ITEM 1. Description of Business

Overview

For more than the last five years, our business has been focused on development and commercialization of disposable medical devices designed to enhance the effectiveness of magnetic resonance imaging ("MRI") in detection and diagnosis of coronary heart disease ("CHD") including the most deadly form of CHD, coronary artery disease ("CAD"). CAD is believed to be the leading cause of death in the United States and represents a significant portion of healthcare costs. While many tests currently exist that give indications of CAD, currently only invasive catheterization gives a definitive diagnosis. Our first two products, Illuminator Probe(TM) and Illuminator Surface Coil(TM), are intended to provide a non-invasive means for imaging the heart and associated structures and vessels. These products are designed to be used in conjunction with existing MRI systems and are intended to significantly enhance the diagnostic image created by MRI.

A key element of our planned activities for the year ended February 28, 2003 included progress on clinical marketing studies using our Illuminator products. Such studies progressed more slowly than we anticipated and so we decreased our expenditures from several other activities in the plan and focused on our imaging objectives. Our plan also contemplated raising necessary capital during the year ended February 28, 2003. Our principal investor, Noga Investments in Technology, Ltd. ("Noga"), had made investment and other financial commitments to us which were a part of our plans. In addition, we worked with an investment bank we had retained in December 2001 to prepare us to raise additional capital and, in July 2002, retained that investment bank to assist us in raising capital with Noga as an expected participant. In September 2002, Noga's parent company sought protection from creditors and in November 2002 a receiver was appointed to seize and manage Noga's assets (including Noga's investment in us). In January 2003 we advised Noga's receiver of unfilled financial commitments of Noga to the Company and Noga's receiver subsequently told us of Noga's inability to keep those financial commitments. In March 2003, the investment bank informed us, among other matters, that Noga's receivership was an "extreme disadvantage" to our capital raising efforts. Prior to seeking protection from creditors and going into receivership, Noga gave us no indication that it might not have the ability to fulfill its financial commitments to us. Instead, Noga indicated its intent to increase its financial commitment and to participate in our planned financing.

As the loss of Noga's financial support and its likely impact on our prospects became clear, we changed our plans, further reducing our expenditures, to give the Company more time to preserve our core assets while we sought a financial or strategic transaction. During October and November 2002 we completed clinical imaging to the point of achieving an in-process milestone, we terminated all non-executive personnel, we vacated our principal executive office in Lynnfield, MA (an effort which had begun in July 2002) and we ceased substantially all development, clinical and other commercialization activities. In addition, our executive officers and Board agreed to defer payment of much of their compensation in September 2002. This was followed in January 2003 by significant cuts in executive compensation and essentially the elimination of Board compensation. In connection therewith, the Company's Chief Executive Officer agreed to voluntarily resign and was retained on a per diem basis as Acting Chief Executive Officer. Compensation earned but not paid during the period from September 1, 2002 through January 15, 2003 for executive management and the Board aggregates approximately $114,000.

While we have reduced our expenditures and use of cash very significantly, we currently do not have sufficient cash resources to continue our plan of operation. Our efforts are currently focused on seeking capital or a strategic arrangement so that we can resume the development and commercialization of our products. Alternatively, we are seeking other means to realize value for our core assets through sale, license, merger or otherwise. If such efforts do not succeed, the Company would need to cease all activities and possibly liquidate.

Our existing products are non-invasive. Illuminator Probe consists of a probe containing an MRI micro-receiver coil. During the imaging procedure, the physician inserts the probe into the patient's esophagus through the mouth. This positions the probe directly behind the heart for optimal imaging. Illuminator Probe is designed to enable imaging of the aortic arch, descending aorta and coronary vessels. Our Illuminator Surface Coil consists of an MRI receiver coil designed to be placed over the patient's chest for imaging the heart. When the two products are used together, they are designed to "surround" the heart, thereby allowing the generation of additional imaging information.

The two Illuminator products were approved for marketing by the United States Food and Drug Administration ("FDA") in May and June 2001 for use with the General Electric 1.5T Signa(R) MRI Systems as further discussed in "Description of Business - Our Products".

Our products have been developed under the direction of Dr. Lawrence
A. Minkoff, Ph.D. our Founder, President and Chief Scientific Officer. We initially developed these products in a collaboration with the Cardiovascular Institute of the Mount Sinai School of Medicine in New York which began in May 1997 and concluded in October 2000. We obtained FDA clearance of our Illuminator products using animal studies. Our business plan calls for human clinical imaging studies in order to further investigate the clinical utility and unique application our products and to serve as a basis for requesting unique reimbursement codes.

Human clinical studies using the Illuminator products started at Brigham and Women's Hospital, an affiliate of Harvard Medical School in October 2001. Through July 2002, the patient enrollment in the BWH study did not meet our anatomical targeting goal and BWH agreed to expand the study to image healthy volunteers. Imaging healthy volunteers gives us both increased number of patients in the study, but importantly allows us more flexibility in imaging anatomical targets of interest that might not be practical with a clinical case because such cases often involve very sick patients and a focus on their specific needs. The delays in obtaining the clinical imaging results at that time caused us to begin reducing and deferring various planned activities, including marketing activities and infrastructure growth, in order to focus our resources on the clinical work and to preserve cash. In August 2002, we also began imaging human volunteers at Dartmouth Hitchcock Medical Center ("Dartmouth"). In November 2002, the Western Internal Review Board of Johns Hopkins Medical Center ("JHU") approved the protocol necessary to conduct clinical studies at JHU.

In November 2002 both the BWH and the Dartmouth studies were stopped in order to recognize: (a) that these studies had achieved the milestones set by the Company (successfully imaging all four of the coronary arteries in cross section) and (b) the Company's need to preserve cash. The clinical studies at JHU have not yet begun for the same reason.

We outsource production of our products to a third party manufacturer to produce the Illuminator products and initial production been successful. We have not yet sold any of our products.

In addition to our existing products, we continually seek to develop new products. We have been developing a minimally invasive device, Artery View, which is designed to permit the cardiologist to see the composition of atherosclerotic plaque from within the arteries. We have developed a working prototype of the Artery View catheter and we conducted successful studies with the device using animals under an Animal Studies Agreement entered into in January 2002 with Massachusetts General Hospital, an affiliate of Harvard Medical School. Such studies concluded in September 2002 and the results included high resolution MRI images of coronary sized arteries and assessment of Nitinol stent deployment under MRI guidance.

