**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


Amendment
      No. 1 to


**FORM
      10-QSB**


x
            
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**


**For
      the quarterly period ended September 30, 2006.**


or


o
            
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**


**For
      the transition period from**  **to**





**Commission
      File Number 000-19709**





**NUWAY
      MEDICAL, INC.**


*(Exact
      name of registrant as specified in its charter)*


Delaware
            
            **65-0159115***(State
                or other jurisdiction of*
            
            *(I.R.S.
                Employer**incorporation
                or organization)*
            
            *Identification
                No.)*





**2603
      Main Street, Suite 1155**


**Irvine,
      California 92614**


*(Address,
      including zip code, of principal executive offices)*





**(949) 235-8062**


*(Registrant’s
      telephone number, including area code)*





**Securities
      registered pursuant to Section 12(b) of the Exchange Act:
      None**


**Securities
      registered pursuant to Section 12(g) of the Exchange Act: Common Stock,
      $0.0067 par**


**value.**





Check
      whether the Registrant (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that the registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. Yes o No x





The
      number of shares of the Registrant’s Common Stock outstanding as of September
      30, 2006 was 77,994,158 shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE: None**




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














**NUWAY
      MEDICAL, INC.**


**FORM
      10-QSB**


**INDEX**





**PART
                  I****Item
                  1**
              
              Financial
                  Statements
              3**Item
                  2**
              
              Management's
                  Discussion and Analysis
              25**Item
                  3**
              
              Controls
                  and Procedures
              43**PART
                  II****Item
                  1**
              
              Legal
                  Proceedings
              44**Item
                  2**
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              45**Item
                  5**
              
              Other
                  Information
              45**Item
                  6**
              
              Exhibits
              46Signatures
              47





**Exhibit
      Index**


Exhibit
      10.1


Exhibit
      31.1


Exhibit
      31.2


Exhibit
      32




-2-





**PART
      I**





**General
      Note**





**This
      Report is being amended primarily for the purpose of correcting (i) certain
      clerical errors in the statement of cash flows for the nine months ended
      September 30, 2006 and related Note 4 in the Notes to Financial Statements,
      from
      the comparable disclosures made in the original filing of the Quarterly Report
      for the period ended September 30, 2006, and (ii) an omission regarding some
      of
      the terms of the Fall 2006 Offering set forth in Note 4 in the Notes to
      Financial Statements and Management's Discussion and Analysis.**





**Item
      1. Financial Statements**





**NUWAY
      MEDICAL, INC AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**


**AS
      OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005**




ASSETSSeptember
                30,
            
            December
                31,2006
            
            2005(unaudited)
            
            (unaudited)CURRENT
                ASSETSCash
                and Cash Equivalents
            
            
            98,497
            
            $
            283,462Prepaid
                Expenses
            
            
            21,250
            
            
            -Total
                Current Assets
            
            
            119,747
            
            
            283,462TOTAL
                ASSETS
            
            
            119,747
            
            
            283,462LIABILITIES
                AND STOCKHOLDERS'
                EQUITYCURRENT
                LIABILITIESAccounts
                Payable and Accrued Expenses
            
            
            2,544,629
            
            
            2,312,663Notes
                Payable
            
            
            3,298,070
            
            
            2,740,570Debentures
                Payable, Net
            
            
            21,151
            
            
            21,151Total
                Current Liabilities
            
            
            5,863,850
            
            
            5,074,384COMMITMENTS,
                CONTINGENCIES AND SUBSEQUENT EVENTSSHAREHOLDERS'
                EQUITYConvertible
                Preferred Series A, $.00067 Par Value, 25,000,000Shares
                Authorized, 399,322 and 559,322 Shares Issued andOutstanding
                at September 30, 2006 and December 31, 2005, respectively
            
            
            268
            
            
            375Common
                Stock, $.00067 Par Value, 100,000,000 SharesAuthorized,
                77,994,158 and 63,333,501 Shares IssuedAt
                September 30, 2006 and December 31, 2005, respectively
            
            
            52,256
            
            
            41,056Additional
                Paid-In Capital
            
            
            23,618,480
            
            
            23,396,834Accumulated
                Deficit
            
            
            (29,415,107
            )
            
            (28,229,187
            )Total
                Shareholders’ Equity
            
            
            (5,744,103
            )
            
            (4,790,922
            )TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            
            119,747
            
            $
            283,462




See
        accompanying notes to unaudited consolidated financial statements.
  -3-


**NUWAY
      MEDICAL, INC AND SUBSIDIARY**


**STATEMENTS
      OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS**


**ENDED
      SEPTEMBER 30, 2006 AND 2005**





Three-Months
              Ended
                September 30,
            
            Nine-Months
              Ended
                September 30,2006
            
            2005
            
            2006
            
            2005(unaudited)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)RevenueTotal
                Revenues
            
            
            -
            
            
            -
            
            
            -
            
            
            -Costs
                and ExpensesResearch
                and Development
            
            
            24,000
            
            
            -
            
            
            108,298
            
            
            -Selling,
                General and Administrative
            
            
            527,311
            
            
            348,725
            
            
            1,077,468
            
            
            716,401Depreciation,
                Depletion and Amortization
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                Costs and Expenses
            
            
            551,311
            
            
            348,725
            
            
            1,185,766
            
            
            716,401Loss
                from operations
            
            
            (551,311
            )
            
            (348,725
            )
            
            (1,185,766
            )
            
            (716,401
            )Other
                Income and Expense
              Interest
                Expense
            
            
            (101,178
            )
            
            (66,521
            )
            
            (282,474
            )
            
            (171,344
            )Reduction
                to Note Payable andrelated
                accrued interest
            
            
            -
            
            
            -
            
            
            282,320
            
            
            -Net
                Other Income and (Expense)
            
            
            (101,178
            )
            
            (66,521
            )
            
            (154
            )
            
            (171,344
            )Loss
                Before Income Taxes
            
            
            (652,489
            )
            
            (415,246
            )
            
            (1,185,920
            )
            
            (887,745
            )Provision
                for Income Taxes (Benefit)
            
            
            
            
            
            -
            
            
            -
            
            
            -Net
                (Loss)
            
            
            (652,489
            )
            $
            (415,246
            )
            
            (1,185,920
            )
            $
            (887,745
            )Loss
                Per Common Share - Basic and DilutedNet
                Loss per Share, rounding
            
            
            (.01
            )
            $
            (.01
            )
            
            (.02
            )
            $
            (.01
            )Weighted
                Average Common ShareEquivalents
                Outstanding
            
            
            70,910,806
            
            
            59,209,062
            
            
            65,290,866
            
            
            54,416,987





See
        accompanying notes to unaudited consolidated financial
        statements.




-4-





**NUWAY
      MEDICAL, INC AND SUBSIDIARY**


**STATEMENTS
      OF STOCKHOLDERS’ DEFICIT (UNAUDITED)**


**FOR
      THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 2006**




Preferred
                Stock
            
            Common
                StockNumber
            
            Par
            
            Number
            
            Par
            
            Additional
            
            Retainedof
            
            Value
            
            of
            
            Value
            
            Paid-In
            
            EarningsShares
            
            $.00067
            
            Shares
            
            $.00067
            
            Capital
            
            (Deficit)BALANCE
                DECEMBER 31, 2005
            
            
            559,322
            
            
            375
            
            
            62,333,501
            
            
            41,056
            
            $
            23,396,834
            
            
            (28,229,187
            )REISSUANCE
              OF SHARES
              INCORRECTLYPREVIOUSLY
                CANCELLED
            
            
            
            
            
            
            
            
            24,744
            
            
            17
            
            
            (17
            )ADJUSTMENT
                TO COMMON STOCK PAR VALUE
            
            
            
            
            
            
            
            
            
            
            
            707
            
            
            (707
            )CONVERSION
                OF PREFERREDTO
                COMMON STOCK
            
            
            (120,000
            )
            
            (80
            )
            
            120,000
            
            
            80
            
            
            -
            
            
            -CORRECTION
                TO PREFERREDSTOCK
            
            
            (40,000
            )
            
            (27
            )STOCK
                ISSUED FOR SERVICES
            
            
            
            
            
            
            
            
            15,515,913
            
            
            10,396
            
            
            222,343
            
            
            -NET
                LOSS
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,185,920
            )BALANCE
                SEPTEMBER 30, 2006
            
            
            399,322
            
            
            268
            
            
            77,994,158
            
            
            52,256
            
            $
            23,618,480
            
            
            (29,415,107
            )








See
        accompanying notes to unaudited consolidated financial statements.
  -5-


**NUWAY
      MEDICAL, INC AND SUBSIDIARY**


**STATEMENTS
      OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDING**


**SEPTEMBER
      30, 2006 AND 2005**




Nine
                Month Periods
                EndingSeptember
                30,2006
              (unaudited)
            
            2005
              (unaudited)CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                Loss
            
            
            (1,185,920
            )
            
            (887,745
            )Adjustments
                to Reconcile Net Loss to Net Cash Used in Operating
                Activities:Issuance
                of Stock for Services
            
            
            232,739
            
            
            103,900Reduction
                to Note Payable including Accrued Interest
            
            
            (282,320
            )
            
            -(Decrease)
                in Prepaid Expenses
            
            
            (21,250
            )
            
            -Increase
                in Accounts Payable and Accrued Expenses
            
            
            294,286
            
            
            169,872Net
                Cash Used In Operating Activities
            
            
            (962,465
            )
            
            (613,973
            )CASH
                FLOWS USED IN INVESTING ACTIVITIESNo
                Cash Used In or Provided by Investing Activities
            
            
            -
            
            
            -CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from Loans - “Third Offering” in 2006
            
            
            777,500
            
            
            758,970Proceeds
                from Sale of Common Stock
            
            
            -
            
            
            -Net
                Cash Provided By Financing Activities
            
            
            777,500
            
            
            758,970NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (184,965
            )
            
            144,997CASH
                AND CASH EQUIVALENTS - BEGINNING
            
            
            283,462
            
            
            -CASH
                AND CASH EQUIVALENTS - ENDING
            
            
            98,497
            
            
            144,997




See
        accompanying notes to unaudited consolidated financial
        statements.




-6-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




**Note
      1.  Accounting
      Policies-Basis of Presentation**




In
      the
      opinion of management, the accompanying balance sheets and related interim
      statements of operations, cash flows, and stockholders’ equity include all
      adjustments, consisting only of normal recurring items, necessary for their
      fair
      presentation in conformity with accounting principles generally accepted in
      the
      United States of America (U.S. GAAP). Preparing financial statements requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets, liabilities, revenue, and expenses. Actual results and outcomes may
      differ from management’s estimates and assumptions. Estimates are used when
      accounting for stock-based transactions, uncollectible accounts receivable,
      asset depreciation and amortization, and taxes, among others.




Interim
      results are not necessarily indicative of results for a full year. The
      information included in this Form 10-QSB should be read in conjunction with
      Management’s Discussion and Analysis and financial statements and notes thereto
      included in the NuWay Medical, Inc. (the “Company”) Annual Report on Form 10-KSB
      for the year ended December 31, 2005.





**Note
      2.  Business and
      Organization**




**Outlook**




The
      Company operated as a shell company during the nine-month period ended September
      30, 2006, and operations primarily consisted of the Company seeking funding,
      maintaining the corporate entity, complying with the reporting and other
      requirements of the Securities Exchange Commission (the "SEC"), engaging in
      ongoing research and development for the BioLargo Technology (as defined below),
      engaging in initial marketing activities for the BioLargo Technology and
      planning for the consummation of certain proposed transactions (the
“Transactions”), as described below. See discussion of the Transactions with
      IOWC Technologies, Inc. (“IOWC”), below.




The
      Company will need working capital resources to maintain the Company's status
      and
      to fund other anticipated costs and expenses during the year ending December
      31,
      2006 and beyond. The Company's ability to continue as a going concern is
      dependent on the Company's ability to raise capital. If the Company is able
      to
      acquire IOWC’s assets, it will need additional capital until and unless that
      prospective operation is able to generate positive working capital sufficient
      to
      fund the Company's cash flow requirements from operations. The Company has
      conducted private offerings of its convertible notes and warrants to provide
      such interim funding and intends to seek additional capital. See Note 4, Sales
      of Unregistered Securities.




Cash
      and
      cash equivalents totaled $98,497 at September 30, 2006. The Company had no
      revenues in the nine-month period ended September 30, 2006 and was forced to
      consume cash on hand to fund operations. The Company's cash position is
      insufficient to meet its continuing anticipated expenses or fund anticipated
      operating expenses after the consummation of the transactions with IOWC. The
      Company will be required to raise additional capital to sustain basic operations
      through the remainder of 2006 and beyond.




-7-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




The
      financial statements accompanying this Report have been prepared on a going
      concern basis, which contemplates the realization of assets and the settlement
      of liabilities and commitments in the normal course of our business. The Company
      had a net loss of $1,185,920 for the nine-month period ended September 30,
      2006;
      a negative cash flow from operating activities of $962,465 for the nine-month
      period ended September 30, 2006; and an accumulated deficit of $28,229,187
      as of
      December 31, 2005, and $29,415,107 as of September 30, 2006.




