UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended September 30, 2007 Commission file number: 0-27943

ADVANCED BIOPHOTONICS INC.

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

Delaware	11-3386214
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
125 Wilbur Place, Suite 120 Bohemia, New York	11716
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:       (631) 244 - 8244

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

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

The number of shares outstanding of the registrant’s Common Stock as of November 2, 2007 was 37,434,881 shares.

Transitional Small Business Disclosure Format. Yes o No x

ADVANCED BIOPHOTONICS INC.

SEPTEMBER 30, 2007 FORM 10-QSB QUARTERLY REPORT

INDEX

	Page
PART I	3
Item 1. - Financial Statements	3
Item 2 - Management’s Discussion and Analysis or Plan of Operation	31
Item 3 - Controls and Procedures	39
PART II	40
Item 1 - Legal Proceedings.	40
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3 - Default Upon Senior Securities	40
Item 4 - Submission of Matters to a Vote of Security Holders	40
Item 5 - Other Information	40
Item 6 - Exhibits	40

PART I

Item 1. Financial Information

Advanced BioPhotonics Inc.

(A Development Stage Enterprise)

BALANCE SHEETS

	September 30, 2007		December 31, 2006
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	333,117	$	850,061
Prepaid expenses and other current assets		32,268		243,682
Total Current Assets		365,385		1,093,743
Property and equipment, net		127,316		178,528
Other assets:
Equipment deposits		232,977		232,977
Deferred financing costs, net		670,628		690,379
Security deposits		9,662		15,062
TOTAL ASSETS	$	1,405,968	$	2,210,689

See notes to condensed financial statements.

3

Advanced BioPhotonics Inc.

(A Development Stage Enterprise)

BALANCE SHEETS 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY 

	September 30, 2007			December 31, 2006
	(Unaudited)
CURRENT LIABILITIES
Notes payable	$	-		$	119,901
Accounts payable and accrued expenses		451,690			582,023
Professional fees payable		200,824			213,981
Accrued registration rights penalties payable		1,095,252			536,333
Accrued interest payable		634,604			257,797
Accrued settlement with former officers		530,000			450,000
Accrued employees compensation		4,327			116,668
Dividends payable		-			122,135
Total Current Liabilities		2,916,697			2,398,838
Convertible debentures(net of debt discount $5,238,712 and $4,324,341, respectively)		849,360			539,578
Detachable warrants		371,757			1,654,336
Non employee stock options		6,422			9,548
Conversion option on convertible debentures		10,958,528			4,400,688
Conversion option on series A convertible preferred stock		234,900			125,585
Conversion option on series B convertible preferred stock		132,778			67,096
Accrued settlement with former officers		15,000			195,000
Total Long Term Liabilities		12,568,745			6,991,831
Total Liabilities		15,485,442			9,390,669
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIENCY
Series A Convertible preferred stock, $.01 par value, 3,000,000 shares authorized; 2,134,811 and 1,851,423 shares issued and outstanding, respectively, liquidation preference $2,134,811 and $1,851,423, respectively		21,348			18,514
Series B Convertible preferred stock, $.01 par value, 7,000,000 shares authorized; 1,690,584 and 1,333,432 shares issued and outstanding, respectively, liquidation preference $845,292 and $666,716, respectively		16,906			13,335
Common stock, $.001 par value; 200,000,000 shares authorized; 40,111,881issued and 37,434,881 outstanding in 2007 and 33,767,972 shares issued and 31,090,972 outstanding in 2006 respectively		40,111			33,767
Additional paid-in capital		19,314,345			19,158,556
Deficit accumulated during the development stage		(33,469,507	)		(26,401,475	)
Treasury stock, at cost, 2,677,000 and shares issued		(2,677	)		(2,677	)
Total Stockholders’ Deficiency		(14,079,474	)		(7,179,980	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY	$	1,405,968		$	2,210,689

 

See notes to condensed financial statements.

4

Advanced BioPhotonics Inc.

(A Development Stage Enterprise)

STATEMENTS OF OPERATIONS

													Cumulative
													For the Period
													From February 7,
													1997 (inception)
	For the Nine months Ended						For the Quarter Ended						through
	September 30,						September 30,						September 30,
	2007			2006			2007			2006			2007
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Development revenues	$	—		$	—		$	—		$	—		$	69,800
Development costs		—			—			—			—			20,000
GROSS PROFIT		—			—			—			—			49,800
OPERATING EXPENSES
Research and development		345,863			984,832			85,280			342,916			10,231,489
Selling, general and administrative		1,401,049			2,041,010			401,210			578,937			13,606,313
Related party legal expense		—			—			—			—			544,881
Write-off of public offering costs		—			—			—			—			501,992
TOTAL OPERATING EXPENSES		1,746,912			3,025,842			486,490			921,853			24,884,675
OPERATING LOSS		(1,746,912	)		(3,025,842	)		(486,490	)		(921,853	)		(24,834,875	)
OTHER (INCOME) EXPENSES
Change in fair value of non employee stock options, warrants and conversion options		4,065,446			3,396,148			5,982,698			(2,531,966	)		3,804,629
Registration rights penalties		558,919			241,200			187,868			131,867			1,095,252
Interest and other expenses, net		696,755			276,288			263,106			133,372			2,153,244
NET (LOSS) INCOME		(7,068,032	)		(6,939,478	)		(6,920,162	)		1,344,874			(31,888,000	)
Series A Convertible Preferred Stock beneficial conversion feature		—			—			—			—			1,161,249
Series B Convertible Preferred Stock beneficial conversion feature		—			—			—			—			420,258
Deemed dividend on issuance of additional Series A Convertible Preferred Stock Warrants		—			—			—			—			449,500
Accumulated Dividends on Series A Convertible Preferred Stock		64,044			46,500			21,348			15,500			205,770
Accumulated Dividends on Series B Convertible Preferred Stock		44,378			32,044			14,793			10,681			112,073
NET (LOSS)/INCOME ATTRIBUTABLE TO COMMON STOCK HOLDERS- BASIC AND DILUTED	$	(7,176,454	)	$	(7,018,022	)	$	(6,956,303	)	$	1,318,693		$	(34,236,850	)
Basic net (loss) income per share	$	(0.21	)	$	(0.23	)	$	(0.19	)	$	0.04
Weighted average number of shares outstanding - basic		34,541,577			30,697,588			37,434,881			30,783,141
Diluted net (loss) income per share	$	(0.21	)	$	(0.23	)	$	(0.19	)	$	0.02
Weighted average number of shares outstanding - diluted		34,541,577			30,697,588			37,434,881			85,954,981

See accompanying notes to condensed financial statements.

5

Advanced BioPhotonics Inc.

(A Development Stage Enterprise)

STATEMENT OF STOCKHOLDERS' DEFICIENCY

For the Nine Months Ended September 30,2007

																						Deficit
																						Accumulated
											Series A				Series B							During the
	Common Stock				Treasury Stock						Preferred Stock				Preferred Stock				Additional			Development
	Shares		Amount		Shares			Amount			Shares		Amount		Shares		Amount		Paid-in-Capital			Stage			Total
Balance at January 1, 2007		33,767,972		33,767		(2,677,000	)		(2,677	)		1,851,423		18,514		1,333,432		13,335		19,158,556			(26,401,475	)		(7,179,980	)
Issuance of dividends on series A Convertible
Preferred Stock to settle accrued dividends		-		-		-			-			283,388		2,834		-		-		71,223			-			74,057
Issuance of dividends on series B Convertible		-		-		-			-			-		-		-		-		-			-			-
Preferred Stock to settle accrued dividends		-		-		-			-			-		-		357,152		3,571		44,507			-			48,078
Reclass of conversion option on preferred shares		-		-		-			-			-		-		-		-		(46,732	)		-			(46,732	)
issued to settle dividends		-		-		-			-			-		-		-		-		-			-			-
Conversion of convertible debenture to common stock		6,343,909		6,344		-			-			-		-		-		-		19,505			-			25,849
Reclass of the fair value of the conversion option		-		-		-			-			-		-		-		-		-			-			-
upon conversion of debenture		-		-		-			-			-		-		-		-		31,804			-			31,804
Stock option compensation expense		-		-		-			-			-		-		-		-		35,482			-			35,482
Net Loss		-		-		-			-			-		-		-		-		-			(7,068,032	)		(7,068,032	)
-
Balance at September 30, 2007 (Unaudited)		40,111,881		40,111		(2,677,000	)		(2,677	)		2,134,811		21,348		1,690,584		16,906		19,314,345			(33,469,507	)		(14,079,474	)

See notes to condensed financial statements

6

Advanced BioPhotonics Inc.

(A Development Stage Enterprise)

STATEMENTS OF CASH FLOWS

	For the Nine months ended September 30,						Cumulative For the Period From February 7, 1997 (inception) through September 30,
	2007			2006			2007
	(Unaudited)			(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(7,068,032	)	$	(6,939,478	)	$	(31,888,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		51,212			63,007			1,031,756
Loss on disposal of net assets		—			—			20,584
Unrealized loss from foreign currency transactions		—			—			19,271
Warrants issued to related party for legal services		—			—			95,000
Warrants and stock options compensation expense		35,482			447,034			2,552,727
Issuance of common stock as compensation		—			64,030			774,530
Amortization of original issue discount		—			—			329,625
Amortization of deferred financing costs		274,512			132,456			672,790
Amortization of debt discount on convertible debentures		335,628			138,335			568,438
Write off of deferred offering costs		—			—			37,000
Change in fair value of non-employee stock options, warrants and conversion options		4,065,446			3,396,148			3,804,629
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		211,414			180,920			530,249
Other assets		5,400			(5,400	)		(143,907	)
Accounts payable and accrued expenses		(130,333	)		36,934			784,951
Professional fees payable		(13,157	)		31,177			61,762
Accrued license fees		—			(323,000	)		94,500
Accrued interest payable		376,807			171,913			654,269
Accrued employee compensation		(112,341	)		90,923			4,327
Accrued registration right payable		558,919			241,200			1,095,252
Accrued settlement with former officers		(100,000	)		(224,632	)		545,000
NET CASH USED IN OPERATING ACTIVITIES		(1,509,043	)		(2,498,433	)		(18,355,247	)
CASH FLOWS USED IN INVESTINGACTIVITIES
Purchases of property and equipment		—			(60,704	)		(1,294,809	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (costs of) issuance of common stock		—			—			12,522,477
Net proceeds from issuance of Series A preferred stock		—			—			1,518,928
Net proceeds from issuance of Series B preferred stock		—			—			491,688
Proceeds from issuance of warrants		—			—			40,000
Proceeds from options exercised		—						44,880
Issuance of bridge note payable		—			—			1,025,000
Payment of deferred financing costs		(73,000	)		(260,154	)		(660,154	)
Proceeds from convertible debenture, net		1,185,000			2,290,000			5,820,000
Repayment of notes payable		(119,901	)		(152,512	)		(819,646	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		992,099			1,877,334			19,983,173
NET (DECREASE) INCREASE IN CASH		(516,944	)		(681,803	)		333,117
CASH AND CASH EQUIVALENTS –Beginning		850,061			868,363			—
CASH AND CASH EQUIVALENTS – Ending	$	333,117		$	186,560		$	333,117
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest	$	2,686		$	6,501		$	978,682
Income Taxes		—			—			4,509
Non cash investing and financing activities:
Conversion of bridge notes		—			—			1,065,625
Conversion of accounts payable to notes payable		—			—			237,861
Insurance premiums financed using a note		—						745,257
Cashless exercise of stock options resulting the issuance of 27,399 shares of common stock.		—			—			27
Issuance of collateral shares in Company’s name		—			—			2,677
Beneficial conversion charge attributable to Series A preferred stock		—			—			1,161,249
Beneficial conversion charge attributable to Series B preferred stock		—			—			420,258
Deemed dividend on issuance of warrants to series A preferred stockholders		—			—			449,500
Dividends accrued on preferred stock		—			—			199,864
Settlement of accrued dividend by issuance of Preferred stock		122,135			—			199,864
Recovery of Trilogy warrants		—			—			44,000
Conversion option liability on the convertible debenture		2,260,639			2,046,265			6,362,522
Reclassification of conversion option liability on convertible preferred stock		(46,732	)		(9,258	)		774,825
Reclassification of non-employee stock option		—			—			104,927
Detachable warrants liability - convertible debenture		1,160,000			4,051,733			6,691,780
Reclassification of detachable warrants		—			—			636,412
Warrants issued to settle license fee		—			—			94,500
Detachable warrants issued as deferred financing costs		116,761			143,447			357,640
Reclassification of conversion option on debenture to equity		31,804			—			16,720
Conversion of debenture to common stock		25,849			—			36,928

See notes to condensed financial statements.

7

Advanced BioPhotonics Inc.

(A Development Stage Enterprise)

Notes to Condensed Financial Statements (unaudited)

NOTE 1 - Organization and Business

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

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-QSB pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006. Management acknowledges its responsibility for the preparation of the accompanying interim financial statements, which reflect all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of management, for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.

NOTE 2 - Summary of Significant Accounting Policies

Accounting Policies

The accounting policies followed by the Company are set forth in Notes 1 and 2 to the Company’s financial statements as filed in its Annual Report on Form 10-KSB for the year ended December 31, 2006. These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.