During the three fiscal years ended February 28, 2002, we received an aggregate of approximately $10 million in private equity financing to fund our development and marketing efforts. In January 2001, Mr. John Geisel joined us as Chief Executive Officer.

Prior to 1997, our efforts had been focused on development and commercialization of anatomy specific MRI scanners. Due to a lack of sufficient sales of the scanner, in February 1997 we made a strategic decision to refocus our efforts to our current line of business. This enabled us to continue to focus on our core competencies in MRI technology while at the same time addressing a perceived need in cardiology for non-invasive or minimally invasive procedures to aid in detection and diagnosis of CAD.

Our principal executive offices are located at 6800 Jericho Turnpike, Suite 120W, Syosset, NY 11791 where our phone number is (516) 393 5874 and our website is www.magna-lab.com. We were incorporated as a New York corporation on February 22, 1991 and commenced operations on February 10, 1992. We have one subsidiary, Cardiac MRI, Inc., a wholly owned New York corporation formed by us in December 1997.

Our Market

Over 60 million Americans are reported by the American Heart Association to have active or developing cardiovascular disease. Cardiovascular disease was a primary or contributing factor in 40% of the deaths in the United States. Coronary Heart Disease ("CHD"), the most deadly form of cardiovascular disease, is the number one killer of Americans, taking approximately one life every minute. Over 12,500,000 million Americans have been diagnosed as having CHD of which over 7,500,000 have experienced a heart attack.

Based on published information of the National Heart Lung and Blood Institute and others, we believe that over $200 billion is spent annually in America on diagnosis, treatment and follow up of patients with cardiovascular diseases including over $58 billion on Coronary Heart Disease, according to the American Heart Association. Within that amount, we believe that over $10 billion dollars is spent on approximately 9.8 million advanced diagnostic procedures (stress tests and angiograms) to detect CAD, the single largest subset of Coronary Heart Disease. We believe that over 12 million Americans have been diagnosed as having CAD and that approximately 6 million people visit U.S. hospitals with CAD complaints annually. We believe that approximately 3 million Americans are referred for testing, observation, or treatment. Annually, we believe that approximately 1.5 million people have a heart attack in the United States (approximately one American every 20 seconds) and approximately 500,000 of these die (approximately one American every minute).

CAD is believed to be the leading cause of death in the United States and a significant factor in United States healthcare costs. Further, recent research by others, including research done by Mount Sinai and others, indicates that "vulnerable" or "unstable plaque" within the coronary arteries may be a cause of sudden massive heart attacks experienced by persons who have not previously exhibited signs of CAD.

Current Detection Methods for Coronary Artery Disease

There are a number of techniques and procedures used by physicians to detect, diagnose and select treatment options for CAD. Most invasive techniques, like cardiac catheterization and angiography, carry a risk of complications, such as stroke, heart attack or death. Additionally, stress tests have a risk of heart attack or death. While the risk of complications and adverse consequences is generally less with noninvasive procedures, there are no currently available noninvasive procedures to definitively diagnose CAD. The currently available techniques and procedures are described below.

o Electrocardiography (ECG) - This procedure measures electrical impulses in the heart - a fast, slow or irregular heart beat can be detected. A physician can analyze the rhythm of the heart that triggers each heartbeat, the nerve conduction pathways of the heart and the rate and rhythm of the heart. These results give clues to the condition of the heart including abnormal blood flow and heart rhythms. The test gives some information as to the location, or extent of the damage, but little or no information of blockage.

o Exercise Tolerance Testing (Stress Test) - This test monitors a person's Electrocardiogram (ECG) and blood pressure during exercise. For example, if coronary arteries are partially blocked, the heart may have sufficient blood flow when the person is resting but not during exercise. This test however gives insufficient detail of the location of blockages or the composition of materials creating the blockage.

o X-Ray - Anyone who presents symptoms of coronary disease may be given a chest x-ray from the front and side. X-rays show the shape and size of the heart and abnormalities. The condition of blood vessels is also viewed on x-rays and is helpful in identifying an enlargement of the right ventricle of the heart. This test provides only a gross overview of what may be going on in the heart.

o Computed Tomography (CT) and Electron Beam Tomography (EBT) Scan - Newer CT and EBT scans can "freeze" the heart and take a 3-D moving picture. This procedure can assess motion abnormalities. Ultra-fast systems such as EBT can see calcium deposits, the hard plaque in the vessels which is a material associated with blockages. GE Imatron, a General Electric Medical Systems Company, produces such a machine. We do not believe that this technique is able, however, to get pictures of the "vulnerable plaque" in the vessels which some now believe is more likely to break off and cause the more serious sudden, life threatening blockages.

o Echocardiography - This technique uses high frequency ultrasound waves emitted by a recording probe (transducer) and bounced off heart and vessel structures to produce a moving image. A trans-esophageal probe can be passed down the patient's throat to analyze structures at the back of the heart. The test can test heart wall motion, blood volume of each heart beat, thickening of the sac around the heart, information about heart valves and the accumulation of fluid between the pericardium and the heart. The images from this technique cannot detect soft tissue or the chemical composition within the vessels.

o Cardiac Catheterization - In this procedure, a thin catheter is inserted through an artery or vein and advanced into the major vessels and heart chambers. Catheters are for either diagnosis or treatment. The catheter often contains a measuring instrument at its tip. Often these catheters are used to measure blood pressure in the major vessels and heart chambers. Blood samples and biopsies may also be taken through the catheter. A subset of the diagnostic catheterization is angiography discussed next.

o Coronary Angiography - A slender catheter is threaded into an artery in the arm or groin toward the heart and into the coronary arteries. A dye is used that is visible on X-ray (flouroscopy). Coronary artery disease is manifested by an irregular or narrowing of the inner wall of the coronary arteries. If coronary artery disease is detected, an angioplasty may be ordered to widen the channel in the artery.

o Positron Emission Tomography (PET Scans) involves injecting a nutrient, labeled with radioactive particles called positrons, necessary for heart cell function into a vein. The nutrient travels to the areas of interest in the heart and three-dimensional images are created. This technique is expensive and recent indications are that it is beginning to be used to evaluate heart function.