As
      of
      September 30, 2006, the Company had limited liquid and capital resources,
      raising a substantial doubt about the Company's ability to continue as a going
      concern. Ultimately, the Company's ability to continue as a going concern is
      dependent upon its ability to attract new sources of capital, establish an
      acquisition or reverse merger candidate with continuing operations, such as
      IOWC, attain a reasonable threshold of operating efficiencies and achieve
      profitable operations. The financial statements do not include any adjustments
      that might be necessary if the Company is unable to continue as a going
      concern.




The
      Company has $2,398,070 aggregate principal amount of its promissory notes that
      mature at various times during 2006 and the nine-month period ending September
      30, 2007. The Company does not presently have funds sufficient to repay these
      obligations as they mature. Even though the terms of all of these notes permit
      the noteholder to convert the notes into shares of our common stock, until
      the
      Company’s stockholders approve an amendment to the Company’s charter to increase
      the number of authorized shares of common stock, the Company will be unable
      to
      fulfill its obligations to all noteholders to permit the conversion into common
      stock of amounts due pursuant to the terms of the notes. In the event that
      the
      Company has not raised further capital prior to the maturity dates of the
      convertible notes, the Company would be in default of those notes if its
      stockholders have not formally approved an increase in the number of authorized
      common shares, or unless the Company is able to refinance or renegotiate the
      terms of these notes. No financing is in place at present, and it is unknown
      if
      any financing will be in place in the future, which would permit the Company
      to
      repay these notes in full as they mature.




The
      Company has obtained the consent of all of its noteholders to extend the
      maturity date of those convertible notes until after the Company has held a
      stockholders’ meeting, currently scheduled for the fourth quarter of 2006, to
      approve, among other things, an increase in the authorized capital stock of
      the
      Company and a reverse split of the Company’s common stock, and thereby permit
      the conversion of such notes into shares of the Company’s common
      stock.




-8-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




**BioLargo
      Technology and BioLargo Products**




IOWC
      Technologies, Inc., a federally registered Canadian corporation (“IOWC”) and
      Kenneth R. Code (“Code”) have developed and own the BioLargo Technology,
      consisting of certain intellectual property (including two U.S. Patents (Patent
      Numbers 6146725 and 6328929), relating to a process whereby disinfecting
      chemistry is incorporated into absorbent materials, liquids, powders, tablets
      or
      other delivery methods, that can be then incorporated into products in multiple
      industries. Three additional patent applications have recently been filed with
      the United States Patent and Trademark Office relating to the BioLargo
      Technology, listing Code as inventor and BLTI as assignee, pursuant to the
      R
& D Agreement (defined below).




If
      the
      Transactions with the IOWC are completed, the Company intends to commercially
      utilize the BioLargo Technology to develop certain products for use in various
      industries. For the purposes of this Report, the term “BioLargo Products” means
      any product designed, manufactured, conceived or contemplated, either at the
      present time, or in the future, based on the BioLargo Technology or any
      derivation thereof.




It
      is expected that the BioLargo Technology will enable the Company to offer a
      portable product that comparably addresses four precautions -- containment,
      isolation, neutralization and disposal -- against disease transmission as
      established by the Center for Disease Control. The BioLargo Technology has
      been
      reviewed and validated in several third party studies. The Company believes
      that
      the BioLargo Technology and derivative products may be applied in approximately
      30 products in several vertical markets.




The
      Company believes that the primary initial markets for its products are likely
      to
      be:




·
            Packaging
                for Blood and Bio-hazardous Material
                Transport




·
            Medical
                Products




·
            Meat
                and Poultry Packing




·
            Disaster
                Relief Efforts, Soil and Sand Remediation, and Water
                Treatment




The
      Company plans to pursue its primary revenues from licensing the BioLargo
      Technology. It has multiple products available for immediate distribution,
      namely absorbent pads and materials to be used for clean up of or as a
      precautionary measure from spills of liquids, including hazardous materials.
      The
      Company is actively developing additional products for distribution by working
      with manufacturers, other technology developers and potential customers.




-9-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




**Letter
      of Intent**




In
      July
      2005, the Company entered into a letter of intent (“LOI”) with IOWC. The LOI set
      out the terms for the acquisition of certain assets of IOWC consisting of
      certain intellectual property, including two United States patent and two
      license and/or distributor agreements pursuant to which IOWC had licensed
      certain of its technologies for use in products designed for distribution in
      the
      food, medical and biohazardous material transportation industries. In connection
      with the transactions contemplated by the LOI, the Company agreed to issue
      up to
      51% of its common stock to IOWC. The LOI provided that the transactions
      contemplated by the LOI would be completed pursuant to the terms of an asset
      purchase agreement as well as a research and development agreement. In addition,
      the LOI required certain stockholders approvals as a condition to the closing
      of
      the transactions contemplated by the LOI including approval of the issuance
      of
      the shares of the Company’s common stock to IOWC, a reverse stock split and an
      increase in the authorized capital stock of the Company.




As
      the parties worked toward preparing the documentation called for by LOI and
      as
      the Company began to prepare the proxy materials needed for its stockholders
      meeting, it became increasingly clear to the parties that the length of time
      and
      the costs involved in preparing documentation for a stockholders meeting would
      likely jeopardize the chances that the transactions contemplated by the LOI
      could be completed in a manner benefiting both parties. Accordingly, in late
      2005 the parties began to explore alternative strategies that would enable
      them
      to begin to realize the benefits of the transactions contemplated by the LOI
      while at the same time allow the Company to call a meeting of its stockholders
      for the purpose of approving the issuance of its shares.




**Marketing
      and Licensing Agreement**




In
      furtherance of the proposed transactions with IOWC, on December 31, 2005, the
      Company entered into a Marketing and Licensing Agreement (“M&L Agreement”)
      with IOWC and Code (collectively “BioLargo”).




Pursuant
      to the M&L Agreement the Company, through its wholly-owned subsidiary
      BioLargo Life Technologies, Inc., a California corporation (“BLTI”), acquired
      certain rights from BioLargo to develop, market, sell and distribute products
      that were developed, and are in development, by BioLargo relating to the
      BioLargo Technology and BioLargo Products.




***Licenses
      Granted to BLTI***




Pursuant
      to the terms of the M&L Agreement, IOWC granted to BLTI a license, with
      respect to the BioLargo Technology and the BioLargo Products, to further develop
      the technology, to further develop existing and new products based on that
      technology, and to produce, market, sell and distribute any such products,
      through its own means, or by contract or assignment to third parties or
      otherwise, including without limitation:




-10-




·
            ***Technology
                Development Rights***.
                Exclusive worldwide right to expand and improve upon the existing
                BioLargo
                Technology, to conduct research and development activities based
                on the
                BioLargo Technology, and to contract with third parties for such
                research
                and development activities; and any improvements on the BioLargo
                Technology, or any new technology resulting such efforts of BLTI,
                shall be
                owned solely by BLTI.




·
            ***Product
                Development Rights***.
                Exclusive worldwide right to expand and improve upon the existing
                BioLargo
                Products, to conduct research and development activities to create
                new
                products for market, and to contract with third parties for such
                research
                and development activities. Any new products created by BLTI resulting
                from these efforts shall be owned solely by
                BLTI.




·
            ***Marketing
                Rights***.
                Exclusive right to market, advertise, and promote the BioLargo Technology
                and the BioLargo Products in any market and in any manner it deems
                commercially reasonable.




·
            ***Manufacturing
                Rights***.
                A
                transferable, worldwide exclusive right to manufacture, or have
                manufactured, BioLargo Products.




·
            ***Selling
                Rights***.
                A
                transferable, worldwide exclusive right to sell BioLargo Technologies
                and
                BioLargo Products.




·
            ***Distribution
                Rights***.
                A
                transferable, worldwide exclusive right to inventory and distribute
                BioLargo Products.




·
            ***Licensing
                Rights***.
                A
                transferable, worldwide exclusive right to license BioLargo Technologies
                and BioLargo Products to third
                parties.




***Assigned
      Agreements***




Pursuant
      to the terms of the M&L Agreement, BioLargo also assigned to BLTI its rights
      and obligations with respect to the following Agreements (collectively, the
      “Assigned Agreements”):




·
            Agreement
                dated October 15, 2004 by and between Kenneth R. Code, IOWC, BioLargo
                Technologies, Inc., or IOWC’s assigns and Craig Sundheimer and Lloyd M.
                Jarvis.




·
            Agreement
                dated January 15, 2005 by and between Kenneth R. Code, IOWC and Food
                Industry Technologies, Inc.




·
            Letter
                of Intent dated November 15, 2004 by and between Kenneth R. Code
                and IOWC
                and GTS Research, Inc.




-11-
 
 **NUWAY
          MEDICAL, INC. AND SUBSIDARY**
 **NOTES
          TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***


Pursuant
      to the terms of the M&L Agreement the Company is to receive any and all
      royalties, payments, license fees, and other consideration generated by the
      Assigned Agreements as of January 1, 2006. As part of the assignment, IOWC
      agreed to transfer its 20% interest in BioLargo, LLC to BLTI. In October 2006,
      the Company terminated the license agreement with BioLargo, LLC, for cause.
      Subsequently, the Company and IOWC agreed that the 20% interest in BioLargo,
      LLC
      would not be transferred by IOWC to BLTI, but BLTI would have the option to
      acquire such 20% interest for $1 at any time until December 31, 2013 (the
“Option Agreement”).




**Consulting
      Agreement**




On
      June
      20, 2006, the Company entered into a Consulting Agreement (the “Consulting
      Agreement”) with Code. Pursuant to the Consulting Agreement, the Company has
      engaged the services of Code, effective January 1, 2006, to advise the Company
      in research and development and technical support, and to provide other services
      and assistance to the Company in matters relating to the Company’s business.




The
      Consulting Agreement contains provisions requiring Code to devote substantially
      all of his business time to the Company; prohibiting Code from directly or
      indirectly engaging in any business activity that would be competitive with
      the
      business of the Company or its affiliates, including its wholly-owned subsidiary
      BLTI; providing that during the term of the Consulting Agreement and for one
      year post-termination, Code will not solicit the Company’s employees or
      customers; and other standard provisions typical for a consulting agreement.
      The
      Consulting Agreement also provides that the Company shall retain the exclusive
      right to use or distribute all creations which may be created during the term
      of
      the Consulting Agreement. The Consulting Agreement terminates on January 1,
      2007, unless terminated earlier as provided therein. During the term of the
      Consulting Agreement, Code shall be paid $15,400 per month, prorated for partial
      months, and shall be entitled to reimbursement for authorized business expenses
      incurred in the performance of his duties.




It
      is
      anticipated that the Consulting Agreement will be replaced with an employment
      agreement between the Company and Mr. Code, pursuant to which Mr. Code will
      be
      employed as BLTI’s Chief Technology Officer. See “Other Agreements - Code
      Employment Agreement” below.




**Research
      and Development Agreement**




On
      August
      11, 2006, the Company and BLTI entered into a Research and Development
      Agreement, which agreement amended was amended on August 14, 2006 (collectively,
      the “R&D Agreement”), with IOWC and Code. Pursuant to the R&D Agreement,
      IOWC and Code will provide its research and development services and expertise
      in the field of disposable absorbent products to the Company and
      BLTI.




-12-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




The
      R&D Agreement provides that the Company and BLTI will own, and the Company
      and BLTI will have the exclusive right to commercially exploit, the intellectual
      property developed, created, generated, contributed to or reduced to practice
      pursuant to the R&D Agreement. In addition, IOWC and Code have agreed that
      during the term of the R&D Agreement and for one year after termination they
      will not compete with, and will not provide services to any person or entity
      which competes with, any aspect of BLTI’s business.




The
      R&D Agreement terminates on December 31, 2006, unless terminated earlier as
      provided therein. During the term of the R&D Agreement, but only after
      mutually acceptable research facilities are established for the performance
      of
      IOWC’s services (as of this date, no acceptable research facilities have been
      established), IOWC shall be paid (i) a fee of $5,500 per month for each month
      during which no services are being performed pursuant to the R&D Agreement
      to offset for laboratory and/or office and IOWC employee expenses and (ii)
      such
      additional amounts as the parties may agree in connection with specific research
      projects conducted pursuant to the R&D Agreement.




As
      further consideration to Code to enter into the R&D Agreement, on August 14,
      2006 the Company issued to Code 15,515,913 shares of its Common Stock (the
“Code
      Stock”), or approximately 19.9% of the Company’s issued and outstanding common
      stock immediately following the issuance of the Code Stock.




IOWC
      and
      Code have agreed to protect, maintain and keep confidential any proprietary
      or
      confidential information of the Company and BLTI and have executed a
      non-disclosure and confidentiality agreement in favor of the
      Company.




**Other
      Agreements**




The
      M&L Agreement also provides that the parties will enter into certain
      additional agreements in furtherance of the LOI, including (i) an asset purchase
      agreement (“Asset Purchase Agreement”) whereby the Company will acquire the two
      U.S. patents held by IOWC and certain other assets of IOWC; and (ii) an
      employment agreement with Code (the “Code Employment Agreement”).




