,431
   
11,606
 
Interest expense
   
(4,303,543
)
 
(1,140,866
)
 
-
   
(1,714,326
)
 
(684,407
)
Additional expense related to warrants
   
(7,304,105
)
 
-
   
-
   
-
   
-
 
Change in fair value of warrant liability
   
5,318,064
   
-
   
-
   
3,434,017
   
-
 
Debt forgiveness
   
-
   
-
   
-
   
197,614
   
-
 
Liquidated damages
   
-
   
-
   
-
   
(652,500
)
 
-
 
Loss on extinguishment of debt-related party
   
(670,053
)
 
-
   
-
   
-
   
-
 
Other income
   
161,196
   
215,789
   
161,749
   
33,939
   
93,701
 
Other expense
    (5,442 )   -    
-
   
-
   
-
 
     
(6,721,659
)
 
(854,376
)
 
173,618
   
1,319,175
   
(579,100
)
Loss from continuing operations before minority interest in Myotech, LLC
   
(19,748,050
)
 
(15,090,543
)
 
(5,793,547
)
 
(4,456,681
)
 
(8,113,625
)
Minority interest in Myotech, LLC
   
2,025,639
   
606,159
   
-
   
725,173
   
1,215,920
 
Net loss
 
$
(17,722,411
)
$
(14,484,384
)
$
(5,793,547
)
$
(3,731,508
)
$
(6,897,705
)
                                 
Loss per common share - basic and diluted
 
$
(0.23
)
$
(0.19
)
$
(0.08
)
$
(0.05
)
$
(0.09
)
                                 
Weighted average shares outstanding
   
77,864,738
   
75,787,052
   
69,263,893
   
81,167,908
   
77,393,718
 
                                 
CONSOLIDATED BALANCE SHEET
DATA:
                               
   
As of February 28, 
 
As of August 31,
 
     
2007
   
2006
   
2007
 
Cash and cash equivalents
 
$
2,418,551
 
$
1,477,716
 
$
268,716
 
Intangible assets, net
 
$
24,396,805
 
$
25,854,850
 
$
23,660,783
 
Total assets
 
$
28,896,251
 
$
27,968,066
 
$
25,780,474
 
Total liabilities
 
$
18,966,774
 
$
3,231,158
 
$
7,970,845
 
Minority interest
 
$
13,139,882
 
$
15,189,109
 
$
12,367,582
 
Total stockholders’ equity (deficiency)
 
$
(3,210,405
)
$
9,547,799
 
$
5,442,047
 

7


RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common stock. If any of the following risks actually materializes, our business, financial condition and results of operations would suffer. The trading price of our common stock could decline as a result of any of these risks, and you might lose all or part of your investment in our common stock. You should read the section entitled "Forward-Looking Statements" immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.
 
WE MAY BE SUBJECT TO LIABILITY IN THE FORM OF A CLAIM FOR RESCISSION BY CERTAIN SHAREHOLDERS.
 
As a result of our Forbearance Agreement with certain investors dated February 16, 2007, the Securities and Exchange Commission may take the position that the sale of the $7,250,000 of senior secured convertible notes had not been completed before we filed the registration statement of which this prospectus is a part and as such we may have issued securities without a valid exemption in violation of Section 5 of the Securities Act of 1933, as amended, for such placement. The $7,250,000 of senior secured convertible notes were convertible by the investors into 10,820,896 shares of common stock. As additional consideration for the senior secured convertible notes we issued the investors warrants to purchase 10,820,896 shares of our common stock and in connection with the execution of the Forbearance Agreement we issued the investors additional warrants to purchase an aggregate of 60,000 shares of our common stock.
 
If the Securities and Exchange Commission takes the position that the foregoing was a violation of Section 5 of the Securities Act of 1933, as amended, the investors may be entitled to, among other penalties or fines which may be assessed against us the right to demand rescission of the offering. In that case, we would be required to pay each investor the amount we received as consideration for the securities issued under an invalid exemption, plus any interest accrued with respect to such amount at the applicable rate, and the securities would be cancelled.
 
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 and no material revenues to date. 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.

8

 
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.
 
For the six months ended August 31, 2007, we incurred a net loss of $3,731,508, and for the fiscal years ended February 28, 2007, 2006 and 2005, we incurred net losses of $17,722,411, $14,484,384, $5,793,547, respectively. We have incurred cumulative net losses from inception through August 31, 2007 of $53,423,577. 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.
 
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 have set forth in this prospectus our proposed research and development program as it is currently conceived. We cannot assure you, however, that this program 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, our research and development efforts are aimed at technology that will enable certain medical procedures and biomedical devices to become safe and 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.

9

 
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.
 

10

 
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 60 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.
 
 
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 $5,287,756 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) 90% 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 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.
 
 
John Lanzafame, our interim Chief Executive Officer, is on the Board of NaturalNano, Inc., the largest shareholder of which is Technology Innovations, LLC, which is a 57% equity member of Biomed Solutions LLC, a company engaged in the business of indentifying and acquiring technologies in the biomedical field for exploitation. Biomed is a beneficial owner of 5.17% of our outstanding common stock and holds an aggregate of $2,250,000 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.

11


FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
 
In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. We discuss many of the risks in greater detail under the heading "Risk Factors." Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Except as required by law, we assume no obligation to update any forward-looking statements after the date of this prospectus.
 
This prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operation" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

USE OF PROCEEDS

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

DIVIDEND POLICY
 
 
SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated statements of operations data for the years ended February 28, 2007, 2006 and 2005 and the consolidated balance sheet data as of February 28, 2007 and 2006 have been derived from our audited consolidated financial statements and related notes, which are included elsewhere in this prospectus. The statements of operations data for the years ended February 29, 2004 and February 28, 2003 and the balance sheet data as of February 28, 2005, February 29, 2004 and February 28, 2003 have been derived from our audited consolidated financial statements that do not appear in this prospectus.

12

 
The consolidated statement of operations data for the six months ended August 31, 2007 and 2006 and the consolidated balance sheet as of August 31, 2007 have been derived from our unaudited consolidated financial statements and related notes, which are included elsewhere in the prospectus. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of our financial position and results of operations for these periods. The consolidated selected financial data set forth below should be read in conjunction with our consolidated financial statements, the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future period. 
 
 
 
Year ended
 
Year ended
 
Year ended 
 
Year ended 
 
Year ended 
 
Six months ended
 
   
February 28,
 
February 28, 
 
February 28, 
 
February 29, 
 
February 28, 
 
August 31,
 
Operating Data:
 
2007
 
 2006
 
 2005
 
 2004
 
 2003
 
 2007
 
 2006
 
Revenues
 
$
989,529
 
$
1,044,861
 
$
-0-
 
$
75,000
 
$
-0-
 
$
332,351
 
$
655,021
 
Research and development expenses
   
7,190,975
   
6,829,142
   
2,629,980
   
1,240,439
   
1,373,124
   
2,817,784
   
4,529,921
 
General and administrative expenses
   
6,824,945
   
8,451,886
   
3,337,185
   
1,911,003
   
1,792,593
   
3,290,423
   
3,659,625
 
Other income (expense)
   
(6,721,659
)
 
(854,376
)
 
173,618
   
(642,128
)
 
(272,535
)
 
1,319,175
   
(579,100
)
Minority interest in Myotech, LLC
   
2,025,639
   
606,159
   
-0-
   
-0-
   
-0-
   
725,173
   
1,215,920
 
Net loss
 
$
(17,722,411
)
$
(14,484,384
)
$
(5,793,547
)
$
(3,718,570
)
$
(3,438,252
)
$
(3,731,508
)
$
(6,897,705
)
Loss per common share -
                                           
 basic and diluted
 
$
(.23
)
$
(.19
)
$
(.08
)
$
(.08
)
$
(.11
)
$
(.05
)
$
(.09
)
Weighted average shares outstanding
   
77,864,738
   
75,787,052
   
69,263,893
   
44,017,010
   
31,731,051
   
81,167,908
   
77,393,718
 
 
   
February 28, 
 
February 28, 
 
February 28, 
 
February 29, 
 
February 28, 
 
 August 31, 
 
Balance Sheet Data:
 
2007
 
 2006
 
 2005
 
2004
 
2003
 
 2007
 
Current assets
 
$
2,631,520
 
$
1,880,826
 
$
2,007,181
 
$
2,077,307
 
$
476,353
 
$
552,769
 
Intangible assets net      24,396,805     27,968,066     997,738      70,000      70,000      23,660,783  
Total assets
   
28,896,251
   
27,968,066
   
3,181,370
   
2,231,345
   
683,056
   
25,780,474
 
Current liabilities
   
7,418,579
   
3,231,158
   
1,462,103
   
254,058
   
796,187
   
6,676,690
 
Long-term liabilities
   
11,548,195
   
-0-
   
-0-
   
-0-
   
83,333
   
1,294,155
 
Minority interest
   
13,139,882
   
15,189,109
   
-0-
   
-0-
   
-0-
   
12,367,582
 
Stockholders' equity(deficiency)
   
(3,210,405
)
 
9,547,799
   
1,719,267
   
1,977,287
   
(196,464
)
 
5,442,047
 
Working capital (deficiency)
   
(4,787,059
)
 
(1,350,332
)
 
545,078
   
1,823,249
   
(319,834
)
 
(6,123,921
)
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATION

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 prospectus. 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 prospectus, particularly in “Risk Factors.”

Overview

We are a technology development company with a strong focus on solving real-world technical challenges facing the medical device industry. We currently have 49 issued U.S. patents and over 60 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.
 
When selecting a market opportunity to address, we generate a wide range of potential technical solutions. We strive to assure that each technical solution we pursue is well-protected by intellectual property to ensure that we have the capability to effectively market our technologies. Whenever practical, we attempt to develop and patent multiple solutions for any given technology requirement. This is done both to strengthen our position against competitors, and to be in a position to offer multiple manufacturers alternative solutions, such as for MRI visibility of vascular stents, as we introduce our technologies to the market. This approach has resulted in the development of a range of core technologies, in various related segments of the medical device market. We are aggressive in development and defense of our intellectual property.

We also continue development of a new circulatory support device, through our relationship with Myotech, LLC. The Myotech Circulatory Support System is a life-saving device that provides benefits and competitive advantages not possible with other cardiac assist devices. In the past, this technology has saved human lives and holds the potential for the treatment of multiple forms of acute and chronic heart failure.

13

 
Revenue
 
We currently derive revenue from sales of intellectual property rights, from development contract payments, license fees from Boston Scientific Scimed 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:
 
·
salaries and related costs for our research and development employees at our U.S. and European sites;
 
·
funding for various research projects, often employing the use of consulting scientists and engineers;
 
·
legal fees to file, renew, and defend our patent estate; and
 
·
license fees for access to certain patent technologies developed by others.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of:
 
·
salaries and related costs of executives, administrative and marketing personnel;
 
·
professional service costs;
 
·
public / investor relations;
 
·
travel and related costs; and
 
·
occupancy and other overhead costs.
 