Basis of Presentation

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

Management’s Liquidity Plans

Management estimates that the Company will require additional cash resources during 2007, based upon its current operating plan and condition. As of November 1, 2007, the Company anticipates that its cash requirements to fund these activities as well as other operating or investing cash requirements over the next month will be greater than its current cash on hand. The Company is currently investigating additional financing alternatives, including equity and/or debt financing and asset based funding sources associated with the commencement of product delivery. There is no assurance that capital in any form would be available to the Company, and if available, on terms and conditions that are acceptable. If the Company is unable to obtain sufficient funds in the next month, the Company will further reduce the size of its organization and will be forced to cease its production and operations, all of which could have a material adverse impact on its business prospects. In the event that the Company cannot raise additional capital and the Company defaults on the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements, the investors in these convertible debentures could take a first priority security interest in all of its goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property pursuant to executed a Security Agreement and an Intellectual Property Security Agreement. The Investors have the right to take possession of the collateral, to operate the Company’s business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements, all of which could have a material adverse impact on the Company’s business prospects. The Company’s success depends upon many factors, including securing market acceptance for its products, obtaining adequate additional financing on acceptable terms, and its ability to roll out the BioScanIR^® system in sufficient quantities and at profitable revenue levels. The uncertainties regarding the availability of continued financing and commencement of adequate commercial revenues raise substantial doubt about the Company’s ability to continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

8

As of September 30, 2007, the Company had cash balances and working capital deficit of $333,117 and $2,551,312, respectively, and total stockholders’ deficiency of $14,079,474. At November 1, 2007, the Company had approximately $205,000 in cash balances.

The Company has a deficit accumulated during the development stage, which commenced on February 7, 1997 through September 30, 2007 of $33,469,507 and cash flows used in operating activities during the development stage of $18,355,247. The accumulated loss resulted principally from costs incurred in developing its business plan, acquiring licenses for its technology, research and development, general and administrative expenses, establishing sales channels and fund raising activities.

The Company has committed to purchase infrared camera components from AEG Infrarot-Module GmbH for approximately $614,000 (430,500 euros) as of September 30, 2007. These components utilize Quantum Well Infrared Photodetectors (“QWIP”) technology. The Company has the exclusive license for QWIP technology from the California Institute of Technology ("Caltech") for biomedical applications.

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

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates include management’s judgments associated with deferred income tax valuation allowance, valuation of derivative liabilities and the capitalization and depreciation of long-term assets. Actual results could differ from those estimates.

Convertible Debentures and Derivative Liabilities

In November 2005, September 2006, October 2006 and August 2007, the Company entered into Securities Purchase Agreements for convertible notes and warrants. (See Note 4).  The convertible notes are convertible into an indeterminate number of shares. The conversion option and warrants shares are subject to registration rights penalties with provisions that are outside the control of the Company and collateral was posted in connection with the sale of these instruments. As such the conversion option and detachable warrants are required to be recorded as liabilities at their fair value on the date of issuance under the guidance of Emerging Issues Task Force Issue No. 19 (“EITF 00-19”). The convertible notes are recorded at their residual value. The resultant discount is accreted up to the maturity date of the convertible notes using the effective interest rate method.

The Company records the registration rights penalty in accordance with FASB Staff Position No. EITF 00-19-2, "Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2”). FSP EITF 00-19-2 requires contingent obligations under a registration payment arrangement to be recognized and measured in accordance with SFAS No. 5, "Accounting for Contingencies" ("FAS 5"). FAS 5 requires loss contingencies to be accrued and expensed if they are probable and reasonably estimable.

EITF 00-19 requires that the classification of contracts that could result in derivative instruments be reassessed at each balance sheet date. Because the convertible notes are convertible into an indeterminate number of shares the Company might not have sufficient authorized shares in the future to settle conversions or exercises of other non-employee instruments, such as convertible preferred stock, warrants and non employee stock options. As a result of this and anti-dilution features triggered in certain of these instruments the Company reclassified these instruments from equity to a liability based on their fair values on November 14, 2005 (See Notes 5 & 6).

9

In accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", at each reporting period these liabilities will be adjusted for changes in their fair value. The conversion option embedded in the convertible notes is valued at its intrinsic value as the conversion price is fixed at a 40% discount to current market prices on conversion dates. Pursuant to the August 29, 2007 Amendment of Notes, the applicable discount changed from 40% to 50% on the outstanding secured convertible notes between the Company and the Purchasers. The conversion options embedded in the preferred stock, detachable warrants and non-employee stock options are valued using the Black Scholes valuation model. Actual period close common stock prices, applicable volatility rates, remaining contractual life and the period close risk free interest rate for the instruments expected remaining life are the key assumptions used in the Black Scholes valuation calculation. The period-to-period changes in fair value will be recorded as either an addition or charge to earnings. There is no cash effect to these additions or charges over the life of these instruments. For the nine months ended September 30, 2007 and 2006, the Company recorded a charge of $4,065,446 and $3,396,148 respectively, and for the quarter ended September 30, 2007 and 2006, the Company recorded a charge of $5,982,698 and a gain of $2,531,966 respectively, as a result of the change in fair value of these derivative instruments as follows:

	Three Months						Nine months
	Ended						Ended
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Conversion option on convertible debenture (see Note 5)	$	5,739,399		$	91,167		$	6,499,646		$	5,180,594
Conversion option on Series A convertible preferred stock (see Note 6)		231,019			(473,055	)		83,632			(357,640	)
Conversion option on Series B convertible preferred stock (see Note 6)		125,855			(211,969	)		44,633			(108,380	)
Detachable warrants (see Note 6)		(119,646	)		(1,848,547	)		(2,559,339	)		(1,268,806	)
Non employee stock options (see Note 7)		6,071			(89,562	)		(3,126	)		(49,620	)
Total charge/(income)	$	5,982,698			($2,531,966	)	$	4,065,446		$	3,396,148

Earnings / (Loss) Per Common Share

The Company displays earnings per share in accordance with SFAS No. 128, “Earnings Per Share”. SFAS No. 128 requires dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS includes no dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The shares issuable upon the exercise of stock options, warrants, conversion of the convertible debenture and conversion of the series A and series B convertible preferred stock have not been included in the computation where the effect would be antidilutive. There were no dilutive securities for the quarter ended September 30, 2007, and the nine months ended September 30, 2007 and 2006 as these periods had a net loss and the effect of any dilutive securities would have been anti-dilutive. The following table presents the shares used in the computation of fully diluted earnings per share for the three month period ended September 30, 2006: 

10

	Quarter Ended September 30, 2006
Average weighted common shares outstanding		30,783,141
Series A convertible preferred stock		5,609,812
Series B convertible preferred stock		2,026,817
Convertible Debenture (if converted method)		47,535,211
Total fully diluted shares		85,954,981

Securities that could potentially dilute basic EPS in the future, that were not included in the computation of the diluted EPS because to do so would have been antidilutive for the periods presented, consist of the following:

	Quarter Ended September 30, 2007		Quarter Ended September 30, 2006		Nine months Ended September 30, 2007		Nine months Ended September 30, 2006
Series A convertible preferred stock		30,506,449		—		30,506,449		5,609,812
Series B convertible preferred stock		12,070,770		—		12,070,770		2,026,817
Warrants to purchase common stock		89,172,719		28,958,658		89,172,719		28,958,658
Options to purchase common stock		7,455,516		8,023,360		7,455,516		8,023,360
Convertible Debenture		1,217,614,374		—		1,217,614,374		47,535,211
Total fully diluted shares		1,356,819,828		36,982,018		1,356,819,828		92,153,858

Stock-Based Compensation

The Company accounts for stock options using the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment”, (“SFAS 123 (R)”). As a result, the Company’s net loss before taxes for the nine months ended September 30, 2007 and 2006 included expenses of $20,134 and $306,619, respectively, and expenses of $6,711 and $30,582, respectively, for the three months ended September 30, 2007 and 2006, respectively, for the fair value of stock options granted to employees and outside directors. For the nine and three months ended September 30, 2007 and 2006 the fair value of stock options granted to consultants were $15,349 and $20,386 respectively and $3,773 and $6,795 respectively. As of September 30, 2007 there was $55,316 of total unrecognized compensation related to stock options granted which is expected to be recognized over an approximate 1.5 year period. The fair value of the Company’s common stock options are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility, (2) risk-free interest rates and (3) expected life. The weighted average fair value of options at the date of grant using the Black-Scholes fair value based methodology for options granted in the year ended December 31, 2006 was estimated at $0.26. There were no new stock option awards granted in the nine months ended September 30, 2007.

Fair Value of Financial Instruments

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

Impact of Recently Issued Accounting Standards

In February 2006, the FASB issued SFAS No. 155 ''Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140'' (''SFAS 155''). SFAS 155 clarifies certain issues relating to embedded derivatives and beneficial interests in securitized financial assets. The provisions of SFAS 155 are effective for all financial instruments acquired or issued after fiscal years beginning after September 15, 2006. The adoption of this pronouncement did not have an impact on the Company's financial position, results of operations, or cash flows.

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In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), which amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 permits the choice of the amortization method or the fair value measurement method, with changes in fair value recorded in income, for the subsequent measurement for each class of separately recognized servicing assets and servicing liabilities. The statement is effective for years beginning after September 15, 2006, with earlier adoption permitted. The adoption of this pronouncement did not have a material effect on the Company's financial position, results of operations, or cash flows.

In September 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The Company has elected to record penalties in other expense and interest paid or received is recorded in interest expense or interest income, respectively, in the statement of operations. There were no amounts accrued for penalties or interest as of or during the nine months ended September 30, 2007. No interest or penalties on income taxes have been recorded during the nine months ended September 30, 2007. Tax years subject to examination are 2003 through 2006. The adoption of FIN 48 did not have a material effect on the Company's consolidated financial position or results of operations

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

In December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2, Accounting for Registration Payment Arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, ”Accounting for Contingencies”. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This FSP amends various authoritative literature notably FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”, FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, and FASB Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to December 21, 2006. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to December 21, 2006, the guidance in the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. The adoption of this pronouncement did not have a material impact on the Company's financial position, results of operations, or cash flows. 

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

NOTE 3 - Accrued Settlement with Former Officers

Accrued settlement with former officers, current and non-current, represent the settlement amounts for payroll deferred by the former Chief Executive Officer ("CEO") and former Chief Financial Officer ("CFO"), which aggregated $545,000 and $645,000 at September 30, 2007 and December 31, 2006, respectively. (See Note 8, Litigation).

NOTE 4 - Securities Purchase Agreement

On November 14, 2005, the Company entered into a Securities Purchase Agreement with the AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New Millennium Capital Partners, II, LLC (“the Purchasers”) for the sale of (i) $4,000,000 in secured convertible notes and (ii) warrants to purchase 4,000,000 shares of the Company’s common stock. As of July 25, 2006, the Purchasers provided the Company $3,100,000 of the $4,000,000. On September 5, 2006, the Company entered into an amendment to the Securities Purchase Agreement to reduce the sale to an aggregate of $3,100,000 principal amount of secured convertible notes and an aggregate of 3,100,000 warrants to purchase shares of common stock.

The secured convertible notes bear interest at 8%, unless the Company's common stock is greater than $0.2875 per share for each trading day of a month, in which event no interest is payable during such month. Interest is to be paid quarterly. Any interest not paid when due bear interest of 15% per annum from the date due until the same is paid. The secured convertible notes mature three years from the date of issuance, and were initially convertible into common stock, at the Purchasers' option, at a 40% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion. As such, these notes are convertible into an indeterminate number of shares of the Company's common stock. At the Company's option, in any month where the current stock price is below the initial market price (100% of the volume weighted average price of our common stock for the five days prior to closing), the Company can pay the outstanding principal and interest due for that month and this will stay any conversions for that month. Pursuant to the August 29, 2007 Amendment of Notes, the applicable discount changed from 40% to 50% on the outstanding secured convertible notes between the Company and the Purchasers.

In addition the Company, entered into a Registration Rights Agreement whereby it was required to file a registration statement with the SEC within the 45 days of the November 14, 2005 and was required to use its best efforts to have the registration statement declared effective within 120 days of November 14, 2005. Effective January 1, 2007, the Registration Rights Agreement is accounted for in accordance with FSF EITF 00-19-2. The Registration Rights Agreement required that the number of shares of common stock included in the registration statement was equal to 200% of the common stock underlying the sum of the number of shares issuable upon conversion of the notes and the number of shares issuable upon exercise of the warrants. The Company filed a registration statement on December 22, 2005 and an amended registration statement on February 13, 2006, April 7, 2006, June 5, 2006 and June 30, 2006. The registration statement was withdrawn on August 17, 2006. The Company filed a new registration statement for the amended Securities Purchase Agreement on September 13, 2006 in which, pursuant to the amendment to the Registration Rights Agreement dated as of September 5, 2006, the selling stockholders and the Company agreed that it would register an aggregate of up to 30% of its outstanding shares of common stock underlying the secured convertible notes. The Company filed an amended registration statement to reduce the number of shares to 6,000,000 on December 8, 2006, January 11, 2007 February 8, 2007 and February 13, 2007. The SEC declared the registration statement effective February 13, 2007.

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

1.	If the registration statement is not declared effective within 120 days from November 14, 2005.
2.	If the Company fails to timely file all reports with the SEC pursuant to the Securities Exchange Act of 1934.
3.	If the Company fails to maintain effectiveness of the registration statement after it has been declared effective.

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4. If the Company's common stock is not listed for quotation on the Nasdaq National Market, Nasdaq Capital Market, New York Stock Exchange, American Stock Exchange once listed there or ceases to be traded on the Over-the-Counter Bulletin Board or equivalent replacement exchange.