MRI, also known as nuclear magnetic resonance imaging, is a medical diagnostic imaging procedure which produces images of slices of the body allowing physicians to view the internal human anatomy. MRI has certain advantages over other imaging procedures such as computerized axial tomography (CAT or CT), Positron Emission Tomography and X-ray. MRI does not use X-rays, or any other ionizing radiation as in other nuclear medicine techniques and can produce soft tissue contrast differences many times greater than other procedures. MRI can acquire data in any planar orientation, is not limited to cross sectional slices and provides greater flexibility in imaging a wide variety of pathologies. MRI systems create images by analyzing the behavior of hydrogen atom nuclei in the body. The living body contains a number of hydrogen atoms, mostly in the form of water. MRI systems typically consist of a large magnet, radio signal generators, radio signal receivers (coils) and computer hardware and software. By affecting the alignment and behavior of nuclei using an external magnet and radio waves, MRI systems obtain information and process the information by a computer to create an image of the internal human anatomy which is displayed on a video monitor.

Because of how it creates images, MRI is particularly effective in imaging soft tissue. Despite its effectiveness in soft tissue imaging, MRI has a number of limitations which have historically prevented it from being used extensively in the diagnosis of CHD. Issues include the difficulty in accessing the heart with a receiver coil because of surrounding organs and bone. Additionally, the small size of the coronary arteries makes them difficult to image. Our products are designed to address these limitations by placing a receiver coil in the esophagus directly behind the heart and on the surface of the chest directly over the heart. Other issues involve the constant motion of the heart and advancements in MRI machine technology and our proprietary imaging techniques have been addressing these issues. As a result, we believe that our technology and products should enable MRI to be used more extensively in the detection, diagnosis and as a guide in the treatment of CHD.

Our Products

Our products, including products under development, consist of the following:

o Illuminator Probe - A non-invasive approach to definitive diagnosis of coronary artery and other heart diseases. Illuminator Probe is designed to operate in conjunction with existing MRI systems to generate diagnostic quality images of the aortic arch, the descending aorta and the coronary vessels of the heart to advance the definitive diagnosis of CAD. The Illuminator Probe device consists of a transesophegeal MRI micro receiver coil which is introduced to the patient by means of a probe which is inserted down the throat and into the esophagus. Positioning in the esophagus puts the micro receiver coil directly behind the heart for optimal imaging.

o Illuminator Surface Coil - Illuminator Surface Coil consists of a specially designed surface MRI receiver coil that is placed over the patient's chest for imaging the heart. It is intended that when the Illuminator Probe is utilized in conjunction with the Illuminator Surface Coil, the two products would surround the heart allowing the generation of additional imaging information.

o Artery View - Under development, this is a minimally invasive product to permit the cardiologist to see the composition of atherosclerotic plaque that is believed to be a cause of CAD. Artery View is an intra-arterial probe that is threaded through a catheter and guidewire to the site of atherosclerotic blockage. The device is intended to facilitate the capture of high resolution magnetic resonance images to provide a diagnostic view of the fine structures of the arterial wall and various components of atherosclerotic plaque. We believe that MRI is the only imaging technique that permits the differentiation of the chemical composition of the tissue. This device is intended to aid in the treatment of CAD by permitting the physician to assess the morphology (structure and form) and the chemistry of the lesion that is causing the distress. We have developed a working prototype of the Artery View catheter and have completed studies with the device using animals under an Animal Studies Agreement entered into in January 2002 with Massachusetts General Hospital, an affiliate of Harvard Medical School. The study with MGH, was successfully completed in September 2002 and the results included high resolution MRI images of coronary sized arteries and assessment of Nitinol stent deployment under MRI guidance.

The two Illuminator products were approved for marketing by the United States Food and Drug Administration ("FDA") in May and June 2001 for use with the General Electric 1.5T Signa(R) MRI Systems. In May 2002, we received approval for U.S. marketing for our Illuminator Automatic Tune Box and Interface Cable, an enhancement which improves the efficiency and ease of use of our Illuminator products by automatically tuning the Illuminator coils to the unique dynamics of each patient, also for use with the General Electric 1.5T Signa(R) MRI Systems. Development and regulatory work necessary to request clearance to market our Illuminator products for use with MRI machines produced by Phillips Medical Systems and Siemens Medical was begun but is currently on hold in order to preserve cash. We believe that our products will be most appropriate for MRI machines produced by General Electric, Philips Medical Systems, and Siemens Medical which are designed for, among other things, cardiac imaging. We believe these companies currently are the leading manufacturers of such machines.

We incurred research and development expenses of approximately $913,000 in the year ended February 28, 2003 and approximately $1,446,000 in the prior fiscal year.

Manufacturing

We believe that there are qualified, established manufacturers of cardiac probes and catheters who can be trained by us to manufacture the Illuminator and Artery View products to our design and specification. Further, we believe that this area of manufacturing, because it includes products that are minimally invasive, has very substantial start-up costs and rigorous government regulation. Accordingly, we presently outsource the manufacturing of our products and we expect to do so for the foreseeable future.

In 1998, we engaged MedSource Technologies (formerly ACT Medical, Inc.) to assist in the design, validation and initial production of our devices. We believe MedSource to be one of the leading contract developers and manufacturers of medical devices. MedSource manufactured and delivered to us the first commercial lot of the Illuminator products in October 2001. We have negotiated and reached agreement in principle regarding pricing and other terms for commercial production of the Illuminator products, however we have not yet signed a written agreement. Our ability to satisfy market demand for the Illuminator products (should it develop) will be dependent, in part, on our ability to establish satisfactory commercial production relationships with MedSource or other contract manufacturers.

We believe we have carefully followed principles of good manufacturing practice in the design, documentation and validation of our products. We work with the advice of outside regulatory consultants to assure compliance with the accepted standards of documentation that is required to achieve "good manufacturing practices" and ISO certification.

Marketing and Distribution

We have not yet sold any of our products. Since our products involve new procedures, data on human patients will be an important factor in achieving acceptance of the use of our products among cardiologists and other members of the medical community. Further, it is our view that optimal reimbursement for the use of our products from third party payors, an important element of market acceptance, will benefit from the development of a unique reimbursement code specific to our products. To obtain such a unique code involves obtaining sufficient clinical data to support the value proposition that the product has a cost benefit. As such, our plan has been to focus our initial marketing effort on the clinical validation of the use and unique benefit of the Illuminator Probe and Illuminator Surface Coil. Progress on our human clinical work is discussed in "Description of Business - Overview".