Critical Accounting Policies and Estimates
 
Management does not believe that any 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. We recognize income from sales of intellectual property rights at the time upon transfer of title to the rights.
 
Accounting Requirements Resulting from the Securities Purchase Agreement dated October 11, 2006
 
The accounting treatment for the $7,250,000 in Senior Secured Convertible Notes and related warrants issued pursuant to the Securities Purchase Agreement dated October 11, 2006 among Biophan and the Investors named therein (the "Purchase Agreement") was accounted for in accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock and EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments. EITF 00-19 requires freestanding contracts that are settled in a company's own stock to be designated as an equity instrument, an asset or a liability. A contract designated as a liability must be carried at fair value with any changes in fair value recorded in results of operations for the current period. We determined that the warrants issued pursuant to the Purchase Agreement, due to the registration rights requirements contained therein, as well as other outstanding warrants, due to the insufficiency of the Company's then current number of authorized and unissued shares of common stock, should be designated as a liability. Accordingly, using the Black-Scholes method to compute the fair value, we recorded a fair value of warrant liability of $10.5 million. Further, we recognized the allocation of value to the warrants by recording a $7,250,000 discount against the Notes. The discount is being amortized to Interest Expense over the term of the Note, using the effective interest method.

14

 
In addition, 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 we have agreed, in the Purchase Agreement, to propose to our stockholders. For accounting purposes, these amendments have been treated, in substance, as an extinguishment of the old debt. Accordingly, the remaining unamortized discount on the old debt of $1,098,442 was written off, a loss on extinguishment of $670,053 on the old debt was recognized, and a discount of $175,970 was recorded on the new debt and fully amortized during the year ended February 28, 2007.
 
The warrants subject to the Subordination Agreement were not reclassified because Biomed agreed not to exercise them until the proposed increase in the number of authorized shares was effective, and Biomed has agreed not to require a cash settlement in the event the number of authorized shares is not increased.
 
Accounting for Income Taxes
 
We are a development stage company with accumulated deficits through August 31, 2007 of $53,423,577. We plan to use our net operating loss carryforwards to offset our future taxable net income until the accumulated net operating losses are exhausted.

Tabular Disclosure of Contractual Obligations

The following table sets forth information, as of February 28, 2007, our most recent fiscal year end, with respect to our known contractual obligations reflected on our Balance Sheet as of such date:

   
Payment Due By Period
 
   
 
Total
 
Less Than
1 Year
 
1-3
Years
 
3-5
Years
 
More Than
5 Years
 
Contractual Obligations:
                     
Long-Term Debt
 
$
7,250,000
 
$
2,856,061
 
$
4,393,939
 
$
 
$
 
Capital Lease Obligations
   
27,049
   
7,445
   
19,604
   
   
 
Operating Lease Obligations
   
2,301,550
   
102,891
   
286,094
   
311,626
   
1,600,939
 
Cooperative Research and Development Agreement (CRADA)
   
112,500
   
75,000
   
37,500
   
   
 
License Agreements
   
5,447,500
   
337,500
   
737,500
   
690,000
   
3,682,500
 
Employment Agreements
   
313,750
   
218,750
   
95,000
             
Total
 
$
15,452,349
 
$
3,597,647
 
$
5,569,637
 
$
1,001,626
 
$
5,283,439
 

15


Lease Obligation
 
At February 28, 2007, the Company was obligated under operating leases 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 we occupied the premises on a month-to-month basis until February 9, 2007. The Company has entered into new operating leases for office space commencing March 2007 and expiring April 30, 2022, subject to our right to terminate at any time after December 31, 2008 upon 90 days' notice.
 
 
Year Ending
February 28,
 
Amount
 
2008
 
$
102,891
 
2009
 
 
139,558
 
2010
 
 
146,536
 
2011
 
 
153,636
 
2012
 
 
157,990
 
Thereafter
 
 
1,600,939
 
 
 
$
2,301,550
 
 
Rent expense, net of subrentals, charged to operations under these operating lease aggregated $113,161, $70,775 and $58,546 for the years ended February 28, 2007, 2006, and 2005, respectively. Rent expense, net of subrentals, charged to operations for the period from August 1, 1968 (Date of Inception) to February 28, 2007 was $368,626.
 
License Agreements
 
We are obligated under seven license or royalty agreements for patents that expire at various dates through 2025. These agreements may be terminated by us with 60 days written notice. Aggregate minimum future payments over the remaining life of the patents under these agreements total $5,447,500. License/royalty expense charged to operations was $152,410, $594,890, and $89,880 for the years ended February 28, 2007, 2006 and 2005 respectively.
 
Employment Agreements
 
We have employment agreements with our 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, we have an employment contract with an officer that expires November 9, 2007, and Biophan Europe has an employment agreement with a key employee that expires on February 24, 2009. These agreements provide 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 28, 2007, excluding bonuses and other awards approximates $313,750.
 
Investment in Myotech, LLC
 

16

 
Based upon the terms of the Securities Purchase Agreement, we were obligated to purchase for cash consideration of $2,225,000 an additional 811,037 Class A units. We may also elect to acquire up to an additional 3,563,097 Class A units for further cash consideration of up to $9,775,000, over a 24-month period, which may result in our owning a majority interest in Myotech. During the three month period ended February 28, 2006, we provided $1,185,000 of additional funding for 431,946 additional Class A units of Myotech. During 2007, we provided $1,040,000 of additional funding satisfying the mandatory $2,225,000 cash contribution, and received in exchange 379,091 additional Class A units of Myotech. In addition, Biophan has also provided an additional investment of $1,994,349 to Myotech against milestone 2 in the year ended February 28, 2007 for 726,963 newly issued Class A units, which increased our ownership to 43.7%. Additional investments of $105,175 against milestone 2 have been made since February 28, 2007 for 38,337 additional newly issued Class A units, which raised our ownership percentage to 43.8% to date.
 
On October 2, 2007, we entered into a Securities Purchase Agreement with Myotech, pursuant to which we agreed to purchase from Myotech an aggregate of 15,496,547 membership units for an aggregate purchase price of $3,200,000. Prior to the execution of the agreement we owned 5,408,194 Class A Membership Units of Myotech. In accordance with the agreement, upon execution of the agreement we received 5,000,000 Class A Membership Units and were to receive an additional 4,316,547 Class A Membership Units upon the payment of an aggregate initial purchase price of $1,200,000. Thereafter, upon the satisfaction of certain conditions, we would purchase an additional 6,180,000 Class A Membership Units of Myotech for a purchase price of $2,000,000. As a result of this investment the Company’s holdings in Myotech will increase to approximately 75% and provide Biophan with control of a majority of the Board of Directors of Myotech.
 
We have determined that Myotech is a Variable Interest Entity within the meaning of FIN 46(R) and that we are 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.
 
Additional Expense Related to Warrants.
 
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 incurred this expense in connection with the issuance of convertible notes and warrants on October 12, 2006 to record the total fair value of derivative liability, originally recorded at $15,309,980. This amount is adjusted quarterly. The adjustment is recorded under a separate caption "Change in Fair Value of Warrant Liability".
 
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 have 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 may be unable to comply with the registration rights of the lenders as contained in the Securities Purchase Agreement and we currently do 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 currently do 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 at February 28, 2007. The Company has obtained stockholder approval to increase the authorized shares at a Special Meeting held on May 8, 2007. The total fair value of derivative liability, originally recorded at $15,309,980 on October 12, 2006, was adjusted by $4,815,974 to $10,494,006 at February 28, 2007. The fair value of the derivative liability pertaining to the warrants is volatile. For a further explanation on the factors and assumptions included in the Black-Scholes model to derive the fair values, please refer to the notes to the consolidated financial statements under the heading 'Fair Value of Warrant Liability'.

17


RESULTS OF OPERATIONS

The following table presents the dollar amount and percentage of changes from period to period of the line-items included in our Condensed Consolidated Statements of Operations for the three months and six months ended August 31, 2007 and 2006:

   
Three Months Ended
August 31,
 
Six Months Ended
August 31,
 
   
2007
 
2006
 
Incr.
(Decr.)
 
%
Change
 
2007
 
2006
 
Incr.
(Decr.)
 
%
Change
 
Revenue
 
$
160,018
 
$
310,099
 
$
(150,081
)
 
(48.40
%)
$
332,351
 
$
655,021
 
$
(322,670
)
 
(49.26
%)
Operating expenses:
                                                 
Research and development
   
1,497,837
   
1,941,513
   
(443,676
)
 
(22.85
%)
 
2,817,784
   
4,529,921
   
(1,712,137
)
 
(37.80
%)
General and administrative
   
1,802,753
   
1,573,434
   
229,319
   
(14.57
%
 
3,290,423
   
3,659,625
   
(369,202
)
 
(10.09
%)
Total expenses
   
3,300,590
   
3,514,947
   
(214,357
)
 
(6.10
%)
 
6,108,207
   
8,189,546
   
(2,081,339
)
 
(25.41
%)
                                                   
Operating loss
   
(3,140,572
)
 
(3,204,848
)
 
64,276
   
(2.01
%)
 
(5,774,856
)
 
(7,534,525
)
 
1,758,669
   
(23.34
%)
                                                   
Other income (expense)
   
(1,026,255
)
 
(329,508
)
 
(696,747
)
 
211.45
%
 
1,319,175
   
(579,100
)
 
1,898,275
   
(327.80
%)
                                                   
Loss from continueing operations before minority interest in Myotech, LLC
   
(4,166,827
)
 
(3,534,356
)
 
(632,471
)
 
17.89
%
 
(4,456,681
)
 
(8,113,625
)
 
3,656,944
   
(45.07
%)
                                                   
Minority interest in Myotech, LLC
   
253,354
   
520,095
   
(266,741
)
 
(51.29
%)
 
725,173
   
1,215,920
   
(490,747
)
 
(40.36
%)
                                                   
Net loss
 
$
(3,913,473
)
$
(3,014,261
)
$
(899,212
)
 
29.83
%
$
(3,731,508
)
$
(6,897,705
)
$
3,166,197
   
(45.90
%)

The following comments discuss the significant factors affecting the consolidated operating results of the Company comparing the three months ended August 31, 2007 to the three months ended August 31, 2006 and the six months ended August 31, 2007 to the six months ended August 31, 2006.
 
Comparison of the Three Months Ended August 31, 2007 to the Three Months Ended August 31, 2006
 
Revenues:

Revenues were $160,018 for the three months ended August 31, 2007 as compared to $310,099 for the three months ended August 31, 2006. The decrease was due principally to the agreed-upon schedule of license fee payments and amortization thereof from Boston Scientific Scimed ($125,000) and decreased operating revenues from our European subsidiary, which consisted primarily of MRI-related testing and consulting services to medical device manufacturers ($50,000).
 
Research and Development Expenses:

Research and development expenses decreased by 23%, or $444,000. After factoring out an increase in non-cash charges relating to stock options expense ($450,000) however, expenses decreased by 894,000, 51%. 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 ($580,000), Consulting ($180,000), and Personnel ($116,000).
 