Since the registration statement exceeded the 120 day time requirement to be declared effective and only a portion of the shares underlying the convertible notes and warrants were registered under the February 14, 2007 Prospectus filed pursuant to Rule 424(b)(3) with the Securities and Exchange Commission, the Company accrued approximately $1,095,000 in liquidated damages as of September 30, 2007.

The warrants are exercisable until five years from the date of issuance at a purchase price of $0.65 per share. The warrants shares carry the same registration rights as the shares underlying the convertible notes.

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

In connection with the closing on November 14, 2005 of the first tranche of $1,000,000 of convertible notes and warrants for 1,000,000 shares of common stock, the Company reviewed the provisions of EITF 00-19 to determine if the conversion option and the detachable warrants should be accounted for as derivative financial instruments. The convertible notes are convertible into an indeterminate number of shares and collateral was posted in connection with the sale of these instruments. As such the conversion option and detachable warrants are required to be recorded as liabilities at their fair value on the date of issuance under the guidance on EITF 00-19. The fair value of the conversion option on the date of issuance of the notes was $612,903. The fair value of the warrants on the date of issuance was $160,048. As such the convertible notes were recorded on the date of issuance at the residual value of $227,049. On January 4, 2006 in the 2^nd tranche of $1,000,000 of convertible notes and warrants for 1,000,000 shares of common stock, the fair value of the conversion option on the date of issuance of the notes was $851,852 and the fair value of the warrants on the date of issuance was $157,000. Since the fair value of the conversion option and warrant exceeded the face value of the convertible notes, the Company recorded a $8,852 charge which was included in the statement of operations in change of fair value of non-employee stock options, warrants and conversion options during the year ended December 31, 2006. The convertible note was recorded at the residual value of $0. On May 10, 2006, in the advance of the 3^rd tranche of $600,000 of convertible notes and warrants for 600,000 shares of common stock, the fair value of the conversion option on the date of issuance of the note was $400,000 and the fair value of the warrants on the date of issuance was $109,200. As such the convertible notes were recorded on the date of issuance at the residual value of $90,800. On July 24, 2006 in the final advance of the 3^rd tranche of $500,000 of convertible notes and warrants for 500,000 shares of common stock, the fair value of the conversion option on the date of issuance of the notes was $586,957 and the fair value of the warrants on the date of issuance was $122,897. Since the fair value of the conversion option and warrant exceeded the face value of the convertible notes, the Company recorded a $209,854 charge which was included in the statement of operations in change of fair value of non-employee stock options, warrants and conversion options during the year ended December 31, 2006. The convertible note will be recorded at the residual value of $0. The resultant debt discount recorded on the secured convertible notes will be amortized over the three-year life of the instrument using the effective interest rate method with a charge to interest expense.

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

The Purchasers provided the Company with the funds as follows:

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

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

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

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The secured convertible notes bear interest at 8%, unless the Company’s common stock is greater than $0.3125 per share for each trading day of a month, in which event no interest is payable during such month. Any interest not paid when due bear interest of 15% per annum from the date due until the same is paid. The secured convertible notes mature three years from the date of issuance, and were initially convertible into common stock, at the Purchasers' option, at a 40% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion. As such, these notes are convertible into an indeterminate number of shares of the Company's common stock. At the Company’s option, in any month where the current stock price is below the Initial Market Price which is $0.30, the Company can pay the outstanding principal and interest due for that month and this will stay any conversions for that month. Pursuant to the August 29, 2007 Amendment of Notes, the applicable discount changed from 40% to 50% on the outstanding secured convertible notes between the Company and the Purchasers.

The Company is required to file a registration statement with the Securities and Exchange Commission within 30 days ofreceipt of written demand of the Purchasers, which will include the common stock underlying the secured convertible notes, and the warrants. If the registration statement is not declared effective within 120 days from the date of filing, the Company is required to pay liquidated damages to the Purchasers. In the event that the Company breaches any representation or warranty in the Securities Purchase Agreement, the Company is required to pay liquidated damages in shares of common stock or cash, at the Company’s election, in an amount equal to 2% of the outstanding principal amount of the secured convertible notes per month plus accrued and unpaid interest. As of September 30, 2007, the Purchasers have not written a demand to require the Company to file a registration statement.

The warrants are exercisable until seven years from the date of issuance at a purchase price of $0.30 per share. The warrants shares carry the same registration rights as the shares underlying the convertible notes.

In connection with the closing on September 12, 2006 of the first tranche of $275,000 of convertible notes and warrants for 20,000,000 shares of common stock, the Company reviewed the provisions of EITF 00-19 to determine if the conversion option and the detachable warrants should be accounted for as derivative financial instruments. The convertible notes are convertible into an indeterminate number of shares and collateral was posted in connection with the sale of these instruments. As such the conversion option and detachable warrants are required to be recorded as liabilities at their fair value on the date of issuance under the guidance on EITF 00-19. The fair value of the conversion options on the date of issuance of the notes was $207,456 for September 12, 2006, $402,174 on October 4, 2006 and $290,541 on November 6, 2006. The fair value of the warrants on the date of issuance was $3,662,522. Since the fair value of the conversion option and warrant exceeded the face value of the convertible notes, the Company recorded a $3,594,978 charge which was included in the statement of operations in change of fair value of non-employee stock options, warrants and conversion options during the year ended December 31, 2006. In the 2^nd and 3^rd tranche, on October 4, 2006 and November 6 2006 the fair value of the conversion option exceeded the face value of the convertible notes. The Company recorded charges of $152,174 and $40,541 respectively, which was included in the statement of operations in change of fair value of non-employee stock options, warrants and conversion options during the year ended December 31, 2006. The convertible notes were recorded at the residual value of $0. The resultant debt discount recorded on the secured convertible notes will be amortized over the three-year life of the instrument using the effective interest rate method with a charge to interest expense.

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

The Purchasers provided the Company with the funds as follows:

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

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

The secured convertible notes bear interest at 8%, unless the Company’s common stock is greater than $0.10 per share for each trading day of a month, in which event no interest is payable during such month. Any interest not paid when due shall bear interest of 15% per annum from the date due until the same is paid. The secured convertible notes mature three years from the date of issuance, and were initially convertible into common stock, at the Purchasers' option, at a 40% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion. As such, these notes are convertible into an indeterminate number of shares of the Company's common stock. At the Company’s option, in any month where the current stock price is below the Initial Market Price, the Company can pay the outstanding principal and interest due for that month and this will stay any conversions for that month. The term “Initial Market Price” means the volume weighted average price of the Common Stock for the five trading days immediately preceding the closing which was $0.069. Pursuant to the August 29, 2007 Amendment of Notes, the applicable discount changed from 40% to 50% on the outstanding secured convertible notes between the Company and the Purchasers.

15

The Company is required to file a registration statement with the Securities and Exchange Commission within 30 days of receipt of written demand of the Purchasers, which will include the common stock underlying the secured convertible notes, and the warrants. In the event that the Company breaches any representation or warranty in the Securities Purchase Agreement, the Company is required to pay liquidated damages in shares or cash, at the Company’s election, in an amount equal to 2% of the outstanding principal amount of the secured convertible notes per month plus accrued and unpaid interest. As of September 30, 2007, the Purchasers have not written a demand to require the Company to file a registration statement.

The warrants are exercisable until seven years from the date of issuance at a purchase price of $0.08 per share. The warrants shares carry the same registration rights as the shares underlying the convertible notes.

In connection with the October 31, 2006 Securities Purchase Agreement, the Company reviewed the provisions of EITF 00-19 to determine if the conversion option and the detachable warrants should be accounted for as derivative financial instruments. The convertible notes are convertible into an indeterminate number of shares and collateral was posted in connection with the sale of these instruments. As such the conversion option and detachable warrants are required to be recorded as liabilities at their fair value on the date of issuance under the guidance on EITF 00-19. The fair value of the conversion options on the date of issuance of the notes was $750,000 on October 31, 2006 and $2,000,000 on February 23, 2007. The fair value of the warrants on the date of issuance was $1,320,000 and $840,000 respectively. On October 31, 2006 the fair value of the conversion options and warrants exceeded the face value of the convertible notes; the Company recorded a $1,070,000 charge which was included in the statement of operations in change of fair value of non-employee stock options, warrants and conversion options during the year ended December 31, 2006. On February 23, 2007, the fair value of the conversion options and warrants exceeded the face value of the convertible notes and the Company recorded a $1,840,000 charge in the statement of operations in change of fair value of non-employee stock options, warrants and conversion options during the nine months ended September 30, 2007. The convertible notes were recorded at the residual value of $0. The resultant debt discount recorded on the secured convertible notes will be amortized over the three-year life of the instrument using the effective interest rate method with a charge to interest expense.

On August 29, 2007, the Company entered into a Securities Purchase Agreement with the certain Purchasers and a related entity for the sale of (i) $250,000 in secured convertible notes; and (ii) warrants to purchase 20,000,000 shares of the Company’s common stock. The Company received the $250,000 from the certain Purchasers and a related entity on August 30, 2007.

The secured convertible notes bear interest at 8%, unless the Company’s common stock is greater than $0.10 per share for each trading day of a month, in which event no interest is payable during such month. Any interest not paid when due shall bear interest of 15% per annum from the date due until the same is paid. The secured convertible notes mature three years from the date of issuance, and are convertible into common stock, at the Purchasers' option, at a 50% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion. As such, these notes are convertible into an indeterminate number of shares of the Company's common stock. At the Company’s option, in any month where the current stock price is below the Initial Market Price, the Company can pay the outstanding principal and interest due for that month and this will stay any conversions for that month. The term “Initial Market Price” means the volume weighted average price of the Common Stock for the five trading days immediately preceding the closing which was $0.018.

The Company is required to file a registration statement with the Securities and Exchange Commission within 30 days of receipt of written demand of the Purchasers, which will include the common stock underlying the secured convertible notes. In the event that the Company breaches any representation or warranty in the Securities Purchase Agreement, the Company is required to pay liquidated damages in shares or cash, at the Company’s election, in an amount equal to 2% of the outstanding principal amount of the secured convertible notes per month plus accrued and unpaid interest. As of September 30, 2007, the Purchasers have not written a demand to require the Company to file a registration statement.

The warrants are exercisable until seven years from the date of issuance at a purchase price of $0.02 per share. The warrants shares do not carry the same registration rights as the shares underlying the convertible notes.

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In connection with the August 29, 2007 Securities Purchase Agreement, the Company reviewed the provisions of EITF 00-19 to determine if the conversion option and the detachable warrants should be accounted for as derivative financial instruments. The convertible notes are convertible into an indeterminate number of shares and collateral was posted in connection with the sale of these instruments. As such the conversion option and detachable warrants are required to be recorded as liabilities at their fair value on the date of issuance under the guidance on EITF 00-19. The fair value of the conversion options on the date of issuance of the notes was $260,638 on August 29, 2007. The fair value of the warrants on the date of issuance was $320,000. On August 29, 2007 the fair value of the conversion options and warrants exceeded the face value of the convertible notes; the Company recorded a $330,638 charge which was included in the statement of operations in change of fair value of non-employee stock options, warrants and conversion options during the nine months ended September 30, 2007. The convertible notes were recorded at the residual value of $0. The resultant debt discount recorded on the secured convertible notes will be amortized over the three-year life of the instrument using the effective interest rate method with a charge to interest expense.

Pursuant to the November 14, 2005, September 12, 2006, October 31, 2006 and August 29, 2007 Securities Purchase Agreements, the Purchasers may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the Purchasers exercise the warrants on a cashless basis, then the Company will not receive any proceeds.

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

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

Under the terms of the November 2005, September 12, 2006, October 31, 2006 and August 29, 2007 Securities Purchase Agreements, the full principal amount of the secured convertible notes are due upon a default under the terms of secured convertible notes. Events of default include:

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

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

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

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

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

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

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

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

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

In addition, the Company granted the Purchasers a security interest in substantially all of the Company’s assets and intellectual property. In the event that the Company defaults on the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements, the investors could take a first priority security interest in all of the Company’s goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property pursuant to executed a Security Agreement and an Intellectual Property Security Agreement. The Investors have the right to take possession of the collateral, to operate the Company’s business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements, all of which could have a material adverse impact on the Company’s business prospects. As of September 30, 2007 the Company is in default under the terms of the November 2005, September 12, 2006 and October 31, 2006 Securities Purchase Agreements for failure to pay interest on the convertible notes. The Purchasers have granted the Company a waiver for defaults and damages resulting from such defaults related to the payment of interest on secured convertible debentures issued pursuant to the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements.

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

In accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", at each reporting period these liabilities will be adjusted for changes in their fair value. The conversion option is valued at its intrinsic value because of the 50% discount to current market prices of the Company's common stock and the non employee options, detachable warrants and preferred stock conversion option are valued using the Black Scholes valuation model. Actual period close common stock price ($0.014), applicable volatility rates (143.88% - 529.96%), remaining contractual life (0.07 yrs.- 8.25 years) and the period close risk free interest rate for the instruments expected remaining life (1.03% - 4.37%) are the key assumptions used in the valuation calculation. The period-to-period changes in fair value will be recorded as either an addition or charge to earnings. These additions or charges have no cash effect over the life of the instrument. The change in the fair value of the non employee stock options, warrants and conversion option for three and nine months ended September 30, 2007 was a charge of $5,982,698 and $4,065,446, respectively.

