UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K





|(MARK ONE)                                                                   |                                                                                         
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|x                                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                                             |                                                                                         
|For the fiscal year ended December 31, 2010                                 
|                                                                            
|OR                                                                          
|                                                                            
|o                                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                             |                                                                                         
|FOR THE TRANSITION PERIOD FROM __________________ TO _______________________



Commission file number 000-19031



NATIONAL
QUALITY CARE, INC.

(Exact name of Registrant as Specified
in its Charter)



|Delaware(State or Other Jurisdiction of
Incorporation or Organization)                                   | 84-1215959(I.R.S. Employer
Identification Number)
|-------------------------------------------------------------------------------------------------------- | -------------------------------------------------
|                                                                                                         |                                                  
|2431 Hill Drive
Los Angeles, California 90041(Address of Principal Executive Offices including Zip Code)
|                                                                                                        
|(323) 254-2014(Registrant’s Telephone Number, Including Area Code)                                      



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



Securities registered
pursuant to Section 12(g) of the Act:



Common Stock, $0.01
par value per share



Indicate by check
mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No x



Indicate by check
mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o
No x



Indicate by check mark
whether the Registrant (1) has 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



Indicate by check mark
whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o
No o



Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. o



Indicate by check mark
whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):



|Large
    accelerated filer o | Accelerated filer
    o | Non-accelerated
    filer o(Do not check if a smaller reporting company) | Smaller
    reporting company x
|----------------------------- | ----------------------- | ------------------------------------------------------------------------ | -------------------------------



Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YesoNo x



The aggregate market
value of voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2010 is not determinable
because there is no market for the Registrant’s common stock.



There were 80,221,807
shares of common stock outstanding as of December 31, 2010.



DOCUMENTS
INCORPORATED BY REFERENCE:NONE.











TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-K
YEAR ENDED DECEMBER 31, 2010





|                           | Page                                                                                                      
|-------------------------- | ----------------------------------------------------------------------------------------------------------
|                           |                                                                                                           
|FORWARD-LOOKING STATEMENTS | 1                                                                                                         
|                           |                                                                                                           
|PART I                     | 2                                                                                                         
|                           |                                                                                                           
|Item 1.                    | Description of Business                                                                                   
|                           |                                                                                                           
|Item 1A.                   | Risk Factors                                                                                              
|                           |                                                                                                           
|Item1B.                    | Unresolved Staff Comments                                                                                 
|                           |                                                                                                           
|Item 2.                    | Description of Property                                                                                   
|                           |                                                                                                           
|Item 3.                    | Legal Proceedings                                                                                         
|                           |                                                                                                           
|Item 4.                    | Mine Safety Disclosures                                                                                   
|                           |                                                                                                           
|PART II                    | 11                                                                                                        
|                           |                                                                                                           
|Item 5.                    | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchaseof Equity Securities
|                           |                                                                                                           
|Item 6.                    | Selected Financial Data                                                                                   
|                           |                                                                                                           
|Item 7.                    | Management’s Discussion and Analysis of Financial Condition and Results of Operations                     
|                           |                                                                                                           
|Item 7A.                   | Quantitative and Qualitative Disclosures About Market Risk                                                
|                           |                                                                                                           
|Item 8.                    | Financial Statements and Supplementary Data                                                               
|                           |                                                                                                           
|Item 9.                    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.                     
|                           |                                                                                                           
|Item 9A.                   | Controls and Procedures                                                                                   
|                           |                                                                                                           
|Item 9B.                   | Other Information                                                                                         
|                           |                                                                                                           
|PART III                   | 20                                                                                                        
|                           |                                                                                                           
|Item 10.                   | Directors and Executive Officers                                                                          
|                           |                                                                                                           
|Item 11.                   | Executive Compensation                                                                                    
|                           |                                                                                                           
|Item 12.                   | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters            
|                           |                                                                                                           
|Item 13.                   | Certain Relationships, Related Transactions and Director Independence                                     
|                           |                                                                                                           
|Item 14.                   | Principal Accounting Fees and Services                                                                    
|                           |                                                                                                           
|PART IV                    | 27                                                                                                        
|                           |                                                                                                           
|Item 15.                   | Exhibits and Financial Statement Schedules                                                                



i







FORWARD-LOOKING STATEMENTS



Certain statements
in this Annual Report constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934. These include statements about anticipated financial performance, future revenues or earnings, business prospects, projected
ventures, new products, anticipated market performance and similar matters. The words “budgeted,” “anticipate,”
“project,” “estimate,” “expect,” “may,” “believe,” “potential”
and similar statements are intended to be among the statements that are forward-looking statements. Because such statements reflect
the risk and uncertainty that is inherent in our business, actual results may differ materially from those expressed or implied
by such forward-looking statements. Some of these risks and uncertainties are related to our current business situation and include,
but are not limited to, our lack of revenues, our history of operating losses, our need for additional financing, the uncertainty
of our outstanding litigation with Xcorporeal, Inc. and the uncertainty about our ability to continue as a going concern, as well
as those set forth in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements,
which are made as of the date of this Report. Readers are advised that we undertake no obligation to release publicly any revisions
to the forward-looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or
developments.



1







PART I



Item 1. Description of Business



Nature of Business



Prior to the sale of
substantially all our assets as described later in this Report, we were a research and development company. Our platform technology
was a wearable artificial kidney for dialysis and other medical applications (the “Wearable Kidney”). This device treats
the blood of patients through a pulsating, dual-chambered pump. Continuous dialysis has always been possible for patients who are
able to make several weekly visits to a dialysis clinic to be attached to a large machine for three to four hours at a time. With
a wearable artificial kidney, patients would be able to have 24-hour dialysis, seven days a week, without having to spend long
hours attached to a large machine at a clinic, allowing them to maintain a reasonable life style.



National Quality Care,
Inc. was incorporated in Delaware in 1989 under the name “Emory Capital Corp.” The Company changed its name to Sargent,
Inc. in 1991 and to National Quality Care, Inc. in 1996. Until May 31, 2006, the Company, through Los Angeles Community Dialysis,
Inc., a California corporation (“LACD”), a wholly-owned subsidiary, provided dialysis services for patients suffering
from chronic kidney failure and for patients suffering from acute kidney failure through a visiting nursing program contracted
to several Los Angeles County hospitals. On May 31, 2006, LACD completed the sale of substantially all of its assets used in the
chronic care dialysis clinic. On June 15, 2006, LACD completed the sale of the acute care dialysis unit. The Company decided to
sell the dialysis units in order to focus principally on completion of the development and eventual commercial marketing of the
Wearable Kidney.



The terms “NQCI,”
“the Company,” “we,” “us” or “our” refer to National Quality Care, Inc., a Delaware
corporation.



Our Wearable Artificial
Kidney



The Wearable Kidney
Solution



We developed a prototype
device that can provide dialysis 24 hours a day, seven days a week, without requiring the patient to spend long hours attached
to a large machine. We believed that this device would drastically improve the effectiveness of treatment and reduce mortality
in the ESRD population and significantly reduce the costs associated with providing care to these patients.



The Wearable Kidney
was designed to be worn on a patient’s belt or carried in a small backpack. We anticipated that the final version would weigh
less than five pounds. We believed that the design of the Wearable Kidney addressed the three key challenges that have historically
impeded the viability of a wearable artificial kidney, namely:



| | · | an efficient blood and dialysate circulation circuit that minimizes the amount of power consumption,
allowing the use of batteries to power the system;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a lightweight dialysate regeneration system that minimizes the amount of dialysate required to
cleanse the blood efficiently; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | an ergonomic design of components that should enable patients to wear the device continuously without
discomfort.
| | - | -----------------------------------------------------------------------------------------------------------------



Background of the
Wearable Kidney



We began filing patent
applications covering aspects of the Wearable Kidney technology in 2001. On November 15, 2004, we announced that we had developed
a working prototype of the Wearable Kidney (the “Prototype”). The Prototype was designed to be powered by a battery
and to operate substantially continuously 24 hours a day while in use. A version of the Prototype was successfully tested in bench
studies and performed safely and effectively in animal testing studies conducted at the research facilities of Cedars Sinai Medical
Center in Los Angles, California. The results of our testing and research were presented at the annual meeting of the American
Society of Nephrology in November 2004. An abstract of the presentation was published in the Journal of the American Society of
Nephrology. We demonstrated the feasibility of our Prototype by testing it on 12 pigs. We did not plan to do further animal studies
because we believed that the testing and experiments performed constituted all the animal studies normally required prior to beginning
clinical studies on human subjects.





2









In late 2006, we conducted
research on new and enhanced techniques for removing blood impurities, such as urea and creatinine, using our Wearable Kidney technology.
These enhanced techniques for removing blood impurities also provide an additional benefit of decreasing the power requirements
of our Wearable Kidney without sacrificing its operational effectiveness. The findings from these lab studies were presented on
November 18, 2006 at the annual meeting of the American Society of Nephrology. Small-scale, preliminary human studies under highly
controlled circumstances were conducted with respect to the Wearable Kidney technology in Italy in 2006 and in England (carried
out by Xcorporeal) in 2007.



We continued to evaluate
our applications for initiating human clinical trials, which we began preparing in November 2005.



We had three issued
U.S. patents covering various aspects of the Wearable Kidney. In addition we had ten pending U.S. patent applications directed
to various aspects of both our Wearable Kidney and another device that we refer to as a Wearable Ultrafiltration Device. In April
2007, a Swedish patent was issued for the Wearable Kidney and in January 2008 a Mexican patent was issued for the Wearable Kidney.
We also had nine additional patent applications pending in various countries including Japan, Mexico, the European Community, Brazil
and China.



The Wearable Ultrafiltration
Device removes excess fluid from patients with Congestive Heart Failure (CHF) and was intended to be worn as a belt and operated
by batteries. The Wearable Ultrafiltration Device, like the Wearable Kidney, was intended to be substantially continuously operational
24 hours a day while in use. A prototype of our Wearable Ultrafiltration Device was successfully tested on animals in our research
laboratory facility at Cedars Sinai Hospital in Los Angeles, California. The main benefit offered by this device was that
it is intended to keep CHF patients free of salt and fluid overload, which is a major cause of hospitalizations and death for these
patients. It was anticipated that the use of this device would result in significant improvements in patients’ quality of
life and longevity while significantly reducing the enormous costs associated with treating the ever-growing CHF population.



Market and Marketing



We had targeted chronic
kidney failure or ESRD as the first application of our new technology. At its most basic level, once the Wearable Kidney is connected
to a patient’s blood supply, it can remove certain chemicals or toxins and excess fluids from the blood before returning
the blood to the body, thus replacing many of the essential functions of a damaged kidney. At the same time, it can also be used
to infuse the blood stream with drugs, hormones or nutritional components, as the clinical circumstances may require. While there
are other devices to accomplish these tasks, only our device was actually wearable. Accordingly, the Wearable Kidney was anticipated
to be able to provide patients with continuous, 24-hours operation, which would not only increase significantly the amount of treatment
time but was also anticipated to enable patients to achieve a quality of life much closer to that of a healthy individual.



We intended to exploit
the Wearable Kidney by generating revenue from sales and leases and from recurring sale of consumables associated with the Wearable
Kidneys, such as pumps, sorbents, filters and rechargeable batteries. In the U.S., we intended to lease the Wearable Kidney mainly
to existing dialysis centers.



Research and Development;
Manufacturing



Pending resolution
of the arbitration related to, among other things, the rights to use our Wearable Kidney technology, we suspended our research
and development activities.



3







Patents and Proprietary
Technology



We protected our proprietary
rights from unauthorized use by third parties to the extent that our proprietary rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets. Patents and other proprietary rights are an essential element of our business.
Our policy was to file patent applications and to protect our technology, inventions and improvements to inventions that are commercially
important to the development of our business. We also rely on trade secret, employee and third-party nondisclosure agreements and
other protective measures to protect our intellectual property rights pertaining to our products and technology.



In November 2005, we
were issued our first U.S. patent covering the general design of the Wearable Kidney. Since then and recently in October 2007,
we were issued a U.S. patent covering a new and useful sorbent cartridge design for use in the Wearable Kidney. Then in December 2007,
we were issued our third U.S. patent, which covers additional novel aspects of the Wearable Kidney. In addition to the issued U.S.
patents, we filed additional U.S. patent applications bringing our total number of pending patent applications in the U.S. to ten.
With respect to our foreign patent filings, we had two issued patents covering basic design aspects of the Wearable Kidney in both
Sweden (issued April 2007) and Mexico (issued January 2008). In addition to the two issued foreign patents, we had pending patent
applications in the countries of, China, Brazil, the European Community, Japan and Mexico bringing the total of pending foreign
patent applications to nine. These nine pending foreign patent applications, as well as the ten pending U.S. patent applications
are directed generally to various overall features of the Wearable Kidney and the Wearable Ultrafiltration devices and systems.
These additional patent applications, for example, are directed to specific novel aspects of the Wearable Kidney and Wearable Ultrafiltration
devices as well as methods of using and servicing the devices, including, but not limited to, device size, power consumption, microprocessor
control, fluid and chemical requirements, alarm systems, fluid pumping features, fluid flow volume and pressures, molecule removal
clearances, as well as methods of servicing and maintaining the Wearable Kidney and Ultrafiltration devices.



Government Regulation



Due to the relatively
early nature of our development efforts, we did not confirm with the FDA its view of the regulatory status of the Wearable Kidney
or which center of the FDA might have primary responsibility for review of the regulatory submissions we intended to make. Depending
on the claims made and the FDA’s ruling regarding the regulatory status of the Wearable Kidney, it could have been designated
as a device, a biologic or as a combination product. However, we anticipated that regardless of regulatory designation, we would
need to conduct pre-clinical and clinical studies on humans before being able to market the Wearable Kidney.



To support a regulatory
submission, the FDA commonly requires clinical studies to show safety and effectiveness. While we could not state the nature of
any such studies that the FDA may have required due to our early stage of product development, it is likely any product we attempted
to develop would require extensive and time-consuming clinical studies in order to secure approval.



Outside the U.S., the
ability to market potential products is contingent upon receiving market application authorizations from the appropriate regulatory
authorities. These foreign regulatory approval processes could involve differing requirements than those of the FDA, but also generally
include many, if not all, of the risks associated with the FDA approval process described above, depending on the country involved.



U.S. Regulation
of Products. In the U.S., medical devices are classified into three different classes, Class I, II and III, on the basis
of controls deemed reasonably necessary to ensure the safety and effectiveness of the device. Class I devices are subject to general
controls (i.e. labeling, pre-market notification and adherence to the FDA’s Good Manufacturing Practices or GMP), Class II
devices are subject to general and special controls (i.e. performance standards, post-market surveillance, patient registries and
FDA guidelines). Class III devices are those which must receive pre-market approval by the FDA to ensure their safety and
effectiveness, that is, life-sustaining, life-supporting and implantable devices, or new devices, which have been found not to
be substantially equivalent to legally marketed devices. We believed that the Wearable Kidney for the treatment of ESRD would likely
to be classified as a Class III device.



4







Clearance Procedure.
Before a new medical device can be marketed, such as the Wearable Kidney for the treatment of ESRD, marketing clearance must be
obtained through either the pre-market approval (“PMA”) process, or a shorter process under Section 510(k) of the Federal
Food, Drug, and Cosmetic Act (“FDC Act”). Noncompliance with applicable requirements can result in fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of production, refusal to authorize the marketing of
new products or to allow us to enter into supply contracts and criminal prosecution. The PMA process is more formal and requires
more panel time for trials, more information and a review period of 180 days (as compared to 90 days for 510(k)). The route required
for a specific device depends on the class of the device and/or the similarity of the new decide to existing approved devices.
The FDA has been requiring an increasingly rigorous demonstration of such similarity, which may include a requirement to submit
human clinical trial data. Class III is the most stringent regulatory category for medical decides, since those devices support
or sustain human life or prevent impairment to health. As such, these devices generally require PMA approval.



Human Clinical
Trials. An investigational device exemption (“IDE”) allows an investigational device to be used in a clinical
study in order to collect safety and effectiveness data required to support a PMA application to the FDA. Clinical studies are
most often conducted to support a PMA. Investigational use also includes clinical evaluation of certain modifications or new intended
uses of legally marketed devices. All clinical evaluations of investigational devices, unless exempt, must have an approved IDE
before the study is initiated. An approved IDE permits a device to be shipped lawfully for the purpose of conducting investigations
of the device without complying with other requirements of the FDC Act that would apply to devices in commercial distribution.



If human clinical trials
of a device are required for a PMA application, or, in the opinion of the FDA, if the device presents a “significant risk,”
the sponsor of the trial (usually the manufacturer or the distributor of the device) must file an IDE application prior to commencing
human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards (“IRBs”),
human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by
the FDA. If the device presents a “nonsignificant risk” to the patient, a sponsor may begin the clinical trial after
obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval.



International Product
Regulation



International Organization
for Standards (“ISO”) standards were developed by the European Community, or EC, as a tool for companies interested
in increasing productivity, decreasing cost and increasing quality. The EC uses ISO standards to provide a universal framework
for quality assurance and to ensure the good quality of products and services across borders. The ISO 9000 standards have facilitated
trade throughout the EC, and businesses and governments throughout the world are recognizing the benefit of the globally accepted
uniform standards. Any manufacturer utilized for purposes of manufacturing our products (including us, if we manufacture our own
Wearable Kidney) will be required to obtain ISO certification to facilitate the highest quality products and the easiest market
entry in cross-border marketing.