General and Administrative Expenses:

General and administrative expenses increased by 15%, or $229,000. After factoring out an increase in non-cash charges relating to stock options expense ($450,000) however other expenses decreased by 660,000, or 35%. 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 Public Relations ($263,000), Personnel ($117,000), Travel ($76,000), Shareholder Expenses ($74,000), Office Supply and Expense ($56,000) and Consulting & Outside Services ($43,000).

18

 
Other income (expense):

The major component of this category is interest expense, accounting for $1,234,622 of a net total of $1,026,255 for the three months ended August 31, 2007 compared with $380,934 of a net total of $329,508 for the three months ended August 31, 2006. Interest expense increased by $853,688. The major areas attributable to the increase was due to interest ($180,000), and discount (905,197) related to the Senior Secured Convertible Notes and a decrease in interest ($359,000) related to the Biomed Line of Credit.

Minority Interest in Myotech LLC:

The increase in this line-item is a direct effect of allocating the losses incurred by Myotech to the interest of the owners of Myotech other than Biophan.

Comparison of the Six Months Ended August 31, 2007 to the Six Months Ended August 31, 2006

Revenues:

Revenues were $332,351 for the six months ended August 31, 2007 as compared to $655,021 for the six months ended August 31, 2006. The decrease was due principally to the agreed-upon schedule of license fee payments and amortization thereof from Boston Scientific Scimed ($315,500) and decreased operating revenues from our European subsidiary, which consisted primarily of MRI-related testing and consulting services to medical device manufacturers ($82,000). There was also an increase in Grant revenues ($75,000).
 
Research and Development Expenses:

Research and development expenses decreased by 38%, or $1,712,137. After factoring out an increase in non-cash charges relating to stock options expense ($267,000) however, expenses decreased by $2,162,000, 49%. 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 ($1,360,000), Consulting ($432,000), and Personnel ($127,000).
 
General and Administrative Expenses:

General and administrative expenses decreased by 10%, or $369,202. After factoring out an increase in non-cash charges relating to stock options expense ($889,000) However, other expenses decreased by 1,258,000, or 36%. The decrease is attributable generally to our planned reductions in spending, due to restructuring. The major areas of decreased expenses were Public Relations ($678,000), Personnel ($128,000), Travel ($100,000), Shareholder Expenses ($70,000), Legal fees ($142,000), Office Supply and Expense ($44,000), and Consulting and Outside Services ($241,000). Also, there was an increase in Accounting fees ($202,000).

Other income (expense):

The major component of this category is interest expense, accounting for $1,714,326 of a net other income of $1,319,175 for the six months ended August 31, 2007 compared with $684,407 of a net other expense of $579,100 for the six months ended August 31, 2006. The major areas attributable to the increase were due to interest ($342,000), discount ($1,910,000), and a decrease in change in fair value of derivative liability ($4,339,000) related to the Senior Secured Convertible Notes and a decrease in interest ($570,000) related to the reduction of the Biomed Line of Credit. Other items attributable to the increase in net other income is the change in the fair value of warrant liability ($3,434,000) and a decrease due to liquidated damages ($652,500).

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The following table sets forth our results of operations for the fiscal years ended February 28, 2005 through 2007:

     
   
2007
 
2006
 
2005
 
Revenues:
             
Development payments
 
$
 
$
225,000
 
$
 
License fees
   
562,500
   
479,166
   
 
Testing services and consulting fees
   
427,029
   
340,695
   
 
     
989,529
   
1,044,861
   
 
Operating expenses:
                   
Research and development
   
7,190,975
   
6,829,142
   
2,629,980
 
General and administrative
   
6,824,945
   
8,451,886
   
3,337,185
 
Write-down of intellectual property rights
   
   
   
 
     
14,015,920
   
15,281,028
   
5,967,165
 
Operating loss
   
(13,026,391
)
 
(14,236,167
)
 
(5,967,165
)
Other income(expense):
                   
Interest income
   
82,224
   
70,701
   
11,869
 
Interest expense
   
(4,303,543
)
 
(1,140,866
)
 
 
Additional expense related to warrants
   
(7,304,105
)
 
   
 
Change in fair value of warrant liability
   
5,318,064
   
   
 
Loss on extinguishment of debt - related party
   
(670,053
)
 
   
 
Other income
   
161,196
   
215,789
   
161,749
 
Other expense
   
(5,442
)
 
   
 
     
(6,721,659
)
 
(854,376
)
 
173,618
 
Loss from continuing operations before minority interest in Myotech, LLC
   
(19,748,050
)
 
(15,090,543
)
 
(5,793,547
)
Minority interest in Myotech, LLC
   
2,025,639
   
606,159
   
 
Loss from continuing operations
   
(17,722,411
)
 
(14,484,384
)
 
(5,793,547
)
Loss from discontinued operations
   
   
   
 
Net loss
 
$
(17,722,411
)
$
(14,484,384
)
$
(5,793,547
)
Loss per common share - basic and diluted
 
$
(0.23
)
$
(0.19
)
$
(0.08
)
   
77,864,738
   
75,787,052
   
69,263,893
 

Comparison of the Years Ended February 28, 2007 and 2006

Revenues

Revenues for the year ended February 28, 2007 were $0.990 million compared to $1.045 in 2006. Our 2007 revenues pertain to $0.563 million in license fees from our licensing agreement with Boston Scientific Scimed, Inc. and $0.427 million from our MRI testing services and consulting fees in Biophan Europe. Our 2006 revenues pertain to $0.704 million in development payments and license fees from our licensing agreement with Boston Scientific Scimed, Inc. and $0.341 million 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 $0.362 million, to $7.191 million compared to $6.829 million for 2006. Because we consolidated Myotech, LLC at November 30, 2005, the fourth quarter of 2006 included $0.443 million of Myotech operational expenses and $0.344 of Myotech intangible assets amortization. We consolidated Myotech LLC for the fiscal year.The most significant changes in this category of expenses include a decrease in non-cash stock option compensation expense of $1.5 million due primarily to a 2006 expense of $ 1.948 million 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 0.1 million for additional professional staff and salary increases. In addition, we increased our funding of various research and development projects by $1.3 million and we incurred $1.0 million of increased noncash patent amortization expense related to the Myotech intangible assets, which was partially offset by $0.6 million of decreased spending for outside professional services related to licenses and patent maintenance.
 
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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 million to $6.825 million compared to $8.452 million for 2006. Because we consolidated Myotech LLC at November 30, 2005, the fourth quarter of 2006 included $0.165 million 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 $1.7 million due primarily to a 2006 expense of $ 2.296 million 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 0.5 million for additional professional staff and salary increases; increased outside professional services of $0.6 million primarily related to audit, first-year Sarbanes Oxley compliance, and financial consulting. These cost increases were offset by decreased spending by $1.0 million for other expenses.

Other Income (Expense)

Interest Expense. We incurred interest expense amounting to approximately $4.304 million for the year February 28, 2007 compared to $1.141 million of expense for the year ended February 28, 2006. The increased expense (noncash) is attributed to $2.3 million in interest under provisions of the $7.25 million Senior Secured Convertible Notes held by Iroquois Master Fund Ltd and other investors; the write-off of $1.1 million of the remaining unamortized discount on a note to Biomed Solutions, LLC; and approximately $0.9 million 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 million primarily related to the Senior Secured Convertible Notes at February 28, 2007, or a decrease in expense of $5.318 million from our initial recording of this derivative liability of $15.309 million at the closing date of October 12, 2006.

Loss on Extinguishment of Debt. We incurred a loss on the extinguishment of the note (noncash) to Biomed Solutions, LLC due to the substantial amendment to the note to Biomed, amounting to $0.670 million.

Minority Interest in Myotech LLC. The loss of $2.026 million 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 $0.606 million 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 holds a 43.7% interest in Myotech LLC, valued on our balance sheet at February 28, 2007 at $12.687 million, which we must consolidate as a variable interest entity since the Company is deemed to be the primary beneficiary in the relationship with Myotech.

Comparison of the Years Ended February 28, 2006 and 2005

Revenues

Revenues for the year ended February 28, 2006 were $1.045 million compared to no revenues in 2005. Our 2006 revenues pertain to $0.704 million in development payments and license fees from our licensing agreement with Boston Scientific Scimed, Inc. and $0.341 million from our MRI testing services and consulting fees in Biophan Europe.
 
21


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, 2006, these expenses increased by 160%, or $4.199 million, to $6.829 million compared to $2.630 million for
2005. Because we consolidated Myotech, LLC at November 30, 2005, the fourth quarter included $0.443 million of Myotech operational expenses and $0.344 of Myotech intangible assets amortization. Excluding these expenses, the year-to-year comparison would have reflected an increase of 130%, or $3.411 million. The most significant increase was caused by $1.948 million in non-cash contingent stock option expense due to the vesting of contingent options that vested upon the achievement of specified performance-based milestones. With the inclusion of the Myotech expenses, we also increased funding of various research and development projects by $0.846 million; we incurred increased licensing fees by $0.515 million, and increased expenses for additional professional staff and salary increases for current staff of $0.538 million.

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, 2006, these expenses rose by 153%, or $5.115 million to $8.452 million compared to $3.337 million for 2005. Because we consolidated Myotech LLC at November 30, 2005, the fourth quarter included $0.165 million of Myotech operational expenses. The most significant increase in expense was caused by approximately $2.296 million in non-cash contingent stock option expense due to the vesting of contingent options that vested upon the achievement of specified performance-based milestones. With the inclusion of the Myotech expenses, outside services increased by $1.666 million, consisting primarily of additional legal and financial consulting and communications expenses, combined with $0.358 million in added costs for new staff and increased salaries, and $0.518 million for travel and other administrative expenses.

Other Income (Expense)

Interest Expense. We incurred interest expense amounting to approximately $1.141 million primarily related to a $5 million line of credit from Biomed Solutions, LLC ("Biomed"), which included a beneficial conversion feature of approximately $1.0 million. The discount is being amortized over the term of the line of credit. The Company incurred no interest expense in 2005.

Minority Interest. This amount is the pro rata share of the loss incurred by Myotech LLC for the 4th quarter of fiscal 2006 at which time Myotech is consolidated with the Company. For further information regarding the basis of consolidation of Myotech, please refer to Footnote 3 in the Notes to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
 
On May 27, 2005, we entered into a Line of Credit Agreement with Biomed Solutions, LLC, a related party, whereby Biomed agreed to provide a line of credit facility of up to $2 million. 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. 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 August 31, 2007.

22

 
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. Under the Line of Credit Agreement, advances may be drawn down in such amounts and at such times as we determine upon 15 days prior notice to Biomed, except that we may not draw down more than $1,500,000 in any 30-day period. Amounts borrowed bear interest at the rate of 8% per annum and 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 expires on June 30, 2007, on which date the entire amount borrowed by us (and not converted into shares of our Common Stock) becomes 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 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").
 