During the nine months ended September 30, 2007, the Company received Notices of Conversion from the Purchasers as follows:

Date of Conversion	Dollar of Note Converted		Price per Share		Common Stock Issued
2/13/2007	$	1,500	$	0.0150		100,000
2/27/2007	$	1,500	$	0.0150		100,000
3/2/2007	$	1,600	$	0.0160		100,000
3/6/2007	$	1,200	$	0.0120		100,000
3/9/2007	$	980	$	0.0098		100,000
3/16/2007	$	610	$	0.0061		100,000
3/22/2007	$	570	$	0.0057		100,000
3/28/2007	$	570	$	0.0057		100,000
4/2/2007	$	1,425	$	0.0057		250,000
4/4/2007	$	1,425	$	0.0057		250,000
4/9/2007	$	1,300	$	0.0052		250,000
4/12/2007	$	1,350	$	0.0054		250,000
4/17/2007	$	1,350	$	0.0054		250,000
4/20/2007	$	1,150	$	0.0046		250,000
4/25/2007	$	850	$	0.0034		250,000
4/30/2007	$	675	$	0.0027		250,000
5/3/2007	$	625	$	0.0025		250,000
5/8/2007	$	625	$	0.0025		250,000
5/14/2007	$	625	$	0.0025		250,000
5/17/2007	$	625	$	0.0025		250,000
5/21/2007	$	625	$	0.0025		250,000
5/24/2007	$	600	$	0.0024		250,000
5/29/2007	$	600	$	0.0024		250,000
5/31/2007	$	600	$	0.0024		250,000
6/5/2007	$	600	$	0.0024		250,000
6/8/2007	$	575	$	0.0023		250,000
6/13/2007	$	500	$	0.0020		250,000
6/15/2007	$	375	$	0.0015		250,000
6/20/2007	$	375	$	0.0015		250,000
6/25/2007	$	375	$	0.0015		250,000
6/27/2007	$	69	$	0.0015		43,909
Total	$	25,849				6,343,909

18

As of September 30, 2007, the secured convertible notes issued pursuant to the Securities Purchase Agreements mature as follows:

For the Year Ending	Note
December 31,	Amount
2008	$	963,072
2009		3,875,000
2010		1,250,000
Total	$	6,088,072
Less debt discount		(5,238,712	)
	$	849,360

NOTE 5 - Stockholders' Equity

Series A Convertible Preferred Stock

On December 14, 2004, the Company completed a private placement of 1,550,000 shares of its series A convertible preferred stock and warrants to purchase 465,000 shares of its common stock at $1.10 per share. The Company received gross proceeds of $1,550,000. The Company allocated $387,667 of the gross proceeds to the warrants based on estimated fair value. In accordance with EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,161,249 to deficit accumulated during the development stage in fiscal 2004. The non-cash charge measures the difference between the relative fair value of the series A convertible preferred stock and the fair market value of the Company's common stock issuable pursuant to the conversion terms on the date of issuance. Holders of the series A convertible preferred stock are entitled to receive a cumulative dividend of 4% per annum, payable either in cash or, at the Company's option, additional shares of series A convertible preferred stock. As a result of anti-dilution provisions relating to the series A convertible preferred stock and the warrants that were issued by the subscription rights offering consummated on August 10, 2005, the conversion price of its series A convertible preferred stock was reduced to $0.50 per share and the exercise price of the warrants was reduced to $0.50 per share. As a result of the reduction in the series A convertible preferred stocks conversion price, the Company recorded a non-cash charge of approximately $703,000 during the third quarter of 2005 in accordance with EITF 00-27. On October 28, 2005, as anti-dilution protection, the Company issued additional five year warrants to purchase 1,550,000 shares of its common stock to the December 2004 private placement investors. The warrants have an exercise price of $0.75 per share and will expire August 9, 2010. The Company recorded a deemed dividend charge of $449,500 for the fair value of those warrants during fiscal 2005. As a result of the issuance of the secured convertible notes and warrants under the November 14, 2005, September 12, 2006, October 31, 2006 and the August 29, 2007 Securities Purchase Agreements, the series A preferred stock conversion price was reduced pursuant to the anti-dilution clause of the certificate of designation.

Prior to the November 14, 2005 Securities Purchase agreement, 1 share of series A preferred stock converted into 2 shares of common stock. With each tranche of the November 2005, the September 12, 2006, October 31, 2006 and the August 29, 2007 Securities Purchase Agreements, anti-dilution provision was triggered. As a result of the August 29, 2007 funding the conversion price of the series A preferred stock was reduced to $0.07 per share. The original investment price of $1.00 per share for the series A preferred stock is divided by the $0.07 per share and result in the conversion of every 1 share of series A preferred stock held can be converted into 14.29 shares of common stock for a total of 30,506,449 shares of common stock. The conversion price of the series A preferred stock was adjusted based on a calculation as set forth in the certificate of designation. The price was determined by multiplying: (i) the conversion price in effect immediately prior thereto; by (ii) a fraction, (A) the numerator of which shall be the sum of the number of shares of common stock outstanding immediately prior to the issuance of such dilutive securities and the number of shares of common stock which the aggregate consideration received for the issuance of such dilutive securities would purchase at the Reference Price which is the 30-day volume-weighted average price of the Company’s common stock and (B) the denominator of which shall be the number of shares of common stock outstanding immediately after the issuance of such dilutive securities (assuming the conversion to common stock of all such dilutive securities that are derivative securities).

Holders of our series A preferred stock are entitled to receive a cumulative dividend of 4% per year, payable annually in cash or, at the Company’s option, in additional shares of series A preferred stock (computed on the basis of the 10-day volume-weighted average price of its common stock on the American Stock Exchange or Nasdaq Capital Market or, if not traded on such exchange or market, on the OTC Bulletin Board). Holders of series A preferred stock were issued 301,423 shares of series A preferred stock. The 10-day volume-weighted average price of the Company’s common stock was $0.206. In December 2005, the Company inadvertently issued an additional 183,869 series A preferred dividend shares in lieu of cash dividends than the holders were required to receive. On December 12, 2006, the Board of Directors voted to allow the stockholders to retain the additional shares of preferred stock that were issued as dividends. On December 12, 2006, the Board of Directors approved the payment of dividends in series A preferred stock to the holders of record as of December 15, 2006. On January 2, 2007 holders of series A preferred stock were issued 283,388 shares of series A preferred stock as dividends. The 10 day volume-weighted average price of the Company’s common stock was $0.047.

19

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

EITF 00-19 requires that the classification of contracts that could result in derivative instruments be reassessed at each balance sheet date. The convertible debentures issued in connection with the November 14, 2005 Securities Purchase Agreement are convertible into an indeterminate number of shares. (See Note 4) Because of this, the Company might not have sufficient authorized shares in the future to settle conversions or exercises of other non-employee instruments. In addition, the series A convertible preferred stock anti dilution provisions will be triggered upon conversions of the November 14, 2005 convertible debentures should their conversion price be less than the existing conversion price of the series A convertible preferred stock. As such, the November 14, 2005 sale of convertible debentures caused the series A convertible preferred stock to be convertible into an indeterminate number of shares. Additionally, since the preferred stock does not embody a claim to a residual interest in the Company, it was determined to be more akin to a debt instrument as defined in SFAS133. As such, the Company determined that the conversion option should be bifurcated from the preferred stock instrument. Under the guidance of EITF 00-19, share settlement of the series A convertible preferred stock could no longer be considered to be within the control of the Company. The Company reclassified the embedded conversion option in the series A convertible preferred stock from equity to a liability based on the fair value of the conversion option on November 14, 2005 of $586,182. In January 2006, the Company recorded the embedded conversion option in the dividend shares as a derivative liability at fair value of $135,037. Excess of fair value over the dividend payable of $60,600 was recorded as a charge of $74,437 in the statement of operation in change of fair value of non-employee stock options, warrants and conversion options during the year ended December 31, 2006. In January 2007, the Company recorded the embedded conversion option in the dividend shares as a derivative liability at fair value of $25,683. The Company re-measured the fair value of the embedded conversion option and recorded a charge of $231,019 and $83,632 for the change in fair value for the three and nine months ended September 30, 2007, respectively, in its statement of operations. The fair value of the series A conversion option was $234,900 and $125,585 at September 30, 2007 and December 31, 2006 respectively. The Company used the Black Scholes Valuation model to determine the fair value of the conversion option. The significant assumptions used include the actual period closing price of the Company's common stock ($0.014), applicable volatility rates (529.96%), remaining contractual life (0.21 years) and the period close risk free interest rate for the instruments remaining contractual life (3.71%).

Proprietary Rights Offering

On August 10, 2005 the Company consummated a subscription rights offering to existing stockholders of the Company, for which the Company received gross proceeds of $703,934, issued 1,407,867 shares of series B convertible preferred stock convertible originally on a one-to-one basis into shares of the Company's common stock and five year warrants to purchase 703,934 shares of common stock. In accordance with EITF 00-27, the Company recorded a non-cash charge of approximately $420,000 during fiscal 2005 associated with the sale of our series B convertible preferred stock. The charge measures the difference between the relative fair value of the series B convertible preferred stock and the fair market value of the shares of the Company’s common stock issuable pursuant to the conversion terms on the date of issuance. As a result of the issuance of the secured convertible notes and warrants under the November 14, 2005, September 12, 2006, October 31, 2006 and the August 29, 2007 Securities Purchase Agreements, the series B preferred stock conversion price was reduced pursuant to the anti-dilution clause of the certificate of designation.

20

Prior to the November 14, 2005 Securities Purchase agreement, 1 share of series B preferred stock converted into 1 shares of common stock. With each tranche of the November 2005, the September 21, 2006, October 31, 2006 and the August 29, 2007 Securities Purchase Agreements, anti-dilution provision was triggered. As a result of the August 29, 2007 funding the conversion price of the series B preferred stock was reduced to $0.07 per share. The original investment price of $0.50 per share for the series B preferred stock is divided by the $0.07 per share. The result is every 1 share of series B preferred stock held converts into 7.14 shares of common stock for a total of 12,070,770 shares of common stock. The conversion price of the series B preferred stock was adjusted based on a calculation as set forth in the certificate of designation. The price was determined by multiplying: (i) the conversion price in effect immediately prior thereto; by (ii) a fraction, (A) the numerator of which shall be the sum of the number of shares of common stock outstanding immediately prior to the issuance of such dilutive securities and the number of shares of common stock which the aggregate consideration received for the issuance of such dilutive securities would purchase at the Reference Price which is the 30-day volume-weighted average price of the Company’s common stock and (B) the denominator of which shall be the number of shares of common stock outstanding immediately after the issuance of such dilutive securities (assuming the conversion to common stock of all such dilutive securities that are derivative securities).

Holders of our series B preferred stock are entitled to receive a cumulative dividend of 7% per year, payable annually in cash or, at the Company’s option, in additional shares of series B preferred stock (computed on the basis of the 10-day volume-weighted average price of its common stock on the American Stock Exchange or Nasdaq Capital Market or, if not traded on such exchange or market, on the OTC Bulletin Board). The holders of series B preferred stock were issued 76,467 shares of series B preferred stock. In December 2005, the Company inadvertently issued an additional 16,701 series B preferred dividend shares in lieu of cash dividends than the holders were required to receive. On December 12, 2006, the Board of Directors voted to allow the stockholders to retain the additional shares of preferred stock that were issued as dividends. On December 12, 2006, the Board of Directors approved the payment of dividends in series B preferred stock to the holders of record as of December 15, 2006. On January 2, 2007 holders of series B preferred stock were issued 357,152 shares of series B preferred stock as dividends. The 10 day volume-weighted average price of our common stock was $0.047.

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

EITF 00-19 requires that the classification of contracts that could result in derivative instruments be reassessed at each balance sheet date. The convertible debentures issued in connection with the November 14, 2005 Securities Purchase Agreement are convertible into an indeterminate number of shares. (See Note 4) Because of this, the Company might not have sufficient authorized shares in the future to settle conversions or exercises of other non-employee instruments. In addition, the series B convertible preferred stock anti dilution provisions will be triggered upon conversions of the November 14, 2005 convertible debentures should their conversion price be less than the existing conversion price of the series B convertible preferred stock. As such, the November 14, 2005 sale of convertible debentures caused the series B convertible preferred stock to be convertible into an indeterminate number of shares. Additionally, since the preferred stock does not embody a claim to a residual interest in the Company, it was determined to be more akin to a debt instrument as defined in SFAS 133. As such, the Company determined that the conversion option should be bifurcated from the preferred stock instrument. Under the guidance of EITF 00-19, share settlement of the series B convertible preferred stock could no longer be considered to be within the control of the Company. The Company reclassified the embedded conversion option in the series B convertible preferred stock from equity to a liability based on the fair value of the conversion option on November 14, 2005 of $244,533. In January 2006, the Company recorded the embedded conversion option in the dividend shares as a derivative liability at fair value of $17,129. In June 2006, 36,237 series B preferred shares were converted into 50,369 shares of common stock. Under the guidance of EITF 00-19, the Company re-measured the conversion option of these shares and reclassified the conversion liability of $9,158 to equity. In January 2007, the Company recorded the embedded conversion option in the dividend shares as a derivative liability at fair value of $21,049. The Company re-measured the fair value of the embedded conversion option and recorded a charge of $125,855 and $44,633 for the change in fair value for the three and nine months ended September 30, 2007, respectively, in its statement of operations. The fair value of the series B conversion option was $132,778 and $67,096 at September 30, 2007 and December 31, 2006 respectively. The Company used the Black Scholes Valuation model to determine the fair value of the conversion option. The significant assumptions used include the actual period closing price of the Company's common stock ($0.014), applicable volatility rates (348.27%), remaining contractual life (0.86 years) and the period close risk free interest rate for the instruments remaining contractual life (4.03%).