Our plans, which are subject to obtaining financing and additional clinical imaging data, have been to establish our own direct sales force in the United States. The sales force would be made up of experienced sales people from the cardiology field. The key target accounts would be the largest teaching

hospitals, larger hospitals in metropolitan areas and active free-standing MRI centers that focus on cardiology. Overseas we would anticipate engaging distributors with a proven track record in distributing diagnostic imaging and cardiology devices. We would expect to retain a representative in each international market to manage the development of the business. These representatives would be expected to have technical expertise in the product to assist dealers in clinical and service related issues.

Depending on the results of our efforts to obtain financing or a strategic transaction, we may elect to partner with a strategic participant in the industry or hire one of several available outsourced medical marketing organizations rather than establish our own direct sales force.

The results of our work in applying our products to CHD were presented at meetings of the American Heart Association, the Radiological Society of North America, the American College of Cardiology and the Society of Magnetic Resonance in Medicine in prior years. We did not present at any medical meetings in the fiscal year ended February 28, 2003.

An important aspect or our marketing strategy includes a comprehensive analysis of healthcare reimbursement issues. It is currently our belief, based on an initial study performed by reimbursement consultants, that optimal reimbursement for use of our products will require that a new reimbursement code be obtained. Obtaining such a code is a process and will largely depend on the demonstrated value and utility of our products. We believe that such value and utility needs to be demonstrated largely through favorable results of our clinical studies which would then be shared with the academic and other bodies that play a role in determining reimbursement. See "Third Party Reimbursement."

Proprietary Rights and Licenses

An important part of our product development strategy is to seek, when appropriate, protection for our products and proprietary technology through the use of various United States and foreign patents and contractual agreements.

U.S. Patent Number 6,437,569 with 33 claims for our Illuminator(TM) Probe has been allowed by the United States Patent and Trademark Office. The inventors of record include Lawrence A. Minkoff, Ph.D., the Company's Chief Scientific Officer as well as the following doctors and scientists at MSSM:
Valentin Fuster, M.D., Ph.D., Meir Shinnar, M.D., Ph.D., Zahi A. Fayad, Ph.D., Juan J. Badimon, Ph.D. Through assignment and license, we have acquired all of the commercial rights to this patent. The license requires us to pay MSSM a royalty of 3% on product sales of the Illuminator Probe. We have filed two additional patent applications in the United States relative to the proprietary elements of our Illuminator and Artery View products. Such patent applications relate to the application and design of the products. We have received "notices of allowance" with respect to one patent related to the Artery View catheter, granting virtually all of the claims made and such patent application was published on January 30, 2003 as Pub. No.: US 2003/0023160 A1. Through assignment and license, we have acquired all of the commercial rights to this patent. The license requires us to pay MSSM a royalty of 3% on product sales of the Artery View. Efforts to advance such patent applications to the non-U.S. markets, including countries covered by the Patent Cooperation Treaty locations, are in process. Each of these applications has been filed in the name of Dr. Minkoff, and Dr. Minkoff has agreed to assign his rights to these patent applications to us.

We cannot assure that our patent applications will result in the issuance of patents or that any patents which have resulted or will result from our applications will not be challenged, invalidated or circumvented. As a result, we could encounter legal and financial difficulties in enforcing our patent rights against alleged infringers. In addition, others could develop technologies or obtain patents which would render our patents obsolete. Although we do not believe patents are the sole determinant in the commercial success of our products, the loss of any of our patents could have a material adverse effect on our business.

Claims by competitors and other third parties that our products allegedly infringe the patent rights of others could have a material adverse effect on our business. The medical device industry is characterized by frequent and substantial intellectual property litigation. Intellectual property litigation is complex and

expensive and the outcome of this type of litigation is difficult to predict. Any future litigation, regardless of outcome, could result in substantial expense and significant diversion of the efforts of our technical and management personnel. An adverse determination in any such proceeding could subject us to significant liabilities or require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, we cannot assure you that necessary licenses would be available on satisfactory terms, or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our products, any of which could have a material adverse effect on our business.

We also have developed technical knowledge which, although nonpatentable, we consider to be significant in enabling us to compete. However, the proprietary nature of such knowledge may be difficult to protect. We have entered into an agreement with each of our employees and consultants who is involved in our research and development or has access to any of our confidential information prohibiting him or her from disclosing any confidential information or trade secrets. In addition, these agreements provide that any inventions or discoveries relating to our business by any of these individuals made in connection with or as a result of his or her employment with us will be assigned to us and become our sole property. We cannot assure you that these agreements will provide meaningful protection of our proprietary information in the event of unauthorized use or disclosure of this information, nor in the event of a competing claim to this technology by a previous employer of any or our employees or consultants. Furthermore, in the absence of patent protection, we may be exposed to competitors who independently develop equivalent technology or gain access to our knowledge.

Governmental Regulation

FDA Overview

Our products are medical devices subject to extensive regulation by the FDA under the U.S. Food, Drug, and Cosmetic Act. The FDA's regulations govern, among other things, the following activities:

o product development;
o product testing;
o product manufacturing;
o product labeling;
o product storage;
o premarket clearance or approval;
o advertising and promotion; and
o product sales and distribution.

Each medical device that we wish to commercially distribute in the U.S. will likely require either 510(k) clearance or premarket application approval from the FDA prior to commercial distribution. Devices deemed to pose relatively less risk are placed in either class I or II, which requires the manufacturer to submit a premarket notification requesting permission for commercial distribution. This is known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device or a "preamendment" class III device (in commercial distribution before May 28, 1976) for which premarket applications have not been called, are placed in Class III requiring premarket application approval.

510(k) Clearance Process. To obtain 510(k) clearance, an applicant must submit a premarket notification demonstrating that the proposed device is substantially equivalent in intended use and in safety and effectiveness to a "predicate device"--either a previously 510(k) cleared device or a preamendment device for which the FDA has not called for premarket applications. The FDA's 510(k) clearance process usually takes from three to 12 months, but it can last longer. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major

change in its intended use, requires a new 510(k) clearance or could even require a premarket application approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with the determination, the agency may retroactively require the manufacturer to seek 510(k) clearance or premarket application approval. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket application approval is obtained.