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 elect to exercise these one-year warrants, they will also receive 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 $.85 per share, and the remaining 50% of the additional five-year warrants having an exercise price of $.92 per share. 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 allow 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 allow 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. 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 three months and six months ended August 31, 2007 amounted to $905,197 and $1,910,971 respectively, and is included in interest expense in the accompanying statements of operations.

23

 
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. Because we were unable to comply with various provisions of the registration requirements of the Purchase Agreement we incurred liquidated damages amounting to $652,500 that have been accrued and was charged to operations during the three months ended May 31, 2007.
 
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").
 
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 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 the we elect to make a monthly installment payment in cash, the holder will have the right to convert any portion of the Note into common stock of the Company and apply the number of shares the holder would have received had we elected to make payment in common stock. In addition, the Conversion Price was reduced to $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 will receive 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.  As of October 22, 2007 an aggregate of $5,287,756 in principal was outstanding with respect to these Notes.
 
24

 
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. We may elect 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 may result in the Company owning a majority interest in Myotech. During the three month period ended February 28, 2006, Biophan provided $1,185,000 of additional funding for 431,946 newly issued Class A units of Myotech. During the year ended February 28, 2007, Biophan has provided $1,040,000 of additional funding satisfying the cash consideration of $2.225 million cited above, for 379,091 newly issued Class A units of Myotech. In addition, Biophan has also provided an additional investment of $1,994,349 to Myotech against milestone 2 in the year ended February 28, 2007 for 726,963 newly issued Class A units, which increased our ownership to 43.7%. Additional investments of $395,685 were made during the six months ended August 31, 2007 for 144,232 additional newly issued Class A units, which raised our ownership percentage to 44.1%.
 
We have determined that Myotech is a Variable Interest Entity within the meaning of FIN 46(R) and that we are 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.
 
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 aggregate of 15,496,547 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 of Myotech. In accordance with the Agreement, upon execution of the Agreement Biophan received 5,000,000 Class A Membership Units and was to receive an addition 4,316,547 Class A Membership Units upon the payment of an aggregate initial purchase price of $1,200,000. Thereafter, upon the satisfaction of certain conditions, Biophan will purchase an additional 6,180,000 Class A Membership Units of Myotech for a purchase price of $2,000,000. As a result of these investments, our ownership percentage in Myotech will increase to approximately 75%.

On August 6, 2007, we entered into an Intellectual Property 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 amount would have been reduced to $10,500,000 if the closing did not occur within 60 days of the execution of the agreement. On October 5, 2007, we closed the transaction contemplated by the Intellectual Property Assignment Agreement, sold the foregoing intellectual property to Medtronic and received an aggregate of $11,000,000 as the sale price. 
 
As of the date of our Quarterly Report on Form 10-Q for the three months ended May 31, 2007, we disclosed and discussed certain information pertaining to our ability to continue as a going concern. We have been in the development stage since inception, incurring recurring losses from operations and, as of August 31, 2007, the Company's current liabilities exceeded its current assets by $6,123,921. In addition, as of August 31, 2007, we were in default of our obligations to make payments of principal, interest and liquidated damages to holders of our Senior Secured Convertible Notes. These factors raise potential doubt about the Company's ability to continue as a going concern.

However, as explained previously, 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 and related agreements, the aforementioned defaults were cured. In addition, the investors released certain intellectual property for the Security Agreement, allowing the Company to transfer and sell certain intellectual property to Medtronic, Inc.. Further, in the Amendment, we agreed to certain spending covenants in connection with the proceeds we will 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. On October 5, 2007, we closed the transaction contemplated by the Intellectual Property Assignment Agreement, sold the foregoing intellectual property to Medtronic and received an aggregate of $11,000,000 as the sale price.
 
25

 
In order to further address the current liquidity situation, management has instituted a cost reduction program that includes a reduction in quarterly operating expenses from approximately $1,950,000 at this time last year to a cap of $600,000 per quarter currently. In addition, the Company has reduced its investments in several product lines and pursued alternative funding vehicles in support of other projects.

We have also reorganized our efforts on funding the development of the Myotech Cardiac Support System device. On October 2, 2007, we entered into a revised Securities Purchase Agreement with Myotech, LLC in which we hold a 44% interest as of August 31, 2007. Pursuant to the Agreement, we agreed to purchase from Myotech an aggregate of 15,496,547 membership units for an aggregate purchase price of $3,200,000. In accordance with the Agreement, we received an additional 5,000,000 Class A Membership Units and an additional 4,316,547 Class A Membership Units upon the payment of an aggregate initial purchase price of $1,200,000. Thereafter, upon the satisfaction of certain conditions, Biophan will purchase an additional 6,180,000 Class A Membership Units of Myotech for a purchase price of $2,000,000. As a result of these investments, our ownership percentage in Myotech will increase to approximately 75%.

The proceeds from the sale of intellectual property rights to Medtronic, along with the receipt in December 2007 of our third $250,000 annual minimum payment under our license agreement with Boston Scientific Scimed, will provide adequate working capital resources for the funding of the Myotech device development and other operations for an estimated twenty-six months.
 
Capital Resources
 
Our current strategic plan does not indicate a need for material capital expenditures in the conduct of research and development activities. We currently employ fourteen full-time individuals, twelve in the U.S. and two in Europe.
 
BUSINESS
 
OVERVIEW
 
Biophan Technologies, Inc. is a technology development company with a strong market focus. We were co-founded by Michael Weiner and Wilson Greatbatch, inventor of the first successfully implanted cardiac pacemaker, which he licensed to Medtronic. We went public in December 2000. We have assembled a veteran management team, with extensive experience in technology development, product development, intellectual property management and business-to-business technology licensing.
 
MRI Related Technologies
 
Our technologies for MRI safety and image compatibility apply to a broad segment of the medical device marketplace. The limitations of existing devices are becoming increasingly significant as MRI continues to grow as a premier imaging modality due to its exceptional soft tissue contrast, ability to provide functional data and its lack of ionizing radiation, which separates MRI from fluoroscopy and CT imaging.
 
The limitations of existing medical devices with MRI are two-fold. Some devices have safety limitations - patients with these types of implants would be in danger if they were placed in an MRI machine. These devices are currently contraindicated for use with MRI, preventing patients with these implants from having potentially life saving diagnostic MRI procedures performed. Devices that are currently contraindicated for use with MRI include pacemakers, implantable cardioverter defibrillators (ICDs) and neurostimulators. Biophan developed and sold a suite of patents related to MRI safety to Medtronic in August 2007.
 
Other types of medical devices are safe for use with MRI, but interfere with the MRI image, creating an image artifact (distortion) when viewed under MRI. This limited MRI image compatibility prevents imaging either within the implant or in the area immediately around the implant. Devices that have limited MRI image compatibility include stents, heart valves, vena cava filters, occluders and certain types of catheters and guidewires.
 
Biophan has solutions to the problems of MRI image compatibility that enable:
 
26

 
MRI image compatible stents which allow for the detection of in-stent restenosis and thrombus detection with a non-invasive MRI procedure rather than a much more invasive angiogram or intravenous ultrasound procedure;
 
MRI image compatible vena cava filters, which allow for visualization within the filter for the detection of thrombi caught in the filter, enabling the physician to determine when it is safe to remove the device;
 
MRI image compatible stent-based heart valves, which can be placed under MRI guidance and enable non-invasive follow up and evaluation of the function of the valve; and
 
Catheters and guidewires designed to operate in an MRI environment safely and effectively, enabling much broader adoption of MRI guided interventional procedures which benefit from improved soft tissue contrast and reduce the exposure of both the patient and physician to the radiation associated with fluoroscopy and CT imaging.
 
Biophan has aggressively protected its technologies with broad patent protection. Our total U.S. portfolio of patents owned as well as exclusively licensed inclusive 49 issued patents and over 60 applications at various stages of examination at the U.S. Patent and Trademark Office.
 
Biophan is well positioned to take advantage of this market opportunity, with proven technologies and broad intellectual property protection. We employ internal research facilities, combined with outsourcing to contract laboratories and universities with appropriate expertise, leveraging our core competencies with a network of strategic partnerships. This approach eliminates the need to build unnecessary infrastructure.
 
Biophan's marketing efforts are focused on business-to-business sales of our technology. Since we are focused on working with the leaders in each market segment, the number of prospective partners is approximately 25 medical device companies. Biophan's marketing and sales efforts rely on a select group of experienced business development and technology licensing executives.
 
Biophan entered into its first significant license agreement with Boston Scientific Scimed Corporation in 2005 covering a range of products in exclusive and non-exclusive product segments. Boston Scientific renewed its license in January 2007, with a $250,000 payment.
 
MYOTECH Circulatory Support System (CSS)
 
Biophan has also taken a majority equity position in Myotech, LLC, to help Myotech develop and market a novel circulatory support system. The Company has determined that Myotech is a variable interest entity in accordance with FIN 46(R). The Company has further concluded that it is the primary beneficiary as defined by FIN 46(R) and, as a result, the Company is required to consolidate Myotech as of the date of acquisition of November 30, 2005. Therefore, the consolidated financial statements of the Company include the accounts of Myotech, LLC.
 
Myotech was formed in July 2003 to commercialize a mechanical circulatory support system called the Myotech CSS which is based upon a family of technologies known as Direct Mechanical Ventricular Actuation (DMVA). The Myotech CSS is aimed at one of the largest and fastest growing medical market segments, the treatment of heart failure. ABN-AMRO Morgan Stanley has forecast worldwide sales of ventricular assist devices (VAD) to grow from its 2003 level of $400 million to $7.1 billion by 2009, reflecting an anticipated compounded annual growth rate of 61%.
 
Existing cardiac assist devices, such as VADs, have serious limitations that include clotting and stroke, infection, bleeding, repeat major surgery, and high mortality rates. The devices are available only at a limited number of transplant and specialized cardiac centers and are very expensive to use, often costing in excess of $200,000 per procedure.
 
The Myotech CSS is a comprehensive circulatory support system that has features designed to provide safer and more effective support to a wide array of acute and chronic heart failure conditions. As shown in trials of early prototypes of DMVA technology at Duke University in the 1990s, such a device can be installed quickly to stabilize and provide short term support to patients suffering from acute heart failure to help the heart to recover and ultimately allow the device to be removed. The Myotech CSS offers the following additional competitive advantages:
 
27

 
No contact with circulating blood which reduces the problems of clotting and stroke, bleeding, repeat surgery, and infection - problems that plague existing VADs;
 
Technically simple, rapid installation (approximately three minutes) that does not require highly specialized cardiothoracic surgeons; and
 
The ability to completely restore blood flow from the diseased or failed heart. The Myotech CSS provides systolic (emptying) and diastolic (filling) support to both ventricles. Current VADs typically provide only systolic support to one ventricle.
 
Future versions are expected to include designs with therapeutic capabilities, such as drug delivery designed to enable the Myotech CSS to treat a wide variety of acute and chronic heart failure conditions. We also plan to make the Myotech CSS available in multiple sizes to treat more heart failure patients, including women.
 