The
      following are summaries only of the likely provisions of the Asset Purchase
      Agreement to be entered into by the Company, BLTI, IOWC and Code, and the Code
      Employment Agreement to be entered into between BLTI and Code. The Company
      has
      approved the consummation of the transaction on the terms and subject to the
      conditions so summarized, but the other parties to the agreements have not,
      as
      of the date of this Report, and other than the number of shares to be issued
      to
      IOWC, approved these terms and conditions in their entirety. Thus these
      summaries are neither complete nor necessarily a summary of the final terms
      between and among the parties with respect to the subject matter thereof, which
      may be still subject to negotiation.




-13-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




**Asset
      Purchase Agreement**




*Sale
      of Assets* . Pursuant
      to the terms of the Asset Purchase Agreement, Code and IOWC will sell, transfer
      and assign all of their rights, title and interests to two US patents and
      related intellectual property, as well as the records related to the patents
      and
      intellectual property.




In
      addition to the Code Stock issued in August 2006 and as further and full payment
      for IOWC’s obligations set forth in the M&L Agreement, pursuant to the Asset
      Purchase Agreement, the Company will deliver to IOWC the following common stock
      (collectively, the “IOWC Stock”) upon the approval of the issuance of the IOWC
      Stock by the Company’s stockholders, which amounts shall be based upon the total
      outstanding common stock after the issuances of this stock consideration, as
      well as the conversion into common stock of the Company’s existing
      debt:




·
            ***Licensing
                Rights***.
                As full payment for the license granted to BLTI, and without taking
                into
                account the effects of a reverse split of the Company’s common stock as
                described in Proposal Four, the Company will deliver to IOWC 411,558,557
                shares of the Company’s common
                stock.




·
            ***Assigned
                Agreements***.
                As full payment for the assignment of the Assigned Agreements, and
                without
                taking into account the effects of a reverse split of the Company’s common
                stock as described in Proposal Four, the Company will deliver to
                IOWC an
                additional 127,725,069 shares of the Company’s common
                stock.




·
            ***Asset
                Purchase Agreement***.
                As full payment for the transfer of any intellectual property under
                the
                terms of the Asset Purchase Agreement, and without taking into account
                the
                effects of a reverse split of the Company’s common stock as described in
                Proposal Four, the Company will deliver to IOWC an additional 14,191,674
                shares of the Company’s common
                stock.




·
            ***Total
                Consideration***.
                The total common stock to be issued to IOWC for all components of
                the
                Transactions, without taking into account the effects of a reverse
                split
                of the Company’s common stock as described in Proposal Four, shall equal
                553,475,300 shares of the Company’s common stock. Separately, Mr. Code has
                already been issued 15,515,913 shares of the Company’s common stock in
                connection with the R&D
                Agreement.




The
      Company’s stockholders are being asked to approve the issuance of 553,475,300
      shares of the Company’s common stock, which comprises the IOWC Stock, at the
      2006 Annual Meeting. A reverse split must be effectuated prior to the
      issuance to IOWC because the Company’s Certificate of Incorporation only allows
      the issuance of 100,000,000 shares of its common stock (or 200,000,000 if
      Proposal Five is approved). The Company’s stockholders are not being asked
      to approve the issuance of the 15,515,913 shares of the Company’s common stock
      previously issued to Mr. Code, which comprise the Code Stock.




-14-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




Representations
      and Warranties .
      As part
      of the Asset Purchase Agreement, Code and IWOC, jointly and severally, will
      make
      certain representations and warranties to BLTI with respect to, among other
      things:




·
            title
                to the assets being sold;




·
            sufficiency
                of the assets for the future conduct of business by
                BLTI;




·
            intellectual
                property matters;




·
            litigation
                and proceedings




·
            compliance
                with laws; and




·
            required
                consents.




The
      Asset
      Purchase Agreement also contains additional representations and warranties
      of
      Code and/or IOWC, and of BLTI, standard for asset purchase transactions.




The
      representations and warranties of the parties contained in the Asset Purchase
      Agreement will survive for four years after the closing at which time they
      will
      expire.




*Conditions
      to Closing* **.** The
      Asset Purchase Agreement provides certain conditions to the obligations of
      the
      parties, which must either be satisfied or waived before the closing can occur.




The
      Transactions are subject to approval by IOWC's board of directors and
      stockholders, approval by the Company's Board and approval by the Company's
      stockholders at the 2006 Annual Meeting of the following matters:




·
            an
                amendment to the Company's Certificate of Incorporation increasing
                the
                number of authorized shares of its common
                stock;




·
            the
                issuance of the number of shares of common stock to IOWC required
                pursuant
                to the Transactions;




·
            authorization
                for the Board to reverse split of the Company's common stock, in
                a ratio
                it deems appropriate; and




·
            the
                election of Mr. Code to the Company's
                Board.




-15-
 
 **NUWAY
          MEDICAL, INC. AND SUBSIDARY**
 **NOTES
          TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***


The
      consummation of the Transactions with IOWC is subject to various other
      conditions, in addition to those described hereinabove, such as contractual
      conditions customary for transactions of this nature.




Indemnification .
      Under
      the Asset Purchase Agreement, IOWC and Code will, jointly and severally,
      indemnify BLTI and each of its officers, directors, employees, agents and
      affiliates, and each of their successors and assigns from and against any and
      all costs, losses, claims, liabilities, fines, penalties, consequential damages
      (other than lost profits), and expenses (including interest which may be imposed
      in connection therewith and court costs and reasonable fees and disbursements
      of
      counsel) incurred in connection with, arising out of, resulting from or incident
      to:




·
            liabilities
                or claims arising out of the assets or the business of IOWC before
                the
                closing;




·
            liabilities
                or claims after the closing relating to IOWC or
                Code;




·
            breach
                of the representations or warranties made by IOWC or
                Code;




·
            default
                in any agreements made by IOWC or
                Code;




·
            taxes
                of any kind arise out of or result from the transactions contemplated
                by
                the Asset Purchase Agreement; and




·
            liabilities
                or claims relating employee
                matters.




BLTI
      will
      also indemnify IOWC and Code and their officers, directors, employees, agents
      and affiliates, and each of their successors and assigns from and against any
      and all costs, losses, claims, liabilities, fines, penalties, consequential
      damages (other than lost profits), and expenses (including interest which may
      be
      imposed in connection therewith and court costs and reasonable fees and
      disbursements of counsel) incurred in connection with, arising out of, resulting
      from or incident to:




·
            breach
                of the representations and warranties made by BLTI;
                and




·
            default
                in any agreement made by BLTI.




The
      Asset
      Purchase Agreement provides the mechanism by which the parties must notify
      each
      other of any claims, the methods for resolution of such and requires the parties
      to arbitrate any unresolved claims.




Termination . 
      The Asset Purchase Agreement provides that the parties by mutual agreement
      may
      terminate the Asset Purchase Agreement. In addition, either party may
      unilaterally terminate the Asset Purchase Agreement if that party determines
      that the conditions to closing of the other party will not be satisfied or
      if
      the other party has breached a representation or warranty and fails to cure
      such
      breach within five days after receiving notice of such breach.




-16-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




The
      Asset
      Purchase Agreement also allows, BLTI to terminate the Asset Purchase Agreement
      if:




·
            it
                is not satisfied, in its sole discretion, with the results of its
                due
                diligence investigations; and




·
            it
                has not obtained on terms and conditions satisfactory to it, in its
                sole
                discretion, all of the financing it needs to consummate the transactions
                contemplated by the Asset Purchase Agreement and fund the working
                capital
                requirements of BLTI after the
                closing.




Miscellaneous .
      The
      Asset Purchase Agreement also contains customary provisions relating to
      governing law, assignment of rights and obligations, attorneys’ fees, force
      majeure and other matters standard for asset purchase transactions.




**Code
      Employment Agreement**




The
      Code
      Employment Agreement is anticipated to provide that Code will be appointed
      Chief
      Technology Officer of BLTI, and receive (i) base compensation of $184,000
      annually (with an automatic 10% annual increase) and (ii) a bonus equal to
      equal
      to 3% of the licensing revenues received by BLTI, plus (iii) such other
      amounts that the Board of Directors of BLTI may determine from time to time.
      In
      addition, Code will be eligible to participate in incentive plans, stock option
      plans, and similar arrangements as determined by the Board of Directors of
      BLTI.
      Code is also eligible to receive heath insurance premium payments for himself
      and his family, a car allowance of $800 per month, paid vacation of four weeks
      per year plus an additional two weeks per year for each full year of service
      during the term of the agreement up to a maximum of ten weeks per year, and
      disability insurance. Code will also be entitled to participate in any other
      plans and arrangements, which provide for sick leave, vacation, or personal
      days, provided to or for the officers of BLTI from time to time. The employment
      agreement will have a term of five years, unless earlier terminated in
      accordance with its terms.




The
      Code
      Employment Agreement is also anticipated to provide that Code’s employment may
      be terminated by BLTI due to disability, for cause or without cause. Code’s
      employment may be terminated if he is unable to return to his duties within
      30
      days after notice of termination is given to him. During the disability period,
      Code is eligible to receive his salary and benefits. If Code’s employment is
      terminated for cause he will be eligible to receive his accrued base
      compensation and vacation compensation through the date of termination. If
      Code’s employment is terminated without cause, then he will be eligible to
      receive the greater of (i) one year’s compensation plus an additional one half
      year for each year of service since the effective date of the employment
      agreement or (ii) one year’s compensation plus an additional one half year for
      each year remaining in the term of the agreement.




-17-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***


The
      Code
      employment agreement requires Code to keep certain information confidential,
      not
      to solicit customers or employees of BLTI or interfere with any business
      relationship of BLTI.




Mr.
      Code
      will also be nominated for election to the Board of the Company and appointed
      to
      the board of directors of BLTI.




**Management
      of the Company after the Transactions**




It
      is expected that Mr. Calvert will remain as President and CEO of the Company
      under a newly executed long-term employment agreement.




The
      Board has agreed to appoint Mr. Code as BLTI's Chief Technology Officer pursuant
      to a long-term employment agreement and has agreed to appoint Mr. Code to the
      Board effective upon closing of the Transactions, if he is not elected to the
      Board by the stockholders at the 2006 Annual Meeting of Stockholders (the “2006
      Annual Meeting”), which is currently scheduled to be held on December 20, 2006.
      In addition, the Company is in the process of negotiating employment and/or
      consulting agreements with third parties, including an interim CFO, marketing
      and corporate development professionals. There is no assurance however that
      the
      Company will be able to attract and retain any such employees.




**Consequences
      if Stockholders Do Not Approve Transactions**




If
      the
      stockholders do not approve the election of Code as a director, and each of
      proposals being put before them at the 2006 Annual Meeting to approve the
      acquisition of the IOWC assets and the issuance of shares to IOWC, to amend
      the
      Company’s Certificate of Incorporation to increase the number of authorized
      shares, to authorize the Board to effect a reverse split of the Company’s common
      stock, and to change the name of the Company to BLTI Holdings, Inc., the
      Transactions with IOWC will not be consummated. In such event, the M&L
      Agreement, the R&D Agreement and the Option Agreement will
      terminate. The Consulting Agreement expires on its terms on December 31, 2006.
      Pursuant to the R&D Agreement, Code must return the Code Stock to the
      Company upon termination of the R&D Agreement. Additionally, upon
      termination of the M&L Agreement, all rights granted by BioLargo to the
      Company (or its subsidiary BLTI) shall revert to BioLargo. Additionally,
      pursuant to the LOI, amounts advanced by the Company to BioLargo would be
      converted into stock of IOWC at $1.00 per share. The parties are currently
      negotiating the classification of sums expended by the Company pursuant to
      the
      Agreements, and whether such sums would constitute an "advance" pursuant to
      letter of the intent. As of September 30, 2006, the Company believes these
      sums
      are in excess of $750,000.  If the Transactions are not consummated, the
      Company will remain a public shell with no continuing business operations and
      the restoration of the parties to the conditions that existed prior to the
      commencement of the Transactions may be time consuming and costly and may
      involve disputes among the parties, including disputes as to the
      calculation of the equity interest in IOWC
      to
      be received by the Company.




-18-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***


**Note
      3.  Due to President -
      Unreimbursed business expenses**




In
      2003
      and 2004 the Company’s President, Dennis Calvert, loaned money to the Company by
      paying from his personal funds certain of the Company’s expenses. A significant
      portion of these personal funds were obtained by Mr. Calvert by refinancing
      his
      primary residence and cashing out equity thereon. On March 7, 2005, the Company
      and Mr. Calvert agreed such that the $101,770 still outstanding and owed by
      the
      Company to Mr. Calvert will be repaid under the terms of a promissory note
      bearing interest of 10% per annum, requiring monthly payments and maturing
      on
      January 15, 2006. The outstanding loan balance was paid off entirely in January
      of 2006 and totals zero as of September 30, 2006.




As
      of
      September 30 2006, the Company had accrued an expense related to the unpaid
      accrued compensation due its president, Mr. Calvert, in the amount of $334,221.
      Mr. Calvert has tendered to the Company a proposal to convert this unpaid
      accrued compensation to the Company’s common stock upon approval by the
      Company’s stockholders of an amendment to the Company’s Certificate of
      Incorporation increasing the number of authorized shares of its common
      stock.