21

Warrants

In 2004, the Company issued warrants in connection with the December 14, 2004 private placement transaction. The warrants entitled the participants of the private placement to purchase up to 465,000 shares of common stock at an exercise price of $1.10 per share. The exercise price was adjusted to $0.50 per share on August 10, 2005 as a result of the consummation of the subscription rights offering. These warrants will expire if unexercised on December 14, 2009. As noted above in October 2005, the investors in the December 2004 private placement received an additional 1,550,000 warrants to purchase the Company's common stock with an exercise price of $0.75, which expire on August 10, 2010. On August 10, 2005, the Company's subscription rights offering of newly-created series B convertible preferred stock closed. Stockholders that purchased shares of the Company's series B preferred stock in the rights offering were issued, for no additional consideration, five-year warrants to purchase that number of shares of the Company's common stock equal to 50% of the number of shares of series B preferred stock acquired by the stockholder in the offering. The warrants have an exercise price of $0.75 per share. The Company issued warrants to purchase 703,934 shares of common stock which expire on August 10, 2010.

On July 25, 2005, the Company signed a non-exclusive finder's fee agreement with Trilogy Capital Partners, Inc. (“Trilogy”). Trilogy agreed to act as finder to seek financing and other strategic relationships for the Company. Under this agreement, if the Company received any financing from a qualified introduction during the fee agreement period, the Company would be required to pay Trilogy a cash finder's fee equal to 10% of the gross proceeds of the financing. The fee period commenced the date of the agreement and was to terminate one year following the termination of Trilogy as finder. Either Trilogy or the Company could terminate the agreement at any time.

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

On November 17, 2005, the Company entered into a settlement agreement and mutual release ("Settlement Agreement") with Trilogy. The Settlement Agreement terminates the Consulting Agreement with Trilogy entered into on September 22, 2005, the Finder's Fee Agreement with Trilogy entered into on July 25, 2005 and the Letter of Engagement with Trilogy entered into on September 14, 2005. The terms of the Settlement Agreement are that the Company agreed to pay Trilogy 3% of the gross proceeds they receive from the Securities Purchase Agreement the Company entered into on November 14, 2005 with the Purchasers for the sale of (i) $4,000,000 in secured convertible notes and (ii) 4,000,000 warrants. The Company also agreed to pay Trilogy $1,664 for marketing costs and $6,250 for fees under the Letter of Engagement from the period October 14, 2005 through November 1, 2005. Trilogy agreed to return and relinquish all rights, title and interest to the 2,400,000 warrants they were given and release the Company of all prior agreements and understandings between Trilogy and the Company. The Company paid $93,000 related to this settlement as of December 31, 2006 with $42,000 allocated to the recovery of warrants.

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

The warrants are issued pro rata upon each investment tranche. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.65 per share. The Purchasers may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the Purchasers exercise the warrants on a cashless basis, then the Company will not receive any proceeds. In addition, the exercise price of the warrants will be adjusted in the event the Company issues common stock at a price below market, with the exception of any securities issued as of the date of the warrants or issued in connection with the secured convertible notes issued pursuant to the Securities Purchase Agreement. On November 15, 2005, the Purchasers received 1,000,000 warrants, on January 4, 2006 the Purchasers received 1,000,000 warrants, on May 10, 2006 the Purchasers received 600,000 warrants and on July 25, 2005 the Purchasers received 500,000 warrants. On September 5, 2006, the Company entered into an amendment to the Securities Purchase Agreement to reduce the sale to an aggregate of $3,100,000 principal amount of secured convertible notes and an aggregate of 3,100,000 warrants to purchase shares of common stock.

22

Pursuant to an amended Finder's Fee Agreement, between Axiom and the Company, Axiom received five year warrants to purchase 378,445, 395,310, 173,580 and 133,776 shares of our common stock at an exercise price of $0.65 per share on November 14, 2005, January 4, 2006, May 10, 2006 and July 24, 2006, respectively. The warrants are exercisable for a period of five years from date of issuance. The number of warrants issued was computed by dividing the total dollar investment by the initial market price (100% of the volume weighted average price of our common stock for the five days prior to closing) multiplied by the 8% warrant coverage as agreed. Warrants are issued pro rata upon each investment tranche. The initial market price was $0.211, $0.202, $0.277 and $0.299 for the first tranche, second tranche, and the first and final advance of the third tranche, respectively. The Company recorded the fair value of the warrants as deferred financing costs and amortizes the expense on a straight line basis over the term of the loan.

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

The warrants are exercisable until seven years from the date of issuance at a purchase price of $0.30 per share. The Purchasers may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the Purchasers exercise the warrants on a cashless basis, then the Company will not receive any proceeds.

Pursuant to the amended Finder's Fee Agreement, between Axiom and the Company, Axiom earned a finders fee of $50,375 in cash of which $17,875 was paid on September 18, 2006, $16,250 was paid on October 19, 2006 and $16,250 was paid on November 27, 2006. In addition, Axiom has received five year warrants to purchase shares of the Company’s common stock at an exercise price of $0.65 per share, of which 108,216 were granted on September 12, 2006, 138,319 were granted on October 4, 2006 and 293,931 were granted on November 6, 2006. (see Note 4). The warrants are exercisable for a period of five years from date of issuance. The number of warrants to be issued is computed by dividing the total dollar investment by the initial market price (100% of the volume weighted average price of our common stock for the five days prior to closing) multiplied by the 8% warrant coverage as agreed. Warrants were issued pro rata upon each investment tranche. The initial market price was $0.203, $0.145 and $0.068 for the 1st tranche, 2nd tranche, and the final tranche, respectively. The Company recorded the fair value of the warrants as deferred financing costs and amortizes the expense on a straight line basis over the term of the loan.

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

The warrants are issued pro rata upon each investment tranche. On each October 31, 2006 and February 23, 2007 the Purchasers received 20,000,000 warrants. The warrants are exercisable until seven years from the date of issuance at a purchase price of $0.08 per share. The Purchasers may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the Purchasers exercise the warrants on a cashless basis, then the Company will not receive any proceeds.

Pursuant to the November 8, 2005 amended Finder's Fee Agreement, between the Company and Axiom, Axiom will earn a finders fee of $130,000 in cash which has been accrued at September 30, 2007. In addition, Axiom will receive five year warrants to purchase shares of the Company’s common stock at an exercise price of $0.65 per share, of which 1,151,393 and 1,777,778 will be granted after November 1, 2007. The warrants are exercisable for a period of five years from date of issuance. The number of warrants to be issued is computed by dividing the total dollar investment by the initial market price (100% of the volume weighted average price of our common stock for the five days prior to closing) multiplied by the 8% warrant coverage as agreed. Warrants were issued pro rata upon each investment tranche. The initial market price was $0.069 and $0.045 for the 1st tranche and final tranche, respectively. The Company recorded the fair value of the warrants as deferred financing costs and amortizes the expense on a straight line basis over the term of the loan.

On August 29, 2007, the Company entered into a new Securities Purchase Agreement with the Purchasers for the sale of (i) $250,000 in secured convertible notes and (ii) warrants to purchase 20,000,000 shares of the Company’s common stock.

23

The warrants are exercisable until seven years from the date of issuance at a purchase price of $0.02 per share. The Purchasers may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the Purchasers exercise the warrants on a cashless basis, then the Company will not receive any proceeds.

Pursuant to the November 2005, September 2006, October 2006 and the August 2007 Securities Purchase Agreements, upon an issuance of shares of common stock below the market price, the exercise price of the warrants will be reduced accordingly with the exception of any securities issued as of the date of the warrants or issued in connection with the secured convertible notes issued pursuant to the Securities Purchase Agreement. The market price is determined by averaging the last reported sale prices for the Company’s shares of common stock for the five trading days immediately preceding such issuance as set forth on the Company’s principal trading market. The exercise price shall be determined by multiplying the exercise price in effect immediately prior to the dilutive issuance by a fraction. The numerator of the fraction is equal to the sum of the number of shares outstanding immediately prior to the offering plus the quotient of the amount of consideration received by us in connection with the issuance divided by the market price in effect immediately prior to the issuance. The denominator of such issuance shall be equal to the number of shares outstanding after the dilutive issuance.

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

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

The convertible debentures issued in connection with the November 2005, September 2006, October 2006 and the August 2007 Securities Purchase Agreement are convertible into an indeterminate number of shares. Because of this, the Company would not have sufficient authorized shares to settle exercises of the warrants issued to the Purchasers or Axiom on the date of issuance. In addition, the underlying shares of the Purchasers warrants were subject to the liquidating damages provisions of the Registration Rights Agreement. If the registration statement that was filed by the Company is not declared effective within 120 days from November 14, 2005 or fails to maintain effectiveness of the registration statement then the Company will be required to pay liquidated damages to the Purchasers in the amount of 2% per month on the outstanding principal amount of the convertible debentures in shares or cash. In accordance with the provisions of EITF 00-19 both the Purchasers and Axiom warrants were recorded as liabilities at their fair values on the date of issuance of $160,048 and $60,569, respectively. In January 2006, the warrants issued to both the Purchasers and Axiom in connection with the 2^nd tranche was recorded as liabilities at their fair values on the date of issuance of $157,000 and $62,064, respectively. On May 10, 2006, the warrants issued to both the Purchasers and Axiom in connection with the advance of the 3rd tranche was recorded as liabilities at their fair values on the date of issuance of $109,200 and $31,592, respectively. On July 24, 2006, the warrants issued to both the Purchasers and Axiom in connection with the final advance of the 3rd tranche was recorded as liabilities at their fair values on the date of issuance of $122,879 and $32,909, respectively. In connection with the September 12, 2006 Securities Purchase Agreement the warrants issued to both the Purchasers and Axiom in connection with the 1st tranche were recorded as liabilities at their fair values on the date of issuance of $3,662,522 and $16,882, respectively. On October 4, 2006 and November 6, 2006, the warrants issued Axiom in connection with the 2^nd and 3rd tranche were recorded as liabilities at their fair values on the date of issuance of $19,226 and $17,636, respectively. In connection with the October 31, 2006 Securities Purchase Agreement the warrants to be issued to the Purchasers were recorded as liabilities at their fair values on October 31, 2006 and February 23, 2007 of $1,320,000 and $840,000, respectively. In connection with the August 29, 2007 Securities Purchase Agreement the warrants to be issued to the Purchasers were recorded as liabilities at their fair values of $320,000.

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

24

On January 30, 2006, the Company entered into a settlement agreement and mutual release (“Settlement Agreement”) with Lockheed Martin (“Lockheed”). (See Note 8 - Litigation) Under the terms of the Settlement Agreement, the Company agreed to issue 500,000 warrants to Lockheed, with each such warrant entitling Lockheed to purchase from the Company, at any time prior to December 28, 2015, one share of the Company’s common stock at $0.65 per share. Because of the convertible debentures issued in connection with the November 14, 2005 Securities Purchase Agreement (See Note 4), the Company might not have sufficient authorized shares in the future to settle exercises of these issued warrants. Under the guidance of EITF 00-19, the Company classified these warrants as liability based on their fair value of $94,500 on the date of grant.

The Company re-measured the fair value of all its issued warrants at September 30, 2007. The change in fair value for the three and nine months ended September 30, 2007 was a gain of $119,646 and $2,559,339, respectively. The change of fair value is reported in the Company’s statement of operations. The fair value of the warrants was $371,757 and $1,654,336 at September 30, 2007 and December 31, 2006, respectively. The Company used the Black Scholes Valuation model to determine the fair value of the warrants. The significant assumptions used include the actual period closing price of the Company's common stock ($0.014), remaining contractual life (from 2.21 - 8.25 years), applicable volatility rates (143.88% - 253.64%) and the period close risk free interest rate for the instruments remaining contractual life (3.95% – 4.37%).

As of September 30, 2007 and 2006, the Company had warrants outstanding to purchase an aggregate of 89,172,719 and 28,958,658 common shares respectively.

A summary of stock warrant activity is as follows:

	September 30, 2007
			Weighted
			Average
			Exercise
	Shares		Price
Outstanding, beginning of period		49,172,719	$	0.29
Warrants granted		40,000,000		0.05
Warrants exercised		—		—
Warrants forfeited		—		—
Outstanding, end of period		89,172,719	$	0.18
Exercisable, end of period		89,172,719	$	0.18

NOTE 6 - Stock Option Plans

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

At September 30, 2007, under the 1998 stock option plan, options to purchase 3,275,516 shares of common stock were outstanding. These options have exercise prices ranging from $0.55 to $4.00 per share. Effective September 7, 2005, no further options can be granted from the 1998 stock option plan.

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

The terms of the 2005 Plan provide for the issuance of up to 5,000,000 awards of stock options, stock appreciation rights or SARs, restricted stock, deferred stock, other stock related awards and performance awards that may be settled in cash, stock or other property. On September 26, 2006, our stockholders approved to amend the 2005 Plan to increase the number of grants available under the Plan from 5,000,000 to 10,000,000.

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At September 30, 2007, under the 2005 Plan, 4,180,000 stock options and 330,000 shares of restricted stock have been granted.