Healthcare leaders in the U.S. government and private sector also recognize this resulting in an allocation of $1 million in 2007 to accelerate the availability of the Myotech CSS in forward combat treatment stations as well as suburban and rural hospitals.
 
The short term goal is to develop and introduce a first generation (Gen-1) product. We will initially focus on the commercialization of the Gen-1 Myotech CSS product, which is designed to address sudden cardiac arrest and acute myocardial infarction complicated with cardiogenic shock. Additional R&D will be conducted in parallel to develop the technological capabilities required for the Company to expand the use of the Gen-1 product.
 
 
MARKET OPPORTUNITY
 
MRI Related Technologies
 
Some medical devices have limitations related to MRI safety, and may be contraindicated for use with MRI (such as pacemakers and neurostimulators). Patients with these types of implants cannot have MRI exams performed even if the exams are needed for life threatening conditions, such as cancer detection or diagnosis of aneurysms.
 
Many devices are already safe for use with MRI, but have limited MRI image compatibility. This includes devices such as stents, vena cava filters, and some types of catheters and guidewires. Some of these devices are simply not well imaged under MRI, while other devices have properties that interfere with the MRI image by causing an image artifact (distortion) in the area in and around the device, limiting the effectiveness of MRI for placement or diagnostic follow-up on these implants.
 
Biophan has solutions to these problems. Biophan's internally developed technology and patents, in combination with exclusive in-licensed technologies provide comprehensive intellectual property coverage for Biophan's MRI image compatibility solutions.
 
 
28

 
STRATEGY
 
MRI Related Technologies
 
Management believes that the target market for Biophan's MRI related technologies, represented by the number of medical devices and implants that have limitations related to MRI image compatibility, is in excess of $5 billion.
 
Biophan has developed the following strategy and operating philosophy:
 
o Position Biophan as the leading innovator in applying technologies for MRI image compatibility to medical implants and interventional devices;
 
Continue to focus on developing and marketing solutions to enable MRI image compatible products and implants; and
 
Seek new and novel market applications for the Company's primary technologies;
 
o Utilize an experienced business-to-business sales and technology licensing team to market the Company's technologies;
 
o Protect current and future technology developments by establishing and maintaining a strong patent position; and
 
o Continue to call on development and marketing partners to bring these technologies to the market in a broad range of products, focusing on the leading 20 to 25 medical device manufacturers, with specific targeting of the top three in each major product category.
 
MYOTECH Circulatory Support System (CSS)
 
With regard to the Myotech CSS technology, we recognize the following:
 
Mechanical cardiac assist devices provide many benefits for heart failure patients relative to existing treatment procedures;
 
The potential of the VAD market alone is estimated to be approximately $7 to $8 billion and growing at a rate of 50-60% annually;
 
Conventional VADs have distinct disadvantages including invasiveness to the patient, clotting and stroke, bleeding, repeat surgery, and infection;
 
There are currently no other equally capable solutions on the market and none are anticipated. This position is based upon the following:
 
Searches of the medical market;
 
Review of U.S. and foreign patents and patent activity;
 
Review of the literature and activity within the scientific community;
 
Our Scientific Advisory Board's knowledge of relevant industry activities; and
 
Participation in relevant tradeshows;
 
We possess a substantial intellectual property portfolio which protects current and future developments of its technology in the U.S. and other major international markets; and
 
29

 
The expertise, depth, and experience of its management team.
 
Based on the above and management's knowledge of its markets, Biophan, along with MYOTECH, has developed the following strategy and operating philosophy:
 
o Initially focus on the development and approval of a Gen-1 product for sudden cardiac arrest;
 
o On an longer term basis, focus on next-generation products for the therapeutic recovery ;
 
o Enhance awareness of the Myotech CSS by:
 
Utilizing the Scientific Advisory Board;
 
Engaging industry thought leaders;
 
Publication of the results of pre-clinical and clinical
 
activities; and
 
Participation at major medical and scientific forums;
 
o Interface with the FDA on a pre-approval basis to help ensure rapid approval of Myotech CSS product;
 
o Market and distribute the Myotech CSS by entering into a strategic relationship with a leading medical device company with an appropriate sales and marketing infrastructure;
 
 
o Protect current and future technology developments by establishing a strong trademark and patent position;
 
o Recruit additional, expert-level subject matter expertise where it compliments core team capabilities; and
 
 
TECHNOLOGY
 
Technologies for MRI Image Compatibility
 
Biophan has developed and in licensed a number of technologies for improving MRI image compatibility of interventional devices and implants. These technologies fall into two main categories:
 
o Resonator Technology
 
o Incorporating a resonant circuit, tuned to the resonant frequency of the MRI machine, to enhance the MRI signal and overcome the image artifact (distortion).
 
Product Opportunities for Improved MRI Imaging
 
These product opportunities include the following:
 
o MRI visible stents
 
30

 
o MRI visible vena cava filters
 
o MRI visible stent based heart valve
 
o Guidewires
 
o Catheters
 
MRI Visible Stents
 
A stent is a device that is implanted to hold open a blood vessel that has become too narrow due to atherosclerosis. When imaged under MRI, stents create a large image artifact which prevents viewing of blockages or clotting within the stent. Biophan has developed a solution to this problem.
 
The image artifact (a large dark area on the MRI image in the area where the stent is located) prevents the physician from seeing the critical area in and around the stent. This is caused by the fact that a metallic stent behaves as a Faraday Cage due to its geometry and material, and the stent additionally creates a magnetic susceptibility artifact due to the material of manufacture of the stent.
 
To overcome this limitation, Biophan has developed a resonator technology, which uses tuned circuits to increase the RF signal, and overcome the Faraday Cage effect, making it possible to image within and around a stent.
 
Biophan's technology allows imaging of a blood clot or restenosis within a stent. Currently, measuring restenosis within a stent requires either angiography or intravenous ultrasound, both of which involve complex and invasive catheterization procedures and have a higher chance of complications to the patient than a simple, non-invasive MRI scan.
 
MRI Visible Vena Cava Filters
 
A vena cava filter is a device inserted into a major vein to prevent a thrombus (blood clot) from entering the lungs, which could cause a pulmonary embolism. This device will trap the blood clot in a "cage" before it reaches the lungs.
 
 
MRI Visible Stent-Based Heart Valve
 
A stent based heart valve enables replacement of the aortic valve without the requirement of an open-heart surgery. In cases of calcification of the aortic valve, the function of the valve is no longer efficient. The standard clinical procedure would be to replace the valve in an open-heart surgery. This is a complicated and expensive procedure.
 
Our technology allows the procedure to be performed via percutaneous access through a peripheral vessel, with the procedure performed over a guide wire for placement. The procedure may be performed under fluoroscopy using contrast media injections, or under MRI guidance. For this procedure, there is no need to stop the heart, and no need to put the patient on a heart-lung bypass machine during the operation.
 
With an MRI visible stent-based heart valve, the physician can utilize MRI imaging, with its 3D-orientation and excellent image quality. It is possible to perform the planning and the implementation of the interventions without the side effects of exposure to x-rays, including harmful radiation exposure for both the patients and the physician, and the need for nephrotoxic contrast media. In addition, the ability to accurately visualize the function of the valve under MRI with Biophan's resonator technology can allow less invasive follow up to assess valve function on a regular basis.
 
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Guidewires and Catheters
 
 
SALES AND MARKETING
 
MRI Related Technologies
 
These technologies are applicable to a broad array of products, including stents, vena cava filters, heart valves, occluders, and catheters.
 
Biophan's technology supplies an important feature for these devices, but the devices and systems are complex and have a significant hurdles in terms of design, development, manufacturing and regulatory approval. As a result, Biophan plans to license these technologies to leading medical device manufacturers who have the experience, capabilities and sales force to market products with these features and benefits.
 
 
COMPETITION
 
In the area of devices that can be imaged non-invasively under MRI, such as imaging restenosis inside stents, or visualizing blood flow in heart valves, the Company holds fundamental issued patents on its solutions, including resonant circuits (which overcome Faraday cage effects of stents). Other companies have filed patents on alternative designs, but Biophan and its licensors have the only known solutions demonstrated to enable visualizing inside stents and heart valves under MRI.
 
In the area of cardiovascular support, there are several manufacturers of circulatory support systems, including Abiomed, Thoratec, World Heart, and others. 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, as quickly as the Myotech circulatory support system. PPA Technologies AG, in Germany, is developing a device that provides non-blood contacting support, their patents are not widely filed outside of Germany and do not cover many of the features and full range of capabilities of the Myotech CSS.
 
In the area of power systems powered by body heat, vs. chemical batteries, the Company knows of at least one competitor, Research Technologies Institute in North Carolina, which has spun off a company to develop materials with improved energy conversion properties, and has identified implantable medical devices as a target market. There are other research activities in this area underway at several research organizations within universities. Biophan's TE-Bio subsidiary holds exclusive licenses to several implantable biothermal battery patents. The TE-Bio subsidiary was co-founded with the original patent owner, Biomed Solutions, prior to Biophan entering the power systems business. NASA is also working in the area, and is collaborating with Biophan under the Space Act program. Biophan recently won an SBIR grant for using the technology for Homeland Security, which is helping to further the collaboration and development. Biophan has certain rights to NASA related developments.
 
INTELLECTUAL PROPERTY
 
MRI Related Technologies
 
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        Biophan controls, directly or through exclusive licenses, 49 issued U.S. patents, and over 60 pending applications at various stages of examination. These cover a broad range of technologies, including MRI image compatibility technologies, biothermal power supply technologies and photonics-related technologies.
 
Trademarks
 
The name "Biophan" is a registered trademark of the Company. We have filed for registration of the following trademarks: Nanolution, Nanolute and Nanoview.
 
Myotech's intangible assets currently consist primarily of trademarks and patent applications.
 
Myotech has filed for registration of the following trademarks: Myotech, MYO-VAD, Your Heart Your Life, and We take therapy to heart.
 
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 divisionals and CIP applications. A provisional application "Method and Apparatus for Minimally Invasive Direct Mechanical Ventricular Actuation" has been filed. Utility and foreign applications will follow. Work has begun on a comprehensive application focused on the biochemical and physiological aspects of the treatment of acute and chronic heart.
 
Employees
 
 
Facilities
 
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. Our lease for this facility extends to April 30, 2022, subject to our right to terminate at any time after January 31, 2009 upon 90 days' notice. For the lease years commencing May 1, 2007 and 2008, we will pay an annual base rent of $89,558. For each year commencing on May 1, 2009 and continuing through April 30, 2011, the base rent will increase by 5% over the previous year's rent. For each year commencing on May 1, 2011 and continuing through April 30, 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 belive that this facility will be adequate for our current and anticipated future needs through the lease expiration date.
 
Legal Proceedings
 
Except as noted below, 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.
 