Any medical device
that is legally in the U.S. may be exported anywhere in the world without prior FDA notification or approval. The export provisions
of the FDC Act apply only to unapproved devices. While FDA does not place any restrictions on the export of these devices, certain
countries may require written certification that a firm or its devices are in compliance with U.S. law. In such instances FDA will
accommodate U.S. firms by providing a Certificate for Foreign Government. In cases where there are devices which the manufacturer
wishes to export during the interim period while their 510(k) submission is under review, exporting may be allowed without prior
FDA clearance under certain limited conditions.



Employees



The Company has no
employees and several consultants in administration as of December 31, 2010.



Available Information



We are a reporting
company and file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange
Commission (the “Commission”). You may inspect and copy these materials at the Public Reference Room maintained by
the Commission at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for more information
on the Public Reference Room. You can also find our Commission filings at the Commission’s website at www.sec.gov.



5







Events Prior to Sale of
our Assets



On September 1, 2006,
we entered into a merger agreement (the “Merger Agreement”) with Xcorporeal, Inc. (“Xcorporeal”) which
contemplated that either (i) we would enter into a triangular merger in which we would become a wholly-owned subsidiary of Xcorporeal,
or (ii) Xcorporeal would issue to us shares of its common stock in consideration of the assignment of the technology relating to
our wearable artificial kidney and other medical devices (collectively sometimes referred to as the “Technology Transactions”).
In connection with the Merger Agreement, also on September 1, 2006, we entered into a license agreement (the “License Agreement”)
with Xcorporeal granting an exclusive license for ninety-nine years (or until the expiration of our proprietary rights in the technology,
if earlier), to all technology relating to our wearable artificial kidney and other medical devices for a minimum royalty of $250,000.



Following execution
of the Merger Agreement and the License Agreement, the parties attempted to close the transactions contemplated by the Merger Agreement,
but disputes arose regarding satisfaction of the conditions to closing and with respect to certain provisions of the Merger Agreement.
In addition, a dispute arose as to whether the License Agreement would survive a failure to consummate either of the two transactions
contemplated by the Merger Agreement. The Company took the position that the License Agreement was revocable if the Merger Agreement
and the transactions contemplated therein were terminated.



Effective as of December
29, 2006, we had terminated the Merger Agreement and License Agreement and all transactions contemplated thereby due to Xcorporeal’s
continuing, uncured and incurable breaches of the Merger Agreement and wrongful conduct related to the Merger Agreement, the License
Agreement and certain related matters. Xcorporeal did not dispute the termination of the Merger Agreement, but disputed our termination
of the License Agreement, which Xcorporeal alleged to be in full force and effect.



On December 1, 2006,
Xcorporeal filed a demand for arbitration against us, alleging an unspecified anticipatory breach of the License Agreement. On
December 29, 2006, at the same time that we terminated the Merger Agreement and the License Agreement, we filed a lawsuit against
Xcorporeal and against Victor Gura, former Chief Financial Officer and Chief Scientific Officer and a director of the Company.
In the lawsuit, we alleged that Xcorporeal wrongfully induced Gura to become a member of Xcorporeal’s board of directors
at the same time that he was an officer and director of the Company, and that both parties misappropriated our valuable rights
and committed other wrongful acts in connection with the Merger Agreement, the License Agreement and transactions contemplated
thereby. Xcorporeal and Gura stipulated to our filing of our claims against them as part of the arbitration proceedings related
to the License Agreement, and we dismissed the lawsuit without prejudice.



On January 22, 2007,
Xcorporeal filed a statement of claims in the arbitration proceeding. In this statement, Xcorporeal alleged that we breached several
provisions of the Merger Agreement and engaged in interference with Xcorporeal’s contractual relations and prospective economic
business advantage. In addition, Xcorporeal alleged that we improperly terminated the License Agreement and that it has retained
the exclusive right to use our technology. On February 5, 2007 we filed a response to Xcorporeal’s statement of claims denying
that we breached the Merger Agreement and asserting, among other things, that we properly terminated the License Agreement and
that the License Agreement did not by its own terms and the meaning of the agreements survive the success or failure of the transactions
contemplated by the Merger Agreement. In this response, the Company also asserted counterclaims against Xcorporeal for fraud, rescission,
reformation, breach of contract, unjust enrichment and defamation. The Company amended its response on March 9, 2007 and on April
4, 2007 to add its claims against Terren S. Peizer, Xcorporeal’s Chairman of the Board and Gura. Xcorporeal, Peizer
and Gura filed responses generally denying the Company’s allegations and asserting counter-claims.



The arbitration was
held in February 2008. On June 9, 2008, the arbitrator issued an interim award in which he stated that “the core dispute
is whether the Merger Agreement is dead and the License Agreement is prospectively enforceable.” The arbitrator concluded
that the License Agreement was not to survive the failure of the transactions contemplated by the Merger Agreement, that Xcorporeal
had waived and excused the Company’s obligations to perform under the Merger Agreement and that the appropriate remedy under
the circumstances was to award the Company specific performance of the Technology Transaction. The arbitrator rejected the Company’s
fraud, misappropriation and other claims, and rejected Gura’s claims against the Company and the Company’s claims against
Gura. In addition, the arbitrator stated that the Company was the prevailing party in the arbitration and therefore entitled to
recover its fees and costs.



6







Pursuant to the interim
award, the Company applied for an award of fees and costs of approximately $3.9 million against Xcorporeal and of approximately
$105,000 against Gura. Such amounts included fees and costs of the Company’s attorneys, experts and certain witnesses, as
well as the costs and fees of the arbitration service, court reporters and litigation support services. Gura filed a separate application
against the Company for approximately $617,000 in fees and costs. Because the Company had prevailed on some, but not all, of its
claims, the arbitrator awarded the Company approximately $1.87 million in fees and costs. The arbitrator rejected the Company’s
application against Gura and Gura’s application against the Company.



On August 4, 2008,
the arbitrator issued a second interim award in which he established a schedule for completion of the Technology Transaction, as
well as for the filing of a registration statement with respect to the resale of the shares of Xcorporeal to be issued to the Company
at the closing (the “Registration Statement”). In the second interim award, the arbitrator clarified that the only
conditions to the closing of the Technology Transaction were the filing and mailing of information statements by the parties as
required by law, and the filing by Xcorporeal of the Registration Statement. On the basis of his interpretation of the parties’
intent as reflected by the provision in the Merger Agreement specifying that the Company was entitled, upon consummation of the
Technology Transaction, to a 48% interest in Xcorporeal, as measured as of the date of the Merger Agreement and as adjusted for
stock splits and certain other events, the arbitrator further confirmed that the Company was entitled to 9,230,000 shares of Xcorporeal,
Inc. (AMEX: XCR) upon closing of the Technology Transaction.



Under the schedule
established by the arbitrator, Xcorporeal was required to file an information statement or a proxy statement with respect to the
Technology Transaction not later than August 22, 2008. Xcorporeal filed a proxy statement on August 22, 2008 seeking approval of
its stockholders for the issuance of common stock in connection with the Technology Transaction. Xcorporeal was directed to close
the Technology Transaction promptly following satisfaction of statutory requirements regarding information statements or proxy
statements, as the case may be, and to file the Registration Statement within 30 days of closing. The Registration Statement was
required to become effective within 90 days of filing. In the event that the Technology Transaction was not approved by Xcorporeal’s
shareholders, the Company was to receive an alternate award in which all of the technology covered by the License Agreement would
be decreed to be the sole and exclusive property of the Company. In such an event, the arbitrator would hold additional hearings
to determine whether the portable artificial kidney technology currently under development by Xcorporeal was included in the technology
under the License Agreement that would revert to the Company, and whether the Company would be entitled to compensatory damages.



The arbitrator further
ordered in the second interim award that the License Agreement would remain in effect until the closing of the Technology Transaction,
or until the arbitrator determined that no such closing will occur and that instead the alternate award described above will apply.
By issuing “interim” awards, the arbitrator retained jurisdiction to oversee either the closing of the Technology Transaction
or the implementation of the alternate award. The arbitrator stated that he would issue a single final, complete and self-contained
award following the conclusion of his monitoring and supervision of the provisions of the second interim award.



On January 30, 2009,
the arbitrator issued an order, in which the arbitrator modified the second interim award by reserving on what the final terms
Xcorporeal's obligation to file the resale registration statement would be and stating that such registration obligation shall
be in accordance with applicable laws, including applicable U.S. federal securities laws. While the arbitrator also retained jurisdiction
to monitor Xcorporeal's compliance with such obligation, to award any appropriate relief to the Company if Xcorporeal failed to
comply with such obligation and to render a decision on any other matters contested in the arbitration, the time periods set forth
in the second interim award and summarized above were no longer applicable. The order also provided, among other things, that if
Xcorporeal filed the proxy statement, obtained stockholder approval to issue to the Company 9,230,000 shares of Xcorporeal common
stock as consideration for the closing of the Technology Transaction and issued such shares to the Company, the arbitrator anticipated
confirming that all of the Technology covered by the License Agreement would be declared Xcorporeal's sole and exclusive property.



7







On April 13, 2009,
the arbitrator in the arbitration proceeding issued a partial final award (“Partial Final Award”), which resolved the
remaining issues that were pending for decision in the arbitration proceeding. The Partial Final Award reflected the arbitrator’s
conclusions based on arguments by Xcorporeal that the 9,230,000 shares could not be issued to the Company in compliance with the
federal securities laws because of the financial condition of the Company. The Partial Final Award provided that Xcorporeal would
have a perpetual exclusive license (the “Perpetual License”) to the technology. Under the terms of the Partial Final
Award, in consideration of the award of the Perpetual License to Xcorporeal, the Company was awarded a royalty of 39% of all net
income, ordinary or extraordinary, to be received by Xcorporeal and the Company was to receive 39% of any shares received in any
merger transaction to which Xcorporeal may become a party. In addition, the Partial Final Award provided that Xcorporeal was obligated
to pay the Company $1,871,430 for its attorneys’ fees and costs previously awarded by the arbitrator in an order issued on
August 13, 2008, that the Company’s application for interim royalties and expenses was denied and that the Company was not
entitled to recover any additional attorneys’ fees.



Binding Memorandum of Understanding



On August 7, 2009,
to clarify, resolve and settle disputes that had arisen between the Company and Xcorporeal with respect to the Partial Final Award,
including with respect to the rights of the parties regarding certain technology and the application of the Partial Final Award
in the case of a sale of the Technology, the Company and Xcorporeal entered into a Memorandum of Understanding (“Memorandum”).



In connection with
the issuance of the Partial Final Award and the Memorandum, on August 7, 2009, the Company entered into a stipulation (the “Stipulation”)
with Xcorporeal. Pursuant to the terms of the Stipulation, the Company and Xcorporeal agreed (i) not to challenge the terms of
the Partial Final Award or any portion of such award, (ii) that any of the parties may, at any time, seek to confirm all but not
part of the Partial Final Award through the filing of an appropriate petition or motion with the appropriate court and in response
to such action to confirm the Partial Final Award, no party would oppose, object to or in any way seek to hinder or delay the court’s
confirmation of the Partial Final Award, but would in fact support and stipulate to such confirmation, and (iii) to waive any and
all right to appeal from, seek appellate review of, file or prosecute any lawsuit, action, motion or proceeding, in law, equity,
or otherwise, challenging, opposing, seeking to modify or otherwise attacking the confirmed Partial Final Award or the judgment
thereon.



Sale Negotiations



In late March 2009,
Xcorporeal began a preliminary dialogue with Fresenius Medical Care Holdings, Inc. (Fresenius), to determine the interest of Fresenius
to acquire certain or all of Xcorporeal assets. These discussions continued through June 2009. In June 2009 Fresenius commenced
its due diligence review of Xcorporeal.



In September 2009,
the Company and Xcorporeal reviewed the terms of a transaction proposed by FUSA, a wholly-owned subsidiary of Fresenius, in a draft
non-binding term sheet for the acquisition of all of the Xcorporeal assets and the Company’s assets, which also included
proposed provisions prohibiting Xcorporeal and the Company from soliciting other offers. The non-binding term sheet indicated that
any further efforts by FUSA would be subject to its remaining due diligence and confirmation by FUSA and its counsel of certain
approvals that would allow it to proceed with the transaction.



On September 21, 2009,
the Company and Xcorporeal and FUSA executed an exclusivity letter (the “Exclusivity Letter’) pursuant to which the
Company and Xcorporeal agreed to grant FUSA access to the respective books, records, personnel, properties, contracts and other
data of Company and Xcorporeal. The Company and Xcorporeal also agreed that, until the later of (i) December 21, 2009 and (ii)
the date on which any of the parties provided the others with written notice that negotiations to execute a definitive agreement
were terminated (which any of the parties were entitled to do in their sole discretion), they would not directly or indirectly
(i) solicit or take any other action to facilitate any offers from third parties with respect to the acquisition of the Company
or a part or all of its assets, (ii) enter into an agreement to facilitate, approve or endorse such proposal or in connection with
such proposal, abandon or terminate the proposed transaction between the Company and Xcorporeal and FUSA or (iii) enter into discussions,
inquire or furnish information with respect to any such proposal.



The Company’s
Board of Directors determined that the proposed asset sale would maximize stockholder value and that the Company’s best chance
to receive any royalty payment(s) from the sale of its assets was to consummate the asset sale and thereby, indirectly partnering
with FUSA, the world’s largest integrated provider of products and services for individuals undergoing dialysis because of
chronic kidney failure.





8







The Company, Xcorporeal
and FUSA executed an Asset Purchase Agreement on December 14, 2009 (“Asset Purchase Agreement”) and the Company publicly
announced this transaction on December 18, 2009. On February 8, 2010, the Company, Xcorporeal and FUSA entered into an amendment
, which extended from February 28, 2010 until March 31, 2010 the date upon which any party to the Asset Purchase Agreement could
terminate the Asset Purchase Agreement if the closing of the transactions contemplated therein has not occurred.



Terms of the Asset Sale



The Asset Purchase
Agreement provided for the sale of substantially all of each of the Company’s and Xcorporeal’s assets (the “Asset
Sale”) to FUSA for an aggregate cash purchase price of $8,000,000 (the “Cash Purchase Price”) and certain other
royalty payment rights (as more fully discussed below). Subject to the terms and conditions of the Asset Purchase Agreement, the
Cash Purchase Price was to be paid to the Company and Xcorporeal as follows: (a) an exclusivity fee in the amount of $200,000 previously
paid by FUSA to Xcorporeal, (b) $3,800,000 on the date of closing (the “Closing Date”) of the transactions contemplated
under the Asset Purchase Agreement (the “Closing”), of which the Company and Xcorporeal received $2,150,000 and $1,650,000,
respectively, (c) $2,000,000 on April 1, 2010, of which the Company and Xcorporeal received $1,625,000 and $375,000, respectively,
and (d) $2,000,000 on April 1, 2011, of which the Company and Xcorporeal received $1,925,000 and $75,000, respectively.



In addition, during
the life of the patents referred to as the HD WAK Technology (the “HD WAK Patents”), which expire between November
11, 2021 and September 9, 2024, the Company will be entitled to certain royalty payments from the sale of wearable hemodialysis
(“HD WAK”) devices in each country where such sales infringe valid and issued claims of the Company’s and Xcorporeal’s
HD WAK Patents issued in such country (“HD WAK Devices Royalty”) and the attendant disposables that incorporate the
HD WAK Technology (as defined below) (“Attendant Disposables”), not to exceed a certain maximum amount per patient
per week in a country where such sales infringe valid and issued claims of the HD WAK Patents issued in such country (the “Attendant
Disposables Royalty”, and together with the HD WAK Devices Royalty, the “HD WAK Royalty”). Such payment for Attendant
Disposables will not be payable with regard to Attendant Disposables that incorporate any technology for which a Supersorbent Royalty
(as defined below) is paid by FUSA to the Company or Xcorporeal. The Company will be entitled to 40% of the HD WAK Royalty and
Xcorporeal will be entitled to the remaining 60%.



Additionally, during
the life of any patents referred to as the Supersorbent Technology (the “Supersorbent Patents”), the Company will be
entitled to certain royalty payments on each supersorbent cartridge sold per patient in each country where such sales infringe
valid and issued claims of the Supersorbent Patents issued in such country less any and all royalties payable to The Technion Research
and Development Foundation Ltd. (“TRDF”) pursuant to a Research Agreement and Option for License, dated June 16, 2005
(the “Research Agreement”), or any subsequently executed license agreement between TRDF and FUSA. Such payment for
supersorbent cartridges will not be payable with regard to supersorbent cartridges that incorporate any HD WAK Technology for which
a HD WAK Royalty is paid by FUSA to the Company or Xcorporeal. During the life of any Supersorbent Patents, the Company will be
entitled to 60% of the Supersorbent Royalty payments and Xcorporeal will be entitled to the remaining 40%. While several applications
for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued.