De Novo Classification. A new procedure for obtaining clearance was added by the Food and Drug Administration Modernization Act of 1997. This procedure is intended for novel but low risk devices. If the FDA denies 510(k) clearance of a device because it is novel and an adequate predicate device does not exist, the "de novo classification" procedure can be invoked to request that the FDA place the device in class I or II despite the absence of a predicate device, based upon reasonable assurance that the device is safe and effective for its intended use. This procedure approximates the level of scrutiny in the 510(k) process but may add several months to the clearance process. If the FDA grants the request, the device is permitted to enter commercial distribution in the same manner as if 510(k) clearance had been granted.

Premarket Application Approval Process. If the FDA denies 510(k) clearance for a product, and denies de novo classification into class I or II, the product is placed in class III and must follow the premarket application approval process, which requires proof of the safety and effectiveness of the device to the FDA's satisfaction. A premarket application must provide extensive preclinical and clinical trial data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. As part of the premarket application review, the FDA will inspect the manufacturer's facilities for compliance with the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process. During the review period, an FDA advisory committee, typically a panel of clinicians, likely will be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel's recommendation is important to the FDA's overall decision making process. After approval of a premarket application, a new premarket application or premarket application supplement is required in the event of a modification to the device, its labeling or its manufacturing process. The premarket application approval pathway is much more costly, lengthy and uncertain. It generally takes from one to three years or longer.

Clinical Studies. A clinical study is generally required to support a premarket application and is sometimes required for a 510(k) premarket notification. For "significant risk" devices, such studies generally require submission of an application for an investigational device exemption. The investigational device exemption application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The investigational device exemption must be approved in advance by the FDA for a specified number of patients. Clinical studies may begin once the investigational device exemption application is approved by the FDA and the appropriate institutional review boards at the study sites. For "nonsignificant risk" devices, one or more institutional review boards must review the study, but submission of an investigational device exemption to the FDA for advance approval is not required. Both types of studies are subject to record keeping, reporting and other investigational device exemption regulation requirements.

Illuminator products. In May and June 2001, we received clearance from the FDA under the 510(k) procedure to market these products in the United States based upon studies performed using animals. In May 2002, we received marketing clearance for our Illuminator Automatic Tune Box and Interface Cable ("ATIB") which is intended for high resolution MRI imaging with the Illuminator products. The function of the ATIB is to tune the receiver coils to the unique characteristics of each patient. Our FDA clearance is presently limited to use of these products with the General Electric 1.5T Signa(R) MRI Systems. We cannot assure you that our Artery View product would receive the same abbreviated regulatory treatment.

Postmarket Regulation

After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include the Quality System Regulation; the FDA's general prohibition against promoting products for unapproved or "off-label" uses; and the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.

After the Illuminator products enter commercial distribution, we will be subject to inspection and market surveillance by the FDA to determine compliance with regulatory requirements. If the FDA finds that we have failed to comply, the agency can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as:

o fines, injunctions and civil penalties;
o recall or seizure of our products;
o issuance of public notices or warnings;
o operating restrictions, partial suspension or total shutdown of production;
o refusal of our requests for 510(k) clearance or premarket application approval of new products;
o withdrawal of 510(k) clearance or premarket application approvals already granted; and criminal prosecution.

The FDA also has the authority to request repair, replacement or refund of the cost of any medical device manufactured or distributed by us or any of our distributors.

Other Government Regulation

In the United States, there are federal and state antikickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intended to induce the purchase or recommendation of healthcare products and services. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in federal healthcare programs. These laws are potentially applicable to manufacturers of medical devices, such as us, and hospitals, physicians and other potential purchasers of medical devices. Other provisions of state and federal law provide civil and criminal penalties for presenting, or causing to be presented, to third-party payors for reimbursement, claims that are false or fraudulent, or which are for items or services that were not provided as claimed. Although we plan to structure our future business relationships with purchasers of our products to comply with these and other applicable laws, it is possible that some of our business practices in the future could be subject to scrutiny and challenge by federal or state enforcement officials under these laws. Such a challenge could have a material adverse effect on our business, financial condition and results of operations.

Third Party Reimbursement

In the United States, healthcare providers that purchase medical devices generally rely on third-party payors, such as Medicare, Medicaid, private health insurance plans and health maintenance organizations, to reimburse all or a portion of the cost of the devices as well as any related healthcare services. The Medicare program is funded by the federal government and administered by the Center for Medicare and Medicaid Services, or CMS. The Medicaid program is jointly funded by the federal government and the states and is administered by the states under general federal oversight. Generally, third-party payors, including Medicare and Medicaid, do not cover and reimburse products that have not received FDA clearance.

FDA clearance does not necessarily result in coverage and reimbursement by third-party payors. The Illuminator products may not be covered under Medicare or Medicaid. A current practices technology code, or CPT code, is necessary to facilitate claims submission. If an existing code is not appropriate, an application for a new code can be made to the American Medical Association. This process can be lengthy, however, typically two or more years before the new code is effective. In the meantime, claims may be submitted using a miscellaneous CPT code.

Even if a device or medical procedure is covered, reimbursement rates must be adequate for providers to use it routinely. Reimbursement rates vary depending on the third-party payor and individual insurance plan involved, the procedure performed and other factors. During the past several years, the major third-party payors have substantially revised their reimbursement methodologies in an attempt to contain their healthcare reimbursement costs.

Medicare reimbursement for inpatient hospital services is based on a fixed amount per admission based on the patient's specific diagnosis. As a result, any illness to be treated or procedure to be performed will be reimbursed only at a prescribed rate set by the government that is known in advance to the healthcare provider. If the treatment cost is less, the provider is still reimbursed for the entire fixed amount; if it costs more, the provider cannot bill the patient for the difference. Thus, separate payment typically would not be made for the Illuminator products when they are used by hospital inpatients, including those patients who have undergone inpatient surgery. Many private third-party payors and some state Medicaid programs have adopted similar prospective payment systems. In addition, Medicare has implemented prospective payment systems for some services performed in hospital outpatient departments and skilled nursing facilities as well.