The Company is pursuing legal claims against one of its former law firms and certain of its attorneys. Review of the firm's work product and bills recently revealed questions about the firm's billing practices and other activities. The amount of potential damages has not yet been quantified. Also, the law firm has asserted claims seeking payment of additional legal fees, which claims the Company has denied. The litigation is in an early stage. While, as with any legal proceedings, no assurance can be given as to ultimate outcome, management believes that the outcome of the litigation will not have a material adverse effect upon the Company's financial condition. Accordingly, adjustments, if any that might result from the resolution of this matter have not been reflected in the financial statements.
 
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        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 oral 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 we intend to defend the lawsuit vigorously. Because of the potential costs of litigation and the anticipated demands that our defense may place on the time and attention of our management our defense of this matter, regardless of the outcome, could have a material adverse effect on our business and operations.


EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information regarding our executive officers and directors. Each of our executive officers has been elected by our board of directors and serves until his or her successor is duly elected and qualified:
 
Name
Age
Position
John F. Lanzafame
40
Chief Executive Officer
Guenter H. Jaensch
68
Director and Chairman of the Board
Theodore A. Greenberg
47
Director
Bonita L. Labosky
65
Director
Stan Yakatan
65
Director
Robert J. Wood
68
Chief Financial Officer
Stuart G. MacDonald
58
Vice-President -- Research and Development
 
The principal occupations and business experience for at least the past five years of each director and executive officer is as follows.
 
John F. Lanzafame joined Biophan in 2004 and has served as interim Chief Executive Officer since September 2007, and previously served as Chief Operating Officer since 2006. He leads operations and business development for the Company. He has served as Vice President- Business Development and President of Nanolution, LLC, the drug delivery division of Biophan. In 2006, Mr. Lanzafame was promoted to Chief Operating Officer. From 1989 to 2004, Mr. Lanzafame was employed by STS Biopolymers, Inc., a privately held medical device company that marketed high performance polymer-based coatings for the medical device industry, including drug eluting surfaces for devices such as coronary stents and indwelling catheters, serving in a variety of positions from 1989 to 2003 and as President beginning in 2003. Mr. Lanzafame left STS Biopolymers in 2004, following sale of the company to Angiotech Pharmaceuticals. Mr. Lanzafame is a member of the Board of Directors of NaturalNano, Inc.

Guenter H. Jaensch, Ph.D. is the former Chairman and CEO of Siemens Pacesetter, Inc., a manufacturer of cardiac pacemakers. During his more than twenty-five years at Siemens, Dr. Jaensch held various senior executive positions prior to running Siemens Pacesetter, including President of Siemens Communications Systems, Inc. from August 1983 to March 1985, Chairman and President of Siemens Corporate Research and Support, Inc., from April 1982 to September 1991 and Chairman and CEO of Siemens Pacesetter, Inc. and Head of the Cardiac Systems Division of Siemens AG Medical Engineering Group from October 1991 to September 1994. In 1994, upon the acquisition of Pacesetter by St. Jude Medical, Inc., he joined St. Jude Medical as Chairman and CEO of Pacesetter, Inc. and retired in 1995 to manage his personal investments. Since December 1997 he has been a director of MRV Communications, a publicly traded company in the fiber optic technology business. Dr. Jaensch has been a director of Biophan since March 2002.

34

 
        Theodore A. Greenberg is Chief Investment Officer, Chief Financial Officer, Secretary, and is a member of the Board of Directors of Infinity Capital Group, Inc., a business development company which he joined in 2005. Since 2004 he has been, and continues to be, a project consultant and advisor and has provided services to various companies. In 1999, Mr. Greenberg co-founded Park Avenue Equity Partners, LP, a $100 million middle market private equity fund and he was a general partner until 2003. From 1998 to 1999, Mr. Greenberg was the Chief Financial Officer of Development Capital, LLC. Mr. Greenberg has been a director of Biophan since April 2006.
 
Bonita L. Labosky has, since December 2006, been President and CEO of Cardiac Concepts, Inc., a Minneapolis-based company developing new medical device technologies. From 2000 until December 2006, she was Group Vice President and member of the Executive Committee of Welch Allyn, Inc., a provider of innovative medical diagnostic devices, patient monitoring systems, and external defibrillators. During her tenure at Welch Allyn, Inc., Ms. Labosky also served as a member of the firm's Executive Committee. From 1993 until 2000, she was a Vice President of Medtronic, Inc., serving as General Manager for Heart Failure Management from 1997 through 2000, General Manager for Micro Interventional Systems from 1996 through 1997, and General Manager of the Promeon Division from 1993 through 1997. From 1989 through 1993, she was a research and development director at Medtronic and from 1978 through 1988 she held various management positions (including Vice President and General Manager) with SPSS, Inc. Ms. Labosky joined our Board of Directors in March 2007.
 
Stan Yakatan is Chairman and Chief Executive Officer of Katan Associates, a private company which he founded in May 1989 that provides advisory services and strategic planning for companies in the life sciences industry. From June 2003 to August 2005, Mr. Yakatan was Chairman and Chief Executive Officer of Grant Life Sciences, a publicly-traded company engaged in the research, development, marketing, and sale of diagnostic kits for the screening, monitoring, and diagnosis of diseases with emphasis on women's health, infectious diseases, and cancers. Mr. Yakatan continues to serve as a Director of Grant Life Sciences. He is also a Director of Response Biomedical Corp. and LifePoint, Inc. and of several privately-held companies in the life sciences industry. From 1968 until he founded Katan Associates in 1989, Mr. Yakatan held various senior executive positions with New England Nuclear Corporation (a division of E.I. DuPont), ICN Pharmaceuticals, Inc., New Brunswick Scientific Co., Inc. and Biosearch. Mr. Yakatan is the Chairman of Biocomm Inc., a venture capital firm, and has founded and served as Chief Executive Officer of numerous entrepreneurial ventures in the biomedical and healthcare sectors. He has served as a strategic advisor to government agencies in Canada and Australia.
 
Robert J. Wood has served as interim Chief Financial Officer since July 2007. Mr. Wood was our Chief Financial Officer, Vice-President, Treasurer and Secretary until his retirement in January 2006. Mr. Wood subsequently continued in a part-time role as a financial consultant to the Company. Mr. Wood is a Certified Public Accountant with extensive experience in public accounting and business consulting. He began his career as Price Waterhouse & Co. in 1962 after graduating from St. John Fisher College with a B.B.A. in Accounting. From 1973 to 2000, he was consecutively owner/partner of Metzger, Wood & Sokolski, CPAs (through December 1985), Mengel, Metzger, Barr & Co., LLP (through December 1990), and Wood & Company, CPAs, P.C. (through November 2000), all in Rochester, New York. In December 2000, his practice was acquired by a regional CPA firm, Eldredge, Fox and Porretti, LLP, and he was engaged in business consulting until joining Biophan as full time Chief Financial Officer in August 2001.
 
Stuart G. MacDonald has been Biophan's Vice-President-Research and Development since January 2001. From January 1995 through December 2000, Mr. MacDonald was employed at Ortho-Clinical Diagnostics, a Johnson & Johnson company, holding the position of Director-Engineering from 1996 to mid-1997 and Vice-President, Clinical Lab Instrumentation R&D from mid-1997 through December 2000. He worked at Eastman Kodak Company from 1971 to 1994, rising to the position of Assistant Director, Clinical Diagnostic Research Labs. A portion of Mr. MacDonald's time is spent assisting with the research programs of Biomed Solutions, LLC and Myotech, LLC, related companies, for which Biophan is reimbursed.

There are no family relationships among any of our directors or executive officers.
 
35

 
Corporate Governance Guidelines
 
Our Board has long believed that good corporate governance is important to ensure that we are managed for the long-term benefit of our stockholders. Our common stock is currently quoted on the OTC Bulletin Board. The OTC Bulletin Board currently does not have any corporate governance rules similar to the NASDAQ Stock Market, Inc., the American Stock Exchange, Inc. or any other national securities exchange or national securities association. However, our Board believes that the corporate governance rules of NASDAQ and AMEX represent good governance standards and, accordingly, during the past year, our Board has continued to review our governance practices in light of the Sarbanes-Oxley Act of 2002, the new rules and regulations of the Securities and Exchange Commission and the new listing standards of NASDAQ and AMEX, and it has implemented certain of the foregoing rules and listing standards during this past fiscal year. Biophan has also adopted a Code of Ethics for Senior Financial Officers that is applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Board is also considering adopting during this current fiscal year additional corporate governance guidelines to assist it in the exercise of its duties and responsibilities and to serve the best interests of Biophan and its stockholders.  
 
Board Determination of Independence
 
 
The Board held nine (9) meetings during our fiscal year ended February 28, 2007. The standing committees of the Board are the Audit Committee and the Compensation Committee. The Board does not currently have a nominating committee and has not established any specific procedure for selecting candidates for director. Directors are currently nominated by a majority vote of the Board. There is also no established procedure for stockholder communications with members of the Board or the Board as a whole. However, stockholders may communicate with our investor relations department, and such communications are either responded to immediately or are referred to the president or chief financial officer for a response. During fiscal 2007, each of the incumbent directors, during his period of service, attended at least 75% of the total number of meetings held by the Board.
 
Audit Committee.
 
The Audit Committee is composed of Dr. Jaensch and Mr. Greenberg. The responsibilities of the Audit Committee as more fully set forth in the Audit Committee Charter adopted in July 2003 and posted on our website at www.biophan.com, include appointing, retaining, replacing, compensating and overseeing the work of the independent accountants, who report to, and are directly accountable to, the Committee. The Audit Committee reviews with the independent accountants the results of the audit engagement, approves professional services provided by the accountants including the scope of non-audit services, if any, and reviews the adequacy of our internal accounting controls. The Audit Committee met formally five (5) times during our fiscal year ended February 28, 2007. During that fiscal year, the Audit Committee was composed at various times of Dr. Jaensch, Mr. Bramson, Mr. Kenzie, Mr. Greenberg, Mr. Yakatan and Mr. Katz. On the occasion of two of the four meetings held by the Committee during his tenure, Mr. Yakatan was absent. Otherwise, each member of the Audit Committee attended all of the meetings. The Board has determined that each of Dr. Jaensch and Mr. Greenberg meets the qualifications as an "audit committee financial expert". Each member of the Audit Committee is "independent" as such term is used in Section 10A(m)(3) of the Securities and Exchange Act of 1934, as amended.
 
Compensation Committee.
 
The Compensation Committee is composed of Ms. Labosky and Mr. Yakatan. The responsibilities of the Compensation Committee as more fully set forth in the Compensation Committee Charter adopted in June 2005 and posted on our website at www.biophan.com, include reviewing our compensation policies, establishing executive officer compensation, and administering our stock option plans. The Compensation Committee met informally several times during our fiscal year ended February 28, 2007. During that fiscal year, the Compensation Committee was composed at various times of Dr. Jaensch, Mr. Kenzie, Mr. Bramson, Mr. Yakatan and Mr. Katz. Each member of the Compensation Committee attended all of the meetings during his or her tenure on the Committee. All of the members of the Committee are deemed to be non-employee directors for purposes of Section 162(m) and Rule 16b-3 of the Exchange Act. None of our executive officers serves as a member of the Board or Compensation Committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our Board or Compensation Committee. None of the members of our Compensation Committee has ever been our employee.
 