FUSA also granted to
the Company and Xcorporeal an option to obtain a perpetual, worldwide license to the Supersorbent Technology for use in healthcare
fields other than renal (the “Option”). The Option will be exercisable during the twelve-month period following FUSA’s
receipt of regulatory approval for the sale of a supersorbent product in the United States or European Union, which the Company
expects will require further development of the supersorbent technology with TRDF and successful completion of clinical trials
by FUSA. In the event that the Option becomes exercisable and the Company and/or Xcorporeal exercises the Option, the consideration
payable to FUSA by the Company or Xcorporeal for the exercise of the Option will consist of a payment in the amount of $7,500,000,
payable in immediately available funds, and a payment of an ongoing royalty in an amount equal to the lesser of $0.75 per supersorbent
cartridge and $1.50 per patient per week in each country where such sales infringe valid and issued claims of the Supersorbent
Patents issued in such country.



9







Written Consent of the Company's
Stockholders



On December 14,
2009, the holders of more than 50% of the issued and outstanding commons stock of the Company, considered and approved by written
consent the Asset Sale. This written consent was sufficient to approve the Asset Sale and delivery of any and all documents necessary
to the consummation of the Asset Sale.



Completion of the Asset
Sale



On March 19, 2010,
the Company and Xcorporeal completed the transactions contemplated by the Asset Purchase Agreement and the Company and Xcorporeal
transferred substantially all of their respective assets to FUSA. The Company received $1,950,000 ($2,150,000 less $200,000 to
resolve issues under the Asset Sale) at the Closing. On April 1, 2010 we received $1,625,000. On April 1, 2011 we received $1,675,000
($1,925,000 less $250,000 to resolve issues under the Asset Sale). The closing of the Asset Sale also terminated the arbitration
proceedings with Xcorporeal.



Item 1A. Risk Factors



As a “smaller
reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.



Item1B. Unresolved Staff Comments



Not applicable.



Item 2. Description of Property



As of December 31,
2010, we are operating out of 2431 Hill Drive, Los Angeles, California 90041.



Item 3. Legal Proceedings



On December 1,
2006, Xcorporeal filed a demand for arbitration at JAMS in Santa Monica, California against us, alleging an unspecified anticipatory
breach of the License Agreement that we entered into with Xcorporeal on September 1, 2006. At the same time we entered into the
License Agreement, we entered into an interrelated and inter-dependent Merger Agreement with Xcorporeal. Effective as of December 29,
2006, we terminated the merger and license agreements due to Xcorporeal’s continuing, uncured and incurable breaches of the
Merger Agreement and its other wrongful conduct related to the merger and license agreements and certain related matters. At the
same time we terminated the Merger Agreement and the License Agreement, we filed a lawsuit against Xcorporeal and against Victor
Gura, a former officer and director of the Company. Xcorporeal and Gura stipulated to our filing of our claims against them as
part of the arbitration proceedings related to the License Agreement, and we dismissed our lawsuit without prejudice. The arbitration
was terminated with the closing of the Asset Sale in March 2010. A description of the arbitration proceedings is set forth
at “Item 1. Description of Business—Events Prior to the Sale of Our Assets”.



On February 17, 2011,
the Company commenced a binding arbitration with its former law firm regarding a fee dispute that arose as a result of claimed
attorneys' fees incurred by the former law firm in connection with an arbitration between the Company and Xcorporeal and certain
transactional and litigation matters handled by the law firm for the Company. The former law firm has asserted that approximately
$2,729,000 million fees and costs are owed to it, plus interest. The binding arbitration is being heard in Los Angeles County by
a panel of three arbitrators. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted
their final closing briefs on November 10, 2011. As of April 2, 2012 the arbitrators had not rendered their decision.



Item 4. Mine Safety Disclosures



Not Applicable.



10







PART II



Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities



During 2009 and 2010
there was no established trading market for our common stock. Our common stock trades only periodically on the so-called over-the-counter
“pink sheets.” In 2009, we are only aware of one transaction in the Company’s common stock for a nominal amount
of shares. In 2010, we are not aware of any transactions.



As of December 31,
2010, our authorized capital stock consisted of 125,000,000 shares of common stock, par value $0.01 per share and 5,000,000 shares
of preferred stock, par value $0.01 per share. As of December 31, 2010, there were issued and outstanding 80,221,807 shares
of common stock held by approximately 435 holders of record. There were no shares of preferred stock issued and outstanding.



Equity Compensation Plan Information



The following is a
summary of all of our equity compensation plans and individual arrangements that provide for the issuance of equity securities
as compensation, as of December 31, 2010:



|                                                               |  | (A)
    Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |           |  | (B)
    Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |   |      | (C)
    Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding
    securities reflected in column (A)) | 
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | --------- |  | ----------------------------------------------------------------------------------- | - | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Equity compensation
    plans approved by security holders     |  |                                                                                                     | 900,000   |  |                                                                                     | $ | 0.24 |                                                                                                                                                         | 
|Equity
    compensation plans not approved by security holders |  |                                                                                                     | 4,980,000 |  |                                                                                     | $ | 0.46 |                                                                                                                                                         | 
|Total                                                          |  |                                                                                                     | 5,970,000 |  |                                                                                     | $ | 0.42 |                                                                                                                                                         | 










|(1) | Represents shares available under the Company’s 1998 Stock Option Plan.
|--- | -----------------------------------------------------------------------



Dividend Policy



We have not declared
or paid any dividends since inception on our common stock. We do not anticipate that any dividends will be declared or paid in
the future on our common stock.



Our transfer agent
is Colonial Stock Transfer, 66 Exchange Place, Salt Lake City, Utah 84111, telephone (801) 355-5740.



Recent Sales of Unregistered Securities



Not applicable.



Item 6. Selected Financial Data



Not applicable.



11







Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations



Overview



Prior to March 19,
2010, the Company’s platform technology was a wearable artificial kidney for dialysis and other medical applications. This
device was being developed to treat the blood of patients through a pulsating, dual-chambered pump.



Until that date, the
Company’s plan of operation was to complete the clinical studies in humans with the Wearable Artificial Kidney in order to
apply to the FDA for permission to market the device. Pending resolution of the arbitration with Xcorporeal, Peizer and Gura, the
Company suspended its research and development efforts with respect to the wearable artificial kidney and had no active business
operations.



As of December 31,
2010, the Company did not have sufficient internal and external working capital resources to meet current and expected future obligations.
Therefore, the Company will need to obtain future funding, in addition to the proceeds received from the sale of its technology
rights in 2010. There can be no assurances that the Company will be successful in obtaining any additional capital on commercially
reasonable terms or at all. The failure to obtain such capital would be expected to have a material adverse effect on the Company’s
financial condition and operations.



Sale of Assets



On December 14, 2009,
the Company, Xcorporeal and FUSA executed an Asset Purchase Agreement that provided for the sale of substantially all of each of
the Company’s and Xcorporeal’s assets (the “Asset Sale”) to FUSA for an aggregate cash purchase price of
$8,000,000 (the “Cash Purchase Price”) and certain other royalty payment rights. Subject to the terms and conditions
of the Asset Purchase Agreement, the Cash Purchase Price was to be paid to the Company and Xcorporeal as follows: (a) an exclusivity
fee in the amount of $200,000 previously paid by FUSA to Xcorporeal, (b) $3,800,000 on the date of closing (the “Closing
Date”) of the transactions contemplated under the Asset Purchase Agreement (the “Closing”), of which the Company
and Xcorporeal received $2,150,000 and $1,650,000, respectively, (c) $2,000,000 on April 1, 2010, of which the Company and Xcorporeal
received $1,625,000 and $375,000, respectively, and (d) $2,000,000 on April 1, 2011, of which the Company and Xcorporeal received
$1,925,000 and $75,000, respectively.



In addition, during
the life of the patents referred to as the HD WAK Technology, which expire between November 11, 2021 and September 9, 2024, the
Company is entitled to certain royalty payments from the sale of wearable hemodialysis devices and the attendant disposables that
incorporate the HD WAK Technology. The Company is entitled to 40% of the HD WAK royalty and Xcorporeal is entitled to the remaining
60%.



Additionally, during
the life of any patents referred to as the Supersorbent Technology, the Company is entitled to certain royalty payments on each
supersorbent cartridge sold less any and all royalties payable to The Technion Research and Development Foundation Ltd. (“TRDF”)
pursuant to a Research Agreement and Option for License, dated June 16, 2005, or any subsequently executed license agreement between
TRDF and FUSA. The Company is entitled to 60% of the Supersorbent royalty payments and Xcorporeal is entitled to the remaining
40%. While several applications for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued.



FUSA also granted to
the Company and Xcorporeal an option to obtain a perpetual, worldwide license to the Supersorbent Technology for use in healthcare
fields other than renal (the “Option”). The Option is exercisable during the twelve-month period following FUSA’s
receipt of regulatory approval for the sale of a supersorbent product in the United States or European Union, which the Company
expects will require further development of the supersorbent technology with TRDF and successful completion of clinical trials
by FUSA. The consideration payable to FUSA by the Company or Xcorporeal for the exercise of the Option consists of a payment in
the amount of $7,500,000, payable in immediately available funds, and a payment of an ongoing royalty in an amount equal to the
lesser of $0.75 per supersorbent cartridge and $1.50 per patient per week in each country where such sales infringe valid and issued
claims of the Supersorbent Patents issued in such country.



12







The Asset Purchase
Agreement closed on March 19, 2010, with payments made to the Company by FUSA of $1,950,000, $1,625,000 and $1,675,000 on March
19, 2010, April 1, 2010 and April 1, 2011, respectively, for a total of $5,250,000. FUSA held back $200,000 and $250,000 from the
March 19, 2010 and April 1, 2011 payments, respectively, for purposes of resolving a dispute between the Company and TRDF. The
closing of the Asset Sale in March 2010 also terminated the arbitration proceeding with Xcorporeal.



Arbitration Proceeding



On February 17, 2011,
the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result
of claimed attorneys’ fees incurred by the former law firm in connection with an arbitration proceeding between the Company
and Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that
approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus
interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing
briefs on November 10, 2011. As of April 2, 2012, the arbitrators had not rendered their decision on this matter. The Company believes
that it has adequately and appropriately provided for the fees incurred through December 31, 2010 in its consolidated financial
statements. Given the Company’s limited liquidity and working capital resources, the Company may be unable to satisfy such
obligation should a decision adverse to the Company be rendered.



Going Concern



The Company’s
consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. Prior to March 19, 2010, the Company was a research
and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications.
On that date, the Company consummated a sale of its technology rights with respect to its developing wearable artificial kidney
and, consequently, those activities have been accounted for as discontinued operations in the Company’s consolidated financial
statements. Since June 15, 2006, the Company has not generated any revenues from operations, and does not expect to do so in the
foreseeable future; however, the Company generated revenue from the sale of the Company’s technology rights during 2010.



For the past several
years, except for 2010, the Company has experienced net operating losses and negative operating cash flows. As of December 31,
2010, the Company had an accumulated deficit of $13,509,581, had no revenues from operating activities, and did not have sufficient
internal and external working capital resources to meet current and expected future obligations. Such deficiencies indicate the
Company will be unable to continue to fund its operations and meet its obligations as they come due. In recent years, the Company
has financed its working capital requirements through the sale of technology rights, loans and the recurring sales of its securities
to related parties; however, there can be no assurances that such related party funding will be available to the Company in future
periods on commercially reasonable terms or at all. As a result, the Company’s independent registered public accounting firm,
in its report on the Company’s 2010 consolidated financial statements, has raised substantial doubt about the Company’s
ability to continue as a going concern.



The Company’s
ability to continue as a going concern is dependent upon its ability to raise additional debt and/or equity capital, and to acquire
sufficient operating capital through the development of business activities, or otherwise. The Company’s consolidated financial
statements do not include any adjustments that might result from the outcome of these uncertainties.



Recent Accounting
Pronouncements



Management does not
believe that any recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact
on the Company's financial statement presentation or disclosures.



Significant Accounting Policies



The Company prepared
its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period. Management periodically evaluates the estimates and judgments
made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.





13







The following critical
accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated
financial statements.



Research and Development



Research and development
costs are expensed as incurred. Research and development expenses consist primarily of costs incurred with respect to the development
of the Company’s wearable artificial kidney for dialysis and other medical applications, and are included in discontinued
operations in the consolidated statement of operations.



Technology Rights



Technology rights relate
to the Company’s wearable artificial kidney and were being amortized over an estimated useful life of approximately 20 years.
Amortization is included in discontinued operations in the consolidated statement of operations.



Stock-Based Compensation



The Company periodically
issues stock options and warrants to officers, directors and consultants for services rendered. Options vest and expire according
to terms established at the grant date. The Company accounts for share-based payments to officers and directors by measuring the
cost of services received in exchange for equity awards based on the grant date fair value of the awards, with the cost recognized
as compensation expense in the Company’s consolidated financial statements over the vesting period of the awards. The Company
accounts for share-based payments to consultants by determining the value of the stock compensation based upon the measurement
date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance
to earn the equity instruments is complete.



Income Taxes



The Company accounts
for income taxes under an asset and liability approach for financial accounting and reporting purposes. Accordingly, the Company
recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and the
tax basis of assets and liabilities.



The Company records
a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In the event
the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount,
an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should
the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to operations in the period such determination was made.



Contingencies



The Company’s
management assesses contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment
of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates
that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case
the nature of the guarantee would be disclosed.



14







Results of Operations for the Years
Ended December 31, 2010 and 2009



The Company had no
revenues from operations for the years ended December 31, 2010 and 2009; however, the Company generated revenue from the sale of
the Company’s technology rights during 2010.



General and administrative
expenses for the year ended December 31, 2010 were $553,129, as compared to $993,287 for the year ended December 31, 2009, a decrease
of $440,158 or 44%. Included in such costs was stock-based compensation of $22,296 and $37,813 in 2010 and 2009, respectively.
The decrease in general and administrative expenses in 2010 as compared to 2009 was primarily a result of a decrease in legal fees
of $460,725. Significant legal fees were incurred in 2009 as compared to 2010 due primarily to the arbitration with Xcorporeal.



Interest expense (all
to a related party) was $197,030 for the year ended December 31, 2010, as compared to $336,883 for the year ended December 31,
2009. The decrease in 2010, as compared to 2009, was the result of the underlying debt being repaid in 2010 from the proceeds received
in 2010 relating to the sale of the Company’s technology rights.



Other income was $156,145
for the year ended December 31, 2010, as compared to $95,228 for the year ended December 31, 2009. The increase was due primarily
to forgiveness of payables by vendors in 2010.



Income tax expense
related to continuing operations of $514,000 was recorded for the year ended December 31, 2010, and related primarily to the gain
from legal settlement of $1,871,430 recognized during the year. Due to the Company’s determination that a gain would be recognized
with respect to the sale of the Company’s technology rights in 2010, the Company recorded a federal income tax benefit of
$1,500,000 for the year ended December 31, 2009, as a result of the reduction of a deferred tax valuation allowance that had been
established in a prior year for uncertainty relating to the utilization of a net operating loss carryforward.



Income from continuing
operations was $764,637 for the year ended December 31, 2010, as compared to income from continuing operations of $265,058 for
the year ended December 31, 2009, due primarily to the gain from legal settlement, net of income taxes, in 2010.



Income from discontinued
operations was $1,980,118 for the year ended December 31, 2010, as compared to a loss from discontinued operations of $109,209
for the year ended December 31, 2009, due primarily to the gain from the sale of assets, net of income taxes, in 2010.



Net income was $2,744,755
for the year ended December 31, 2010, as compared to net income of $155,849 for the year ended December 31, 2009.



The Company expects
to report continuing losses from operations and negative operating cash flows in 2011 and subsequently, as the Company has no on-going
revenue-generating activities, except for any ancillary revenues that may be derived in future periods from the sale of the Company’s
technology rights.



At December 31, 2010,
the Company had net operating loss carryforwards for federal income tax purposes of approximately $14,000,000, which, if not utilized,
expire through 2029. In addition, the Company had net operating loss carryforwards of approximately $9,900,000 for state income
tax purposes which expire through 2029.



Liquidity and Capital
Resources



The Company had cash
and money market funds of $1,522,374 at December 31, 2010, as compared to $22,281 at December 31, 2009, an increase of $1,500,093.
However, the Company does not have sufficient internal and external working capital resources to meet current and expected future
obligations. In recent years, the Company has financed its working capital requirements through the sale of technology rights,
loans and the recurring sales of its securities to related parties; however, there can be no assurances that such related party
funding will be available to the Company in future periods on commercially reasonable terms or at all. As a result, the Company’s
independent registered public accounting firm, in its report on the Company’s 2010 consolidated financial statements, has
raised substantial doubt about the Company’s ability to continue as a going concern.



15







The Company had a working
capital surplus of $79,180 at December 31, 2010, as compared to a working capital deficit of $2,687,871 at December 31, 2009.



As of December 31,
2010, the Company had no note payable obligations. As of December 31, 2009, the Company had notes payable to related parties of
$964,083, net of discount and including accrued interest.



Operating Activities



During the year ended
December 31, 2010, the Company generated cash of $1,214,563 from continuing operating activities, as compared to using cash of
$279,618 in continuing operating activities during the year ended December 31, 2009, a net increase of $1,494,181. Cash provided
from continuing operations increased in 2010, as compared to 2009, due primarily to the proceeds received from the legal settlement,
net of income taxes, during the year ended December 31, 2010.