Currently, MRI diagnostic services provided on an outpatient basis are reimbursable under Part B of the Medicare program. The professional and technical components of radiological procedures which are performed in a physician's office or freestanding diagnostic imaging center, and the professional component of radiological procedures performed in a hospital setting, are currently reimbursed on the basis of a relative value scale.

Medicare reimbursement for the technical component (the operating costs) for MRI diagnostic services furnished in the hospital outpatient setting generally is currently calculated on a formula that is the lesser of the hospital's reasonable costs and a 42/58 blended amount respectively of hospital reasonable costs and the blended amount of reimbursement for the technical component of the service if furnished in a physician's office in the same locality.

Several payors have increased their emphasis on managed care, leading to greater use of cost-effective medial devices by healthcare providers. In addition, through their purchasing power, these payors often seek discounts, price reductions or other incentives from medical product suppliers.

Should we obtain additional financing, our plan calls for us to work with healthcare consultants and professional medical societies to help ensure that third-party payors cover and adequately reimburse our products and procedures using our products.

Furthermore, the federal government and certain state governments are currently considering a number of proposals to reform the Medicare and Medicaid programs. We are unable to evaluate what legislation may be proposed and whether or when any such legislation will be enacted or implemented.

In countries outside the United Sates, reimbursement is obtained from various sources, including governmental authorities, private health insurance plans, and labor unions. In some foreign countries, private insurance systems may also offer payments for some therapies. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. To effectively conduct our business, we will need to seek international reimbursement approvals on a country-by-country or region-by-region basis. We have not yet obtained any international reimbursement approvals.

Competition

The health care industry in general, and the market for medical and diagnostic devices in particular, is highly competitive and virtually all of the other entities known to us to be engaged in the

manufacture of medical and diagnostic devices possess substantially greater resources than us. We will experience competition both from existing technologies and from others who may attempt other approaches to MRI imaging for diagnosis of CHD. The competing technologies that physicians utilize to make diagnoses and select treatment options for CHD are described in "Description of Business - Current Detection Methods for Coronary Artery Disease". There are a number of factors which will determine selection of a particular diagnostic procedure. These include cost/degree of reimbursement, ease and patient comfort, reliability, effectiveness and risk.

We are aware of certain research activities by others that could be in competition with our products including products developed or under development by several private companies such as Surgi-Vision and Top Spin Medical and certain research centers including Allegheny University and Stanford University.

We are aware of developments in surface coil improvements for MRI at certain other universities and companies, including General Electric Company. We understand that General Electric has developed and now markets a surface coil for cardiac imaging which includes coils on both the patient's chest and back.

Product Liability

Product liability claims relating to our products may be asserted against us. If such claims are asserted against us, there can be no assurance that we will have sufficient resources to defend against any such claim or satisfy any such successful claim. We have product liability insurance related to our current activities in the amount of $3,000,000.

Human Resources

At May 16, 2002, we have one full time executive and research and development employee and three executive officers who devote such time as is necessary to the business and one part time administrative employee.

Factors and Risks That May Affect Future Results

Some of the statements contained in this report discuss our plans and strategies for our business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "should," "seek," "will," and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management. However, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements, including those identified below. We assume no obligation to update any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

You should carefully consider the risks described below before deciding whether to invest in shares of our common stock. Any investment in our common stock involves a high degree of risk. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us may also impair our operations and business.

If we do not successfully address the risks described below, there could be a material adverse effect on our financial condition, operating results and business, and the trading price of our common stock may decline and you may lose all or part of your investment. We cannot assure you that we will successfully address these risks.

We have only one full time employee and are substantially dependant on the efforts of part-time management, none of whom are bound by term employment agreements, to raise capital or realize value for our assets.

Our executive officers consist of one full-time employee and two persons who have agreed to work for us as per diem consultants in the roles of Chief Executive and Chief Financial Officers. Each of them have agreed to accept substantially reduced compensation and our Board has essentially agreed to the elimination of its compensation. This was done to permit us more time to either raise capital or realize value for our core assets. If those executive officers and Board members were no longer willing to accept these arrangements, then the Company's attempts to raise capital or realize value for its core assets could be negatively affected or cease altogether.

If we cannot obtain additional financing we will not be able to continue our planned operation. Further, we may be forced to sell our products/technology or merge with another company or liquidate.

Our available cash and working capital at February 28, 2003 is clearly not sufficient to meet our cash requirements for the coming year, even with our reduced use of cash. As a result of our limited cash resources, our auditors have indicated in their report on our financial statements included herein that there is substantial doubt about our ability to continue as a going concern. In order to carry out our plan of operation, we will need to raise significant additional financing. We presently have no commitments for such financing and cannot assure investors that we will be successful in obtaining such financing as and when needed, on terms acceptable to us or at all. Any equity financing could be dilutive to our existing stockholders. If we are unsuccessful in obtaining sufficient financing which we need currently, we may be forced to further eliminate some or all of our planned operations. We have begun to explore other alternatives including a strategic transaction, a sale or license of our products and technology or a merger with an unrelated business.

We have incurred significant net losses in the past, our plans call for higher losses in the future, our present working capital is not sufficient for our current plans and we may never achieve or maintain sales or profitability.

We have incurred significant net losses since our inception and since our transition to a medical device business in 1997. Our net loss was $3,042,000 for the year ended February 28, 2003 and $4,544,000 for the year ended February 28, 2002. Our accumulated deficit since our inception in 1992 was $26,865,000 at February 28, 2003. At February 28, 2003 we had approximately $765,000 of cash and $19,000 of working capital and $6,000 of shareholders' deficit. This level of funding is clearly insufficient to fund our planned operations for the coming twelve months. We received FDA clearance to market our initial products in May and June of 2001 and have not yet sold any of these products. Our ability to generate revenue is uncertain and we may never generate sufficient revenue from product sales to achieve or maintain profitable operations.

If we are successful in locating new capital, we would need to restart our operations and there is a risk that relationships, people and process that were available to us in the past may not be available in the future on the same terms or at all.