EITF 00-19 requires that the classification of contracts that could result in derivative instruments be reassessed at each balance sheet date. The convertible debentures issued in connection with the November 14, 2005 Securities Purchase Agreement are convertible into an indeterminate number of shares. (See Note 4). Because of this, the Company might not have sufficient authorized shares in the future to settle exercises of its non-employee issued stock options. Under the guidance of EITF 00-19, share settlement of the Company's non employee issued stock options could no longer considered to be within the their control. The Company reclassified these non-employee stock options to a liability based on the fair value of the stock options on November 14, 2005 of $104,927. The Company re-measured the fair value of the non-employee stock options. For the three and nine months ended September 30, 2007, a charge of $6,071 and a gain of $3,126, respectively, were recorded as a change in fair value in its statement of operations. The fair value of the Company's non-employee stock options was $6,422 and $9,548 at September 30, 2007 and December 31, 2006, respectively. The Company used the Black Scholes Valuation model to determine the fair value. The significant assumptions used include the actual period closing price of the Company's common stock ($0.014), applicable volatility rates (222.56% - 489.30%), remaining contractual life (0.07 – 2.92 years) and the period close risk free interest rate for the instruments remaining contractual life (1.03%-4.07%).  

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

	September 30, 2007
			Weighted				Weighted
			Average		Aggregate		Average
			Exercise		Intrinsic		Grant Date
	Shares		Price		Value		Fair Value
Outstanding, beginning of period		7,943,935	$	0.74		—		—
Options granted		—		—		—		—
Options exercised		—		—		—		—
Options forfeited		488,419	$	0.55		—		—
Outstanding, end of period		7,455,516	$	0.76	$	—	$	—
Exercisable, end of period		7,106,392	$	0.78	$	—	$	—

NOTE 7 - License Agreements

Technology License Agreement

In 1997, and in connection with the formation of the Company, the founding stockholders entered into an agreement pursuant to which the Company could acquire the exclusive worldwide right to exploit technology related to the detection of cancerous lesions by their effect on the periodic modification of perfusion in the surrounding tissues (the "Technology"). In February 1998, the Company funded the required research budget and in March 1998, issued 1,320,000 shares of previously reserved common stock to one of the founders, Dr. Michael A. Anbar. The Company recorded the issuance of these shares at the historical cost ($4,400) of the technology transferred from Dr. Anbar. The license, as amended, required the Company to fund future research and development costs in the amount of $495,000. The Company funded the first $110,000 of this obligation in late 1997, with the balance paid in March 1998. The Company also entered into a consulting agreement with a company controlled by this stockholder of the Company. Under the terms of the agreement, the Company was contractually obligated to pay a maximum of $26,000 for consulting services; $25,000 for travel; and $50,000 for research supplies for a 12-month period. The Company satisfied this entire obligation with a one-time $50,000 payment, which is included in the $495,000 as discussed above. The Company also was obligated to pay this shareholder a royalty of $300 for each device installed at a client's site based only on installations at which the Company derives revenues from the licensed technology. Effective February 1, 2005, the Company amended a settlement agreement dated October 3, 2001, and entered into a two-year consulting agreement with Dr. Anbar, founding scientist of the Company, which provided for Dr. Anbar to advise management on the optimization of its technology. The agreement awarded Dr. Anbar $1,000 and 1,000 restricted shares of common stock per day with a minimum consulting fee of $12,000 for the first 12-month period, as well as a grant of 250,000 additional restricted shares. On February 13, 2006, in accordance with the 2005 amended settlement agreement, the Company issued 12,000 restricted shares of its common stock to Dr. Anbar. The fair value of the stock was $2,280 on the date of grant. As part of this agreement, the Company will acquire one patent on complementary technology developed and held by Dr. Anbar. The consulting agreement expired February 1, 2007.

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Caltech License Agreement

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

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

NOTE 8 - Commitments and Contingencies

Purchase Commitments

The Company has committed to purchase infrared camera components from AEG Infrarot-Module GmbH ("AIM") in the amount of 430,500 Euros or $614,000 (at the current exchange rates) as of September 30, 2007. These components utilize QWIP technology. The Company has the exclusive license for QWIP technology from Caltech for biomedical applications.

Operating Lease Commitments

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

Future annual minimum lease payments under non-cancelable operating leases and arrangements as of September 30, 2007 are as follows:

	Amount
Three months Ending December 31, 2007	$	16,000
Year Ending December 31, 2008		65,100
Year Ending December 31, 2009		61,800
Total	$	142,900

Rent expenses charged to operations were $61,304 and $58,413 for the nine months ended September 30, 2007 and September 30, 2006, respectively. Rent expense charged to operations for the three months ended September 30, 2007 and September 30, 2006 and for period February 7, 1997 (inception) to September 30, 2007 amounted to $15,665, $16,689, and $396,170, respectively.

Litigation

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

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

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On February 15, 2005, the Company moved for partial summary judgment on the CFO's deferred salary claim. By Order dated March 23, 2005, the Court denied the Company's motion, but allowed the Company to renew its motion at the close of discovery. The Court did find that it is unlikely that the CFO could recover any deferred compensation prior to April 1, 1999. The parties completed discovery and a final pretrial conference was held on August 17, 2005. On September 5, 2006 the Company entered into a Settlement and Release Agreement (“Agreement”) with our former Chief Financial Officer. The Agreement disposes of and resolves all disputes, claims, issues and differences between the former chief financial officer and the Company.

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

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

Employment and Consulting Agreements

On March 4, 2005, the Company announced the appointment of Denis A. O'Connor as its President and CEO, effective March 23, 2005. Mr. O'Connor was also appointed to the Company's Board of Directors on March 7, 2005. The Company entered into an employment agreement with Mr. O'Connor, with a two-year term expiring in March 2007, with an option to renew for one additional year. Due to the financial condition of the Company, this contract was not renewed. However, Mr. O’Connor continued his employment under the same salary arrangement as the expired employment agreement. The employment agreement provided that Mr. O'Connor received a fixed salary at an annual rate of $225,000. In May 2007, Mr. O’Connor voluntarily deferred 25% of his salary due to the financial constraints of the Company. The Company issued to Mr. O'Connor, upon commencement of employment, stock options to purchase an aggregate of 852,000 shares of the Company's common stock at an exercise price of $1.00 per share, with 27,000 shares vesting immediately and the remaining 825,000 shares vesting in three equal installments on the first, second and third anniversary of the commencement of employment. The Company also issued options to purchase an additional 825,000 shares of our common stock at an exercise price of $1.00 per share from the 2005 Incentive Plan, vesting in three equal installments on the first, second and third anniversary of the commencement of employment. The Company paid Mr. O'Connor the balance of his prior employment contract bonus of $55,000 in two equal installments in April 2005 and January 2006. Based upon the attainment of specified performance goals determined by the Company’s Compensation Committee and Mr. O'Connor, the Company agreed to pay Mr. O'Connor (1) up to $28,000 at the end of each of our fiscal years during the term of the agreement, and (2) at the end of our second and each subsequent fiscal year during the term of the agreement, options to purchase up to 27,000 shares of the Company's common stock at an exercise price equal to the market price of the Company's common stock on the date of grant, vesting in three equal installments on the first, second and third anniversary of the date of grant. All stock options described above are exercisable for a ten-year period from the date of grant. On March 14, 2006 the Board of Directors approved a performance bonus of $28,000 in accordance with Mr. O’Connor’s employment agreement. The payment was made to the CEO in September 2007.  In September 2006, all employees were asked to defer part of their salaries due to the Company’s declining financial position. After the Company entered into the October 31, 2006 Securities Purchase Agreement, all employees began to receive their full compensation except for Mr. O’Connor who continued to defer approximately $2,100 per month until May 2007. In May 2007, Mr. O’Connor voluntarily opted to defer 25% of his salary. In September 2007 all employees received payment of salaries that were deferred through August 2007. At September 30, 2007 the Company had recorded deferred compensation of $4,327 which was for Mr. O’Connor.

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On March 9, 2005, in settlement of arbitration proceeding arising from the December 13, 2004 termination of his employment agreement as President and CEO, the Company announced that it entered into a Consulting Agreement with Mark A. Fauci. Mr. Fauci remained a member of the Board of Directors until he voluntarily resigned his position on April 30, 2007. The agreement, which terminated Mr. Fauci's previous employment agreement with the Company, provided that Mr. Fauci performed consulting services for the Company for a retroactive two-year period in exchange for consulting fees of $200,000 per year during the term of the agreement which expired December 2006. Mr. Fauci was nominated at the 2005 and 2006 annual meetings of stockholders to continue as a board member in accordance with the settlement agreement. The agreement also provided for a three-year payout schedule of the Company's obligation to pay Mr. Fauci's settlement of accrued salary under his previous employment agreement, in the amount of $625,000. Those payments commenced on October 1, 2005. This amount is payable at the rate of $10,000 per month for the initial 12 months and $20,000 per month thereafter. As of September 30, 2007 the Company owed Mr. Fauci $515,000 for the settlement of deferred accrued salary.

Effective February 1, 2005, the Company amended a settlement agreement dated October 3, 2001, and entered into a two-year consulting agreement with Dr. Michael A. Anbar, founding scientist of the Company, which provides for Dr. Anbar to advise management on the optimization of its technology. The agreement awards Dr. Anbar $1,000 and 1,000 restricted shares of common stock per day with a minimum fee of $12,000 for the first twelve month period as well as a grant of 250,000 additional restricted shares. On February 13, 2006 in accordance with the 2005 amended settlement agreement, the Company issued 12,000 restricted shares of its common stock to Dr. Anbar. The fair value of the stock was $2,280 on the date of grant. As part of this agreement, the Company will acquire one patent on complementary technology developed and held by Dr. Anbar. The consulting agreement expired February 1, 2007.

The following table summarizes the aggregate commitments under employment and related agreement obligations as of September 30, 2007:

	Aggregate Commitment
Three months ending December 31, 2007		320,000
Year ending December 31, 2008		195,000
Totals	$	515,000

NOTE 9 - Related Party Transactions

On January 3, 2006 the Company issued shares of series A and series B convertible preferred stock as dividends in-kind to the holders of its series A and B convertible preferred stock. Dividends were payable to holders of record as they appear in the stockholder records of the Company at the close of business on the applicable record date, which was December 15, 2005. Joseph Casey, as co-trustee for the Casey Living Trust, and Jed Schutz each received 48,616 shares of series A convertible preferred stock as dividends. The Company’s former director, George Benedict received 19,447 shares of series A convertible preferred stock as dividends. Joseph Casey, as co-trustee for the Casey Living Trust was issued 8,869 shares of series B preferred stock as dividends. Jed Schutz and George Benedict each received 5,913 shares and Michael Davis received 591 shares of series B preferred stock as dividends. On January 2, 2007 the Company issued shares of series A and series B convertible preferred stock as dividends in-kind to the holders of its series A and B convertible preferred stock. Dividends were payable to holders of record as they appear in the stockholder records of the Company at the close of business on the applicable record date, which was December 15, 2006. Joseph Casey, as co-trustee for the Casey Living Trust, and Jed Schutz each received 45,708 shares of series A convertible preferred stock as dividends. The Company’s former director, George Benedict received 18,283 shares of series A convertible preferred stock as dividends. Joseph Casey, as co-trustee for the Casey Living Trust was issued 42,556 shares of series B preferred stock as dividends. Jed Schutz and George Benedict each received 28,371 shares and Michael Davis received 2,827 shares of series B preferred stock as dividends.

On March 9, 2005, in settlement of an arbitration proceeding arising from the December 13, 2004 termination of his employment agreement as President and Chief Executive Officer, the Company entered into a consulting agreement with Mark A. Fauci, a member of the board of directors. The agreement, which terminated Mr. Fauci's previous employment with the Company, provided that Mr. Fauci performed consulting services for the Company for a retroactive two-year period in exchange for consulting fees of $200,000 per year during the term of the agreement which expired December 2006. Mr. Fauci was nominated at the 2005 and 2006 annual meetings of stockholders to continue as a board member in accordance with the settlement agreement. Mr. Fauci voluntarily resigned his position on the board of directors on April 30, 2007. The agreement also provided for a three-year payout schedule of the obligation to pay Mr. Fauci's settlement of accrued salary under his previous employment agreement, in the amount of $625,000. Those payments commenced on October 1, 2005. This amount is payable at the rate of $10,000 per month for the initial 12 months and $20,000 per month thereafter. As of September 30, 2007 the Company paid Mr. Fauci $400,000 for consulting fees and $110,000 for settlement of deferred salary.

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Under a Guaranty and Pledge Agreement entered into on November 14, 2005, the Company's President and Chief Executive Officer, agreed (i) to unconditionally guarantee the timely and full satisfaction of all obligations, whether matured or unmatured, now or hereafter existing or created and becoming due and payable to the Purchasers, their successors, endorsees, transferees or assigns under the Securities Purchase Agreement and other transaction documents to the extent of 2,677,000 shares of the Company's common stock issued in the Company's name, and (ii) to grant to their successors, endorsees, transferees or assigns a security interest in the 2,677,000 shares, as collateral security for such obligations.

During 2005, Dr. Michael Davis, the Chairperson of the Executive Committee of the Board of Directors was compensated $95,000 for his service in this role to the Company. By unanimous consent of the Board of Directors on December 13, 2005, the Executive Committee was disbanded effective December 31, 2005 in keeping with the long term strategic plan to reorganize and restructure the Company’s Board. The Company offered Dr. Davis a new consulting contract in January 2006, whereby he will provide medical and scientific expertise for the Company. Dr. Davis was compensated $5,000 per month for his consulting services. This agreement was amended in May 2006 and his compensation was reduced to $2,500 per month for September through September 2006. As of October 1, 2006 the agreement was amended again and Dr. Davis’ compensation was increased to $4,000 per month. In May 2007, his consulting fees were reduced to $2,000 for May 2007 and $1,000 for June 2007. Beginning July 1, 2007, his services were suspended due to the financial condition of the Company. In the nine months ended September 30, 2007, the Company paid Dr. Davis $32,000.