During the year ended
December 31, 2010, the Company used cash of $136,928 in discontinued operating activities, as compared to using cash of $129,901
in discontinued operating activities during the year ended December 31, 2009, a net increase of $7,027.



Investing Activities



During the year ended
December 31, 2010, the Company generated $285,601 of cash from investing activities, consisting of the proceeds received from sale
of assets of $1,703,570, less $1,417,969 transferred to the Company’s money market funds.



Financing Activities



During the year ended
December 31, 2010, the Company used cash of $1,281,112 in financing activities, consisting primarily of principal and interest
payments made on debt incurred in prior periods to finance the Company’s activities.



During the year ended
December 31, 2009, the Company generated $315,000 of cash from financing activities, consisting of $87,500 in advances from a related
party, $115,000 from the exercise of stock warrants, and $220,000 in proceeds from a note payable to a related party, less the
repayment of advances and notes in the amount of $107,500.



The following significant
financing transactions, primarily equity related, were completed in 2009 and 2010:



On May 13, 2009, a
$700,000 promissory note dated December 26, 2007 payable to Robert M. Snukal, director and chief executive officer, and a $150,000
promissory note dated August 12, 2008 payable to Robert M. Snukal, plus accrued interest of $64,611, were rolled-over into
a new uncollateralized non-convertible promissory note in the amount of $914,611, due on May 13, 2010, with interest at 6% per
annum. In connection with this note, the Company issued warrants to purchase 16,937,240 shares of the Company’s common stock
at an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about
the date of the note. The warrants expire on the earlier of (i) May 13, 2016 or (ii) the closing of the Company’s sale of
all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of
the warrants at the time of issuance was determined to be $377,667, using the Black-Scholes option-pricing model, and was recorded
as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over
the term of the note using the straight-line method. In March 2010, the $914,611 note, with accrued interest of $42,398, was paid
in full.



16







On April 21, 2009,
the Company entered into a $20,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and chief
executive officer, with interest at 6% per annum, payable on August 31, 2009. Under the terms of the note, at the option of the
holder through maturity, the principal amount plus any accrued interest thereon could be converted at any time into shares of the
Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s
common stock on the date the note was issued. In connection with this note, the Company issued warrants to purchase 333,333 shares
of the Company’s common stock at an exercise price of $0.03 per share, which was the approximate closing price of the Company’s
common stock on the date the warrants were issued. The warrants expire on the earlier of (i) April 21, 2016 or (ii) the closing
of the Company’s sale of all or substantially all of its assets, or the acquisition of the Company, as defined in the warrant.
The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the Black-Scholes option-pricing
model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized
to interest expense over the term of the note using the straight-line method. On April 28, 2009, the $20,000 note was paid in full.



On April 29, 2009,
the Company issued 3,000,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise
of warrants at $0.02 per share. The Company received $60,000 of proceeds.



On May 11, 2009, the
Company issued 2,000,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise
of warrants at $0.02 per share. The Company received $40,000 of proceeds.



On May 13, 2009, the
Board approved the issuance of 500,000 shares of the Company’s common stock to Dr. Rambod, a consultant and former officer
of the Company, as payment for services in connection with the completion and filing of a patent application regarding the Company’s
rights in and to the polymer technology developed by the Company. The 500,000 shares of common stock were valued at $0.027 per
share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, for a
total of $13,500, which was charged to discontinued operations on May 13, 2009. On August 5, 2009, the Board approved an additional
issuance of 250,000 shares of the Company’s common stock to Dr. Rambod as payment for additional services in connection with
the patent application. The 250,000 shares of common stock were valued at $0.02 per share, which was the approximate closing price
of the Company’s common stock on the date of the issuance, for a total of $5,000, which was charged to discontinued operations
on August 5, 2009.



On May 13, 2009, the
Company issued options to purchase 250,000 shares of common stock to a consultant for past services, which were fully vested on
the date of grant. The options are exercisable at $0.027 per share, which was the approximate closing price of the Company’s
common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant
was $6,037, which was charged to operations on May 13, 2009.



On May 13, 2009, the
Company issued options to purchase a total of 300,000 shares of common stock to two outside directors for past services, which
were fully vested on the date of grant. The options are exercisable at $0.027 per share, which was the approximate closing price
of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options
on the date of grant was $7,244, which was charged to operations on May 13, 2009.



On July 7, 2009, the
Company issued 555,555 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise
of warrants at $0.027 per share. The Company received $15,000 of proceeds.



During August and September
2009, Robert M. Snukal, director and chief executive officer, advanced $87,500 to the Company on a non-interest bearing basis for
working capital purposes. On October 17, 2009, the advances were repaid in full.



On October 18, 2009,
the Company entered into a $200,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and
chief executive officer, with interest at 6% per annum, and payable on April 30, 2010. Under the terms of the note, at the option
of the holder through maturity, the principal amount plus any accrued interest thereon could be converted at any time into shares
of the Company’s common stock at a conversion price of $0.022 per share, which was the approximate closing price of the Company’s
common stock on or about the date the note was issued. In connection with this note, the Company issued warrants to purchase 4,545,455
shares of the Company’s common stock at an exercise price of $0.022 per share, which was the approximate closing price of
the Company’s common stock on or about the date the warrants were issued. The warrants expire on the earlier of (i) October
18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets, or the acquisition of the Company,
as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $83,597, using
the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value
of the warrants was amortized to interest expense over the term of the note using the straight-line method. In March 2010, the
$200,000 note, including accrued interest of $4,077, was paid in full.



17







On February 23, 2010,
the Company entered into a $45,000 uncollateralized promissory note agreement with Robert M. Snukal, director and chief executive
officer, with interest at 5% per annum, and payable on February 23, 2011. In March 2010, the $45,000 note, with accrued interest
of $26, was paid in full.



Item 7A. Quantitative and Qualitative
Disclosures About Market Risk



Not applicable.



Item 8. Financial Statements and Supplementary
Data



The financial statements
required by this Item 8 are included elsewhere in this Annual Report and incorporated herein by this reference.



Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.



The Company’s
Board of Directors dismissed PMB Helin Donovan, LLP (“PMB”) as the Company’s independent registered public accounting
firm effective March 4, 2011.



Effective March 4,
2011, the Company engaged the accounting firm of Gumbiner Savett Inc. as the Company’s new independent registered public
accounting firm. The retention of Gumbiner Savett Inc. was approved by the Company’s Board of Directors. During the two most
recent fiscal years and the subsequent interim period to the date hereof, the Company did not consult with Gumbiner Savett Inc.
regarding any of the matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.



Item 9A. Controls and Procedures



Disclosure Controls and
Procedures



Regulations under the
Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are
defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed
in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms.



We conducted an evaluation,
with the participation of our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures as of the period covered by this Report. Based on that evaluation, our Chief Executive Officer has concluded that
as of December 31, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to
the material weaknesses.



A material weakness
is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or
combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses
in our disclosure controls and procedures:



1.            We do not have
written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial
reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written
documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded
that the control deficiency that resulted represented a material weakness.



18











2.          We
do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and
nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the
extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by
separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.



3.          We
do not have review and supervision procedures for financial reporting functions. The review and supervision function of internal
control relates to the accuracy of financial information reported. The failure to review and supervise could allow the reporting
of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible
or economically possible. Management evaluated the impact of our significant number of audit adjustments and has concluded that
the control deficiency that resulted represented a material weakness.



To address these material
weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein
fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Management also retained outside consultants to assist it in the preparation of consolidated financial statements and footnotes.



Report on Internal Control
over Financial Reporting



Our management is responsible
for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting
is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under
the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board
of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and
procedures that:



| | · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on the financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there
is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this risk.



As of December 31,
2010, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal Control— Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) and Securities and Exchange Commission guidance on conducting
such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls
and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This
was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely
affected our internal controls and that may be considered to be material weaknesses.



19







The matters involving
internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company
Accounting Oversight Board were: (1) lack of written documentation of internal control policies and procedures; (2) inadequate
segregation of duties consistent with control objectives; and (3) lack of review and supervision over period end financial disclosure
and reporting processes.



Management believes
that the lack of documentation of internal controls did not have an effect on our financial results. However, management believes
that the lack of segregation of duties, and a lack of review and supervision of reporting, could result in a material misstatement
in our financial statements in future periods.



This annual report
does not include an attestation report of the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting
firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report
in this annual report.



Changes in Internal Control
over Financial Reporting



There were no changes
in our internal control over financial reporting that occurred during the fourth quarter of the fiscal year ended December 31,
2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Item 9B.   Other Information



None.



PART III



Item
10.   Directors and Executive Officers



Executive Officers and Directors



The directors of the
Company currently have terms which will end at the next annual meeting of the stockholders of the Company or until their successors
are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the Board of
Directors. There are no family relationships among any of our directors and executive officers.



The following sets
forth the names, ages and principal positions of our directors and executive officers as of December 31, 2010:



|Name                      |  | Age |  | Position                                                    | 
|------------------------- |  | --- |  | ----------------------------------------------------------- | 
|Leonardo Berezovsky, M.D. |  | 65  |  | Chairman of the Board of Directors, Chief Financial Officer | 
|Robert M. Snukal          |  | 66  |  | Chief Executive Officer, President and Director             | 
|Ronald P. Lang, M.D.      |  | 59  |  | Executive Vice-President, Secretary and Director            | 
|Edmond Rambod, Ph.D.      |  | 49  |  | Chief Scientific Officer and Director                       | 
|Jose Spiwak, M.D.         |  | 64  |  | Director                                                    | 



Leonardo Berezovsky,
M.D. has been a director since 2003, Chairman since 2005, and Chief Financial Officer since March 2007. Dr. Berezovsky
is the Chairman and CEO of AssistMed, Inc., which utilizes proprietary technology to deliver integrated solutions for online clinical
documentation and related business processes within the healthcare industry. In addition, Dr. Berezovsky was the Co-Founder,
Chairman and CEO of AHI Healthcare Systems, Inc., a managing company for primary care physicians and comprehensive healthcare delivery
networks. AHI completed a public offering and was later sold via merger to FPA Medical Management, Inc. in 1997. Dr. Berezovsky
was also the co-founder, Chairman and CEO of Fiberspace, Inc., an optical networking concern that manufactured innovative fiber
optic components for the telecommunications and oil and gas industries. Dr. Berezovsky completed his training in Internal
Medicine and Cardiology at the Cleveland Clinic in Cleveland, Ohio, and practiced at Cedars Sinai Medical Center in Los Angeles,
California. Dr. Berezovsky received his bachelor’s degree in 1960 and M.D. in 1968 from the Universidad de Rosario in
Rosario, Argentina.



20







Robert M. Snukal
has been a director since February 2003 and CEO and President since December 2005. From 1997 to 2002, he served as a member
of the Board of Directors, Chief Executive Officer and President of Fountain View, Inc., a healthcare provider providing physical
therapy, occupational therapy, speech therapy and pharmacy services as well as operating skilled nursing facilities and assisted
living facilities. Mr. Snukal holds a Bachelors Degree and a Masters Degree in English Literature from the University of Manitoba.
Mr. Snukal has been a lecturer and an assistant professor at several universities, including the University of British Columbia,
the University of Sussex in England and the University of Calgary.



Ronald P. Lang,
M.D. has been a director and the Secretary of the Company since May 1996. Dr. Lang is a medical doctor who is board
certified in internal medicine/nephrology. He has been a physician with Medipace Medical Group, Inc. since 1983. Dr. Lang
graduated from the Ohio State University College of Medicine in 1973, completed his residency at St. Luke’s Medical Center
in Chicago, Illinois, and was a fellow in the nephrology department at UCLA-Center for the Health Sciences/Wadsworth Veterans Hospital.
Dr. Lang also serves as a Clinical Assistant Professor of Medicine at UCLA School of Medicine. Dr. Lang also received
M.A. and M.Ph. degrees in economics from Yale University and was an Economist — Program Analyst for the U.S. Department of
Health, Education and Welfare (office of the Assistant Secretary for Planning and Education) from 1973 to 1974.



Edmond Rambod,
Ph.D was appointed as a director and as the Company’s Chief Scientific Officer in August 2008. As the Company’s
Chief Scientific Officer, Dr. Rambod is responsible for the Company’s scientific, technical and intellectual property related
activities. Dr. Rambod is the inventor of the Company’s wearable devices and has provided the Company with scientific, technical
and intellectual property consulting services since 2002. Dr. Rambod is the founder and Chief Executive Officer of BioQuantetics,
Inc., a California-based corporation which has developed, among others, an ultrasound diagnostic technology with a variety of medical
applications. Dr. Rambod received a Bachelors of Science degree in Chemical Engineering, a Masters of Science degree in Biomedical
Engineering and a Doctorate of Philosophy degree in Medicine and Medical Sciences from the Technion - Israel Institute of Technology
in Haifa, Israel. Currently, Dr. Rambod holds a Visiting Scholar appointment at the Department of Aeronautics and Bioengineering
at the California Institute of Technology in Pasadena, California, where he also served as a Senior Scientist between 1993 and
2000. Prior to 1993, Dr. Rambod served as a Research Scientist in the Department of Cardiothoracic Surgery at Cedars-Sinai Medical
Center and as an Associate Scientist in the Biomedical Engineering Program at the University of California at Los Angeles. Dr.
Rambod is the recipient of the Achievements Award of the American Physical Society and is an active member of several professional,
scientific and medical organizations such as the American Heart Association and the American Association for the Advancement of
Science. Many of Dr. Rambod’s accomplishments and peer-reviewed reports relating to science, medicine and healthcare have
been published in major medical and scientific journals. Between 1987 and 1989, Dr. Rambod actively served in the Israeli
Defense Force.



Jose Spiwak M.D.
has been a director since February 1998. Dr. Spiwak is a board certified thoracic and cardiovascular surgeon, and serves as
Chairman of the Cardiovascular Thoracic Section of St. Francis Medical Center and Presbyterian Intercommunity Hospital in Los Angeles,
California. He served as Vice-Chairman of American Health, Inc., a managing company of primary care physicians and comprehensive
healthcare delivery networks, which was sold to FPA Medical Management, Inc. in April 1997. Dr. Spiwak graduated from the
Universidad Javeriana Medical School (Bogotá, Columbia) in 1968 and performed his residency in Israel and the United States.
Dr. Spiwak is a member of the Board of Directors of the American Cancer Society.



Audit Committee



The members of the
Audit Committee of our Board of Directors are Ronald P. Lang, M.D. and Jose Spiwak M.D. The Audit Committee of our Board of Directors
does not have a member that qualifies as an “audit committee financial expert” as that term is defined under applicable
rules of the Securities and Exchange Commission.



21







Code of Ethics



We have adopted a code
of ethics for directors, executive officers and other employees. We will provide to any person without charge, upon request, a
copy of our code of ethics. Such copy may be obtained by writing to Secretary, National Quality Care, Inc., 2431 Hill Drive,
Los Angeles, California 90041.



Compliance with Section 16(a) of the
Securities Exchange Act of 1934



Section 16(a) of the
Exchange Act requires its directors and executive officers and beneficial holders of more than 10% of our common stock to file
with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our equity securities.
Based solely on a review of copies of such forms we have received and other information provided to us, Section 16(a) reports applicable
to our officers, directors and greater-than-10% shareholders were timely filed during the year ended December 31, 2010.



Item 11.   Executive Compensation



Summary Compensation Table



The following table
sets forth for the periods shown information as to the compensation of our principal executive officer, principal financial officer
and our two other executive officers:



|Name [and Principal Position] |  | Year |      |  | Salary
    ($) |  |   | Bonus
    ($) |  |  | Stock
    Awards ($) |  |  | Option
    Awards ($)(1) |        |     | Non-Equity
    Incentive Plan Compensation ($) |  |        | Nonqualified
    Deferred Compensation Earnings ($) |  |  | All Other
    Compensation ($) |  |  | Total
    ($) |  
|----------------------------- |  | ---- | ---- |  | -------------- |  | - | ------------- |  |  | -------------------- |  |  | ------------------------ | ------ | --- | ---------------------------------------------- |  | ------ | --------------------------------------------------- |  |  | ------------------------------ |  |  | ------------- | -
|Leonardo
    Berezovsky       |  |      | 2010 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|Chairman of the Board, CFO    |  |      | 2009 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|                              |  |      | 2008 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|                              |  |      |      |  |                |  |   |               |  |  |                      |  |  |                          |        |     |                                                |  |        |                                                     |  |  |                                |  |  |               |  
|Robert
    M. Snukal          |  |      | 2010 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|CEO, President                |  |      | 2009 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|                              |  |      | 2008 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|                              |  |      |      |  |                |  |   |               |  |  |                      |  |  |                          |        |     |                                                |  |        |                                                     |  |  |                                |  |  |               |  
|Ronald
    Lang, M.D.         |  |      | 2010 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|Executive Vice President      |  |      | 2009 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 3,622  | (1)                                                 |  |  | 0                              |  |  |               | 0
|                              |  |      | 2008 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|                              |  |      |      |  |                |  |   |               |  |  |                      |  |  |                          |        |     |                                                |  |        |                                                     |  |  |                                |  |  |               |  
|Edmond
    Rambod             |  |      | 2010 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|Executive Vice President/     |  |      | 2009 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 18,500 | (2) |                                                |  | 0      |                                                     |  |  | 0                              |  |  |               | 0
|Chief Science Officer         |  |      | 2008 |  |                |  | 0 |               |  |  | 0                    |  |  |                          | 0      |     |                                                |  | 10,414 | (3)                                                 |  |  | 0                              |  |  |               | 0

_______________

(1)          The
grant date value for options issued May 13, 2009 to purchase 150,000 shares of common stock.