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Director Compensation
 
Directors who are also our employees do not receive additional compensation for serving on the Board or its committees. Non-employee directors, for their services as directors, receive an annual cash fee of $8,000. Dr. Jaensch receives an additional $30,000 for serving as Chairman of the Board. In addition, non-employee directors receive options under our 2006 Incentive Stock Plan. All directors receive reimbursement for their reasonable expenses incurred in attending Board meetings. An additional $3,000 per year is paid to the Chairman of the Audit Committee. Otherwise, no additional compensation is paid to any director for serving as a member of any committee of the Board. We maintain directors and officers liability insurance.
 
 
DIRECTOR COMPENSATION (1)
Name
 
Fees Earned or
Paid in Cash
($)
 
Option Awards
($)(2)
 
All Other Compensation
($)
 
Total
($)
 
Guenter H. Jaensch
   
38,000 (3
)
 
24,834 (9
)
 
0
   
62,834
 
Steven Katz
   
8,000 (4
)
 
24,834 (10
)
 
183,500 (16
)
 
216,334
 
Theodore A. Greenberg
   
6,000 (5
)
 
24,834 (11
)
 
0
   
30,834
 
Stan Yakatan
   
2,000 (6
)
 
5,165 (12
)
 
0
   
7,165
 
Michael Friebe
   
0 (7
)
 
0 (13
)
 
27,984 (17
)
 
27,984
 
Robert S. Bramson
   
2,000 (7
)
 
0 (14
)
 
34,607 (18
)
 
36,607
 
Ross B. Kenzie
   
6,000 (8
)
 
24,834 (15
)
 
0
   
30,834
 
 
(1) Certain columnar information required by Item 402(k)(2) of Regulation S-K has been omitted for categories where there was no compensation awarded to, or paid to, the named directors during the fiscal year ended February 28, 2007.
 
(2) The reported amounts reflect the dollar amounts recognized for financial statement reporting purposes for the fiscal year ended February 28, 2007, in accordance with FAS 123R, of awards pursuant to our Stock Incentive Plan and may include amounts from awards granted both in and prior to the fiscal year ended February 28, 2007. As required, the amounts shown exclude the impact of any forfeitures related to service-based vesting conditions. The actual amount realized by the director will likely vary based on a number of factors, including the Company's performance, stock price fluctuations and applicable vesting.
 
(3) Includes a $30,000 fee for service as Chairman of the Board and an $8,000 fee for service on the Board.
 
(4) Resigned in March 2007.
 
(5) Elected to the Board in April 2006.
 
(6) Elected to the Board in December 2006.
 
(7) Term expired in July 2006.
 
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(9) An option for the purchase of 40,000 shares of common stock at an exercise price of $1.06 per share was granted to Dr. Jaensch on July 18, 2006. This option becomes fully vested and exercisable on the earlier of (i) completion of one year of service as a director measured from the date of grant or (ii) continuation of such service through the day immediately preceding the first annual shareholders meeting following the date of grant. This option has a termination date of July 18, 2016. At February 28, 2007, Dr. Jaensch held options for the purchase of an aggregate of 715,000 shares of common stock, of which options for the purchase of 627,500 shares were exercisable.
 
(10) An option for the purchase of 40,000 shares of common stock at an exercise price of $1.06 per share was granted to Mr. Katz on July 18, 2006. This option becomes fully vested and exercisable on the earlier of (i) completion of one year of service as a director measured from the date of grant or (ii) continuation of such service through the day immediately preceding the first annual shareholders meeting following the date of grant. This option has a termination date of July 18, 2016. At February 28, 2007, Mr. Katz held options for the purchase of an aggregate of 420,000 shares of common stock, of which options for the purchase of 332,500 shares were exercisable.
 
(11) An option for the purchase of 40,000 shares of common stock at an exercise price of $1.06 per share was granted to Mr. Greenberg on July 18, 2006. This option becomes fully vested and exercisable on the earlier of (i) completion of one year of service as a director measured from the date of grant or (ii) continuation of such service through the day immediately preceding the first annual shareholders meeting following the date of grant. This option has a termination date of July 18, 2016. At February 28, 2007, Mr. Greenberg held options for the purchase of an aggregate of 40,000 shares of common stock, none of which were exercisable.
 
(12) An option for the purchase of 40,000 shares of common stock at an exercise price of $0.45 per share was granted to Mr. Yakatan on December 1, 2006. This option becomes fully vested and exercisable on the earlier of (i) completion of one year of service as a director measured from the date of grant or (ii) continuation of such service through the day immediately preceding the first annual shareholders meeting following the date of grant. This option has a termination date of December 1, 2016. At February 28, 2007, Mr. Yakatan held options for the purchase of an aggregate of 40,000 shares of common stock, none of which were exercisable.
 
(13) Dr. Friebe held no options at February 28, 2007.
 
(14) At February 28, 2007, Mr. Bramson held options for the purchase of an aggregate of 365,000 shares, of which options for the purchase of 277,500 shares were exercisable.
 
(15) An option for the purchase of 40,000 shares of common stock at an exercise price of $1.06 per share was granted to Mr. Kenzie on July 18, 2006. This option required (i) completion of one year of service as a director measured from the date of grant or (ii) continuation of such service through the day immediately preceding the first annual shareholders meeting following the date of grant. Because Mr. Kenzie resigned on October 31, 2006 before satisfaction of the vesting requirements, this option terminated without becoming exercisable. At February 28, 2007, Mr. Kenzie held options for the purchase of an aggregate of 245,000 shares of common stock, of which options for the purchase of 197,500 shares were exercisable.
 
(16) Other compensation consists of fees for consulting services performed by Mr. Katz.
 
(17) Other compensation consists of salary as an employee of our subsidiary, Biophan Europe GmbH, through May 2006 and fees for consulting services through September 2006.
 
 
38

 
CODE OF ETHICS
 
 
POTENTIAL CONFLICTS OF INTEREST
 
Messrs. MacDonald, Helfer, and other of our employees from time to time spend a portion of their time on the business affairs of Biomed or its affiliates, for which Biomed reimburses us a percentage of their salary and benefits. Our Board of Directors reviews this arrangement on a regular basis. Currently, Biomed reimburses us for less than 50% of the payroll costs of Messrs. MacDonald, Helfer, and others. The Board of Directors does not believe that any conflicts of interest arise as a result of this policy, but it monitors the relationship on an ongoing basis.
 
Messrs. MacDonald and Helfer serve on the board of managers of Myotech, LLC, an entity in which Biomed is a 12.53% owner and Biophan is a 68% owner. Myotech is developing a biomedical device that does not compete with those being developed by us.
 
Mr. Lanzafame is on the Board of NaturalNano, Inc., the principal owner of which is Technology Innovations, LLC. NaturalNano has entered into a research and development agreement with us for drug eluting technology.
 
 
LIMITATION OF LIABILITY AND INDEMNIFICATION
 
As permitted by the Nevada General Corporation Law, we have adopted provisions in our certificate of incorporation and by-laws to be in effect at the closing of this offering that limit or eliminate the personal liability of our directors. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:
 
o any breach of the director's duty of loyalty to us or our stockholders;
 
o any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
 
o any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or
 
o any transaction from which the director derived an improper personal benefit.
 
These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.
 
In addition, our by-laws provide that:
 
o we will indemnify our directors, officers and, in the discretion of our board of directors, certain employees to the fullest extent permitted by the Nevada General Corporation Law; and
 
o we will advance expenses, including attorneys' fees, to our directors and, in the discretion of our board of directors, to our officers and certain employees, in connection with legal proceedings, subject to limited exceptions.
 
39

 
        We also maintain general liability insurance that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act of 1933, as amended. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder's investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.
 
At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
 
COMPENSATION DISCUSSION AND ANALYSIS
 
General Compensation Philosophy
 
 
Executive Compensation Guiding Principles
 
Our general compensation philosophy is further guided by the following principles specific to our executives:
 
o A strong link between pay and Company performance
 
o Executives aligned with stockholders and managing from the perspective of owners with a meaningful equity stake in Biophan in the form of grants of stock options and restricted stock.
 
o A competitive compensation package that will enable the Company to attract and motivate high-performing talent and that is strongly competitive with other biotechnology companies in our industry.
 
o A simple and cost-efficient program design
 
The Compensation Committee of our Board of Directors determines the base salary (and any bonus and equity-based compensation) for each executive officer annually. John F. Lanzafame, our Chief Executive Officer, confers with members of the Compensation Committee, and makes recommendations, regarding the compensation of all executive officers other than himself. He does not participate in the Compensation Committee's deliberations regarding his own compensation. In determining the compensation of our executive officers, the Compensation Committee consults the annual Bioworld Executive Compensation Report, but does not engage in any benchmarking of total compensation or any material element of compensation.
 
 
40

 
Components of Biophan's Compensation Program
 
The compensation program for our Named Executive Officers consists of:
 
(1)  Base salary;
 
(2)  Long-term incentive compensation, including:
 
(i)  Stock Options, Restricted Stock, and Restricted Stock Units,
 
(ii)  Stock Appreciation Rights, and Other Stock-Based Awards,
 
(iii)  Broad-based Employee Benefits
 
(1)  Base Salary
 
With respect to annual compensation, the fundamental objective in setting base salary levels for the Company's senior management is to pay competitive rates to attract and retain high quality, competent executives. Competitive pay levels are determined based upon proxy disclosures, individual leadership, level of responsibility, management skills and industry activities. The Company does not currently have a bonus program for its executives.
 
(2)  Long Term Incentive Compensation
 
(i)  Stock Options, Restricted Stock, and Restricted Stock Units.
 
The Company has two equity-based compensation plans, entitled Biophan Technologies, Inc. 2001 Stock Option Plan and Biophan Technologies, Inc. 2006 Incentive Stock Plan (the "Plans"), which are stockholder approved. The Plans provide for the grant of incentive and non-qualified stock options to employees, and the grant of non-qualified options to consultants and to directors and advisory board members. In addition, various other types of stock-based awards, such a stock appreciation rights, may be granted under the Plans. The Plans are administered by the Compensation Committee of our Board of Directors, which determines the individuals eligible 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. Under the 2006 Plan, non-employee directors receive automatic grants of options for the purchase of 40,000 shares of common stock (i) upon the initial election to the Board of Directors and (ii) at each successive Annual Meeting at which they are re-elected to the Board. Under the 2001 Plan, 13,000,000 shares of our common stock were reserved for issuance pursuant to options or restricted stock awards; at February 28, 2007, 597,981 shares were available for future option grants and awards. Under the 2006 Plan, 7,500,000 shares of our common stock were reserved for issuance pursuant to options or restricted stock awards; at February 28, 2007, 7,265,003 shares were available for future option grants and awards.
 