**Note
      4.  Sales of Unregistered
      Securities**




**First
      Offering**




In
      January 2005, pursuant to a private offering that commenced in October 2004
      and
      terminated in January 2005 (the “First Offering”), the Company received gross
      and net proceeds of $25,000 from an outside investor and issued its convertible
      promissory note (the “First Offering Note”) due and payable one year from the
      date of issuance. The First Offering Note bears interest at a rate of 10% per
      annum, payable on the maturity date. The First Offering Note can be converted,
      in whole or in part, into shares of the Company's Series A Preferred stock,
      on
      the basis of $.005 per share, at any time prior to maturity by either the
      Company or the lender. Each share of Series A Preferred Stock may be converted
      by the holder into one share of the Company's common stock. If the noteholder
      converts the First Offering Note into Series A Preferred Stock, on or after
      the
      note's original maturity date the noteholder may require the Company to buy
      back
      the shares of Series A Preferred Stock for 110% of the principal amount of
      the
      note (the "Buy Back Provision"). If the Company is unable to do so, the
      Company's president, Dennis Calvert, has agreed to buy back the shares on the
      same terms. If shares of Series A Preferred Stock are converted into common
      stock, the holder has the right to include (piggyback) the shares of common
      stock in a registration of securities filed by the Company, other than on Form
      S-4 or Form S-8.




-19-




The
      Company's payment obligations under the First Offering Note may be accelerated
      upon the following events: (i) the sale of the Company's assets outside the
      ordinary course of business; (ii) a breach of the representations and warranties
      contained within the evidencing the loan; (iii) the failure to timely pay the
      note; (iv) the Company's default in any other loan obligation greater than
      $100,000; (v) the Company's dissolution, liquidation, merger, consolidation,
      bankruptcy, or future insolvency; and (vi) the commencement of any suit that
      threatens to have a material adverse effect on the Company, including the entry
      of a final judgment or settlement in excess of $100,000.




**Second
      Offering**




In
      January 2005, pursuant to a private offering that commenced in that month and
      terminated in August 2005 (the “Second Offering”), the Company received gross
      and net proceeds of $75,000 from two outside investors and issued its
      convertible promissory note (the “Second Offering Note”) due and payable one
      year from the date of issuance. The Second Offering Note bears interest at
      a
      rate of 10% per annum, payable on the maturity date. The Second Offering Note
      can be converted, in whole or in part, into shares of the Company's common
      stock, on the basis ranging from $.005 to $0.016 per share, at any time prior
      to
      maturity by either the Company or the holder. The holder has the right to
      include (piggyback) the shares of common stock in a registration of securities
      filed by the Company, other than on Form S-4 or Form S-8.




The
      Company's payment obligations under the Second Offering Note may be accelerated
      upon the following events: (i) the sale of the Company's assets outside the
      ordinary course of business; (ii) a breach of the representations and warranties
      contained within the evidencing the loan; (iii) the failure to timely pay the
      note; (iv) the Company's default in any other loan obligation greater than
      $100,000; (v) the Company's dissolution, liquidation, merger, consolidation,
      bankruptcy, or future insolvency; and (vi) the commencement of any suit that
      threatens to have a material adverse effect on the Company, including the entry
      of a final judgment or settlement in excess of $100,000.




In
      February 2005, the Company received gross proceeds of $51,000 and net proceeds
      of $47,000 from four outside investors and issued Second Offering Notes which
      allow conversion into an aggregate total of 5,558,036 shares of common stock
      (at
      a conversion price of approximately $0.009 per common share).




In
      April
      2005, the Company received gross proceeds of $29,000 and net proceeds of $23,750
      from two outside investors and issued Second Offering Notes which allow
      conversion into an aggregate total of 2,500,000 shares of common stock (at
      a
      conversion price of approximately $0.009 per common share).




-20-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***


In
      May 2005, the Company received gross and net proceeds of $50,000 and $47,500
      from an outside investor and issued a Second Offering Note which allows
      conversion into a total of 7,142,857 shares of common stock (at a conversion
      price of $0.007 per common share).




In
      June
      2005, the Company received gross and net proceeds of $256,120 from eleven
      outside investors and issued Second Offering Notes which allow conversion into
      an aggregate total of 28,612,000 shares of common stock (at a weighted average
      conversion price of approximately $0.009 per common share).




Also
      in
      July 2005, the Company received gross proceeds of $10,000 and net proceeds
      of
      $9,500 from an outside investor and issued a Second Offering Note which allows
      conversion into an aggregate total of 625,000 shares of common stock (at a
      conversion price of $0.016 per common share).




In
      August
      2005, the Company received gross proceeds of $260,000 and net proceeds of
      $252,000 from five outside investors and issued Second Offering Notes which
      allow conversion into an aggregate total of 16,250,000 shares of common stock
      (at a conversion price of $0.016 per common share).




**Third
      Offering**




Pursuant
      to another private offering that commenced in September 2005 and terminated
      in
      February 2006, on December 31, 2005, the Company sold an aggregate amount of
      $299,500 of its promissory notes (the "Third Offering Notes") due and payable
      January 31, 2007 to twelve individual investors. Each Third Offering Note bears
      interest at a rate of 10% per annum, and can be converted, in whole or in part,
      into shares of the common stock of the Company at an initial conversion price
      of
      $0.025 per share. The Third Offering terminated on February 21, 2006, by which
      date the Company had raised $1,102,000 gross and net proceeds. Of this amount,
      $777,500 **** gross
      and
      net proceeds were recorded during the three-month period ended March 31, 2006,
      and the balance had been raised during 2005, excluding $25,000 received prior
      to
      the year end for which the Third Offering Note was not issued until the
      three-month period ended March 31, 2006.




The
      Third
      Offering Notes may not be converted by either the Company or the holder unless
      and until each of the following events has first occurred: (i) the Company's
      stockholders have approved an increase in the number of shares of common stock
      authorized by the Company's Certificate of Incorporation in an amount not less
      than the amount required to permit all notes and warrants issued in this series
      to be converted into shares of the Company's Common Stock as provided herein,
      at
      a validly held meeting of stockholders at which a quorum is present and acting
      throughout; and (ii) the Company has filed with the Secretary of State of State
      of Delaware a Certificate of Amendment to the Company's Certificate of
      Incorporation to amend its Certificate of Incorporation to increase the number
      of shares of common stock authorized by the Company's Certificate of
      Incorporation.




-21-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




Purchasers
      of the Third Offering Notes received, for no additional consideration, a stock
      purchase warrant (the "Third Offering Warrant") entitling the holder to purchase
      a number of Shares of Common Stock equal to the number of Shares of Common
      Stock
      into which the Third Offering Note is convertible. The Third Offering Warrant
      is
      exercisable at an initial price of $0.05 per Share and will expire on January
      31, 2008.




**Fall
      2006 Offering**




Pursuant
      to a private offering that commenced in September 2006 and is scheduled to
      expire December 30, 2006, unless extended by the Company, the Company is
      offering up to $1,000,000 of its convertible notes (the “Fall 2006 Notes”),
      which are due and payable on September 13, 2008 (the “Maturity Date”). Interest
      will accrue monthly and be paid annually on the Fall 2006 Notes, such interest
      to be paid in shares of the Company’s common stock based on the average closing
      price of the Company’s common stock for the 20 trading days preceding the
      interest due date. Purchasers of the Fall 2006 Notes will receive, for no
      additional consideration, a stock purchase warrant (the “Warrant”) entitling the
      holder to purchase a number of shares of the Company’s Common Stock equal to the
      number of shares of Common Stock into which the note is convertible. The Warrant
      is exercisable at an initial price of $0.05 per share and will expire on
      September 13, 2009. No value was attributed to the warrants as the amount was
      deemed immaterial.




The
      Fall
      2006 Notes may be subordinated in an amount up to $5 **** million
      of additional debt financing that the Company may incur prior to the Maturity
      Date. The Fall 2006 Notes are convertible into shares of the Company’s common
      stock at an initial conversion price of $0.0275 per share. The Notes can be
      converted voluntarily by the noteholders at any time, and from time to time,
      prior to the Maturity Date. The Fall 2006 Notes can be converted mandatorily
      by
      the Company (i) on or after September 13, 2007, if the Company has received
      one
      or more written firm commitments, or has closed on one or more transactions,
      or
      a combination of the foregoing, of at least $3 million gross proceeds of equity
      or debt; or (ii) on the Maturity Date. Accordingly, the Fall 2006 Notes may
      not
      be repaid in cash on the Maturity Date and may be converted, at the sole option
      of the Company, into shares of the Company’s common stock, on the Maturity Date.
      Notwithstanding the foregoing, the Fall 2006 Notes can be converted into shares
      of the Company’s common stock only after the Company’s stockholders have
      approved an increase in the number of authorized shares of the Company’s common
      stock at its 2006 annual meeting, which is currently scheduled to be held on
      December 20, 2006.




The
      Company has received gross and net proceeds of $252,500 from eight outside
      investors and issued Fall 2006 Notes which allow conversion into an aggregate
      of
      9,181,820 shares of common stock.




-22-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




**Other
      Issuances**




In
      March
      2006, the Company issued 120,000 shares of common stock in connection with
      the
      conversion, at the request of one stockholder, of 120,000 shares of convertible
      preferred stock.




In
      August
      2006, the Company issued 15,515,913 shares of its Common Stock to Code, as
      additional consideration for Code’s entering into the R&D Agreement.




All
      of
      these offerings and sales were made in reliance on the exemption from
      registration contained in Section 4(2) of the Securities Exchange Act and/or
      Regulation D promulgated thereunder as not involving a public offering of
      securities.




Until
      the
      Company’s stockholders approve an amendment to the Company’s charter to increase
      the number of authorized shares of common stock, the Company will be unable
      to
      fulfill its obligations to all convertible noteholders to permit the conversion
      into common stock of amounts due pursuant to the terms of the convertible notes.
      In the event that the Company has not raised further capital prior to the
      maturity dates of the convertible notes, the Company would be in default of
      those notes if its stockholders have not formally approved an increase in the
      number of authorized common shares. The Company is not, at this time, in default
      of the convertible notes.




**Note
      5.  Extension of
      Augustine Loan**




On
      June
      10, 2003 the Company entered into a Term Loan Agreement ("Loan Agreement")
      with
      Augustine II, LLC (the “Augustine Fund”), pursuant to which the Augustine Fund
      agreed to lend the Company $420,000, payable in installments of $250,000,
      $100,000, and $70,000 (the "Augustine Loan"). The proceeds of the Augustine
      Loan
      were used by the Company for working capital.




On
      July
      29, 2005, the Company and the Augustine Fund finalized the terms of an amendment
      to the Augustine Loan and executed formal documentation, in which the parties
      agreed to extend the maturity date to May 2006. In exchange, the Company issued
      a warrant that gives the Augustine Fund the right to purchase 8,000,000 shares
      of the Company's common stock at $0.005 per share for a period of five years.




On
      October 18, 2006, the Company and Augustine Fund, entered into a further
      amendment to their term loan agreement dated as of June 10, 2003, as amended,
      pursuant to which the parties have agreed to further extend to May 1, 2007
      the
      maturity date of the Company’s convertible term note in the principal amount of
      $420,000, issued in favor of Augustine.




-23-


**NUWAY
        MEDICAL, INC. AND SUBSIDARY**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 ***(Unaudited)***




**Note
      6.  Revisions to New
      Millennium Note**




On
      April
      28, 2006, the Board and Mr. Calvert agreed to amend the New Millennium Note
      to
      (i) extend the due date to January 15, 2008; (ii) waive any payments of interest
      until the New Millennium Note becomes due; (iii) reduce the principal amount
      of
      the New Millennium Note from $1,120,000 to $900,000, equal to a 19.6% reduction,
      and New Millennium's basis in said Note; and (iv) correspondingly reduce the
      accrued but unpaid interest due under the terms of the New Millennium Note
      from
      $317,956 to $255,636, also equal to a 19.6% reduction.




**Note
      7.  Stockholders'
      Equity**




The
      amounts related to common stock as of December 31, 2005 were changed because
      the
      Company did not convert 120,000 shares of preferred stock until March 2006.
      It
      had erroneously been reflected as converted during 2005. The management of
      the
      Company believes it had an immaterial impact on the previously reported
      financial statements.




During
      2006, the Company was contacted by an entity entitled to 24,744 shares of stock
      pursuant to a transaction with the Company in 2002. The share certificate had
      been issued in 2002, but the Company was unable to deliver the certificate
      because the stockholder’s contact information was incorrect. Subsequently, the
      Company cancelled the shares. Therefore, in 2006, the Company reissued the
      share
      certificate and delivered it the stockholder.




During
      2006, a review of outstanding preferred stock indicated that an overstatement
      of
      preferred shares had been made since 2003, and therefore an adjustment to the
      number of preferred stock outstanding was necessary. A further adjustment was
      made to the amount of par value of common stock to reflect par value based
      on
      the aggregate shares




-24-




**Item
      2. Management’s Discussion and Analysis**




This
      Quarterly Report on Form 10-QSB of NuWay Medical, Inc. (the "Company") contains
      forward-looking statements. These forward-looking statements include predictions
      regarding, among other things, our:




·
            business
                and acquisition plans, including the completion of previously-announced
                transactions; ·
            financing plans; ·
            general and administrative
              expenses;


·
            liquidity
                and sufficiency of existing cash;
                and


·
            the
                outcome of pending or threatened
                litigation.