NOTE 10 – Accounting for the Uncertainty in Income Taxes

The Company has adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109"("FIN 48"), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes," and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition.

Based on the Company's evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements. The Company's evaluation was performed for tax years ended 2003 through 2006, the only periods subject to examination. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

The Company's policy for recording interest and penalties associated with audits is to record such items as a component of income before income taxes. Penalties are recorded in other expense and interest paid or received is recorded in interest expense or interest income, respectively, in the statement of operations. There were no amounts accrued for penalties or interest as of or during the nine months ended September 30, 2007. The Company does not expect its unrecognized tax benefit position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

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Item 2 - Management’s Discussion and Analysis or Plan of Operation

Special Note on Forward-Looking Statements. Certain statements in “Management’s Discussion and Analysis or Plan of Operation” below, and elsewhere in this annual report, are not related to historical results, and are forward-looking statements. Forward-looking statements present our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements frequently are accompanied by such words such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms or other words and terms of similar meaning. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements, or timeliness of such results. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this quarterly report. Subsequent written and oral forward looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements and risk factors set forth below and elsewhere in this annual report, and in other reports filed by us with the SEC.

Overview and Corporate Information

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

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

Plan of Operations

Planned Clinical Trials in 2007.

· Pigmented Lesions of the Skin assessment (Melanoma). Melanoma detection and assessment represents a large clinical problem and a disease state where the BioScanIR® system may readily measure and assess the primary photonic emissions of skin tumors. In July 2007, we began a pilot research trial at Beth Israel Deaconess Medical Center (BIDMC), a teaching hospital of Harvard Medical School. The first results for this trial are anticipated to be available in late November 2007.

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

We intend to concentrate our efforts and pursue clinical trials in the above noted applications provided that we have sufficient funds to do so. Previously, we had reported that we had also intended to organize a clinical trial to test the assessment of peripheral perfusion. The assessment of peripheral perfusion after tourniquet stress is a non invasive method of measuring peripheral outflow as a measure of systemic vascular disease. The current methods employ ultrasound techniques over which we may have significant benefits. After further investigation, we have decided to focus our limited assets on pigmented lesions of the skin assessment (Melanoma) and adjunctive screening and detection of breast cancer. As of November 1, 2007, we had two fully functional prototype or commercial units installed in various U.S. medical institutions for testing and evaluation.

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As of November 1, 2007, we anticipate that our cash requirements to fund these activities as well as other operating or investing cash requirements over the next month will be greater than our current cash on hand. We have reduced the size of our organization and have cut back operational expenses. But, if we are unable to obtain additional sufficient funds in the next month, we will be forced to cease our production and operations, all of which could have a material adverse impact on our business prospects. We are currently investigating additional financing alternatives, including equity and/or debt financing and asset based funding sources associated with the commencement of product delivery. There is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable.

Revenue Model

We believe that initial revenues will come primarily from the sale of the BioScanIR^® system in the applications of Pigmented Lesions of the Skin assessment (Melanoma) and / oradjunctive screening and detection of breast cancer. Other customers such as imaging research organizations may purchase BioScanIR^® systems for use in their own research programs. It is possible, however, that initial revenues in certain applications could involve an operating lease for the equipment or a fee per use, either as the sole revenue source, or more likely in combination with other forms of revenue. Such other forms could include up front licensing fees, and/or annual maintenance fees over the estimated 4-5 year life of the BioScanIR^® system. Even if the initial source of revenue is the sale of the BioScanIR^® system, it is anticipated that such sales would also be accompanied by annual maintenance fees. As we expand our efforts into other applications we will evaluate our revenue model options.

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

For a discussion of the accounting policies we intend to employ with respect to revenue recognition, inventory and capitalized costs, refer to the “Summary of Significant Accounting Policies-Basis of Presentation” in the Notes to our Financial Statements included in our Annual Report on Form 10-KSB for the year ended December 31, 2006. Based upon the circumstances at the time, we will apply the appropriate methods that comply with accounting principles generally accepted in the United States as they relate to our business practices, including licensing, lease/rental, and outright sale. Since we have not generated any significant revenues to date, our expected revenue model may change as market conditions dictate.

Results of Operations

Three Months ended September 30, 2007 as Compared to Three Months ended September 30, 2006

The following represents a summary of the results of operations for the three months ended September 30, 2007 and 2006:

	September 30, 2007			September 30, 2006
	(Unaudited)			(Unaudited)
OPERATING EXPENSES
Research and development	$	85,280		$	342,916
Selling, general and administrative		401,210			578,937
Total Operating Expenses		486,490			921,853
Operating Loss		(486,490	)		(921,853	)
Change in fair value of non-employee stock options, warrants, and conversion options		5,982,698			(2,531,966	)
Registration rights penalties		187,868			131,867
Interest and other expenses, net		263,106			133,372
Net (Loss) Income		(6,920,162	)		1,344,874
Accumulated Dividend on Series A Convertible Preferred Stock		21,348			15,500
Accumulated Dividend on Series B Convertible Preferred Stock		14,793			10,681
Net (loss) income attributable to common stockholders- basic and diluted	$	(6,956,303	)	$	1,318,693
Basic net (loss) income per share	$	0.19		$	0.04
Weighted average number of shares outstanding - basic		37,434,881			30,783,141
Diluted net (loss) income per share	$	0.19		$	0.02
Weighted average number of shares outstanding - diluted		37,434,881			85,954,981

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Net Income / (Loss). We had net loss of $6,920,162 and a net income of $1,344,874 for the three months ended September 30, 2007 and 2006, respectively. The net loss attributable to common stockholders was $6,956,303 for the three months ended September 30, 2007 compared to the $1,318,693 net income attributable to common stockholders for the three months ended September 30, 2006. The three months ended September 30, 2007 and 2006 included a non-cash loss of $5,982,698 and a non-cash gain of $2,531,966, respectively, for the change in of the fair value of the embedded conversion option of our convertible debenture and preferred stock, outstanding warrants, and non-employee options. We used the Black Scholes Valuation model to determine the fair value of the conversion option of our preferred stock, warrants and non-employee options. We used the intrinsic value method to determine the fair value of the conversion option of our convertible debenture as the conversion price is at a 40% discount to current market prices of our common stock on conversion dates. Pursuant to the August 29, 2007 Amendment of Notes, the applicable discount changed from 40% to 50% on the outstanding secured convertible notes between us and the Purchasers. The significant assumptions used include the actual period closing price of our common stock, applicable volatility rates, remaining contractual life and the period close risk free interest rate for the instruments remaining contractual life.

The three month period ended September 30, 2007 and 2006, included $21,348 and $15,500, respectively, of accumulated dividends on our series A convertible preferred stock and $14,793 and $10,681, respectively, of accumulated dividends on our series B convertible preferred stock. Dividends are payable in cash or, at our option, in additional shares of series A and series B convertible preferred stock. We have been a development stage enterprise and have had a cumulative net loss of $31,888,000 since inception in 1997. During this period we have expended cash raised through various equity offerings, and issued stock and options and warrants to purchase shares of our common stock in exchange for services. The increased loss has been funded by the proceeds of the December 19, 2003 and December 14, 2004 private placements, the August 10, 2005 proprietary rights offering and the November 14, 2005, September 12, 2006, October 31, 2006 and August 29, 2007 Securities Purchase Agreements, which has enabled us to continue product development, conduct clinical trials, build our administrative organization and promote the sales and marketing of BioScanIR^® System.

Research and Development Expenses. Research and development expense decreased by $257,636, or 75.1%, to $85,280 for the three months ended September 30, 2007 as compared to $342,916 for the three months ended September 30, 2006.

Significant components of the research and development activity for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 were:

Technical salaries and consulting expense decreased by $179,924 to $13,455 from $193,379, attributable to a reduction of headcount in our product development and quality control support staff to one employee from seven employees and the reduction of outside consultants. Fewer employees in the three months ended September 30, 2007 attributed to the decrease in business travel and entertainment expenses by $12,212 to $4,097 from $16,309.

Expenses for materials used in research and development and pilot site support decreased by $51,570 to $8,145 for the three months ended September 30, 2007 from $59,715 for the three months ended September 30, 2006. In the last quarter of 2005, we hired an outside consulting firm to perform our quality, regulatory and clinical service. We terminated the contract with the consulting firm in the third quarter of 2006. During the three months ended September 30, 2006, we paid $15,000 to the consulting firm compared to $0 during the three months ended September 30, 2007. Pilot site support decreased $30,801 to $7,500 for the three months ended September 30, 2007 from $38,301 for the three months ended September 30, 2006.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $177,727, or 30.7%, to $401,210 for the three months ended September 30, 2007 as compared to $578,937 for the three months ended September 30, 2006.

Significant components of the decrease for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 were:

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Consulting expenses were $4,273 and $80,922 for the three months ended September 30, 2007 and 2006, respectively. Of the $76,649 decrease, $50,000 was attributable to the completion of the two year business consulting agreement we entered into with our former CEO. The agreement was part of a settlement of an arbitration proceeding which paid our former CEO $200,000 per year and expired December 2006. In the three months ended September 30, 2006, we had $50,000 in expenses related to this agreement. In the three months ended September 30, 2006 we anticipated going to the 2006 Plastic Surgery Conference in California. We paid a consultant $15,000 for the preparation and the marketing materials for that conference. We did not attend any conference in the three months ended September 30, 2007.

Administrative and business development payroll and payroll related expenses decreased $45,506 to $154,281 from $199,787. In the three months ended September 30, 2007, there was a reduction in headcount by one full time administrative support staff. In addition, during the three months ended September 30, 2007, two employee’s wages and time were reduced.

In the three months ended September 30, 2006, we granted stock options to purchase 160,555 shares of our common stock from our 2005 Incentive Plan to a Director. The fair value of the grant was $21,996 and was recorded as a compensation charge in the quarter ended September 30, 2006 in accordance with SFAS 123R. There were no stock option grants during the three months ended September 30, 2007.

Investor relation expenses decreased by $35,860 to $2,775 for the three months ended September 30, 2007 from $38,635 for the three months ended September 30, 2006. A significant part of the decrease was attributable the $30,000 paid to the outside investor relations firm in the three months ended September 30, 2006. We did not retain the investor relations firm in 2007.

For the three months ended September 30, 2007, financing costs increased $22,394 to $93,774 from $71,380 for the three months ended September 30, 2006. The increase was related to the amortized expense of deferred financing costs related to the Securities Purchase Agreements we entered into on November 14, 2005, September 12, 2006, October 31, 2006 and August 29, 2007.

Insurance expense increased $14,327 to $74,757 for the three months ended September 30, 2007 from $60,430 for the three months ended September 30, 2006. The increase is attributable to the increased premium charged for the Director’s and Officer’s liability insurance. The policy renews each November.

Nine months Ended September 30, 2007 as Compared to Nine months Ended September 30, 2006

The following represents a summary of the results of operations for the nine months ended September 30, 2007 and 2006:

	September 30, 2007			September 30, 2006
	(Unaudited)			(Unaudited)
OPERATING EXPENSES
Research and development	$	345,863		$	984,832
Selling, general and administrative		1,401,049			2,041,010
Total Operating Expenses		1,746,912			3,025,842
Operating Loss		(1,746,912	)		(3,025,842	)
Change in fair value of non-employee stock options, warrants, and conversion options		4,065,446			3,396,148
Registration rights penalties		558,919			241,200
Interest and other expenses, net		696,755			276,288
Net Loss		(7,068,032	)		(6,939,478	)
Accumulated Dividend on Series A Convertible Preferred Stock		64,044			46,500
Accumulated Dividend on Series B Convertible Preferred Stock		44,378			32,044
Net loss attributable to common stockholders- basic and diluted	$	(7,176,454	)	$	(7,018,022	)
Basic and diluted net loss per share	$	(0.21	)	$	(0.23	)
Weighted average number of shares outstanding		34,541,577			30,697,588

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Net Loss. We had net losses of $7,068,032 and $6,939,478 for the nine months ended September 30, 2007 and 2006, respectively. The net loss attributable to common stockholders was $7,176,454 for the nine months ended September 30, 2007 compared to $7,018,022 for the nine months ended September 30, 2006. For the nine months ended September 30, 2007 and 2006, this included $64,044 and $46,500, respectively, of accumulated dividends on our series A convertible preferred stock and $44,378 and $32,044, respectively, of accumulated dividends on our series B convertible preferred stock. The dividends are payable in cash or, at our option, additional shares of Series A and Series B convertible preferred stock. We have been a development stage enterprise and have had a cumulative net loss of $31,888,000, since inception in 1997. During this period we have expended cash raised through various equity offerings, and issued stock and options and warrants to purchase shares of our common stock in exchange for services. The increased loss has been funded by the proceeds of the December 19, 2003, the December 14, 2004 private placement, the proceeds of the August 10, 2005 proprietary rights offering and the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements, which has enabled us to continue product development, conduct clinical trials, build our administrative organization and promote the sales and marketing of BioScanIR^® System.

For the nine months ended September 30, 2007 and 2006 this included a non-cash charge of $4,065,446 and $3,396,148, respectively, for the change in the fair value of the embedded conversion option of our convertible debenture and preferred stock, outstanding warrants, and non-employee options. We used the Black Scholes Valuation model to determine the fair value of the conversion option of our preferred stock, warrants and non employee option. We used the intrinsic value method to determine the fair value of the conversion option of our convertible debenture as the conversion price is at a 40% discount to current market prices of our common stock on conversion dates. Pursuant to the August 29, 2007 Amendment of Notes, the applicable discount changed from 40% to 50% on the outstanding secured convertible notes between us and the Purchasers. The significant assumptions used include the actual period closing price of our common stock, applicable volatility rates remaining contractual life and the period close risk free interest rate for the instruments remaining contractual life.