To date, awards have been solely in the form of non-qualified stock options granted under the Plans. The Compensation Committee grant these stock-based incentive awards from time to time for the purpose of attracting and retaining key executives, motivating them to attain the Company's long-range financial objectives, and closely aligning their financial interests with long-term stockholder interests and share value.
 
Restricted stock awards entitle recipients to acquire shares of common stock, subject to our right to repurchase all or part of such shares from the recipient in the event that the conditions specified in the applicable award are not satisfied prior to the end of the applicable restriction period established for such award. Restricted stock unit awards entitle the recipient to receive shares of common stock to be delivered in the future subject to such terms and conditions on the delivery of the shares as the Board of Directors may determine.
 
Restricted stock and restricted stock unit awards granted under the 2006 Plan may vest (a) solely on the basis of passage of time, (b) solely based on achievement of specified performance criteria or (c) upon the passage of time, subject to accelerated vesting if specified performance criteria are met. The Board of Directors may determine, at the time of grant, that restricted stock or restricted stock unit award being made to an officer will vest solely upon achievement of specified performance criteria designed to qualify for deduction under Section 162(m) of the Code. The performance criteria for each restricted stock or restricted stock unit award intended to so qualify for purposes of Section 162(m) of the Code will be based on one or more of the following measures: sales, earnings per share, return on net assets, return on equity, and customer service levels.
 
41

 
        Except as noted below, (a) restricted stock and restricted stock units that vest solely on the basis of passage of time may vest no faster than ratably over three years; and (b) restricted stock and restricted stock units that vest based on achievement of specified performance criteria, or provide for accelerated vesting based upon achievement of specified performance criteria, may not vest earlier than the first anniversary of the date of grant. These vesting restrictions do not apply to restricted stock and restricted stock unit awards collectively with respect to up to 5% of the total number of shares of common stock covered by the 2006 Plan. In addition, the Board of Directors may make exceptions to the vesting limitations described above in the event of the recipient's death, a change in control or other extraordinary circumstances specified in the 2006 Plan.
 
(ii)  Stock Appreciation Rights and Other Stock-Based Awards
 
A stock appreciation right, or SAR, is an award entitling the holder on exercise to receive, at the election of the Board of Directors, an amount in cash or common stock or a combination thereof determined in whole or in part by reference to appreciation, from and after the date of grant, in the fair market value of a share of common stock. SARs may be based solely on appreciation in the fair market value of common stock or on a comparison of such appreciation with some other measure of market growth such as (but not limited to) appreciation in a recognized market index. Under the 2006 Plan, the Board of Directors has the right to grant other awards of common stock or awards otherwise based upon common stock or other property, including without limitation rights to purchase shares of common stock, having such terms and conditions as the board may determine.
 
The Company believes that, through the use of stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards, executives' interests are directly tied to enhanced stockholder value. The Compensation Committee has the flexibility of awarding any of these incentives to executives. This flexibility enables the Company to fine-tune its grants in order to maximize the alignment of the interests of the stockholders and management.
 
(iii) Broad-based Employee Benefits
 
As employees, our Named Executive Officers have the opportunity to participate in a number of benefits programs that are generally available to all eligible employees. These benefits include:
 
o Healthcare Plans includes medical benefits, dental benefits, behavioral health program, vision and hearing care program, and wellness programs.
 
o Disability Plans— includes short-term and long-term disability income plans.
 
o Investing Plans— includes a 401(k) plan.
 
Qualified Retirement Plan
 
We maintain 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 allows for matching contributions to be made by us. 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 us when made.
 
For eligible employees, our Investing Plans likewise use base and lump-sum merit pay as components of "eligible compensation" under the applicable plans (incentive plan awards are not part of "eligible compensation"). In addition, our "qualified" plans are subject to applicale IRS limits.
 
42

 
SUMMARY COMPENSATION TABLE (1)
 
The table set forth below summarizes the compensation paid to our named executive officers during the year ended February 28, 2007.
Name and Principal Position
 
Year
 
Salary
($)
 
Bonus
($)(2)
 
Stock
Awards
($)(3)
 
Option
Awards ($)(4)
 
All
Other
Compensation
($)
 
Total
($)
 
Michael L. Weiner (6)
   
2007
   
260,000
   
0
   
0
   
0
   
11,758
   
271,758
 
President
                                           
   
                                         
Darryl L. Canfield (7)
   
2007
   
180,000
   
0
   
0
   
0
   
0
   
180,000
 
CFO
                                           
   
                                         
John F. Lanzafame (8)
   
2007
   
188,077
   
0
   
0
   
0
   
0
   
188,077
 
Vice-President and COO
                                           
                                             
Stuart G. MacDonald
   
2007
   
175,000
   
0
   
0
   
0
   
0
   
175,000
 
Vice-President-Research
                                           
                                             
Jeffrey L. Helfer
   
2007
   
180,000
   
0
   
0
   
0
   
0
   
180,000
 
Vice-President-Engineering
                                           
 
 
(1)
Certain columnar information required by Item 402(c)(2) of Regulation S-K has been omitted for categories where there has been no compensation awarded to, or paid to, the named executive officers required to be reported in the table during fiscal year ended February 28, 2007.
 
 
(2)
No bonus was paid to any named executive officer. The Company does not have a formal bonus plan, but the Compensation Committee has, from time to time on the recommendation of management, awarded cash bonuses to employees in recognition of exceptional service.
 
 
(3)
The Company did not issue any stock awards to named executive officers in the fiscal year ended February 28, 2007.
 
 
(4)
The Company did not issue any options awards to named executive officers in the fiscal year ended February 28, 2007.
 
 
(5)
Unless otherwise indicated, the aggregate amount of perquisites and other personal benefits given to each of the named executive officers valued at the actual cost to the Company was less than $10,000. These amounts consist of contributions made by the Company to the 401(k) Plan and premiums for long-term disability for each of the officers.
 
 
(6)
Resigned in October 2007.
 
 
(7)
Resigned in June 2007.
 
 
(8)
Was appointed as Chief Executive Officer in September 2007.

Grants of Plan Based Awards
 
 
Outstanding Equity Awards at Fiscal Year End
 
The following table presents the number and values of exercisable and unexercisable options at February 28, 2007:
 
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Option Awards (1)

Name  
 
Number of Securities
Underlying Unexercised
Options
(#)
Exercisable
(Vested)
 
Number of Securities Underlying Unexercised Options
(#)
Unexercisable (Unvested)  
 
Option
Exercise
Price
($/Sh)
 
Option
Expiration
Date
 
Michael L. Weiner
   
250,000 (2
)
 
0
   
0.50
   
01/01/2011
 
 
   
250,000 (3
 
0
   
0.43
   
07/16/2012
 
 
   
300,000 (4
 
0
   
0.18
   
10/31/2013
 
     
800,000
   
200,000 (5
)
 
0.97
   
05/10/2014
 
                           
Darryl Canfield
   
300,000
   
300,000 (6
)
 
1.87
   
11/09/2015
 
                           
John F. Lanzafame
   
75,000
   
25,000 (7
)
 
0.67
   
07/19/2014
 
 
   
112,500
   
37,500 (8
)
 
0.74
   
09/03/2014
 
     
240,000
   
60,000 (9
)
 
1.80
   
3/15/2015
 
     
91,667
   
183,333 (10
)
 
1.56
   
01/06/2016
 
                           
Stuart G. MacDonald
   
100,000 (11
)
 
0
   
0.50
   
01/01/2011
 
 
   
100,000 (12
 
0
   
0.43
   
07/16/2012
 
 
   
200,000 (4
)  
0
   
0.18
   
10/31/2013
 
     
340,000
   
85,000 (13
)
 
0.97
   
05/10/2014
 
 
   
25,000 (14
 
0
   
2.60
   
05/27/2015
 
                           
Jeffrey L. Helfer
   
100,000 (15
)
 
0
   
0.50
   
01/01/2011
 
 
   
100,000 (3
 
0
   
0.43
   
07/16/2012
 
 
   
200,000 (4
 
0
   
0.18
   
10/31/2013
 
     
340,000
   
85,000 (13
)
 
0.97
   
05/10/2014
 
 
   
25,000 (14
 
0
   
2.60
   
05/27/2015
 
 
(1) Certain columnar information required by Item 402(f) (2) of Regulation S-K has been omitted for categories where there has been no compensation awarded to, or paid to, the named executive officers required to be reported in the table during fiscal year ended February 28, 2007.
 
(2) These stock options were granted on January 1, 2001, with 100,000 vesting and becoming exercisable immediately. The remaining options vested and became exercisable in three equal annual installments with the first installment vesting on January 1, 2002.
 
(3) These stock options were granted on July 16, 2002. This option vested and became exercisable in three equal annual installments with the first installment vesting on December 31, 2002.
 
(4) These stock options were granted on October 31, 2003. This option vested and became exercisable in four equal annual installments with the first installment vesting on October 31, 2003.
 
(5) These stock options were granted on May 10, 2004. This option becomes vested and exercisable after the following contingencies are met.
 
a. 400,000 options upon completion of a financing deal,
 
 
c. 200,000 options upon completion of a listing on a major exchange.
 
(6) These stock options were granted on November 9, 2005. This option becomes vested and exercisable in six equal annual installments with the first installment vesting on November 9, 2005.
 
(7) These stock options were granted on July 19, 2004. This option becomes vested and exercisable in four equal annual installments with the first installment vesting July 19, 2004.
 
(8) These stock options were granted September 3, 2004. This option becomes vested and exercisable in four equal annual installments with the first installment vesting September 3, 2004.
 
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(9) These stock options were granted on March 10, 2005. This option becomes vested and exercisable after the following contingencies are met.
 
a. 90,000 options upon completion of a financing deal vest and become exercisable in three equal semi-annual installments with the first installment vesting March 15, 2005,
 
b. 150,000 options upon completion of a substantial licensing and/or strategic transaction vest and become exercisable in three equal semi-annual installments with the first installment vesting March 15, 2005, and
 
c. 60,000 options upon completion of a listing on a major exchange vest and become exercisable in three equal semi-annual installments with the first installment vesting on the date of completion.
 
(10) These stock options were granted on January 6, 2006. This option becomes vested and exercisable in three equal annual installments with the first installment vesting on January 6, 2007.
 
(11) These stock options were granted January 1, 2001. This option vested and became exercisable in five equal annual installments with the first installment vesting January 1, 2002.
 
(12) These stock options were granted July 16, 2002. This option vested and became exercisable on December 31, 2002.
 
(13) These stock options were granted on May 10, 2004. This option becomes vested and exercisable after the following contingencies are met.
 
a. 127,500 options upon completion of a financing deal,
 
b. 212,500 options upon completion of a substantial licensing and/or strategic transaction, and
 
c. 85,000 options upon completion of a listing on a major exchange.
 
(14) These stock options were granted May 27, 2005. This option vested and became exercisable on May 27, 2005.