(2)          The
issuance of 500,000 shares of common stock at $0.027 per share on May 13, 2009 and the issuance of 250,000 shares of common
stock at $0.02 per share on August 5, 2009 for services.



(3)          Includes
options to purchase 1,000,000 shares of common stock at an exercise price of $0.12 per share, vested in eight equal semi-annual
installments commencing on February 8, 2009 and continuing on each August 8 and February 8 thereafter, until the
options become fully vested on the fourth anniversary of the date of grant (August 8, 2008).



We have no employment
agreements with our current named executive officers.





22







The following table
sets forth certain information concerning outstanding equity awards held by our named executive officers at December 31, 2010:



Outstanding Equity Awards at 2010 Fiscal
Year-End



|Option Awards       |  | Stock Awards                                                               |          
|------------------- |  | -------------------------------------------------------------------------- | ---------
|Name                |  | Number of Securities Underlying
    Unexercised Options (#) Exercisable(1) |          
|                    |  |                                                                            |          
|Leonardo Berezovsky |  |                                                                            |          
|                    |  |                                                                            | 200,000  
|                    |  |                                                                            | 1,000,000
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 250,000  
|                    |  |                                                                            |          
|Robert M. Snukal    |  |                                                                            |          
|                    |  |                                                                            | 400,000  
|                    |  |                                                                            | 2,000,000
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 500,000  
|                    |  |                                                                            |          
|Ronald Lang         |  |                                                                            |          
|                    |  |                                                                            | 150,000  
|                    |  |                                                                            | 250,000  
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 5,000    
|                    |  |                                                                            | 50,000   
|                    |  |                                                                            |          
|Edmond Rambod       |  |                                                                            |          
|                    |  |                                                                            | 500,000  



23







Director Compensation



The following table
sets forth certain information concerning compensation paid for services as our directors during the fiscal year December 31,
2010:



2010 Director Compensation



|Name                   |  | Fees Earned or paid in Cash ($) |   |  | Stock Awards ($) |  |   | Option Awards ($) |  |  | All Other Compensation ($) |  |  | Total ($) |  
|---------------------- |  | ------------------------------- | - |  | ---------------- |  | - | ----------------- |  |  | -------------------------- |  |  | --------- | -
|Leonard Berezovsky (1) |  |                                 | 0 |  |                  |  | 0 |                   |  |  | 0                          |  |  |           | 0
|Robert M. Snukal (1)   |  |                                 | 0 |  |                  |  | 0 |                   |  |  | 0                          |  |  |           | 0
|Ronald Lang (1)        |  |                                 | 0 |  |                  |  | 0 |                   |  |  | 0                          |  |  |           | 0
|Jose Spiwak            |  |                                 | 0 |  |                  |  | 0 |                   |  |  | 0                          |  |  |           | 0
|Edmond Rambod          |  |                                 | 0 |  |                  |  | 0 |                   |  |  | 0                          |  |  |           | 0

_____________________



(1)           See
“Summary Compensation Table” for compensation paid to these executive officers named therein.



At December 31,
2010, the number of outstanding option awards held by the directors was as follows: L. Berezovsky — 1,470,000, R. Snukal
— 2,920,000, R. Lang — 470,000, J. Spiwak — 220,000, Edmond Rambod — 2,500,000.



24







Item
12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The following table
reflects, as of December 31, 2010, based on 80,221,807 shares outstanding, the beneficial ownership of our common stock by:
(a) each director of the Company, (b) each executive officer named in the Summary Compensation Table presented elsewhere in this
document, (c) each person (or group of affiliated persons) known by us to be the beneficial owner of 5% or more of our common stock,
and (d) all current executive officers and directors of the Company as a group:



|Name and Address of Beneficial Owner                    |  | Number of Shares Beneficially Owned(1) |            |     | Percentage of Shares Beneficially Owned | 
|------------------------------------------------------- |  | -------------------------------------- | ---------- | --- | --------------------------------------- | 
|Robert M. Snukal                                        |  |                                        | 47,207,331 | (2) |                                         | 
|                                                        |  |                                        |            |     |                                         | 
|Victor Gura                                             |  |                                        | 15,497,250 | (3) |                                         | 
|                                                        |  |                                        |            |     |                                         | 
|Leonard Berezovsky                                      |  |                                        | 6,107,258  | (4) |                                         | 
|                                                        |  |                                        |            |     |                                         | 
|Ronald P. Lang                                          |  |                                        | 3,808,449  | (5) |                                         | 
|                                                        |  |                                        |            |     |                                         | 
|Jose Spiwak                                             |  |                                        | 2,132,500  | (6) |                                         | 
|                                                        |  |                                        |            |     |                                         | 
|Edmond Rambod                                           |  |                                        | 3,050,000  | (7) |                                         | 
|                                                        |  |                                        |            |     |                                         | 
|Executive officers and directors as a group (5 persons) |  |                                        | 62,305,538 | (8) |                                         | 

_____________________



(1)          Such
persons have sole voting and investment power with respect to all shares of Common Stock shown as being beneficially owned by them,
subject to community property laws, where applicable, and the information contained in the footnotes to this table.



(2)          Includes
6,017,500 shares subject to options and warrants held by Mr. Snukal which are exercisable or become exercisable within 60 days
after December 31, 2010.



(3)          Includes
800,000 shares held by Medipace Medical Group, Inc., an affiliate of Dr. Gura. Also includes 250,000 shares subject to warrants
held by Dr. Gura which are currently exercisable.



(4)          Includes
2,926,841 shares held by various family and charitable trusts of which 2,879,966 shares are common stock and 46,875 shares are
subject to warrants which are currently exercisable. Dr. Berezovsky has voting and investment power with respect to the shares
held by the trusts. Also includes 1,470,000 shares subject to options held by Dr. Berezovsky which are exercisable or become
exercisable within 60 days after December 31, 2010.



(5)          Includes
800,000 shares held by Medipace Medical Group, Inc., an affiliate of Dr. Lang. Also includes 470,000 shares subject to options
held by Dr. Lang which are exercisable or become exercisable within 60 days after December 31, 2010.



(6)          Includes
220,000 shares subject to options held by Dr. Spiwak which are exercisable or become exercisable within 60 days after December 31,
2010.



(7)          Includes
2,000,000 shares subject to options which are exercisable or become exercisable within 60 days after December 31, 2010.



(8)          Includes
10,314,375 shares subject to options and warrants beneficially owned by current officers and directors as a group which are exercisable
within 60 days after December 31, 2010.



25







Item 13.
Certain Relationships, Related Transactions and Director Independence



On February 23, 2010,
the Company entered into a $45,000 uncollateralized promissory note agreement with Robert M. Snukal, director and chief executive
officer, with interest at 5% per annum, and payable on February 23, 2011. In March 2010, the $45,000 note, with accrued interest
of $26, was paid in full.



Director Independence



Jose Spiwak qualifies
as an independent director under the independence standards of the Nasdaq Stock Market (Rule 4200(a)(15)).



Item 14.   Principal Accounting Fees
and Services



The Company did not
pay or accrue principal accounting fees in 2009 or 2010.



The Board of Directors
is responsible for approving every engagement of our independent registered public accounting firm.





26







PART IV



Item 15.   Exhibits and Financial Statement
Schedules



A list of exhibits
required to be filed as part of this report is set forth in the Index to Exhibits, which is presented elsewhere in this document,
and is incorporated herein by reference.



27







NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM)



Years Ended December 31, 2010 and 2009



|Report of Independent Registered Public Accounting Firm                                              |  | F-2 | 
|---------------------------------------------------------------------------------------------------- |  | --- | 
|                                                                                                     |  |     | 
|Consolidated Balance Sheets - December 31, 2010 and 2009                                             |  | F-3 | 
|                                                                                                     |  |     | 
|Consolidated Statements of Operations - Years Ended December 31, 2010 and 2009                       |  | F-4 | 
|                                                                                                     |  |     | 
|Consolidated Statement of Stockholders’ Equity (Deficiency) - Years Ended December 31, 2010 and 2009 |  | F-5 | 
|                                                                                                     |  |     | 
|Consolidated Statements of Cash Flows - Years Ended December 31, 2010 and 2009                       |  | F-6 | 
|                                                                                                     |  |     | 
|Notes to Consolidated Financial Statements – Years Ended December 31, 2010 and 2009                  |  | F-7 | 



F-1







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Stockholders

of National Quality Care, Inc.



We have audited the consolidated balance
sheets of National Quality Care, Inc. and its wholly-owned subsidiary (the “Company”) as of December 31, 2010 and 2009,
and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of National Quality Care, Inc. and
its wholly-owned subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the
years then ended, in conformity with United States generally accepted accounting principles.



The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has suffered recurring losses and negative cash flows from operations that raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are
described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.



/s/ GUMBINER SAVETT INC.

Gumbiner Savett Inc.

Santa Monica, California

April 2, 2012



F-2







NATIONAL QUALITY CARE, INC.
AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS



|                                                                                                           |  | December 31, |            
|---------------------------------------------------------------------------------------------------------- |  | ------------ | -----------
|                                                                                                           |  | 2010         |            
|                                                                                                           |  |              |            
|ASSETS                                                                                                     |  |              |            
|Current assets:                                                                                            |  |              |            
|Cash                                                                                                       |  | $            | 104,405    
|Money market funds                                                                                         |  |              | 1,417,969  
|Receivable from sale of technology rights                                                                  |  |              | 1,675,000  
|Prepaid expenses and other current assets                                                                  |  |              | 68,965     
|Technology rights held for sale, net of accumulated amortization of $40,162 – discontinued operations      |  |              | —          
|Deferred income taxes                                                                                      |  |              | —          
|Total current assets                                                                                       |  |              | 3,266,339  
|Total assets                                                                                               |  | $            | 3,266,339  
|                                                                                                           |  |              |            
|LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)                                                          |  |              |            
|Current liabilities:                                                                                       |  |              |            
|Accounts payable and accrued expenses                                                                      |  | $            | 2,794,945  
|Accounts payable and accrued expenses – discontinued operations                                            |  |              | 15,214     
|Income taxes payable                                                                                       |  |              | 231,000    
|Deferred income taxes                                                                                      |  |              | 146,000    
|Notes payable to related party, including accrued interest of $37,497, net of discount of $188,025         |  |              | —          
|Note payable to consultant – discontinued operations                                                       |  |              | —          
|Total current liabilities                                                                                  |  |              | 3,187,159  
|Total liabilities                                                                                          |  |              | 3,187,159  
|                                                                                                           |  |              |            
|Commitments and contingencies                                                                              |  |              |            
|                                                                                                           |  |              |            
|Stockholders’ equity (deficiency):                                                                         |  |              |            
|Preferred stock, $0.01 par value; authorized - 5,000,000 shares; issued – none                             |  |              | —          
|Common stock, $0.01 par value; authorized - 125,000,000 shares; issued and outstanding – 80,221,807 shares |  |              | 802,219    
|Additional paid-in capital                                                                                 |  |              | 12,786,542 
|Accumulated deficit                                                                                        |  |              | (13,509,581
|Total stockholders’ equity (deficiency)                                                                    |  |              | 79,180     
|Total liabilities and stockholders’ equity (deficiency)                                                    |  | $            | 3,266,339  



See accompanying notes to consolidated financial
statements.



F-3







NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                                                                          |  | Years Ended December 31, |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------
|                                                                                                                                                                          |  | 2010                     |           
|Revenues                                                                                                                                                                  |  | $                        | —         
|                                                                                                                                                                          |  |                          |           
|General and administrative, including $22,296 and $37,813 of stock-based compensation costs for the years ended December 31, 2010 and 2009, respectively                  |  |                          | 553,129   
|Loss from operations                                                                                                                                                      |  |                          | (553,129  
|Interest expense – related party                                                                                                                                          |  |                          | (197,030  
|Gain from legal settlement                                                                                                                                                |  |                          | 1,871,430 
|Interest income                                                                                                                                                           |  |                          | 1,221     
|Other income                                                                                                                                                              |  |                          | 156,145   
|Income (loss) before income taxes                                                                                                                                         |  |                          | 1,278,637 
|Income tax benefit (expense)                                                                                                                                              |  |                          | (514,000  
|Income from continuing operations                                                                                                                                         |  |                          | 764,637   
|Income (loss) from discontinued operations, including gain from sale of assets of $3,318,732, and net of income taxes of $1,363,000, for the year ended December 31, 2010 |  |                          | 1,980,118 
|Net income                                                                                                                                                                |  | $                        | 2,744,755 
|                                                                                                                                                                          |  |                          |           
|Income (loss) per common share:                                                                                                                                           |  |                          |           
|Continuing operations:                                                                                                                                                    |  |                          |           
|Basic                                                                                                                                                                     |  | $                        | 0.01      
|Diluted                                                                                                                                                                   |  | $                        | 0.01      
|                                                                                                                                                                          |  |                          |           
|Discontinued operations:                                                                                                                                                  |  |                          |           
|Basic                                                                                                                                                                     |  | $                        | 0.02      
|Diluted                                                                                                                                                                   |  | $                        | 0.02      
|                                                                                                                                                                          |  |                          |           
|Net income:                                                                                                                                                               |  |                          |           
|Basic                                                                                                                                                                     |  | $                        | 0.03      
|Diluted                                                                                                                                                                   |  | $                        | 0.03      
|                                                                                                                                                                          |  |                          |           
|Weighted average common shares outstanding:                                                                                                                               |  |                          |           
|Basic                                                                                                                                                                     |  |                          | 80,221,807
|Diluted                                                                                                                                                                   |  |                          | 80,221,807



See accompanying notes to consolidated financial
statements.



F-4







NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY



CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY (DEFICIENCY)



Years Ended December 31, 2010 and 2009



|                                                      |  | Common Stock |            |  | Additional Paid-in |   |         | Accumulated |  |   | Total Stockholders’Equity | 
|----------------------------------------------------- |  | ------------ | ---------- |  | ------------------ | - | ------- | ----------- |  | - | ------------------------- | 
|                                                      |  | Shares       |            |  | Amount             |   |         | Capital     |  |   | Deficit                   | 
|Balance at December 31, 2008                          |  |              | 73,916,252 |  |                    | $ | 739,163 |             |  | $ | 12,186,413                | 
|Stock-based compensation costs                        |  |              | 750,000    |  |                    |   | 7,500   |             |  |   | 48,813                    | 
|Exercise of stock warrants                            |  |              | 5,555,555  |  |                    |   | 55,556  |             |  |   | 59,444                    | 
|Fair value of warrants issued in connection with debt |  |              | —          |  |                    |   | —       |             |  |   | 469,576                   | 
|Net income                                            |  |              | —          |  |                    |   | —       |             |  |   | —                         | 
|Balance at December 31, 2009                          |  |              | 80,221,807 |  |                    |   | 802,219 |             |  |   | 12,764,246                | 
|Stock-based compensation costs                        |  |              | —          |  |                    |   | —       |             |  |   | 22,296                    | 
|Net income                                            |  |              | —          |  |                    |   | —       |             |  |   | —                         | 
|Balance at December 31, 2010                          |  |              | 80,221,807 |  |                    | $ | 802,219 |             |  | $ | 12,786,542                | 



See accompanying notes to consolidated financial
statements.