You
      can
      identify these and other forward-looking statements by the use of words such
      as
      "may," "will," "expects," "anticipates," "believes," "estimates," "continues,"
      or the negative of such terms, or other comparable terminology. Forward-looking
      statements also include the assumptions underlying or relating to any of the
      foregoing statements.




Such
      statements, which include statements concerning future revenue sources and
      concentrations, selling, general and administrative expenses, research and
      development expenses, capital resources, additional financings and additional
      losses, are subject to risks and uncertainties, including, but not limited
      to,
      those discussed elsewhere in this Form 10-QSB, that could actual results to
      differ materially from those projected.




Our
      actual results could differ materially from those anticipated in these
      forward-looking statements as a result of various factors, including those
      set
      forth under the heading "Risk Factors" in our Annual Report on Form 10-KSB
      for
      the year ended December 31, 2005. Unless otherwise expressly stated herein,
      all
      statements, including forward-looking statements, set forth in this Form 10-QSB
      are as of September 30, 2006, and we undertake no duty to update this
      information.




**Plan
      of Operations**




***Overview***




The
      Company operated as a shell company during the nine-month period ended September
      30, 2006, and operations primarily consisted of the Company seeking funding,
      maintaining the corporate entity, complying with the reporting and other
      requirements of the Securities Exchange Commission (the "SEC"), engaging in
      ongoing research and development for the BioLargo Technology (as defined below),
      engaging in initial marketing activities for the BioLargo Technology and
      planning for the consummation of certain proposed transactions (the
“Transactions”), as described below.




-25-


***BioLargo
      Technology and BioLargo Products***




IOWC
      Technologies, Inc., a federally registered Canadian corporation (“IOWC”) and
      Kenneth R. Code (“Code”) have developed and own the BioLargo Technology,
      consisting of certain intellectual property (including two U.S. Patents (Patent
      Numbers 6146725 and 6328929), relating to a process whereby disinfecting
      chemistry is incorporated into absorbent materials, liquids, powders, tablets
      or
      other delivery methods, that can be then incorporated into products in multiple
      industries. Three additional patent applications have recently been filed with
      the United States Patent and Trademark Office relating to the BioLargo
      Technology, listing Code as inventor and BLTI as assignee, pursuant to the
      R
& D Agreement (defined below).




If
      the
      Transactions with the IOWC are completed, the Company intends to commercially
      utilize the BioLargo Technology to develop certain products for use in various
      industries. For the purposes of this Report, the term “BioLargo Products” means
      any product designed, manufactured, conceived or contemplated, either at the
      present time, or in the future, based on the BioLargo Technology or any
      derivation thereof.




It
      is expected that the BioLargo Technology will enable the Company to offer a
      portable product that comparably addresses four precautions -- containment,
      isolation, neutralization and disposal -- against disease transmission as
      established by the Center for Disease Control. The BioLargo Technology has
      been
      reviewed and validated in several third party studies. The Company believes
      that
      the BioLargo Technology and derivative products may be applied in approximately
      30 products in several vertical markets.




The
      Company believes that the primary initial markets for its products are likely
      to
      be:




·
            Packaging
                for Blood and Bio-hazardous Material
                Transport




·
            Medical
                Products




·
            Meat
                and Poultry Packing




·
            Disaster
                Relief Efforts, Soil and Sand Remediation, and Water
                Treatment




The
      Company plans to pursue its primary revenues from licensing the BioLargo
      Technology. It has multiple products available for immediate distribution,
      namely absorbent pads and materials to be used for clean up of or as a
      precautionary measure from spills of liquids, including hazardous materials.
      The
      Company is actively developing additional products for distribution by working
      with manufacturers, other technology developers and potential customers.




***Letter
      of Intent***




In
      July
      2005, the Company entered into a letter of intent (“LOI”) with IOWC. The LOI set
      out the terms for the acquisition of certain assets of IOWC consisting of
      certain intellectual property, including two United States patent and two
      license and/or distributor agreements pursuant to which IOWC had licensed
      certain of its technologies for use in products designed for distribution in
      the
      food, medical and biohazardous material transportation industries. In connection
      with the transactions contemplated by the LOI, the Company agreed to issue
      up to
      51% of its common stock to IOWC. The LOI provided that the transactions
      contemplated by the LOI would be completed pursuant to the terms of an asset
      purchase agreement as well as a research and development agreement. In addition,
      the LOI required certain stockholders approvals as a condition to the closing
      of
      the transactions contemplated by the LOI including approval of the issuance of
      the shares of the Company’s common stock to IOWC, a reverse stock split and an
      increase in the authorized capital stock of the Company.




-26-




As
      the parties worked toward preparing the documentation called for by LOI and
      as
      the Company began to prepare the proxy materials needed for its stockholders
      meeting, it became increasingly clear to the parties that the length of time
      and
      the costs involved in preparing documentation for a stockholders meeting would
      likely jeopardize the chances that the transactions contemplated by the LOI
      could be completed in a manner benefiting both parties. Accordingly, in late
      2005 the parties began to explore alternative strategies that would enable
      them
      to begin to realize the benefits of the transactions contemplated by the LOI
      while at the same time allow the Company to call a meeting of its stockholders
      for the purpose of approving the issuance of its shares.




***Marketing
      and Licensing Agreement***




In
      furtherance of the proposed transactions with IOWC, on December 31, 2005, the
      Company entered into a Marketing and Licensing Agreement (“M&L Agreement”)
      with IOWC and Code (collectively “BioLargo”).




Pursuant
      to the M&L Agreement the Company, through its wholly-owned subsidiary
      BioLargo Life Technologies, Inc., a California corporation (“BLTI”), acquired
      certain rights from BioLargo to develop, market, sell and distribute products
      that were developed, and are in development, by BioLargo relating to the
      BioLargo Technology and BioLargo Products.




***Licenses
      Granted to BLTI***




Pursuant
      to the terms of the M&L Agreement, IOWC granted to BLTI a license, with
      respect to the BioLargo Technology and the BioLargo Products, to further develop
      the technology, to further develop existing and new products based on that
      technology, and to produce, market, sell and distribute any such products,
      through its own means, or by contract or assignment to third parties or
      otherwise, including without limitation:




·
            ***Technology
                Development Rights***.
                Exclusive worldwide right to expand and improve upon the existing
                BioLargo
                Technology, to conduct research and development activities based
                on the
                BioLargo Technology, and to contract with third parties for such
                research
                and development activities; and any improvements on the BioLargo
                Technology, or any new technology resulting such efforts of BLTI,
                shall be
                owned solely by BLTI.




-27-




·
            ***Product
                Development Rights***.
                Exclusive worldwide right to expand and improve upon the existing
                BioLargo
                Products, to conduct research and development activities to create
                new
                products for market, and to contract with third parties for such
                research
                and development activities. Any new products created by BLTI resulting
                from these efforts shall be owned solely by
                BLTI.




·
            ***Marketing
                Rights***.
                Exclusive right to market, advertise, and promote the BioLargo Technology
                and the BioLargo Products in any market and in any manner it deems
                commercially reasonable.




·
            ***Manufacturing
                Rights***.
                A
                transferable, worldwide exclusive right to manufacture, or have
                manufactured, BioLargo Products.




·
            ***Selling
                Rights***.
                A
                transferable, worldwide exclusive right to sell BioLargo Technologies
                and
                BioLargo Products.




·
            ***Distribution
                Rights***.
                A
                transferable, worldwide exclusive right to inventory and distribute
                BioLargo Products.




·
            ***Licensing
                Rights***.
                A
                transferable, worldwide exclusive right to license BioLargo Technologies
                and BioLargo Products to third
                parties.






***Assigned
      Agreements***




Pursuant
      to the terms of the M&L Agreement, BioLargo also assigned to BLTI its rights
      and obligations with respect to the following Agreements (collectively, the
      “Assigned Agreements”):




·
            Agreement
                dated October 15, 2004 by and between Kenneth R. Code, IOWC, BioLargo
                Technologies, Inc., or IOWC’s assigns and Craig Sundheimer and Lloyd M.
                Jarvis.




·
            Agreement
                dated January 15, 2005 by and between Kenneth R. Code, IOWC and Food
                Industry Technologies, Inc.




·
            Letter
                of Intent dated November 15, 2004 by and between Kenneth R. Code
                and IOWC
                and GTS Research, Inc.




Pursuant
      to the terms of the M&L Agreement the Company is to receive any and all
      royalties, payments, license fees, and other consideration generated by the
      Assigned Agreements as of January 1, 2006. As part of the assignment, IOWC
      agreed to transfer its 20% interest in BioLargo, LLC to BLTI. In October 2006,
      the Company terminated the license agreement with BioLargo, LLC, for cause.
      Subsequently, the Company and IOWC agreed that the 20% interest in BioLargo,
      LLC
      would not be transferred by IOWC to BLTI, but BLTI would have the option to
      acquire such 20% interest for $1 at any time until December 31,
      2013.




-28-




***Consulting
      Agreement***




On
      June
      20, 2006, the Company entered into a Consulting Agreement (the “Consulting
      Agreement”) with Code. Pursuant to the Consulting Agreement, the Company has
      engaged the services of Code, effective January 1, 2006, to advise the Company
      in research and development and technical support, and to provide other services
      and assistance to the Company in matters relating to the Company’s business.




The
      Consulting Agreement contains provisions requiring Code to devote substantially
      all of his business time to the Company; prohibiting Code from directly or
      indirectly engaging in any business activity that would be competitive with
      the
      business of the Company or its affiliates, including its wholly-owned subsidiary
      BLTI; providing that during the term of the Consulting Agreement and for one
      year post-termination, Code will not solicit the Company’s employees or
      customers; and other standard provisions typical for a consulting agreement.
      The
      Consulting Agreement also provides that the Company shall retain the exclusive
      right to use or distribute all creations which may be created during the term
      of
      the Consulting Agreement. The Consulting Agreement terminates on January 1,
      2007, unless terminated earlier as provided therein. During the term of the
      Consulting Agreement, Code shall be paid $15,400 per month, prorated for partial
      months, and shall be entitled to reimbursement for authorized business expenses
      incurred in the performance of his duties.




It
      is
      anticipated that the Consulting Agreement will be replaced with an employment
      agreement between the Company and Mr. Code, pursuant to which Mr. Code will
      be
      employed as BLTI’s Chief Technology Officer. See “Other Agreements - Code
      Employment Agreement” below.




***Research
      and Development Agreement***




On
      August
      11, 2006, the Company and BLTI entered into a Research and Development
      Agreement, which agreement amended was amended on August 14, 2006 (collectively,
      the “R&D Agreement”), with IOWC and Code. Pursuant to the R&D Agreement,
      IOWC and Code will provide its research and development services and expertise
      in the field of disposable absorbent products to the Company and
      BLTI.




The
      R&D Agreement provides that the Company and BLTI will own, and the Company
      and BLTI will have the exclusive right to commercially exploit, the intellectual
      property developed, created, generated, contributed to or reduced to practice
      pursuant to the R&D Agreement. In addition, IOWC and Code have agreed that
      during the term of the R&D Agreement and for one year after termination they
      will not compete with, and will not provide services to any person or entity
      which competes with, any aspect of BLTI’s business.




The
      R&D Agreement terminates on December 31, 2006, unless terminated earlier as
      provided therein. During the term of the R&D Agreement, but only after
      mutually acceptable research facilities are established for the performance
      of
      IOWC’s services (as of this date, no acceptable research facilities have been
      established), IOWC shall be paid (i) a fee of $5,500 per month for each month
      during which no services are being performed pursuant to the R&D Agreement
      to offset for laboratory and/or office and IOWC employee expenses and (ii)
      such
      additional amounts as the parties may agree in connection with specific research
      projects conducted pursuant to the R&D Agreement.




-29-




As
      further consideration to Code to enter into the R&D Agreement, on August 14,
      2006 the Company issued to Code 15,515,913 shares of its Common Stock (the
“Code
      Stock”), or approximately 19.9% of the Company’s issued and outstanding common
      stock immediately following the issuance of the Code Stock.




IOWC
      and
      Code have agreed to protect, maintain and keep confidential any proprietary
      or
      confidential information of the Company and BLTI and have executed a
      non-disclosure and confidentiality agreement in favor of the
      Company.




***Other
      Agreements***




The
      M&L Agreement also provides that the parties will enter into certain
      additional agreements in furtherance of the LOI, including (i) an asset purchase
      agreement (“Asset Purchase Agreement”) whereby the Company will acquire the two
      U.S. patents held by IOWC and certain other assets of IOWC; and (ii) an
      employment agreement with Code (the “Code Employment Agreement”).