In order to preserve our core assets and permit us time to obtain new capital, a strategic transaction or a sale or license of our products and technology, we have ceased virtually all of our planned development, clinical and commercialization activities and terminated all non-executive employees. If we were to restart our planned operations with new capital, there is no assurance that previously existing people, vendors, consultants and processes would be available to us on the same or acceptable terms, or at all. Additionally, we would want to restart clinical work at institutions where we have already done work and such institutions may not be available to us at the time or on terms which would be acceptable or at all. The loss of such people, vendors, consultants, processes and clinical sites, or any of them, could result in unforeseen costs or difficulties and may be viewed as an obstacle to any sale of the products or technology.

If the Illuminator products do not achieve broad market acceptance among physicians, we will not be able to generate the revenue necessary to support our business.

Acceptance of the use of the Illuminator products assumes that physicians are willing to use new diagnostic methods to diagnose CHD. We began human imaging using our products in October 2001, such imaging has been limited and was ceased in November 2002. As such, while progress has been made toward demonstrating the clinical effectiveness or advantage of our products compared to other diagnostic methods, and we believe important milestones have been achieved, more work is necessary. Acceptance of our products is dependent first on demonstrating such clinical effectiveness or advantage and then on educating the medical community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our products relative to competitive products, and on training physicians in the proper application of our products. We anticipate that a substantial amount of clinical experience and physician education may be required to demonstrate the full capabilities and advantages of our products and to achieve widespread utilization of such products. Physicians may be reluctant to use our products simply because existing methods are already so widely accepted and are based on established technologies. Patients may also be reluctant to have their physicians use new diagnostic methods. In addition, clinical experience may indicate that the Illuminator products cause unexpected complications or other unforeseen negative effects. If, due to any of these factors, the Illuminator products do not receive broad market acceptance among physicians, we will not generate significant revenues. In this event, our business, financial condition and results of operations would be seriously harmed.

If physicians, hospitals and other healthcare providers are unable to obtain coverage and reimbursement from third-party healthcare payors for procedures using the Illuminator products, or if reimbursement is insufficient to cover the costs of purchasing the Illuminator products, we may be unable to generate sufficient sales to support our business.

Demand for the Illuminator products is likely to depend substantially on the extent to which reimbursement for the cost of the Illuminator products and the procedures in which they are used will be available from government third-party payors such as the Medicare and Medicaid programs in the United States, other government health administration authorities, private health insurers and other organizations. These third-party payors may deny coverage if they determine that a procedure was not reasonable or necessary, was experimental or was used for an unapproved indication. We have not yet obtained any confirmations of reimbursement approvals either for our products or for procedures using our products. Use of our products will involve a diagnostic procedure which is not currently used. While there may be "miscellaneous" MRI reimbursement codes which may, or may not, permit reimbursement for MRI procedures utilizing our products, there is not currently an existing reimbursement code for the incremental cost of our product, which is a single use device. Payors continue to review their coverage policies carefully for existing and new diagnostic methods and can, without notice, deny coverage for procedures that include the use of our products. Furthermore, we could be adversely affected by changes in reimbursement policies of governmental or private healthcare payors to the extent any such changes affect reimbursement for procedures in which the Illuminator products are used. If physicians, hospitals and other healthcare providers are unable to obtain sufficient coverage and reimbursement from third-party payors for procedures using our products, or if reimbursement is insufficient to cover the cost of purchasing our products, we may be unable to generate sufficient sales to support our business.

Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have governmentally managed health care systems that govern reimbursement for new devices and procedures. Some European countries have tightened reimbursement rates.

We have no experience manufacturing our products in commercial quantities and are dependent on an outsourced manufacturer to produce product for us. If we lose this key supplier, or if it does not perform satisfactorily, we may be unable to meet customer orders for our products in a timely manner or within our budget or we may be unable to generate any meaningful revenues at all.

We have no manufacturing facilities or capabilities of our own. We have engaged MedSource Inc. as our contract manufacturer for our first products. We have worked with MedSource since 1998 on design and manufacturability matters related to our products, and received our first commercial product from them in October 2001. If MedSource were unable to produce our product in sufficient quantities, or in time to meet potential customer schedules, we would likely suffer significant delays in finding and qualifying a new manufacturer. Such delays could result in interruptions in our business for a period of time which could disrupt or destroy our ability to generate meaningful revenue or achieve budgeted cost.

Our experience marketing Illuminator products is limited and may not result in meaningful revenue.

We have limited experience marketing the Illuminator products directly to end users or otherwise and we do not currently have a sales force. To the extent that we form our own sales force, we will have to hire qualified people and make significant expenditures of money and management resources to develop, educate and expand our sales force. To the extent that we rely on marketing arrangements with others, this may result in a lack of control by us over any or some of the marketing and distribution of such products. Our efforts are, therefore, uncertain to result in meaningful revenues.

We are subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, which could restrict the sales and marketing of the Illuminator products and could cause us to incur significant costs.

We have received clearance from the FDA to market the Illuminator products in the United States. Our FDA clearance is presently limited to use of these products with General Electric 1.5T Signa(R) MRI Systems. FDA regulations prohibit us from promoting or advertising the Illuminator products, or any other devices that the FDA may clear in the future, for uses not within the scope of our clearances or making unsupported safety and effectiveness claims. These determinations can be subjective, and the FDA may disagree with our promotional claims. Noncompliance with applicable regulatory requirements can result in enforcement action which may include recalling products, ceasing product marketing, paying significant fines and penalties, and similar FDA actions which could limit product sales, delay or halt product shipment, delay new product clearance or approval, and adversely affect our operations. Unanticipated changes in existing regulatory requirements or adoption of new requirements could hurt our business, financial condition and results of operations.

The FDA also requires us to adhere to the Quality System Regulation which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of the Illuminator products. The FDA enforces the Quality System Regulation through inspections. We have never been through a Quality System Regulation inspection, and we cannot assure you that we or any contract manufacturer we may engage would pass. If we or any contract manufacturer we may engage fail a Quality System Regulation inspection, our operations could be disrupted and our manufacturing delayed. Failure to take adequate corrective action in response to a Quality System Regulation inspection could force a shutdown of our manufacturing operations and a recall of the Illuminator products, which would have a material adverse effect on our product sales, financial condition and results of operations.