F-5







NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF CASH FLOWS



|                                                                                                                                  |  | Years Ended December 31, |           
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------
|                                                                                                                                  |  | 2010                     |           
|Cash flows from operating activities:                                                                                             |  |                          |           
|Continuing operations:                                                                                                            |  |                          |           
|Income from continuing operations                                                                                                 |  | $                        | 764,637   
|Adjustments to reconcile income from continuing operations to net cash provided by (used in)
    continuing operating activities: |  |                          |           
|Amortization of discount on notes payable                                                                                         |  |                          | 188,025   
|Stock-based compensation costs                                                                                                    |  |                          | 22,296    
|Forgiveness of payables                                                                                                           |  |                          | (156,145  
|Deferred income taxes                                                                                                             |  |                          | 432,000   
|Changes in operating assets and liabilities:                                                                                      |  |                          |           
|(Increase) decrease in -                                                                                                          |  |                          |           
|Prepaid expenses and other current assets                                                                                         |  |                          | (68,965   
|Increase (decrease) in -                                                                                                          |  |                          |           
|Accounts payable and accrued expenses                                                                                             |  |                          | (58,289   
|Income taxes payable                                                                                                              |  |                          | 82,000    
|Accrued interest due to related party                                                                                             |  |                          | 9,004     
|Net cash provided by (used in) continuing operating activities                                                                    |  |                          | 1,214,563 
|Discontinued operations:                                                                                                          |  |                          |           
|Income (loss) from discontinued operations                                                                                        |  |                          | 1,980,118 
|Adjustments to reconcile income (loss) from discontinued operations to net cash used in
    discontinued operating activities:    |  |                          |           
|Stock-based compensation costs                                                                                                    |  |                          | —         
|Amortization of technology rights                                                                                                 |  |                          | —         
|Forgiveness of payables                                                                                                           |  |                          | (25,101   
|Deferred income taxes                                                                                                             |  |                          | 1,214,000 
|Gain from sale of assets                                                                                                          |  |                          | (3,318,732
|Changes in discontinued operating assets and liabilities:                                                                         |  |                          |           
|Increase (decrease) in -                                                                                                          |  |                          |           
|Accounts payable and accrued expenses                                                                                             |  |                          | (136,213  
|Income taxes payable                                                                                                              |  |                          | 149,000   
|Net cash used in discontinued operating activities                                                                                |  |                          | (136,928  
|Net cash provided by (used in) operating activities                                                                               |  |                          | 1,077,635 
|                                                                                                                                  |  |                          |           
|Cash flows from investing activities:                                                                                             |  |                          |           
|Proceeds from sale of assets                                                                                                      |  |                          | 1,703,570 
|Increase in money market funds                                                                                                    |  |                          | (1,417,969
|Net cash provided by investing activities                                                                                         |  |                          | 285,601   
|                                                                                                                                  |  |                          |           
|Cash flows from financing activities:                                                                                             |  |                          |           
|Proceeds from notes payable to related party                                                                                      |  |                          | 45,000    
|Advances from related party                                                                                                       |  |                          | —         
|Repayment of advances from related party                                                                                          |  |                          | —         
|Payment of note payable issued for services                                                                                       |  |                          | (120,000  
|Exercise of stock warrants                                                                                                        |  |                          | —         
|Repayment of note payable to related party                                                                                        |  |                          | (1,206,112
|Net cash provided by (used in) financing activities                                                                               |  |                          | (1,281,112
|                                                                                                                                  |  |                          |           
|Net increase (decrease) in cash                                                                                                   |  |                          | 82,124    
|Cash balance at beginning of year                                                                                                 |  |                          | 22,281    
|Cash balance at end of year                                                                                                       |  | $                        | 104,405   
|                                                                                                                                  |  |                          |           
|Supplemental disclosures of cash flow information:                                                                                |  |                          |           
|Cash paid for -                                                                                                                   |  |                          |           
|Interest                                                                                                                          |  | $                        | 116,043   
|Income taxes                                                                                                                      |  | $                        | 1,600     
|                                                                                                                                  |  |                          |           
|Non-cash investing activities:                                                                                                    |  |                          |           
|Notes payable to related party, including related accrued interest, rolled-over into a new note payable                           |  | $                        | —         
|Discount recorded for issuance of warrants in connection with convertible notes payable to related party                          |  | $                        | —         
|During 2010, the Company sold technology rights summarized as follows:                                                            |  |                          |           
|Total sales price                                                                                                                 |  | $                        | 3,378,570 
|Less amount receivable as of December 31, 2010                                                                                    |  |                          | (1,675,000
|Cash received during 2010                                                                                                         |  | $                        | 1,703,570 



See accompanying notes to consolidated financial
statements.



F-6







NATIONAL QUALITY CARE, INC.



AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Years Ended December 31, 2010 and 2009



1.            Basis
of Presentation



Organization and
Nature of Business



National Quality Care,
Inc. (“NQCI”), a publicly-traded Delaware corporation, was incorporated on January 1, 1996. Prior to March 19, 2010,
NQCI was a research and development company in the business of developing a wearable artificial kidney for dialysis and other medical
applications. On that date NQCI consummated a sale of its technology rights with respect to its developing wearable artificial
kidney (see Note 11). Subsequent to March 19, 2010, NQCI has had no operations other than the maintenance of its corporate shell.
Unless the context indicates otherwise, NQCI and its wholly-owned subsidiary, Los Angeles Community Dialysis, Inc. (“LACDI”),
are hereinafter referred to as the “Company”.



The Company’s
common stock is presently traded on the OTC Market (also referred to as the “Pink Sheets”) under the symbol “NQCI.PK”.



Going
Concern



The Company’s
consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. Prior to March 19, 2010, the Company was a research
and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications.
On that date, the Company consummated a sale of its technology rights with respect to its developing wearable artificial kidney
(see Note 11) and, consequently, those activities have been accounted for as discontinued operations in the Company’s consolidated
financial statements. Since June 15, 2006 (the date on which the Company sold its dialysis services business), the Company has
not generated any revenues from operations, and does not expect to do so in the foreseeable future; however, the Company generated
revenue from the sale of the Company’s technology rights during 2010.



For the past several
years, except for 2010, the Company has experienced net operating losses and negative operating cash flows. As of December 31,
2010, the Company had an accumulated deficit of $13,509,581, had no revenue from operating activities, and did not have sufficient
internal and external working capital resources to meet current and expected future obligations. Such deficiencies indicate the
Company will be unable to continue to fund its operations and meet its obligations as they come due. In recent years, the Company
has financed its working capital requirements through the sale of technology rights, loans and the recurring sales of its securities
to related parties; however, there can be no assurances that such related party funding will be available to the Company in future
periods on commercially reasonable terms or at all. As a result, the Company’s independent registered public accounting firm,
in its report on the Company’s 2010 consolidated financial statements, has raised substantial doubt about the Company’s
ability to continue as a going concern.



The Company’s
ability to continue as a going concern is dependent upon its ability to raise additional debt and/or equity capital, and to acquire
sufficient operating capital through the development of business activities, or otherwise. The Company’s consolidated financial
statements do not include any adjustments that might result from the outcome of these uncertainties.



F-7







2.            Summary of Significant Accounting Policies



Principles of Consolidation



The accompanying consolidated
financial statements include the financial statements of NQCI and its wholly-owned subsidiary, LACDI. All intercompany balances
and transactions have been eliminated in consolidation.



Concentrations



The Company’s
cash and money market fund balances may periodically exceed federally insured limits and the limits of the Securities Investor
Protection Corporation. The Company has not experienced a loss in such accounts to date. The Company maintains its accounts with
financial institutions with high credit ratings.



Convertible Instruments



The Company issued
convertible debt with non-detachable conversion features and detachable warrants. The non-detachable conversion feature and detachable
warrants are recorded as a discount to the related debt either as additional paid-in capital or a derivative liability, depending
on the guidance, using the intrinsic value method or relative fair value method, respectively. The debt discount associated with
the warrants and embedded beneficial conversion feature, if any, is amortized to interest expense over the life of the debenture
or upon earlier conversion of the debenture using either the effective yield method or the straight-line method, as appropriate.



Research and Development



Research and development
costs were expensed as incurred.  Research and development expenses consist primarily of costs incurred with respect to the
development of the Company’s wearable artificial kidney for dialysis and other medical applications, and are included in
discontinued operations in the consolidated statement of operations.



Income Taxes



The Company accounts
for income taxes under an asset and liability approach for financial accounting and reporting purposes. Accordingly, the Company
recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and the
tax basis of assets and liabilities.



The Company records
a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In the event
the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount,
an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should
the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to operations in the period such determination was made.



The Company recognizes
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement. As of December 31, 2010, no liability for unrecognized tax benefits was required to be recorded.



The Company files income
tax returns in the U.S. federal jurisdiction and is subject to income tax examinations by federal tax authorities for the year
2008 and thereafter.  The Company’s policy is to record interest and penalties on uncertain tax positions as income
tax expense. As of December 31, 2010, the Company had no accrued interest or penalties related to uncertain tax positions.



F-8







Contingencies



The Company’s
management assesses contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment
of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates
that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material,
would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case
the nature of the guarantee would be disclosed.



Stock-Based Compensation



The Company periodically
issues stock options and warrants to officers, directors and consultants for services rendered.  Options vest and expire according
to terms established at the grant date. The Company accounts for share-based payments to officers and directors by measuring the
cost of services received in exchange for equity awards based on the grant date fair value of the awards, with the cost recognized
as compensation expense in the Company’s consolidated financial statements over the vesting period of the awards. The Company
accounts for share-based payments to consultants by determining the value of the stock compensation based upon the measurement
date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance
to earn the equity instruments is complete.



Earnings Per Share



The Company’s
computation of earnings per share (“EPS”) includes basic and diluted EPS.  Basic EPS is measured as the income
(loss) available to common shareholders divided by the weighted average common shares outstanding for the period.  Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants and
options) as if they had been converted at the beginning of the periods presented, or issuance date, if later.  Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from
the calculation of diluted EPS.



Fair Value of Financial
Instruments



The carrying amounts
of cash, money market funds, receivable from sale of technology rights, prepaid expenses and other current assets, accounts payable
and accrued expenses, and income taxes payable approximate their respective fair values due to the short-term nature of these items.
The amounts shown for notes payable also approximate fair value because current interest rates offered to the Company for debt
of similar maturities are substantially the same.



Use of Estimates



The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements
and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The Company
evaluates its estimates on an on-going basis, including those related to valuation of warrants and options, analysis of deferred
taxes and provision for income taxes, contingencies and litigation.



Segment Information



Prior to the discontinued
operations discussed in Note 11, the Company’s reportable operating segments included dialysis services and development of
a wearable artificial kidney.



Technology Rights



Technology rights for
a wearable artificial kidney were being amortized over an estimated useful life of approximately 20 years. On December 14, 2009,
the Company entered into an Asset Purchase Agreement for the sale of these rights, which was consummated on March 19, 2010 (see
Note 11). Amortization is included in discontinued operations and amounted to $-0- and $4,860 for the years ended December 31,
2010 and 2009, respectively.



F-9







Recent Accounting
Pronouncements



Management does not
believe that any recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact
on the Company's financial statement presentation or disclosures.



3.            Notes
Payable



Notes Payable to
Consultant



The Company was party
to a contract dispute with a consultant claiming additional compensation relating to an agreement dated January 6, 2002, as amended.
In August 2008, the Company and consultant reached an agreement whereby the Company executed and delivered a promissory note in
the amount of $120,000, bearing interest at 2.54% per annum, and payable on August 7, 2010. In connection therewith, the Company
and the consultant entered into a mutual general release agreement. As a result, compensation in the amount of $120,000 was charged
to discontinued operations in August 2008. Additionally, on June 21, 2008, the Company granted the consultant options to purchase
1,500,000 shares of the Company’s common stock. In August 2008, the consultant was elected as a Director of the Company and
was also appointed to serve as the Company’s Chief Scientific Officer. In connection with such election and appointment,
the consultant received an additional 1,000,000 options to purchase shares of common stock. In March 2010, the note principal and
related accrued interest were paid.



Note Payable to Related
Party



On December 26, 2007,
the Company entered into a $700,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and
chief executive officer, bearing interest at 6% per annum, and payable on December 31, 2008. Under the terms of the note, at the
option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of
the Company’s common stock at a conversion price of $0.07 per share, which was the approximate closing price of the Company’s
common stock on or about the date of the note. In connection with this note, the Company issued warrants to purchase 5,000,000
shares of the Company’s common stock at an exercise price of $0.07 per share. The warrants were exercised in March 2008.
The relative fair value of the warrants at the time of issuance was determined to be $179,163, using the Black-Scholes option-pricing
model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized
to interest expense over the term of the note using the straight-line method. The discount was fully amortized as of December 31,
2008.



On August 12, 2008,
the Company entered into a $150,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and
chief executive officer, bearing interest at 6% per annum, payable on December 31, 2008. Under the terms of the note, at the option
of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s
common stock at a conversion price of $0.12 per share, which was the approximate closing price of the Company’s common stock
on or about the date of the note. In connection with this note, the Company issued warrants to purchase 625,000 shares of the Company’s
common stock at an exercise price of $0.12 per share. The warrants expire on the earlier of (i) August 12, 2015 or (ii) the
closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in
the warrant. The relative fair value of the warrants at the time of issuance was determined to be $45,478, using the Black-Scholes
option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants
was amortized to interest expense over the term of the note using the straight-line method. The discount was fully amortized as
of December 31, 2008. On March 19, 2010, the above described warrants to acquire 625,000 shares expired unexercised as a result
of the Company’s sale of substantially all of its assets (see Note 11).



F-10







On May 13, 2009, the
$700,000 promissory note payable to related party and the $150,000 promissory note payable to related party, plus accrued interest
of $64,611, were rolled-over into a new uncollateralized non-convertible promissory note in the amount of $914,611, due on May
13, 2010, with interest at 6% per annum. In connection with this note, the Company issued warrants to purchase 16,937,240 shares
of the Company’s common stock at an exercise price of $0.027 per share, which was the approximate closing price of the Company’s
common stock on or about the date of the note. The warrants expire on the earlier of (i) May 13, 2016 or (ii) the closing of the
Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The
relative fair value of the warrants at the time of issuance was determined to be $377,667, using the Black-Scholes option-pricing
model, and was recorded as discount to the note payable upon issuance. The relative fair value of the warrants was amortized to
interest expense over the term of the note using the straight-line method. For the year ended December 31, 2010, the Company recorded
interest expense of $136,581 relative to the amortized discount. The discount was fully amortized as of December 31, 2010. In March
2010, the $914,611 note, with accrued interest of $42,398, was paid in full. On July 7, 2009, warrants to acquire 555,555 shares
were exercised. On March 19, 2010, warrants to acquire the remaining 16,381,685 shares expired unexercised as a result of the Company’s
sale of substantially all of its assets (see Note 11).



On April 21, 2009,
the Company entered into a $20,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and
chief executive officer, bearing interest at 6% per annum, and payable on August 31, 2009. Under the terms of the note, at the
option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of
the Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s
common stock on the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 333,333
shares of the Company’s common stock at an exercise price of $0.03 per share. The warrants expire on the earlier of (i) April
21, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company,
as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the
Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of
the warrants was charged to interest expense over the period that the note was outstanding. The discount was fully amortized as
of December 31, 2009. On April 28, 2009, the $20,000 note was paid in full. On March 19, 2010, the above described warrants to
acquire 333,333 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note
11).



On October 18, 2009,
the Company entered into a $200,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and
chief executive officer, bearing interest at 6% per annum, and payable on April 30, 2010. Under the terms of the note, at the option
of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s
common stock at a conversion price of $0.022 per share, which was the approximate closing price of the Company’s common stock
on or about the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 4,545,455
shares of the Company’s common stock at an exercise price of $0.022 per share. The warrants expire on the earlier of (i)
October 18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of
the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $83,597,
using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair
value of the warrants was amortized to interest expense over the term of the note using the straight-line method. For the year
ended December 31, 2010, the Company recorded interest expense of $51,444 relative to the amortized discount. The discount was
fully amortized as of December 31, 2010. In March 2010, the $200,000 note, with accrued interest of $4,077, was paid in full. On
March 19, 2010, the above described warrants to acquire 4,545,455 shares expired unexercised as a result of the Company’s
sale of substantially all of its assets (see Note 11).



On February 23, 2010,
the Company entered into a $45,000 uncollateralized promissory note agreement with an officer and director, bearing interest at
5% per annum, and payable on February 23, 2011. In March 2010, the $45,000 note, with accrued interest of $26, was paid in full.



During the years ended
December 31, 2010 and 2009, the Company recorded total interest expense of $188,025 and $281,551, respectively, relative to the
amortization of discounts.



F-11













| | 4. | Income Taxes
| | -- | ------------



The components of income
tax expense (benefits) were as follows for the years ended December 31, 2010 and 2009:



|                        |  | Federal |            |   | State |   |         | Total | 
|----------------------- |  | ------- | ---------- | - | ----- | - | ------- | ----- | 
|December 31, 2010:      |  |         |            |   |       |   |         |       | 
|Continuing operations   |  |         |            |   |       |   |         |       | 
|Current                 |  | $       | —          |   |       | $ | 82,000  |       | 
|Deferred                |  |         | 432,000    |   |       |   | —       |       | 
|                        |  | $       | 432,000    |   |       | $ | 82,000  |       | 
|Discontinued operations |  |         |            |   |       |   |         |       | 
|Current                 |  | $       | —          |   |       | $ | 149,000 |       | 
|Deferred                |  |         | 1,068,000  |   |       |   | 146,000 |       | 
|                        |  | $       | 1,068,000  |   |       | $ | 295,000 |       | 
|Total                   |  |         |            |   |       |   |         |       | 
|Current                 |  | $       | —          |   |       | $ | 231,000 |       | 
|Deferred                |  |         | 1,500,000  |   |       |   | 146,000 |       | 
|                        |  | $       | 1,500,000  |   |       | $ | 377,000 |       | 
|December 31, 2009:      |  |         |            |   |       |   |         |       | 
|Continuing operations   |  |         |            |   |       |   |         |       | 
|Current                 |  | $       | —          |   |       | $ | —       |       | 
|Deferred                |  |         | (1,500,000 | ) |       |   | —       |       | 
|                        |  | $       | (1,500,000 | ) |       | $ | —       |       | 
|Discontinued operations |  |         |            |   |       |   |         |       | 
|Current                 |  | $       | —          |   |       | $ | —       |       | 
|Deferred                |  |         | —          |   |       |   | —       |       | 
|                        |  | $       | —          |   |       | $ | —       |       | 
|Total                   |  |         |            |   |       |   |         |       | 
|Current                 |  | $       | —          |   |       | $ | —       |       | 
|Deferred                |  |         | (1,500,000 | ) |       |   | —       |       | 
|                        |  | $       | (1,500,000 | ) |       | $ | —       |       | 



Due to the gain to
be recognized for the sale of its technology rights, during the year ended December 31, 2009, the Company recorded a federal
income tax benefit of $1,500,000 as a result of the reduction of a deferred tax valuation allowance that had been established in
a prior year for uncertainty relating to the utilization of a net operating loss carryforward.