The
      following are summaries only of the likely provisions of the Asset Purchase
      Agreement to be entered into by the Company, BLTI, IOWC and Code, and the Code
      Employment Agreement to be entered into between BLTI and Code. The Company
      has
      approved the consummation of the transaction on the terms and subject to the
      conditions so summarized, but the other parties to the agreements have not,
      as
      of the date of this Report, and other than the number of shares to be issued
      to
      IOWC, approved these terms and conditions in their entirety. Thus these
      summaries are neither complete nor necessarily a summary of the final terms
      between and among the parties with respect to the subject matter thereof, which
      may be still subject to negotiation.




***Asset
      Purchase Agreement***




*Sale
      of Assets* . Pursuant
      to the terms of the Asset Purchase Agreement, Code and IOWC will sell, transfer
      and assign all of their rights, title and interests to two US patents and
      related intellectual property, as well as the records related to the patents
      and
      intellectual property.




In
      addition to the Code Stock issued in August 2006 and as further and full payment
      for IOWC’s obligations set forth in the M&L Agreement, pursuant to the Asset
      Purchase Agreement, the Company will deliver to IOWC the following common stock
      (collectively, the “IOWC Stock”) upon the approval of the issuance of the IOWC
      Stock by the Company’s stockholders, which amounts shall be based upon the total
      outstanding common stock after the issuances of this stock consideration, as
      well as the conversion into common stock of the Company’s existing
      debt:




-30-




·
            ***Licensing
                Rights***.
                As full payment for the license granted to BLTI, and without taking
                into
                account the effects of a reverse split of the Company’s common stock as
                described in Proposal Four, the Company will deliver to IOWC 411,558,557
                shares of the Company’s common
                stock.




·
            ***Assigned
                Agreements***.
                As full payment for the assignment of the Assigned Agreements, and
                without
                taking into account the effects of a reverse split of the Company’s common
                stock as described in Proposal Four, the Company will deliver to
                IOWC an
                additional 127,725,069 shares of the Company’s common
                stock.




·
            ***Asset
                Purchase Agreement***.
                As full payment for the transfer of any intellectual property under
                the
                terms of the Asset Purchase Agreement, and without taking into account
                the
                effects of a reverse split of the Company’s common stock as described in
                Proposal Four, the Company will deliver to IOWC an additional 14,191,674
                shares of the Company’s common
                stock.




·
            ***Total
                Consideration***.
                The total common stock to be issued to IOWC for all components of
                the
                Transactions, without taking into account the effects of a reverse
                split
                of the Company’s common stock as described in Proposal Four, shall equal
                553,475,300 shares of the Company’s common stock. Separately, Mr. Code has
                already been issued 15,515,913 shares of the Company’s common stock in
                connection with the R&D
                Agreement.




The
      Company’s stockholders are being asked to approve the issuance of 553,475,300
      shares of the Company’s common stock, which comprises the IOWC Stock, at the
      2006 Annual Meeting. A reverse split must be effectuated prior to the
      issuance to IOWC because the Company’s Certificate of Incorporation only allows
      the issuance of 100,000,000 shares of its common stock (or 200,000,000 if
      Proposal Five is approved). The Company’s stockholders are not being asked
      to approve the issuance of the 15,515,913 shares of the Company’s common stock
      previously issued to Mr. Code, which comprise the Code Stock.




Representations
      and Warranties .
      As part
      of the Asset Purchase Agreement, Code and IWOC, jointly and severally, will
      make
      certain representations and warranties to BLTI with respect to, among other
      things:




·
            title
                to the assets being sold;




·
            sufficiency
                of the assets for the future conduct of business by
                BLTI;




·
            intellectual
                property matters;




·
            litigation
                and proceedings




·
            compliance
                with laws; and




·
            required
                consents.




-31-


The
      Asset
      Purchase Agreement also contains additional representations and warranties
      of
      Code and/or IOWC, and of BLTI, standard for asset purchase transactions.




The
      representations and warranties of the parties contained in the Asset Purchase
      Agreement will survive for four years after the closing at which time they
      will
      expire.




*Conditions
      to Closing* **.** The
      Asset Purchase Agreement provides certain conditions to the obligations of
      the
      parties, which must either be satisfied or waived before the closing can occur.




The
      Transactions are subject to approval by IOWC's board of directors and
      stockholders, approval by the Company's Board and approval by the Company's
      stockholders at the 2006 Annual Meeting of the following matters:




·
            an
                amendment to the Company's Certificate of Incorporation increasing
                the
                number of authorized shares of its common
                stock;




·
            the
                issuance of the number of shares of common stock to IOWC required
                pursuant
                to the Transactions;




·
            authorization
                for the Board to reverse split of the Company's common stock, in
                a ratio
                it deems appropriate; and




·
            the
                election of Mr. Code to the Company's
                Board.




The
      consummation of the Transactions with IOWC is subject to various other
      conditions, in addition to those described hereinabove, such as contractual
      conditions customary for transactions of this nature.




Indemnification .
      Under
      the Asset Purchase Agreement, IOWC and Code will, jointly and severally,
      indemnify BLTI and each of its officers, directors, employees, agents and
      affiliates, and each of their successors and assigns from and against any and
      all costs, losses, claims, liabilities, fines, penalties, consequential damages
      (other than lost profits), and expenses (including interest which may be imposed
      in connection therewith and court costs and reasonable fees and disbursements
      of
      counsel) incurred in connection with, arising out of, resulting from or incident
      to:




·
            liabilities
                or claims arising out of the assets or the business of IOWC before
                the
                closing;




·
            liabilities
                or claims after the closing relating to IOWC or
                Code;




·
            breach
                of the representations or warranties made by IOWC or
                Code;




·
            default
                in any agreements made by IOWC or
                Code;




-32-




·
            taxes
                of any kind arise out of or result from the transactions contemplated
                by
                the Asset Purchase Agreement; and




·
            liabilities
                or claims relating employee
                matters.




BLTI
      will
      also indemnify IOWC and Code and their officers, directors, employees, agents
      and affiliates, and each of their successors and assigns from and against any
      and all costs, losses, claims, liabilities, fines, penalties, consequential
      damages (other than lost profits), and expenses (including interest which may
      be
      imposed in connection therewith and court costs and reasonable fees and
      disbursements of counsel) incurred in connection with, arising out of, resulting
      from or incident to:




·
            breach
                of the representations and warranties made by BLTI;
                and




·
            default
                in any agreement made by BLTI.




The
      Asset
      Purchase Agreement provides the mechanism by which the parties must notify
      each
      other of any claims, the methods for resolution of such and requires the parties
      to arbitrate any unresolved claims.




Termination . 
      The Asset Purchase Agreement provides that the parties by mutual agreement
      may
      terminate the Asset Purchase Agreement. In addition, either party may
      unilaterally terminate the Asset Purchase Agreement if that party determines
      that the conditions to closing of the other party will not be satisfied or
      if
      the other party has breached a representation or warranty and fails to cure
      such
      breach within five days after receiving notice of such breach.




The
      Asset
      Purchase Agreement also allows, BLTI to terminate the Asset Purchase Agreement
      if:




·
            it
                is not satisfied, in its sole discretion, with the results of its
                due
                diligence investigations; and




·
            it
                has not obtained on terms and conditions satisfactory to it, in its
                sole
                discretion, all of the financing it needs to consummate the transactions
                contemplated by the Asset Purchase Agreement and fund the working
                capital
                requirements of BLTI after the
                closing.




Miscellaneous .
      The
      Asset Purchase Agreement also contains customary provisions relating to
      governing law, assignment of rights and obligations, attorneys’ fees, force
      majeure and other matters standard for asset purchase transactions.




***Code
      Employment Agreement***




The
      Code
      Employment Agreement is anticipated to provide that Code will be appointed
      Chief
      Technology Officer of BLTI, and receive (i) base compensation of $184,000
      annually (with an automatic 10% annual increase) and (ii) a bonus equal to
      equal
      to 3% of the licensing revenues received by BLTI, plus (iii) such other
      amounts that the Board of Directors of BLTI may determine from time to time.
      In
      addition, Code will be eligible to participate in incentive plans, stock option
      plans, and similar arrangements as determined by the Board of Directors of
      BLTI.
      Code is also eligible to receive heath insurance premium payments for himself
      and his family, a car allowance of $800 per month, paid vacation of four weeks
      per year plus an additional two weeks per year for each full year of service
      during the term of the agreement up to a maximum of ten weeks per year, and
      disability insurance. Code will also be entitled to participate in any other
      plans and arrangements, which provide for sick leave, vacation, or personal
      days, provided to or for the officers of BLTI from time to time. The employment
      agreement will have a term of five years, unless earlier terminated in
      accordance with its terms.




-33-




The
      Code
      Employment Agreement is also anticipated to provide that Code’s employment may
      be terminated by BLTI due to disability, for cause or without cause. Code’s
      employment may be terminated if he is unable to return to his duties within
      30
      days after notice of termination is given to him. During the disability period,
      Code is eligible to receive his salary and benefits. If Code’s employment is
      terminated for cause he will be eligible to receive his accrued base
      compensation and vacation compensation through the date of termination. If
      Code’s employment is terminated without cause, then he will be eligible to
      receive the greater of (i) one year’s compensation plus an additional one half
      year for each year of service since the effective date of the employment
      agreement or (ii) one year’s compensation plus an additional one half year for
      each year remaining in the term of the agreement.




The
      Code
      employment agreement requires Code to keep certain information confidential,
      not
      to solicit customers or employees of BLTI or interfere with any business
      relationship of BLTI.




Mr.
      Code
      will also be nominated for election to the Board of the Company and appointed
      to
      the board of directors of BLTI.




***Management
      of the Company after the Transactions***




It
      is expected that Mr. Calvert will remain as President and CEO of the Company
      under a newly executed long-term employment agreement.




The
      Board has agreed to appoint Mr. Code as BLTI's Chief Technology Officer pursuant
      to a long-term employment agreement and has agreed to appoint Mr. Code to the
      Board effective upon closing of the Transactions, if he is not elected to the
      Board by the stockholders at the 2006 Annual Meeting of Stockholders (the “2006
      Annual Meeting”), which is currently scheduled to be held on December 20, 2006.
      In addition, the Company is in the process of negotiating employment and/or
      consulting agreements with third parties, including an interim CFO, marketing
      and corporate development professionals. There is no assurance however that
      the
      Company will be able to attract and retain any such employees.




-34-




***Consequences
      if Stockholders Do Not Approve Transactions***




If
      the
      stockholders do not approve the election of Code as a director, and each of
      proposals being put before them at the 2006 Annual Meeting to approve the
      acquisition of the IOWC assets and the issuance of shares to IOWC, to amend
      the
      Company’s Certificate of Incorporation to increase the number of authorized
      shares, to authorize the Board to effect a reverse split of the Company’s common
      stock, and to change the name of the Company to BLTI Holdings, Inc., the
      Transactions with IOWC will not be consummated. In such event, the M&L
      Agreement, the R&D Agreement and the Option Agreement will
      terminate. The Consulting Agreement expires on its terms on December 31, 2006.
      Pursuant to the R&D Agreement, Code must return the Code Stock to the
      Company upon termination of the R&D Agreement. Additionally, upon
      termination of the M&L Agreement, all rights granted by BioLargo to the
      Company (or its subsidiary BLTI) shall revert to BioLargo. Additionally,
      pursuant to the LOI, amounts advanced by the Company to BioLargo would be
      converted into stock of IOWC at $1.00 per share. The parties are currently
      negotiating the classification of sums expended by the Company pursuant to
      the
      Agreements, and whether such sums would constitute an "advance" pursuant to
      letter of the intent. As of September 30, 2006, the Company believes these
      sums
      are in excess of $750,000.  If the Transactions are not consummated, the
      Company will remain a public shell with no continuing business operations and
      the restoration of the parties to the conditions that existed prior to the
      commencement of the Transactions may be time consuming and costly and may
      involve disputes among the parties, including disputes as to the
      calculation of the equity interest in IOWC to be received by the
      Company.




***Other***




The
      Company will need working capital resources to maintain the Company's status
      and
      to fund other anticipated costs and expenses during the remainder of the year
      ending December 31, 2006 and beyond. The Company's ability to continue as a
      going concern is dependent on the Company's ability to raise capital. If the
      Company is able to acquire IOWC, it will need additional capital until and
      unless that prospective operation is able to generate positive working capital
      sufficient to fund the Company's cash flow requirements from operations. The
      Company has conducted an offering of its convertible notes and warrants to
      provide such interim funding and intends to seek additional capital. See
      "Liquidity and Capital Resources" below.




**Results
      of Operations**




The
      Company had no revenues from continuing operations during the three- and
      nine-month periods ended September 30, 2006 and 2005.




***Research
      and Development***




Research
      and development expenses were $24,000 and $108,000 for the three- and nine-month
      periods ended September 30, 2006, respectively, compared to $0 and $0 for the
      three- and nine-month periods ended September 30, 2005, respectively, an
      increase of $24,000 and $108,000, respectively. These increases are attributable
      to the research and development related to the BioLargo Technology, specifically
      regarding the testing of the efficacy of the BioLargo Technology in certain
      applications, and the development of production methods for use of the BioLargo
      Technology in certain applications.