We will be required to obtain additional FDA clearances before commercially distributing the Illuminator products for (a) use with MRI machines other than the General Electric 1.5T Signa(R) MRI Systems , (b) other intended uses, (c) significant changes to the product as a result of clinical experience or otherwise or (d) for any other new products that we wish to market. This process can take the form of a 510(k) premarket notification, de novo classification or approval of a premarket application. We may also be required to obtain new 510(k) clearance or supplemental premarket application approval for significant postmarket modifications to the Illuminator products. Each of these processes can be lengthy and expensive. The FDA's 510(k) premarket notification process usually takes from three to 12 months, but may take longer. De novo classification is a somewhat lengthier process and the premarket application approval process is much more costly, lengthy and uncertain. It generally takes from one to three years, or even longer. We cannot assure you that FDA clearance for other intended uses of the Illuminator products, postmarket modifications or new products will be granted. Delays in obtaining further clearances will adversely affect our revenues and profitability.

Because we are smaller and have fewer financial resources than most of the companies in the medical device and diagnostic industry, we may not be able to successfully compete in the rapidly-evolving market for medical devices.

The market for medical devices and diagnostic products is intensely competitive and rapidly evolving. Our products compete against a large number of firms that provide diagnostic products and medical devices. Many of these competitors have longer operating histories, greater name recognition, larger installed user bases and significantly greater financial, technical, marketing and sales resources than we do. As a result, competitors may be able to react more quickly to emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. Further, customers may be reluctant to purchase products from a company that is not widely known and is in its early stage.

We expect competition to persist and intensify. Competitors could develop or offer products that provide superior performance, ease of use, price or other advantages over those offered by us. In addition, certain of our current competitors may broaden or enhance their offerings to provide products which would compete more effectively with our products. Intense competition in our markets can be expected to continue to put downward pressure on prices and adversely affect our profitability. We cannot assure you that we will be able to compete successfully against our competitors and we may lose customers or fail to grow our business as a result of this competition.

Our products employ proprietary information and technology which may be difficult to protect and may infringe on the intellectual property rights of third parties. If our intellectual property rights do not adequately protect our products, we may be unable to operate our business profitably or at all.

We rely on patents (including those under application), trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products. These legal means, however, afford only limited protection and may not adequately protect our rights. Further, companies in the medical device industry have used intellectual property litigation to gain a competitive advantage.

We cannot assure you that any of our pending patent applications will issue. The U.S. Patent and Trademark Office (PTO) may deny or significantly narrow claims made under patent applications and the issued patents, if any, may not provide us with significant commercial protection. We could incur substantial costs in proceedings before the PTO. These proceedings could result in adverse decisions as to the priority of our inventions. In addition, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as U.S. laws, or at all. We may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries.

We seek to protect our trade secrets and unpatented proprietary technology, in part, with confidentiality agreements with our employees and consultants. We cannot assure you that these confidentiality agreements will be sufficient to protect our confidential information or that our trade secrets will not otherwise become known to or independently developed by our competitors.

Our significant shareholders and executive officers and directors may be able to influence matters requiring stockholder approval and their interests may conflict with those of other shareholders.

Our principal shareholder, Noga Investments in Technologies, Ltd., beneficially owns approximately 40.5% in the aggregate of our outstanding voting power and our executive officers and directors beneficially own approximately 15.3% (1.8% actual ownership) of our outstanding voting power. Noga is a party to an agreement which entitled it to designate a specified number of persons to our board of directors until December 2001. Noga has designated two directors. Because of its high level of stock ownership, and Board representation, Noga, or Noga and the executive officers and directors, will be able to influence all of our affairs and actions including matters requiring shareholder approval. This concentration of ownership could have the effect of delaying or preventing a change in control of us, even when such change of control is in the best interests of shareholders, and might adversely affect the market price of our common stock. The interests of our executive officers, directors and Noga may differ from the interests of the other stockholders.

Sales of shares, including those underlying our stock options, may depress the price of our common stock.

Sales of substantial amounts of our common stock by shareholders in the public market, or even the potential for such sales, are likely to adversely affect the market price of our common stock and our ability to raise capital by selling equity securities.

Also, many of our employees, executives, directors and consultants may exercise their stock options in order to sell the stock underlying their options in the market under a registration statement we have filed with the Securities and Exchange Commission.

We have outstanding stock options and warrants to purchase an aggregate of 13,196,667 shares of our common stock, approximately all of which are currently exercisable. If any of these currently outstanding options and warrants are exercised such exercise will result in additional outstanding shares of common stock which may, because substantially all of them are registered, be sold in the public market. This presents potential substantial dilution to our current shareholders and may result in a drop in the market price of our common stock.

We currently have 74,458,938 shares of common stock issued and outstanding, of which approximately 660,000 shares may be deemed restricted securities and approximately 31,000,00 shares may be deemed control and/or restricted securities (substantially all of which are held by one stockholder), as those terms are defined in the Securities Act of 1933, as amended. These restricted securities may be sold in the future only pursuant to registration under the Securities Act or an exemption such as Rule 144 under the Securities Act. Substantially all of the approximately 31,660,000 restricted and control shares, are currently eligible for sale pursuant to the volume limitations of Rule 144. As restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted securities sell them or are perceived by the market as intending to sell them.

Our common stock price has fluctuated considerably, has limited trading volume and may not appreciate in value.

Our shares are traded on the OTC Bulletin Board under the symbol "MAGLA." There is currently no other broadly followed established trading market for our shares. Such an "established trading market" may never develop or be maintained. The absence of an active trading market reduces the liquidity of an investment in our shares. The market price for our shares has been and is likely to be very volatile. Numerous factors beyond our control may have a significant adverse effect on prices. In the past, companies that have experienced volatility in the market price of their stock have been the objects of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources.

Our corporate charter contains authorized, unissued preferred stock which may inhibit a takeover at a premium price that may be beneficial to you.

Our certificate of incorporation authorizes the issuance of up to 5,000,000 shares of "blank check" preferred stock with designations, rights and preferences that may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without shareholder approval, to issue a new series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common shareholders. The issuance of a new series of preferred stock could be used in certain circumstances as a method of discouraging, delaying or preventing a change in control of us.

Shareholders may not be able to recover damages from our directors and executive officers for actions taken.

Our certificate of incorporation includes provisions which eliminate the personal liability of our directors and executive officers to the extent permitted by applicable law. As a result, shareholders may be unable to recover damages against our directors and executive officers for actions taken by them which constitute negligence or a violation of some of their fiduciary duties.