F-12







Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2010 and 2009 are summarized below.



|                                   |  | December 31, |           
|---------------------------------- |  | ------------ | ----------
|                                   |  | 2010         |           
|Deferred tax assets:               |  |              |           
|Net operating loss carryforwards   |  | $            | 5,351,000 
|Share-based compensation           |  |              | 707,000   
|Amortization of intangible assets  |  |              | 24,000    
|Accrued interest to related party  |  |              | —         
|Accrued unpaid professional fees   |  |              | 1,093,000 
|State income taxes                 |  |              | 80,000    
|Total deferred tax assets          |  |              | 7,255,000 
|Valuation allowance                |  |              | (6,651,000
|Total deferred tax assets          |  |              | 604,000   
|                                   |  |              |           
|Deferred tax liabilities:          |  |              |           
|State income taxes                 |  |              | 146,000   
|Gain from installment sale         |  |              | 604,000   
|Total deferred tax liability       |  |              | 750,000   
|                                   |  |              |           
|Net deferred tax asset (liability) |  | $            | (146,000  



In assessing the potential
realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable
income during the periods in which those temporary differences become deductible. As of December 31, 2009, the Company determined
that income resulting from the Asset Sale (see Note 11) provided the Company with assurance that a portion of its federal net operating
loss carryforward would more likely than not be utilized in 2010 and 2011 and, as such, the accompanying consolidated balance sheets
reflects a current deferred tax asset of $1,500,000 as of December 31, 2009.



Presented below is
a reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the effective tax rate for
the years ended December 31, 2010 and 2009.



|                                          |  | Years Ended December 31, |     
|----------------------------------------- |  | ------------------------ | ----
|                                          |  | 2010                     |     
|                                          |  |                          |     
|U. S. federal statutory tax rate          |  |                          | 34.0
|State income tax, net of federal tax      |  |                          | 5.8 
|Amortization of discount on notes payable |  |                          | 1.6 
|Change in valuation allowance             |  |                          | (2.9
|Other                                     |  |                          | 2.1 
|Effective tax rate                        |  |                          | 40.6



At December 31, 2010,
the Company had available net operating loss carryforwards for federal income tax purposes of approximately $14,000,000 which,
if not utilized earlier, expire through 2029.



F-13







| | 5. | Common Stock and Preferred Stock
| | -- | --------------------------------



The Company’s
Certificate of Incorporation provides for authorized capital of 130,000,000 shares, of which 125,000,000 shares consist of common
stock with a par value of $0.01 per share and 5,000,000 shares consist of preferred stock with a par value of $0.01 per share.



The Company is authorized
to issue 5,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined
from time to time by the Board of Directors.



Exercise of Options
and Warrants



On April 29, 2009,
the Company issued 3,000,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise
of warrants at $0.02 per share. The Company received $60,000 of proceeds.



On May 11, 2009, the
Company issued 2,000,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise
of warrants at $0.02 per share. The Company received $40,000 of proceeds.



On July 7, 2009, the
Company issued 555,555 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise
of warrants at $0.027 per share. The Company received $15,000 of proceeds.



| | 6. | Related Party Transactions
| | -- | --------------------------



During August and September
of 2009, Robert M. Snukal, a director and chief executive officer, advanced $87,500 to the Company on a non-interest bearing basis
for working capital purposes. On October 17, 2009, the advances were repaid in full.



| | 7. | Money Market Funds — Fair Value
| | -- | -------------------------------



Money market funds
at December 31, 2010 consisted of an investment in shares of the UBS Select Prime Institutional Fund with a market value of $1,417,969.
The stated objective of the UBS Select Prime Institutional Fund is to maximize current income consistent with liquidity and preservation
of capital. The Fund invests in a diversified portfolio of high quality money market instruments of governmental and private issuers
and may invest up to 5% of its net assets in investments exempt from federal income tax.



The authoritative guidance
with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value into three levels, and requires that assets and liabilities carried at fair value be classified and disclosed in one
of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level 3 fair
value measurements, is also required.



Level 1: quoted prices
(unadjusted) in active markets for an identical asset or liability that the Company has the ability to access as of the measurement
date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based
derivatives.



Level 2: inputs other
than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through
corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities,
non-exchange based derivatives, mutual funds, and fair-value hedges.



Level 3: unobservable
inputs for the asset or liability are only used when there is little, if any, market activity for the asset or liability at the
measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds, and are measured using present value pricing models.



F-14







The Company determines
the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level
input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company performs
an analysis of the assets and liabilities at each reporting period end.



Money market funds
are the only financial instrument that is measured and recorded at fair value on the Company’s balance sheet on a recurring
basis. The following table presents money market funds at their level within the fair value hierarchy at December 31, 2010.



|                   |  | Total |           |  | Level 1 |   |           | Level 2 |  |   | Level 3 | 
|------------------ |  | ----- | --------- |  | ------- | - | --------- | ------- |  | - | ------- | 
|                   |  |       |           |  |         |   |           |         |  |   |         | 
|December 31, 2010: |  |       |           |  |         |   |           |         |  |   |         | 
|Money market funds |  | $     | 1,417,969 |  |         | $ | 1,417,969 |         |  | $ | —       | 



| | 8. | Stock Options and Warrants
| | -- | --------------------------



A summary of the Company’s
stock option activity and related information for the years ended December 31, 2010 and 2009 is as follows:



|                                |  | 2010    |           |  | 2009             |  
|------------------------------- |  | ------- | --------- |  | ---------------- | -
|                                |  |         |           |  | Weighted Average |  
|                                |  |         |           |  | Exercise         |  
|                                |  | Options |           |  | Price            |  
|Outstanding — beginning of year |  |         | 8,070,000 |  |                  | $
|Granted                         |  |         | —         |  |                  | $
|Exercised                       |  |         | —         |  |                  | $
|Expired                         |  |         | —         |  |                  | $
|                                |  |         |           |  |                  |  
|Outstanding — end of year       |  |         | 8,070,000 |  |                  | $



The following table
summarizes the number of option shares, the weighted average exercise price, and weighted average life (by years) by price range
for both total outstanding options and total exercisable options as of December 31, 2010:



|              |  |  | Total Outstanding |           |           | Total Exercisable |  
|------------- |  |  | ----------------- | --------- | --------- | ----------------- | -
|              |  |  | Number            |           |           | Weighted Average  |  
|Price Range   |  |  | of Shares         |           |           | Exercise Price    |  
|$0.03 - $0.35 |  |  |                   | 4,090,000 |           |                   | $
|$0.36 - $0.99 |  |  |                   | 3,980,000 |           |                   | $
|              |  |  |                   |           |           |                   |  
|              |  |  |                   |           | 8,070,000 |                   |  



See Note 9 for a description
of the Company’s share-based compensation, including the stock option activity during the years ended December 31, 2010 and
2009.



F-15







Stock Warrants



A summary of the Company’s
stock warrant activity and related information for the years ended December 31, 2010 and 2009 is as follows:



|                                |  | 2010    |             |   | 2009             |  
|------------------------------- |  | ------- | ----------- | - | ---------------- | -
|                                |  |         |             |   | Weighted Average |  
|                                |  | Warrant |             |   | Exercise Price   |  
|Outstanding — beginning of year |  |         | 26,351,098  |   |                  | $
|Granted                         |  |         | —           |   |                  | $
|Exercised                       |  |         | —           |   |                  | $
|Expired                         |  |         | (21,885,473 | ) |                  | $
|                                |  |         |             |   |                  |  
|Outstanding — end of year       |  |         | 4,465,625   |   |                  | $



The following table
summarizes the number of warrants, the weighted average exercise price, and weighted average life (by years) by price range for
both total outstanding warrants and total exercisable warrants as of December 31, 2010:



|              |  |  | Total Outstanding |           |           | Total Exercisable |  
|------------- |  |  | ----------------- | --------- | --------- | ----------------- | -
|              |  |  | Number            |           |           | Weighted Average  |  
|Price Range   |  |  | of Shares         |           |           | Exercise Price    |  
|$0.02 - $0.35 |  |  |                   | 4,315,625 |           |                   | $
|$0.36 - $0.99 |  |  |                   | 100,000   |           |                   | $
|$1.00 - $1.25 |  |  |                   | 50,000    |           |                   | $
|              |  |  |                   |           |           |                   |  
|              |  |  |                   |           | 4,465,625 |                   |  





| | 9. | Share-Based Compensation
| | -- | ------------------------



As of December 31,
2010, the Company had adopted three stock option plans for the benefit of officers, directors, employees, independent contractors
and consultants of the Company. These plans include: (i) the 1998 Stock Option Plan, (ii) the 1996 Stock Option Plan, and (iii)
the 1996 Employee Compensatory Stock Option Plan. The 1998 Stock Option Plan was terminated with respect to future grants on April
8, 2008, the 1996 Stock Option Plan was terminated with respect to future grants on May 11, 2006 and the 1996 Employee Compensatory
Stock Option Plan was terminated with respect to future grants on February 7, 2000. In addition to these plans, from time to time,
the Company grants various other stock options and warrants directly to certain parties. The Company grants all such awards as
incentive compensation to officers, directors, and employees, and as compensation for the services of independent contractors and
consultants of the Company.



The fair value of each
option and warrant awarded is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded options. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options
and warrants have characteristics significantly different from those of traded options, and because changes in the subjective assumptions
can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options and warrants. The expected dividend yield assumption is based on
the Company’s expectation of dividend payouts. Expected volatilities are based on historical volatility of the Company’s
stock. The average risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. Expected life
of the options and warrants is the average of the vesting term and the full contractual term of the options and warrants.



F-16







There were no transactions
during the year ended December 31, 2010 requiring an assessment of value pursuant to the Black-Scholes option-pricing model. For
the year ended December 31, 2009 the Black-Scholes option-pricing model has utilized the following assumptions: expected dividend
yield – 0.00%; expected volatility – 142.57%; average risk-free interest rate – 1.98%; expected life –
5 years.



On August 5, 2009,
the Board approved the issuance of 250,000 shares of the Company’s common stock to Dr. Rambod as payment for additional services
in connection with the patent application. The common stock issued was valued at $0.02 per share, which was the approximate closing
price of the Company’s common stock on the date of the issuance, for a total of $5,000, and was charged to discontinued operations
on August 5, 2009.



On May 13, 2009, the
Board approved the issuance of 500,000 shares of the Company’s common stock to Dr. Rambod, a consultant and former officer
of the Company, as payment for services in connection with the completion and filing of a patent application regarding the Company’s
rights in and to the polymer technology developed by the Company. The common stock issued was valued at $0.027 per share, which
was the approximate closing price of the Company’s common stock on or about the date of the issuance, for a total of $13,500.
On May 13, 2009, the Company charged discontinued operations for consultant compensation expense of $13,500 relating to these
shares.



On May 13, 2009, the
Company issued options to purchase 250,000 shares of common stock to a consultant for past services. The options became fully vested
on May 13, 2009, the date of grant. The options have an exercise price of $0.027 per share, which was the approximate closing price
of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options
on the date of grant was $6,037, and was charged to operations on May 13, 2009.



On May 13, 2009, the
Company issued options to purchase a total of 300,000 shares of common stock to two outside directors for past services. The options
became fully vested on May 13, 2009, the date of grant. The options have an exercise price of $0.027 per share, which was the approximate
closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value
of these options on the date of grant was $7,244, and was charged to operations on May 13, 2009.



On August 8, 2008,
the Company issued options to purchase 1,000,000 shares of common stock to a director pursuant to the 1998 Stock Option Plan. The
options vest in eight equal semi-annual installments commencing on February 8, 2009 and continuing on each August 8 and February
8 thereafter until the becoming fully vested on the fourth anniversary of the date of grant, and expire in ten years. The fair
value of these options on the date of grant was $83,621 and will be charged to operations on a straight-line basis over the requisite
service period. During the year ended December 31, 2010 and 2009, the Company charged continuing operations for share-based compensation
expense of $20,820 and $20,819, respectively, relating to these options.



On June 21, 2008, the
Company issued options to purchase 100,000 shares of common stock to a consultant. The options vest over two years, have an exercise
price of $0.08 per share, and expire in ten years. The fair value of these options on the date of grant was to $5,901 and is being
charged to operations on a straight-line basis over the requisite service period. During the year ended December 31, 2010 and 2009,
the Company charged continuing operations for share-based compensation expense of $1,476 and $2,952, respectively, relating to
these options.



On February 12, 2007,
the Company issued options to purchase 50,000 shares of common stock to a consultant pursuant to the 1998 Stock Option Plan. The
options vest over two years, have an exercise price of $0.36 per share, and expire in ten years. The fair value of these options
on the date of grant was $12,163 and is being charged to operations on a straight-line basis over the requisite service period.
During the year ended December 31, 2009, the Company recorded consultant compensation expense of $761 relating to these options.



During the years ended
December 31, 2010 and 2009, a total of $22,296 and $56,313, respectively, was charged to continuing and discontinued operations
for share-based compensation costs relating to common stock, stock options and warrants.



F-17







As of December 31,
2010, there was approximately $31,300 of total unrecognized compensation cost related to share-based compensation arrangements,
which is expected to be recognized over the ensuing 19 months.



There were no unexercised
in-the-money stock options and warrants at December 31, 2010. Accordingly, they had no intrinsic value on that date, based
on a fair market value of $0.01 on December 31, 2010. The intrinsic value of exercisable but unexercised in-the-money stock
options and warrants at December 31, 2009 was approximately $87,000, based on a fair market value of $0.03 per share on December
31, 2009.



| | 10. | Commitments and Contingencies
| | --- | -----------------------------



Arbitration Proceeding
with Xcorporeal



On September 1, 2006,
the Company entered into a merger agreement (the “Merger Agreement”) with Xcorporeal, Inc. (“Xcorporeal”)
which contemplated that either (i) the Company would enter into a triangular merger in which the Company would become a wholly-owned
subsidiary of Xcorporeal, or (ii) Xcorporeal would issue to the Company shares of its common stock in consideration of the assignment
of the technology relating to the Company’s wearable artificial kidney and other medical devices (collectively sometimes
referred to as the “Technology Transactions”). In connection with the Merger Agreement, also on September 1, 2006,
the Company entered into a license agreement (the “License Agreement”) with Xcorporeal granting an exclusive license
for ninety-nine years (or until the expiration of the Company’s proprietary rights in the technology, if earlier), to all
technology relating to the Company’s wearable artificial kidney and other medical devices for a minimum royalty of $250,000.



Following execution
of the Merger Agreement and the License Agreement, the parties attempted to close the transactions contemplated by the Merger Agreement,
but disputes arose regarding satisfaction of the conditions to closing and with respect to certain provisions of the Merger Agreement.
In addition, a dispute arose as to whether the License Agreement would survive a failure to consummate either of the two transactions
contemplated by the Merger Agreement.



Effective as of December
29, 2006, the Company terminated the Merger Agreement and License Agreement and all transactions contemplated thereby due to Xcorporeal’s
continuing, uncured and incurable breaches of the Merger Agreement, the License Agreement and certain related matters. Xcorporeal
did not dispute the termination of the Merger Agreement, but had disputed the Company’s termination of the License Agreement,
which Xcorporeal alleged to be in full force and effect.



On December 1, 2006,
Xcorporeal filed a demand for arbitration against the Company, alleging an unspecified anticipatory breach of the License Agreement.
On December 29, 2006, at the same time that the Company terminated the Merger Agreement and the License Agreement, the Company
filed a lawsuit against Xcorporeal and against Victor Gura, former Chief Financial Officer and Chief Scientific Officer and a director
of the Company.



The arbitration was
held in February 2008. On June 9, 2008, the arbitrator issued an interim award. The arbitrator concluded that the License Agreement
was not to survive the failure of the transactions contemplated by the Merger Agreement, that Xcorporeal had waived and excused
the Company’s obligations to perform under the Merger Agreement and that the appropriate remedy under the circumstances was
to award the Company specific performance of the Technology Transaction. The arbitrator rejected the Company’s fraud, misappropriation
and other claims, and rejected Gura’s claims against the Company and the Company’s claims against Gura. In addition,
the arbitrator stated that the Company was the prevailing party in the arbitration and therefore entitled to recover its fees and
costs. Because the Company had prevailed on some, but not all, of its claims, the arbitrator awarded the Company approximately
$1,870,000 in fees and costs.