Research and Development Expenses. Research and development expense decreased by $638,969 to $345,863 for the nine months ended September 30, 2007 as compared to $984,832 for the nine months ended September 30, 2006.

Significant components of the research and development activity for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 were:

Technical salaries and consulting expense decreased by $317,437 to $114,744 from $432,181 attributable to a reduction of six employees in the research and development department as well as a reduction of outside consultants. Having fewer employees and two less pilot sites in the nine months ended September 30, 2007 attributed to the decrease in business travel and entertainment by $46,865 to $17,184 from $64,049. Recruitment expense decreased $50,976 to $3,398 for the nine months ended September 30, 2007 from $54,374 for the nine months ended September 30, 2006.

Expenses for materials used in research and development and pilot site support decreased by $200,484 to $18,391 for the nine months ended September 30, 2007 from $218,875 for the nine months ended September 30, 2006. In the last quarter of 2005, we hired an outside consulting firm to perform our quality, regulatory and clinical service. During the nine months ended September 30, 2006 we paid $105,000 to the consulting firm compared to $0 during the nine months ended September 30, 2007. The contract was terminated in August 2006. Expenses for materials to refurbish and upgrade our BioScanIR’s in the nine months ended September 30, 2006 were $49,546 compared to $645 spent in the nine months ended September 30, 2007, a decrease of $48,901. Expenses for pilot site support and clinical trials decreased $35,179 to $16,450 in the nine months ended September 30, 2007 from $51,629 for the nine months ended September 30, 2006.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $639,961 to $1,401,049 from $2,041,010 for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006.

Significant components of the decrease for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006 were:

Consulting expenses decreased $177,000 to $40,710 for the nine months ended September 30, 2007 from $217,710 for the nine months ended September 30, 2006. The decrease was attributable to the completion of the two year business consulting agreement we entered into with the former CEO. The agreement was part settlement of an arbitration proceeding which paid our former CEO $200,000 per year and expired December 2006. In the nine months ended September 30, 2006 we had $150,000 in expenses related to this agreement compared to $0 in the nine months ended September 30, 2007. In the fourth quarter of 2006, we also terminated the consulting contract with an outside firm that provided investor relations services. For the nine months ended September 30, 2006 we had $202,357 in investor relation consulting expense of which $61,750 was for the fair value of a stock grant awarded to the investor relations company and $95,000 was for the monthly retainer fees.

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Marketing expense decreased $45,774 to $1,150 for the nine months ended September 30, 2007 from $46,924 for the nine months ended September 30, 2006. In December 2005, we retained the services of an outside firm to do public relations. We terminated the contact in September 2006 and paid the firm $30,000 during that period. In the nine months ended September 30, 2006 we anticipated going to the 2006 Plastic Surgery Conference in California. We paid $6,877 for the deposit and marketing materials for that conference. We did not attend any conference in the three months ended September 30, 2007.

We incurred compensation expense of $332,149 for the nine months ended September 30, 2006 compared to $14,672 for the nine months ended September 30, 2007. Most of the $317,477 decrease is attributable to the new stock options granted to our outside directors under the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment”, (“SFAS 123”). There were no new stock options granted in the nine months ended September 30, 2007.

Administrative and business development payroll expenses decreased $57,951 to $557,795 for the nine months ended September 30, 2007 from $615,746 for the nine months ended September 30, 2007. A reduction in headcount of two employees from 2006 and reducing time and wages of two employees in 2007 accounted for the decrease of approximately $140,800 in payroll. In March 2006, based upon the attainment of specified performance goals determined by our Compensation Committee and our CEO, we agreed to pay our CEO $28,000 under the terms of his employment agreement. There was no bonus accrued for the CEO in the nine months ended September 30, 2007. These decreases were offset by a reduction in administrative salaries to adjust for the over accrual for deferred officer’s salaries of $134,632 in the nine months ended September 30, 2006. There were no adjustments made in 2007. Fewer employees accounted for the $18,282 decrease in travel and entertainment expense to $6,404 from $24,686 in the nine months ended September 30, 2007 and 2006, respectively.

Our legal fees decreased $17,683 to $45,249 for the nine months ended September 30, 2007 from $62,932 for the nine months ended September 30, 2006. A settlement agreement with our former CFO resulted in higher legal fees in 2006. Accounting fees increased $27,791 to $222,117 for the nine months ended September 30, 2007 from $194,326 for the nine months ended September 30, 2006 due to the additional time spent on review of complex accounting transactions.

Financing costs increased $127,055 to $274,512 for the nine months ended September 30, 2007 from $147,457 for the nine months ended September 30, 2006. The increase is related to amortized expense of deferred financing costs related to the Securities Purchase Agreements we entered into in November 2005, September 2006, October 2006 and August 2007.

Insurance expense increased $34,162 to $216,062 for the nine months ended September 30, 2007 from $181,900 for the nine months ended September 30, 2006. The increase is attributable to the increased premium charged for the Director’s and Officer’s liability insurance. The policy renews each November.

Liquidity and Capital Resources

Management estimates that it will require additional cash resources during 2007, based upon its current operating plan and condition. As of November 1, 2007, we anticipate that our cash requirements to fund these activities as well as other operating or investing cash requirements over the next month will be greater than our current cash on hand. If we are unable to obtain additional sufficient funds in the next month, we will further reduce the size of our organization, and will be forced cease our production and operations, all of which could have a material adverse impact on our business prospects. We are currently investigating additional financing alternatives, including equity and/or debt financing and asset based funding sources associated with the commencement of product delivery. There is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable. In the event that we cannot raise additional capital and we default on the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements, the investors could take a first priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property pursuant to executed a Security Agreement and an Intellectual Property Security Agreement. The Investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements, all of which could have a material adverse impact on our business prospects. Our success depends upon many factors, including securing market acceptance for our products, obtaining adequate additional financing on acceptable terms, and its ability to roll out the BioScanIR^® system in sufficient quantities and at profitable revenue levels. The uncertainties regarding the availability of continued financing and commencement of adequate commercial revenues raise substantial doubt about our ability to continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern.

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As of September 30, 2007, we had cash balances and working capital deficit of $333,117 and $2,551,312, respectively, and total stockholders’ deficiency of $14,079,474. At November 1, 2007, we had approximately $205,000 in cash balances.

We have a deficit accumulated during the development stage, which commenced on February 7, 1997 through September 30, 2007 of $33,469,507 and cash flows used in operating activities during the development stage of $18,355,247. The accumulated loss resulted principally from costs incurred in developing our business plan, acquiring licenses for our technology, research and development, general and administrative expenses, establishing sales channels and fund raising activities.

August 2007 Securities Purchase Agreement

On August 29, 2007, we entered into a Securities Purchase Agreement with AJW Partners, LLC, AJW Master Fund, Ltd. and New Millennium Capital Partners, II, LLC (collectively, the “Purchasers”)for the sale of (i) $250,000 in secured convertible notes; and (ii) warrants to purchase 20,000,000 shares of our common stock. We received the $250,000 from the Purchasers on August 30, 2007.

The secured convertible notes bear interest at 8%, unless our common stock is greater than $0.10 per share for each trading day of a month, in which event no interest is payable during such month. Any interest not paid when due shall bear interest of 15% per annum from the date due until the same is paid. The secured convertible notes mature three years from the date of issuance, and are convertible into common stock, at the Purchasers' option, at a 50% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion. At our option, in any month where the current stock price is below the Initial Market Price, we can pay the outstanding principal and interest due for that month and this will stay any conversions for that month. The term “Initial Market Price” means the volume weighted average price of the Common Stock for the five trading days immediately preceding the closing which was $0.018.

The full principal amount of the secured convertible notes is due upon default under the terms of secured convertible notes. In addition, we granted the Purchasers and a related entity a security interest in substantially all of our assets and intellectual property. We are required to file a registration statement with the Securities and Exchange Commission within 30 days of receipt of written demand of the Purchasers and a related entity, which will include the common stock underlying the secured convertible notes. In the event that we breach any representation or warranty in the Securities Purchase Agreement, we are required to pay liquidated damages in shares or cash, at our election, in an amount equal to 2% of the outstanding principal amount of the secured convertible notes per month plus accrued and unpaid interest.

The warrants are exercisable until seven years from the date of issuance at a purchase price of $0.02 per share. There can be no assurance to how many, if any, of these warrants will be exercised. The warrants shares do not carry the same registration rights as the shares underlying the convertible notes.

Pursuant to the terms of the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements, the Purchasers and a related entity may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the Purchasers exercise the warrants on a cashless basis, we will not receive any proceeds.

Upon an issuance of shares of common stock below the market price, the exercise price of the warrants issued to the Purchasers and a related entity in the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements will be reduced accordingly with the exception of any securities issued in connection with the secured convertible notes issued pursuant to the Securities Purchase Agreements. The market price is determined by averaging the last reported sale prices for our shares of common stock for the five trading days immediately preceding such issuance as set forth on our principal trading market. The exercise price shall be determined by multiplying the exercise price in effect immediately prior to the dilutive issuance by a fraction. The numerator of the fraction is equal to the sum of the number of shares outstanding immediately prior to the offering plus the quotient of the amount of consideration received by us in connection with the issuance divided by the market price in effect immediately prior to the issuance. The denominator of such issuance shall be equal to the number of shares outstanding after the dilutive issuance.

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

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

We are in default with the Purchasers under the November 2005 Securities Purchase Agreementbecause the registration statement was not declared effective within 120 days from November 14, 2005 and all of shares underlying the convertible notes and warrants were not registered under the February 14, 2007 Prospectus filed pursuant to Rule 424(b)(3) with the Securities and Exchange Commission.  We are required to pay liquidated damages in shares of our common stock or cash, at our election, in an amount equal to 2% of the outstanding principal amount of the secured convertible notes per month plus accrued and unpaid interest. At September 30, 2007, we accrued approximately $1,095,000 in liquidated damages. In addition, as of September 30, 2007 we were in default under the terms of the convertible notes issued pursuant to the November 2005, September 12, 2006 and October 31, 2006 Securities Purchase Agreements for failure to pay interest on the convertible notes. The Purchasers have granted us a waiver for defaults and damages resulting from such defaults related to the payment of interest on secured convertible debentures issued pursuant to the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements.

During the three months ended September 30, 2007, we did not receive any notices of conversion from the Purchasers.

General

We have committed to purchase infrared camera components from AEG Infrarot-Module GmbH for approximately $614,000 (430,500 euros) as of September 30, 2007. These components utilize QWIP technology. We have the exclusive license for QWIP technology from the California Institute of Technology (“Caltech”) for biomedical applications.

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

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Item 3 - Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2007. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and principal financial officer concluded, as explained in further detail below, that our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our company is not an accelerated filer (as defined in the Securities Exchange Act) and is not required to deliver management’s report on control over our financial reporting until our fiscal year ended December 31, 2007. Nevertheless, in our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002, during the nine months ended September 30, 2007, we identified certain matters that would constitute material weakness (as such term is defined under the Public Company Accounting Oversight Board Auditing Standard No. 5) in our internal controls over financial reporting.

In 2006, we identified a material weakness in the accounting and reporting of complex transactions. There is a lack of the necessary corporate accounting resources to realign and cross-train other current personnel. This has led to dependence on our Controller, the loss of whom could impair our ability to ensure consistently complete and accurate financial reporting. With our limited resources, it would be difficult to hire additional competent personnel at this time. We have implemented internal control procedures such as dual approval procedures at the CEO and Controller level, as well as requiring approvals for purchases by two authorized signers and check signatories from the CEO and/or Controller plus, in the absence of the CEO and Controller, another department head, to help prevent error and fraud.

We believe that, for the reasons described above, we expect to continue to have material weaknesses in our controls and procedures until such time as we have the financial resources to hire additional, qualified personnel.

(b)Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

The only changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting have been described in the above section.

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PART II

Item 1 - Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 - Default Upon Senior Securities

We are in default with the Purchasers under the November 2005 Securities Purchase Agreementbecause the registration statement was not declared effective within 120 days from November 14, 2005 and all of shares underlying the convertible notes and warrants were not registered under the February 14, 2007 Prospectus filed pursuant to Rule 424(b)(3) with the Securities and Exchange Commission.  We are required to pay liquidated damages in shares of our common stock or cash, at our election, in an amount equal to 2% of the outstanding principal amount of the secured convertible notes per month plus accrued and unpaid interest. At September 30, 2007, we accrued approximately $1,095,000 in liquidated damages. In addition. as of September 30, 2007 we were in default under the terms of the November 2005, September 12, 2006 and October 31, 2006 Securities Purchase Agreements for failure to pay interest on the convertible notes. The Purchasers have granted us a waiver for defaults and damages resulting from such defaults related to the payment of interest on secured convertible debentures issued pursuant to the November 2005, September 2006, October 2006 and August 2007 Securities Purchase Agreements.

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

None.

Item 5 - Other Information

None.

Item 6 - Exhibits

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended

32.1 Joint Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer)

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SIGNATURES

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

		Advanced BioPhotonics Inc.
Date: November 9, 2007	By:	/s/ Denis A. O’Connor
		Denis A. O’Connor   President and Chief Executive Officer (Principal   Executive Officer)
	By:	/s/ Celia Schiffner
		Celia Schiffner   Controller   (Principal Financial Officer)