-35-




***Selling,
      General and Administrative Expense***




Selling,
      general and administrative expenses were $527,000 and $1,077,000 for the three-
      and nine-month periods ended September 30, 2006, respectively, compared to
      $349,000 and $716,000 for the three- and nine-month periods ended September
      30,
      2005, respectively, an increase of $178,000 and $361,000, respectively. These
      increases are primarily attributable to the increase in salaries, consulting
      expenses and legal expenses, compared with the same periods in 2005, as
      follows:




a.  Salaries
      and Payroll-Related Expenses: These expenses were $46,000 and $139,000 for
      the
      three- and nine-month periods ended September 30, 2006, respectively, compared
      to $42,000 and $173,000 for the three- and nine-month periods ended September
      30, 2005, respectively, an increase of $4,000 and decrease of $34,000,
      respectively. The decrease in the nine-month period ended September 30, 2006
      is
      primarily attributable to an expense recorded by the Company in the prior year
      for the issuance of shares of the Company’s common stock to an officer of the
      Company in lieu of cash compensation.




b.  Consulting
      Expenses: These expenses were $349,000 and $567,000 for the three- and
      nine-month periods ended September 30, 2006, respectively, compared to $103,000
      and $205,000 for the three- and nine-month periods ended September 30, 2005,
      respectively, an increase of $246,000 and $362,000 respectively. The increase
      in
      the three- and nine-month periods ended September 30, 2006 is primarily
      attributable to the one time stock issuance to Code pursuant to the R&D
      Agreement and the Company’s increased need for outside consultants.




c.  Legal
      and
      Professional Expenses: These expenses were $62,000 and $180,000 for the three-
      and nine-month periods ended September 30, 2006, respectively, compared to
      $74,000 and $146,000 for the three- and nine-month periods ended September
      30,
      2005, respectively, an increase of $12,000 and $34,000, respectively. These
      increases are primarily due to the high level of legal and professional services
      required during the nine-month period ended September 30, 2006 with respect
      to
      IOWC, the Transactions, private offerings of the Company’s securities and other
      matters.




***Net
      Loss***




Net
      loss
      for the three- and nine-month periods ended September 30, 2006 was $652,000
      and
      $1,186,000, respectively, or $(0.01) and $(0.02) per share. Comparatively,
      for
      the three- and nine-month periods ended September 30, 2005, net loss was
      $415,000, and $888,000, respectively, or $(0.01) and $(0.01) per share.




-36-




**Liquidity
      and Capital Resources**




***General***




Cash
      and
      cash equivalents totaled $98,497 at September 30, 2006. The Company had no
      revenues in the nine-month period ended September 30, 2006 and was forced to
      consume cash on hand to fund operations. The Company's cash position is
      insufficient to meet its continuing anticipated expenses or fund anticipated
      operating expenses after the consummation of the Transactions with IOWC. The
      Company will be required to raise additional capital to sustain basic operations
      through the remainder of 2006 beyond.




The
      financial statements accompanying this Report have been prepared on a going
      concern basis, which contemplates the realization of assets and the settlement
      of liabilities and commitments in the normal course of our business. The Company
      had a net loss of $1,185,920 for the nine-month period ended September 30,
      2006;
      a negative cash flow from operating activities of $962,465 for the nine-month
      period ended September 30, 2006; and an accumulated deficit of $28,229,187
      as of
      December 31, 2005, and $29,415,107 as of September 30, 2006.




As
      of
      September 30, 2006, the Company had limited liquid and capital resources,
      raising a substantial doubt about the Company's ability to continue as a going
      concern. Ultimately, the Company's ability to continue as a going concern is
      dependent upon its ability to attract new sources of capital, establish an
      acquisition or reverse merger candidate with continuing operations, such as
      IOWC, attain a reasonable threshold of operating efficiencies and achieve
      profitable operations. The financial statements do not include any adjustments
      that might be necessary if the Company is unable to continue as a going
      concern.




The
      Company has $2,398,070 aggregate principal amount of its promissory notes that
      mature at various times during 2006 and the nine-month period ending September
      30, 2007. The Company does not presently have funds sufficient to repay these
      obligations as they mature. Even though the terms of all of these notes permit
      the noteholder to convert the notes into shares of our common stock, until
      the
      Company’s stockholders approve an amendment to the Company’s charter to increase
      the number of authorized shares of common stock, the Company will be unable
      to
      fulfill its obligations to all noteholders to permit the conversion into common
      stock of amounts due pursuant to the terms of the notes. In the event that
      the
      Company has not raised further capital prior to the maturity dates of the
      convertible notes, the Company would be in default of those notes if its
      stockholders have not formally approved an increase in the number of authorized
      common shares, or unless the Company is able to refinance or renegotiate the
      terms of these notes. No financing is in place at present, and it is unknown
      if
      any financing will be in place in the future, which would permit the Company
      to
      repay these notes in full as they mature.




The
      Company has obtained the consent of all of its noteholders to extend the
      maturity date of those convertible notes until after the Company has held the
      2006 Annual Meeting, to approve, among other things, an increase in the
      authorized capital stock of the Company and thereby permit the conversion of
      such notes into shares of the Company’s common stock.




-37-




Pursuant
      to a private offering that commenced in September 2005 and terminated in
      February 2006, the Company offered up to $2,000,000 of its convertible notes
      (the “Third Offering Notes”), which are due and payable on January 31, 2007. The
      Third Offering Notes bear interest at a rate of 10% per annum, payable on the
      maturity date, and can be converted, in whole or in part, into shares of the
      Company's common stock, on a basis of $0.025 per common share, at any time
      prior
      to maturity by either the Company or the holder. Purchasers of the Third
      Offering Notes will receive, for no additional consideration, a stock purchase
      warrant (a "Third Offering Warrant") entitling the holder to purchase a number
      of shares of Common Stock equal to the number of shares of Common Stock into
      which the Third Offering Note is convertible, at an initial price of $0.05
      per
      share, with an expiration of January 31, 2008. The offering terminated on
      February 21, 2006, by which date the Company had raised $1,102,000 gross and
      net
      proceeds. Of this amount, $802,500 gross and net proceeds were raised during
      the
      three-month period ended March 31, 2006, and the balance had been raised during
      2005.




The
      Company will be required to raise additional capital during 2006 to sustain
      its
      operations and meet its liabilities as they become due for the next twelve
      months, as well as to fund the operations of the Company after the Transactions
      are consummated. While the Company is actively considering alternatives for
      the
      Company's longer-term financial requirements, including additional raises of
      capital from investors in the form of convertible debt or equity, there is
      no
      assurance that the Company will be able to raise any additional capital. It
      is
      unlikely that the Company will be able to qualify for bank debt until such
      time
      as the Company is able to demonstrate the financial strength to provide
      confidence for a lender.




Pursuant
      to a private offering that commenced in September 2006 and is scheduled to
      expire December 30, 2006, the Company is offering up to $1,000,000 of its
      convertible notes (the “Fall 2006 Notes”), which are due and payable on
      September 13, 2008 (the “Maturity Date”). Interest will accrue monthly and be
      paid annually on the Fall 2006 Notes, such interest to be paid in shares of
      the
      Company’s common stock based on the average closing price of the Company’s
      common stock for the 20 trading days preceding the interest due date. Purchasers
      of the Fall 2006 Notes will receive, for no additional consideration, a stock
      purchase warrant (the “Warrant”) entitling the holder to purchase a number of
      shares of the Company’s Common Stock equal to the number of shares of Common
      Stock into which the note is convertible. The Warrant is exercisable at an
      initial price of $0.05 per share and will expire on September 13,
      2009.




The
      Fall
      2006 Notes may be subordinated in an amount up to $5 **** million
      of additional debt financing that the Company may incur prior to the Maturity
      Date. The Fall 2006 Notes are convertible into shares of the Company’s common
      stock at an initial conversion price of $0.0275 per share. The Notes can be
      converted voluntarily by the noteholders at any time, and from time to time,
      prior to the Maturity Date. The Fall 2006 Notes can be converted mandatorily
      by
      the Company (i) on or after September 13, 2007, if the Company has received
      one
      or more written firm commitments, or has closed on one or more transactions,
      or
      a combination of the foregoing, of at least $3 million gross proceeds of equity
      or debt; or (ii) on the Maturity Date. Accordingly, the Fall 2006 Notes may
      not
      be repaid in cash on the Maturity Date and may be converted, at the sole option
      of the Company, into shares of the Company’s common stock, on the Maturity Date.
      Notwithstanding the foregoing, the Fall 2006 Notes can be converted into shares
      of the Company’s common stock only after the Company’s stockholders have
      approved an increase in the number of authorized shares of the Company’s common
      stock at its 2006 annual meeting, which is currently scheduled to be held on
      December 20, 2006 . See Part II, Item 2, " Unregistered Sales of Equity
      Securities and Use of Proceeds ".




-38-




The
      Company has received gross and net proceeds of $252,500 from eight outside
      investors and issued Fall 2006 Notes which allow conversion into an aggregate
      of
      9,181,820 shares of common stock.




Significant
      debt obligations of the Company at September 30, 2006 included:




(i)
      $420,000 due to Augustine II, LLC (the "Augustine Fund"), together with accrued
      but unpaid interest, described in more detail below;




(ii)
      a **** $900,000
      note payable which was purchased in March 2003 by New Millennium Capital
      Partners, LLC ("New Millennium"), an entity owned and controlled by the
      Company's president, Dennis Calvert, and certain members of his family, together
      with accrued but unpaid interest, described in more detail below;




(iii)
      amounts owed to Mr. Calvert personally in the aggregate amount of approximately
      $334,000, as described below;




(iv)
      convertible promissory notes to various investors in the aggregate principal
      amount of $816,000, plus accrued interest;




(v)
      approximately $21,000 outstanding remaining on a settlement agreement with
      former convertible debenture holders;




(vi)
      $35,000 in remaining balance due to a former advisory board member, from a
      promissory note dated November 20, 2003 in the original principal amount of
      $65,000; and




(vii)
      convertible promissory notes issued to various investors in the offering that
      terminated in February 2006 in the aggregate principle amount of
      $1,102,000.




As
      of
      September 30, 2006, there was also $799,207 of accrued and unpaid interest
      recorded related to these obligations.




***Augustine
      Fund Note***




On
      June
      10, 2003 the Company entered into a Term Loan Agreement ("Loan Agreement")
      with
      the Augustine Fund, pursuant to which the Augustine Fund agreed to lend the
      Company $420,000, payable in installments of $250,000, $100,000, and $70,000
      (the "Augustine Loan"). The proceeds of the Augustine Loan were used by the
      Company for working capital.




-39-




Principal
      and interest, at an annual rate of 10%, of the Augustine Loan, was originally
      due on February 29, 2004. In addition, the Loan Agreement contains certain
      requirements that the Company make mandatory prepayments of the Augustine Loan
      from the proceeds of any asset sales outside of the ordinary course of business,
      and, on a quarterly basis, from positive cash flow. In addition, all or any
      portion of the Augustine Loan may be prepaid by the Company may prepay all
      or
      any portion of the Augustine Loan at any time without premium or
      penalty.




As
      additional consideration for making the Augustine Loan, the Augustine Fund
      received five-year warrants to purchase up to 6,158,381 shares of the Company's
      common stock at an exercise price of $0.16 per share. The Company could require
      that the warrants be exercised if certain conditions were satisfied. Since
      these
      conditions were not fully satisfied by the maturity date, the Loan Agreement
      provides that the Augustine Fund may, at any time following the maturity date
      and so long as the warrants remain exercisable, elect to exercise all or any
      portion of the warrants pursuant to a "cashless exercise", whereby the Augustine
      Fund would be issued the net amount of shares of our common stock, taking into
      consideration the difference between the exercise price of the warrants and
      the
      fair market value of our common stock at the time of exercise, without having
      to
      pay anything to the Company for such exercise.




As
      security for the Augustine Loan, New Millennium Capital Partners LLC ("New
      Millennium"), a company controlled and owned by the Company's president, Dennis
      Calvert, and members of his family, pledged 2.5 million shares of the Company's
      common stock owned by New Millennium, and, in addition, the Company has granted
      the Augustine Fund a security interest in its 51% membership ownership interest
      in NuWay Sports. As a result, the Company will need to consent of the Augustine
      Fund to release its security interest in NuWay Sports if the Company is able
      to
      sell NuWay Sports.




Prior
      to
      the original maturity date of the Augustine Loan, the Company spoke with
      representatives of the Augustine Fund and advised them that the Company was
      unable to pay the amount due under the Augustine Loan by the February 29, 2004
      maturity date. On March 30, 2004, the Augustine Fund agreed to extend the
      maturity date of the Loan Agreement to August 2004. In addition to the extension
      of the maturity date, the Augustine Fund was given the option of having the
      Augustine Loan satisfied in cash or by the conversion of any remaining principal
      balance and any accrued interest on the Augustine Loan to shares of the
      Company's common stock at a 15% discount to market, so long as Augustine Fund's
      holdings do not exceed 4.9% of the total issued and outstanding shares of the
      Company's common stock at any time. In addition, the warrants held by the
      Augustine Fund to purchase 6,158,381 shares of the Company's common stock were
      re-priced to an exercise price of $.035 per share. Exercise of the warrants
      is
      also subject to the limit that the Augustine Fund does not hold more than 4.9%
      of the issued and outstanding shares of the Company's common stock.