F-18







On April 13, 2009,
the arbitrator in the arbitration proceeding issued a partial final award (“Partial Final Award”), which resolved the
remaining issues that were pending for decision in the arbitration proceeding. The Partial Final Award reflected the arbitrator’s
conclusions based on arguments by Xcorporeal that the 9,230,000 shares could not be issued to the Company in compliance with the
federal securities laws because of the financial condition of the Company. The Partial Final Award provided that Xcorporeal would
have a perpetual exclusive license (the “Perpetual License”) to the technology. Under the terms of the Partial Final
Award, in consideration of the award of the Perpetual License to Xcorporeal, the Company was awarded a royalty of 39% of all net
income, ordinary or extraordinary, to be received by Xcorporeal and the Company was to receive 39% of any shares received in any
merger transaction to which Xcorporeal may become a party. In addition, the Partial Final Award provided that Xcorporeal was obligated
to pay the Company $1,871,430 for its attorneys’ fees and costs previously awarded by the arbitrator in an order issued on
August 13, 2008, that the Company’s application for interim royalties and expenses was denied and that the Company was not
entitled to recover any additional attorneys’ fees.



On August 7, 2009,
to clarify, resolve and settle disputes that had arisen between the Company and Xcorporeal with respect to the Partial Final Award,
including with respect to the rights of the parties regarding certain technology and the application of the Partial Final Award
in the case of a sale of the Technology, the Company and Xcorporeal entered into a Memorandum of Understanding (“Memorandum”).



In connection with
the issuance of the Partial Final Award and the Memorandum, on August 7, 2009, the Company entered into a stipulation (the “Stipulation”)
with Xcorporeal. Pursuant to the terms of the Stipulation, the Company and Xcorporeal agreed (i) not to challenge the terms of
the Partial Final Award or any portion of such award, (ii) that any of the parties may, at any time, seek to confirm all but not
part of the Partial Final Award through the filing of an appropriate petition or motion with the appropriate court and in response
to such action to confirm the Partial Final Award, no party would oppose, object to or in any way seek to hinder or delay the court’s
confirmation of the Partial Final Award, but would in fact support and stipulate to such confirmation, and (iii) to waive any and
all right to appeal from, seek appellate review of, file or prosecute any lawsuit, action, motion or proceeding, in law, equity,
or otherwise, challenging, opposing, seeking to modify or otherwise attacking the confirmed Partial Final Award or the judgment
thereon.



In late March 2009,
Xcorporeal began a preliminary dialogue with Fresenius Medical Care Holdings, Inc. (“Fresenius”), to determine the
interest of Fresenius to acquire certain or all of Xcorporeal assets. These discussions continued through June 2009. In June 2009,
Fresenius commenced its due diligence review of Xcorporeal.



In September 2009,
the Company and Xcorporeal reviewed the terms of a transaction proposed by Fresenius USA, Inc. (“FUSA”), a wholly-owned
subsidiary of Fresenius, in a draft non-binding term sheet for the acquisition of all of the Xcorporeal assets and the Company’s
assets.



The Company, Xcorporeal
and FUSA executed an Asset Purchase Agreement on December 14, 2009 (“Asset Purchase Agreement”) and the Company
publicly announced this transaction on December 18, 2009. The arbitration was terminated with the
closing of the Asset Sale in March 2010 (see Note 11).



Arbitration Proceeding
with Former Legal Counsel



On February 17, 2011,
the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result
of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and
Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately
$2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The
arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10,
2011. As of April 2, 2012, the arbitrators had not rendered their decision on this matter. Management reviews available information
and determines the need for recording an estimate of the potential expense when the amount is probable, reasonable and estimable.
The Company believes that it has adequately and appropriately provided for the fees incurred through December 31, 2010 in the accompanying
consolidated financial statements. Given the Company’s limited liquidity and working capital resources, it is uncertain whether
the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered.



F-19







| | 11. | Discontinued Operations
| | --- | -----------------------



Asset Purchase Agreement



On December 14, 2009,
the Company, Xcorporeal and FUSA executed an Asset Purchase Agreement that provided for the sale of substantially all of each of
the Company’s and Xcorporeal’s assets (the “Asset Sale”) to FUSA for an aggregate cash purchase price of
$8,000,000 (the “Cash Purchase Price”) and certain other royalty payment rights. Subject to the terms and conditions
of the Asset Purchase Agreement, the Cash Purchase Price was to be paid to the Company and Xcorporeal as follows: (a) an exclusivity
fee in the amount of $200,000 previously paid by FUSA to Xcorporeal, (b) $3,800,000 on the date of closing (the “Closing
Date”) of the transactions contemplated under the Asset Purchase Agreement (the “Closing”), of which the Company
and Xcorporeal received $2,150,000 and $1,650,000, respectively, (c) $2,000,000 on April 1, 2010, of which the Company and Xcorporeal
received $1,625,000 and $375,000, respectively, and (d) $2,000,000 on April 1, 2011, of which the Company and Xcorporeal received
$1,925,000 and $75,000, respectively.



In addition, during
the life of the patents referred to as the HD WAK Technology, which expire between November 11, 2021 and September 9, 2024, the
Company is entitled to certain royalty payments from the sale of wearable hemodialysis devices and the attendant disposables that
incorporate the HD WAK Technology. The Company is entitled to 40% of the HD WAK royalty and Xcorporeal is entitled to the remaining
60%.



Additionally, during
the life of any patents referred to as the Supersorbent Technology, the Company is entitled to certain royalty payments on each
supersorbent cartridge sold less any and all royalties payable to The Technion Research and Development Foundation Ltd. (“TRDF”)
pursuant to a Research Agreement and Option for License, dated June 16, 2005, or any subsequently executed license agreement between
TRDF and FUSA. The Company is entitled to 60% of the Supersorbent royalty payments and Xcorporeal is entitled to the remaining
40%. While several applications for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued.



FUSA also granted to
the Company and Xcorporeal an option to obtain a perpetual, worldwide license to the Supersorbent Technology for use in healthcare
fields other than renal (the “Option”). The Option is exercisable during the twelve-month period following FUSA’s
receipt of regulatory approval for the sale of a supersorbent product in the United States or European Union, which the Company
expects will require further development of the supersorbent technology with TRDF and successful completion of clinical trials
by FUSA. The consideration payable to FUSA by the Company or Xcorporeal for the exercise of the Option consists of a payment in
the amount of $7,500,000, payable in immediately available funds, and a payment of an ongoing royalty in an amount equal to the
lesser of $0.75 per supersorbent cartridge and $1.50 per patient per week in each country where such sales infringe valid and issued
claims of the Supersorbent Patents issued in such country.



The Asset Purchase
Agreement closed on March 19, 2010, with payments made to the Company by FUSA of $1,950,000, $1,625,000 and $1,675,000 on March
19, 2010, April 1, 2010 and April 1, 2011, respectively, for a total of $5,250,000. FUSA held back $200,000 and $250,000 from the
March 19, 2010 and April 1, 2011 payments, respectively, for purposes of resolving a dispute between the Company and TRDF. The
closing of the Asset Sale in March 2010 also terminated the arbitration proceeding with Xcorporeal (see Note 10).



As a result of the
Asset Sale, the Company has accounted for its previous research and development activities as a discontinued operation for all
periods presented. During the years ended December 31, 2010 and 2009, the Company had income (loss) from its discontinued research
and development operation of $24,386 and $(109,209), respectively.



Additionally, upon
the closing of the Asset Sale on March 19, 2010, the Company recorded a gain from debt settlement of $1,871,430 (see Note 10),
which is included in continuing operations, and a gain from the Asset Sale of $3,318,732, before income taxes of approximately
$1,363,000, which is included in discontinued operations, in the accompanying consolidated statement of operations.



| | 12. | Income (Loss) Per Share
| | --- | -----------------------



Basic and diluted income
per common share amounts for the year ended December 31, 2010 are the same because all warrants, stock options and convertible
notes payable outstanding were anti-dilutive.



F-20







The following table
illustrates the computation of basic and diluted income (loss) per common share for the year ended December 31, 2009:



|                                                                       |  | Income
    (Numerator) |          |   | Shares
    (Denominator) |  |            | Per-
    Share Amount | 
|---------------------------------------------------------------------- |  | ---------------------- | -------- | - | ------------------------ |  | ---------- | --------------------- | 
|Income per common share from continuing operations                     |  |                        |          |   |                          |  |            |                       | 
|Basic                                                                  |  |                        |          |   |                          |  |            |                       | 
|Income from
    continuing operations available to common stockholders |  | $                      | 265,058  |   |                          |  | 77,917,165 |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Effect of dilutive securities:                                         |  |                        |          |   |                          |  |            |                       | 
|Warrants                                                               |  |                        |          |   |                          |  | 20,479     |                       | 
|Convertible notes payable                                              |  |                        | 34,619   |   |                          |  | 1,865,814  |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Diluted                                                                |  | $                      | 299,677  |   |                          |  | 79,803,458 |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Loss per common share from discontinued operations                     |  |                        |          |   |                          |  |            |                       | 
|Basic                                                                  |  |                        |          |   |                          |  |            |                       | 
|Loss from discontinued
    operations available to common stockholders |  | $                      | (109,209 | ) |                          |  | 77,917,165 |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Effect of dilutive securities                                          |  |                        | 34,619   |   |                          |  | 1,886,293  |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Diluted                                                                |  | $                      | (74,590  | ) |                          |  | 79,803,458 |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Net income per common share                                            |  |                        |          |   |                          |  |            |                       | 
|Basic                                                                  |  |                        |          |   |                          |  |            |                       | 
|Net income available to common stockholders                            |  | $                      | 155,849  |   |                          |  | 77,917,165 |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Effect of dilutive securities                                          |  |                        | 34,619   |   |                          |  | 1,886,293  |                       | 
|                                                                       |  |                        |          |   |                          |  |            |                       | 
|Diluted                                                                |  | $                      | 190,468  |   |                          |  | 79,803,458 |                       | 





At December 31, 2010
and 2009, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares
of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.



|              |  | 2010 |            |  | 2009 | 
|------------- |  | ---- | ---------- |  | ---- | 
|              |  |      |            |  |      | 
|Warrants      |  |      | 4,465,625  |  |      | 
|Stock options |  |      | 8,070,000  |  |      | 
|Total         |  |      | 12,535,625 |  |      | 



F-21







SIGNATURES



Pursuant to the requirements
of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.



|                     | NATIONAL QUALITY CARE, INC.
|-------------------- | ---------------------------
|                     |                            
|Date:  April 2, 2012 | By:                        
|                     |                            
|                     |                            



Pursuant to the requirements
of the Securities Exchange Act of 1934, this Report has been signed as of April 2, 2012 by the following persons on behalf of the
registrant and in the capacities indicated.



|Signature                    |  | Capacity in Which Signed                       
|---------------------------- |  | -----------------------------------------------
|                             |  |                                                
|/s/ LEONARDO BEREZOVSKY, MD. |  | Chairman of the Board of Directors and         
|Leonardo Berezovsky M.D.     |  | Chief Financial Officer                        
|                             |  | (principal financial officer)                  
|                             |  |                                                
|/s/ ROBERT M. SNUKAL         |  | Chief Executive Officer, President and Director
|Robert M. Snukal             |  | (principal executive officer)                  
|                             |  |                                                
|/s/ RONALD LANG, M.D.        |  | Executive Vice-President and Director          
|Ronald Lang, M.D.            |  |                                                
|                             |  |                                                
|/s/ JOSE SPIWAK              |  | Director                                       
|Jose Spiwak, M.D.            |  |                                                
|                             |  |                                                
|                             |  | Chief Scientific Officer and Director          
|Edmond Rambod, Ph.D.         |  |                                                











Index to Exhibits



|Exhibit No. |  | Description                                                                                                                                                                                                                                           
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                       
|2.1         |  | Agreement for Exchange of Stock dated May 11, 1996, by and among the Company, Los Angeles Community Dialysis, Inc., Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald P. Lang, M.D. (1)                                                            
|            |  |                                                                                                                                                                                                                                                       
|3.1         |  | Restated Certificate of Incorporation (2)                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                       
|3.2         |  | Bylaws (2)                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                       
|10.1        |  | 1996 Employee Compensation Stock Option Plan (3)                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                       
|10.2        |  | 1996 Stock Option Plan (4)                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                       
|10.3        |  | 1998 Stock Option Plan (5)                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                       
|10.4        |  | Technology Purchase Agreement, dated as of December 18, 2001, between the Company and Victor Gura, M.D. (6)                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                       
|10.5        |  | Purchase and Sale Agreement, dated May 31, 2006, between Los Angeles Community Dialysis, Inc., a California corporation, Ronald Lang, M.D. and Victor Gura, M.D., on the one hand, and Los Angeles Kidney Dialysis Center, LLC. on the other hand. (7)
|            |  |                                                                                                                                                                                                                                                       
|10.6        |  | License Agreement, dated as of September 1, 2006, between the Company and Xcorporeal, Inc. (8)                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                       
|10.7        |  | Merger Agreement, dated as of September 1, 2006, among the Company, NQCI Acquisition Corporation and Xcorporeal, Inc. (8)                                                                                                                             
|            |  |                                                                                                                                                                                                                                                       
|10.8        |  | Form of Subscription Agreement (9)                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                       
|10.9        |  | Form of Promissory Note (9)                                                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                       
|10.10       |  | Form of Warrant (9)                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                       
|10.11       |  | Deferred Compensation Plan (10)                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                       
|10.12       |  | Convertible Promissory Note dated December 26, 2007 issued to Robert M. Snukal (11)                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                       
|10.13       |  | Warrant dated December 26, 2007 issued to Robert M. Snukal (11)                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                       
|10.14       |  | Subscription Agreement dated October 16, 2008 between the Company and Robert M. Snukal (12)                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                       
|10.15       |  | Warrant dated October 16, 2008 issued to Robert M. Snukal (12)                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                       
|10.16       |  | Promissory Note dated October 16, 2008 issued by Robert M. Snukal to Company (12)                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                       
|10.17       |  | Warrant dated March 25, 2008 issued to Robert M. Snukal (13)                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                       
|10.18       |  | Convertible Promissory Note dated August 12, 2008 issued to Robert M. Snukal (14)                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                       
|10.19       |  | Warrant dated August 12, 2008 issued to Robert M. Snukal (14)                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                       
|10.20       |  | Asset Purchase Agreement dated December 14, 2009 among the Company, Xcorporeal, Inc., Xcorporeal Operations, Inc. and Fresenius USA, Inc. (15)                                                                                                        
|            |  |                                                                                                                                                                                                                                                       
|10.21       |  | Amendment No. 1 to Asset Purchase Agreement dated February 8, 2010 among the Company, Xcorporeal, Inc., Xcorporeal Operations, Inc. and Fresenius USA, Inc. (16)                                                                                      
|            |  |                                                                                                                                                                                                                                                       
|14.1        |  | Code of Ethics. (17)                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                       
|16.1        |  | Letter from PMB Helin Donovan dated March 4, 2011 (18)                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                       
|31.1        |  | Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                                                             
|            |  |                                                                                                                                                                                                                                                       
|31.2        |  | Certification of CFO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.                                                                                             



-1-







|Exhibit No. |  | Description                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                       
|32.1        |  | Certification of CEO and CFO pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002.










|1.  |  | Incorporated by reference herein to its Current Report on Form 8-K dated May 24, 1996.                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                           
|2.  |  | Incorporated by reference herein to its Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1996.    
|    |  |                                                                                                                           
|3.  |  | Incorporated by reference herein to its Registration Statement on Form S-8 dated April 6, 1996.                           
|    |  |                                                                                                                           
|4.  |  | Incorporated by reference herein to its Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1996.     
|    |  |                                                                                                                           
|5.  |  | Incorporated by reference herein to its Registration Statement on Form S-8 dated March 5, 1999.                           
|    |  |                                                                                                                           
|6.  |  | Incorporated by reference herein to its Annual Report on Form 10-KSB for the year ended December 31, 2001.                
|    |  |                                                                                                                           
|7.  |  | Incorporated by reference herein to its Current Report on Form 8-K dated June 5, 2006.                                    
|    |  |                                                                                                                           
|8.  |  | Incorporated by reference herein to its Annual Report on Form 10-KSB for the year ended December 31, 2006.                
|    |  |                                                                                                                           
|9.  |  | Incorporated by reference herein to its Current Report on Form 8-K dated June 22, 2007.                                   
|    |  |                                                                                                                           
|10. |  | Incorporated by reference herein to its Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2007.
|    |  |                                                                                                                           
|11. |  | Incorporated by reference herein to its Current Report on Form 8-K dated December 26, 2007.                               
|    |  |                                                                                                                           
|12. |  | Incorporated by reference herein to its Current Report on Form 8-K dated October 16, 2008.                                
|    |  |                                                                                                                           
|13. |  | Incorporated by reference herein to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008.      
|    |  |                                                                                                                           
|14. |  | Incorporated by reference herein to its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008.  
|    |  |                                                                                                                           
|15. |  | Incorporated by reference herein to its Current Report on Form 8-K dated December 14, 2009.                               
|    |  |                                                                                                                           
|16. |  | Incorporated by reference herein to its Current Report on Form 8-K dated February 8, 2010.                                
|    |  |                                                                                                                           
|17. |  | Incorporated by reference herein to its Annual Report on Form 10-KSB for the year ended December 31, 2003.                
|    |  |                                                                                                                           
|18. |  | Incorporated by reference herein to its Current Report on Form 8-K dated March 4, 2011.                                   



-2-