On
      July
      29, 2005, the Company and the Augustine Fund finalized the terms of an amendment
      to the Augustine Loan and executed formal documentation, in which the parties
      agreed to further extend the maturity date to May 2006. In exchange, the Company
      issued a warrant that gives the Augustine Fund the right to purchase 8,000,000
      shares of the Company's common stock at $0.005 per share for a period of five
      years.




-40-




On
      October 18, 2006, the Company and Augustine Fund, entered into a further
      amendment to their term loan agreement dated as of June 10, 2003, as amended,
      pursuant to which the parties have agreed to further extend to May 1, 2007
      the
      maturity date of the Company’s convertible term note in the principal amount of
      $420,000, issued in favor of Augustine.




Accordingly,
      as of September 30, 2006, the principal amount of the loan, together with
      approximately $249,755 in accrued but unpaid interest, had not been
      repaid.




***Obligation
      to New Millennium***




In
      conjunction with the acquisition from Med Wireless of the license for the its
      technology in 2002, the Company assumed a $1,120,000 note (the "Note") with
      interest at 10% per annum payable by Med Wireless to Summitt Ventures, Inc.
      ("Summitt Ventures"). The Note is secured by the Company's assets and was
      originally due on June 15, 2003. It was sold, as part of a series of
      transactions with Mark Anderson, a former consultant and former principle
      stockholder of the Company, and his affiliated entities, to New Millennium,
      an
      entity owned and controlled by the Company's president, Dennis Calvert, and
      certain members of his family, in March 2003.




Since
      New
      Millennium purchased the Note, the Company has attempted multiple times to
      convert the Note, but has been unable to obtain the required stockholder vote,
      due to a lack of quorum, to do so. New Millennium orally agreed with the Company
      to extend the maturity date of the Note to a first payment due October 1, 2003
      in the amount of $100,000 and the balance of the principal due on April 1,
      2004.
      The Company was unable to make the $100,000 payment on the Note on the extended
      due date of October 1, 2003.




In
      October 2004, New Millennium agreed to extend the maturity of the Note
      indefinitely until the Company acquired assets or an operating business that
      would allow it to meet its obligations on the note.




Under
      the
      terms of the New Millennium Note, it is possible that Summitt Ventures, and
      Mr.
      Anderson's affiliated entities may have a claim to reacquire the shares of
      the
      Company's common stock that were sold to New Millennium. The New Millennium
      Note
      is purportedly secured by the purchased shares of the Company's common stock;
      however, New Millennium and Mr. Calvert believe that Mr. Anderson and his
      affiliates have not perfected their security interest in those shares. In
      addition, the Augustine Fund is the pledgee of 2,500,000 of those shares and
      has
      physical possession of those shares.




On
      April
      28, 2006, the Board and Mr. Calvert agreed to amend the New Millennium Note
      to
      (i) extend the due date to January 15, 2008; (ii) waive any payments of interest
      until the New Millennium Note becomes due; (iii) reduce the principal amount
      of
      the New Millennium Note from $1,120,000 to $900,000, equal to a 19.6% reduction,
      and New Millennium's basis in said Note; and (iv) correspondingly reduce the
      accrued but unpaid interest due under the terms of the New Millennium Note
      from
      $317,956 to $255,636, also equal to a 19.6% reduction.




-41-




Accordingly,
      as of September 30, 2006, the principal amount of the loan, together with
      approximately $315,435 in accrued but unpaid interest, had not been
      repaid.




***Obligations
      to Dennis Calvert***




In
      2003
      and 2004 the Company's President, Dennis Calvert, loaned money to the Company
      by
      paying from his personal funds certain of the Company's expenses. A significant
      portion of these personal funds was obtained by Mr. Calvert by refinancing
      his
      primary residence and cashing out equity thereon. On March 7, 2005, the Company
      and Mr. Calvert agreed such that the $101,770 still outstanding and owed by
      the
      Company to Mr. Calvert will be repaid under the terms of a promissory note
      bearing interest of 10% per annum, requiring monthly payments and maturing
      on
      January 15, 2006.




As
      of
      September 30, 2006, the Company had repaid this entire loan. As of September
      30,
      2006, the Company had accrued an expense related to the unpaid accrued
      compensation due Mr. Calvert in the amount of $334,221. Mr. Calvert has tendered
      to the Company a proposal to convert this unpaid accrued compensation to the
      Company’s common stock upon approval by the Company’s stockholders of an
      amendment to the Company’s Certificate of Incorporation increasing the number of
      authorized shares of its common stock.




**Critical
      Accounting Policies**




The
      SEC
      recently issued Financial Reporting release No. 60, "Cautionary Advice Regarding
      Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies
      provide additional disclosure and commentary on their most critical accounting
      policies. In FRR 60, the SEC defined the most critical accounting policies
      as
      the ones that are most important to the portrayal of a company's financial
      condition and operating results, and require management to make its most
      difficult and subjective judgments, often as a result of the need to make
      estimates of matters that are inherently uncertain. Based on this definition,
      the Company's most critical accounting policies include: non-cash transactions
      and compensation valuations that affect the total expenses reported in the
      current period and/or values of assets received in exchange.




The
      Company has established a policy relative to the methodology to determine the
      value assigned to each intangible acquired with or licensed by the Company
      and/or services or products received for non-cash consideration of the Company's
      common stock. The value is based on the market price of the Company's common
      stock issued as consideration, at the date of the agreement of each transaction
      or when the service is rendered or product is received, as adjusted for
      applicable discounts.




The
      methods, estimates and judgments the Company uses in applying these most
      critical accounting policies have a significant impact on the results of the
      Company reports in its financial statements.




-42-




**Item
      3. Controls and Procedures**




(a)
      Evaluation of disclosure controls and procedures: Our management evaluated,
      with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      the effectiveness of our disclosure controls and procedures as of the end of
      the
      period covered by this Quarterly Report on Form 10-QSB. Based on this
      evaluation, our Chief Executive Officer and Chief Financial Officer have
      concluded that our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
      Act") are effective to ensure that information required to be disclosed by
      us in
      reports that we file or submit under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in SEC rules and
      forms. It should be noted that the design of any system of controls is based
      in
      part upon certain assumptions about the likelihood of future events, and there
      can be no assurance that any design will succeed in achieving its stated goals
      under all potential future conditions, regardless of how remote.




(b)
      Changes in internal control over financial reporting: There was no change in
      our
      internal control over financial reporting that occurred during the period
      covered by this Quarterly Report on Form 10-QSB that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.




-43-


**PART
      II**






**Item
      1. Legal Proceedings**




In
      June
      2002, Geraldine Lyons, the Company's former Chief Financial Officer, sued the
      Company and the Company's former president Todd Sanders, for breach of her
      employment contract. The lawsuit was brought in the Circuit Court of the 11th
      Judicial Circuit in Miami-Dade County in Florida. Ms. Lyons seeks approximately
      $25,000 due under the contract and the issuance of 100,000 shares of common
      stock, with a guarantee that the stock could be sold by Ms. Lyons for $300,000.
      Ms. Lyons alleges that additional funds are due under her employment contract;
      that the contract requires the Company guarantee that she can sell for $300,000
      the 100,000 shares of stock the Company is required to issue her; and, that
      Mr.
      Sanders promised to purchase from her 100,000 shares of Company common stock
      held by her at the price of $4.00 per share.




The
      Company has counter-sued Ms. Lyons for breach of fiduciary duty, fraud,
      violation of Section 12(a)(2) of the Securities Act of 1933, violation of
      Section 517.301 of the Florida Statutes, negligent misrepresentation, conversion
      and unjust enrichment resulting from the required restatement of the Company's
      financial statements for the years ended December 31, 2000 and December 31,
      1999. The restatements corrected the previous omission of certain material
      expenses related primarily to compensation expense arising from warrants issued
      and repriced stock options, as well as other errors.




In
      July
      2006, the Court dismissed Ms. Lyons’ lawsuit, citing the failure of the
      plaintiff to timely prosecute the matter. The Company’s counter-claim was
      dismissed simultaneously.




In
      May
      2004, the Company was sued by Flight Options, Inc. ("Flight Options"), a jet
      plane leasing company, in the Superior Court of Orange County California. The
      lawsuit alleges that the Company owes Flight Options approximately $418,300,
      pursuant to a five-year lease assigned to the Company by the Company's former
      president Todd Sanders, from his corporation, Devenshire Management Corporation
      ("Devenshire"). Management of the Company believes that the assignment of the
      lease was not properly authorized or approved by the Company, and that by Mr.
      Sander's failure to identify the lease in a December 2002 settlement agreement
      with the Company, he breached the terms of that settlement agreement and,
      pursuant to the settlement agreement, must indemnify the Company for any losses
      owed to Flight Options. The Company filed a cross-complaint against Mr. Sanders
      and Devenshire seeking indemnity and alleging Mr. Sander's breached his
      fiduciary duties in connection with the assignment of the lease. The Company's
      Legal Defense Agreement with the Augustine Fund applies also to the Flight
      Options litigation.




On
      March
      17, 2005, the Company settled with Flight Options pursuant to a stipulation
      that
      would have allowed the Company to pay Flight Options $100,000 on or before
      August 5, 2005; if $100,000 was not paid by August 5, 2005, Flight Options
      could
      file a judgment against the Company for $163,310. The Company did not make
      a
      payment on or before August 5, 2005. Subsequently, the parties agreed that
      the
      Company would pay Flight Options a total of $116,000, which amount was paid.
      In
      exchange, Flight Options dismissed the case.




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At
      about
      the time of the settlement with Flight Options, the Company, Mr. Sanders and
      Devenshire agreed to submit the matters in the cross-complaint, including the
      indemnity claim, to binding arbitration. On March 7, 2006, an arbitrator issued
      a binding award in favor of the Company and against Mr. Sanders for
      $120,000.




Legal
      Fees in the matter have been paid by Augustine, pursuant to the Legal Defense
      Agreement between Augustine and the Company. In January 2006, Augustine and
      the
      Company agreed to modify the terms of the Legal Defense Agreement to allow
      for
      both parties to share in any amounts which might be recovered from Sanders,
      on a
      percentage basis equal to the respective costs incurred by each party. Legal
      Fees incurred by Augustine are estimated to be approximately $81,000 as of
      February 2006, but will likely increase. On June 14, 2006, the arbitrator
      increased the arbitration award from $120,000 to $175,000 at the Company’s
      request to account for its attorneys fees. The Company intends to confirm the
      arbitration award with the Superior Court and seek a judgment against Mr.
      Sanders and his company Devenshire, and can make no assurances it will be able
      to collect on any such judgment.




The
      Company is party to various other claims, legal actions and complaints arising
      periodically in the ordinary course of business. In the opinion of management,
      no such matters will have a material adverse effect on the Company's financial
      position or results of operations.






**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**




On
      August
      14, 2006, the Company issued 15,515,913 shares of its Common Stock to Code,
      as
      additional consideration for Code’s entering into the R&D
      Agreement.




All
      of
      these offerings and sales were made in reliance on the exemption from
      registration contained in Section 4(2) of the Securities Exchange Act and/or
      Regulation D promulgated thereunder as not involving a public offering of
      securities.






**Item
      5. Other Information**




Pursuant
      to the terms of the M&L Agreement, IOWC assigned its rights and obligations
      to BLTI in a license agreement with BioLargo, LLC, and agreed to transfer its
      20% interest in BioLargo, LLC to BLTI. In October 2006, the Company terminated
      the license agreement with BioLargo, LLC, for cause. Subsequently, on November
      13, 2006, the Company and IOWC agreed that the 20% interest in BioLargo, LLC
      would not be transferred by IOWC to BLTI, but BLTI would have the option to
      acquire such 20% interest for $1 at any time until December 31, 2013.




-45-




**Item 6.
      Exhibits**




The
      exhibits listed below are attached hereto and filed herewith:




Exhibit
      No.      Description




10.1
            Option
                Agreement with IOWC dated as of November 13,
                2006




31.1
            Certification
                of Chief Executive Officer of Quarterly Report Pursuant to Rule
                13(a)-15(e) or
                Rule 15(d)-15(e).




31.2
            Certification
                of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
                Section 1350




32
            Certification
                of Chief Executive Officer and Chief Financial Officer of Quarterly
                Report
                pursuant to Rule 13(a)-15(e) or
                Rule 15(d)-15(e).




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**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
      caused this report to be signed on its behalf by the undersigned, hereunto
      duly
      authorized.




NUWAY
              MEDICAL,
              INC.Date: December
              14, 2006
            By:
            /s/ Dennis
              CalvertDennis
                CalvertPresident,
                Chief Executive Officer and Interim Chief Financial
                Officer




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**EXHIBIT
      INDEX**





Exhibit
      No.      Description




10.1
            Option
                Agreement with IOWC dated as of November 13,
                2006




31.1
            Certification
                of Chief Executive Officer of Quarterly Report Pursuant to Rule
                13(a)-15(e) or
                Rule 15(d)-15(e).




31.2
            Certification
                of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
                Section 1350




32
            Certification
                of Chief Executive Officer and Chief Financial Officer of Quarterly
                Report
                pursuant to Rule 13(a)-15(e) or
                Rule 15(d)-15(e).




-48-