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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

          [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2004

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

               For the transition period from ________ to ________

                         Commission file number: 0-19031

                           NATIONAL QUALITY CARE, INC.
            (Name of small business issuer specified in its charter)

           Delaware                                             84-1215959
           --------                                             ----------
  (State or other jurisdiction                               (I.R.S. Employer
of incorporation or organization)                           Identification No.)

       9033 Wilshire Boulevard, Suite 501, Beverly Hills, California 90211
       -------------------------------------------------------------------
          (Address of principal executive offices, including zip code)

          (Issuer's telephone number, including area code) 310-550-6242
                                                           ------------

         Securities registered under Section 12(b) of the Exchange Act:

                                                   Name of each exchange
        Title of each class                         on which registered
        -------------------                         -------------------
                None                                        None

         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, $0.01 par value per share
                                (Title of Class)

Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]

The number of shares outstanding of its common stock as of August 15, 2005 was
37,590,322. The aggregate market value of the common stock (shares) held by
non-affiliates, based on the closing market price ($0.58) of the common stock as
of August 15, 2005 was $3,491,638. The issuer's revenues for the fiscal year
ended December 31, 2004 were $4,001,232.

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<S>     <C>
                                         TABLE OF CONTENTS TO ANNUAL REPORT
                                                   ON FORM 10-KSB
                                            YEAR ENDED DECEMBER 31, 2004

                                                                                                               Page
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                                                       Part I

Item 1.           Description of Business.........................................................................2

Item 2.           Description of Properties......................................................................22

Item 3.           Legal Proceedings..............................................................................22

Item 4.           Submission of Matters to a Vote of Security Holders............................................22

                                                      Part II

Item 5.           Market for Common Equity and Related Stockholder Matters and Small Business Issuer
                  Purchase of Equity Securities..................................................................22

Item 6.           Management's Discussion and Analysis or Plan of Operation......................................26

Item 7.           Financial Statements...........................................................................30

Item 8.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........30

Item 8A           Controls and Procedures........................................................................31

Item 8B           Other Information..............................................................................31

                                                      Part III

Item 9.           Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
                  of the Exchange Act............................................................................31

Item 10.          Executive Compensation.........................................................................34

Item 11.          Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                  Matters........................................................................................39

Item 12.          Certain Relationships and Related Transactions.................................................40

Item 13.          Exhibits.......................................................................................41

Item 14.          Principal Accountant Fees and Services.........................................................41


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            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 REALITY OF 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 UNCERTAINTY ARE RELATED TO OUR CURRENT BUSINESS
SITUATION AND INCLUDE, BUT ARE NOT LIMITED TO, OUR INADEQUATE REVENUES, OUR
HISTORY OF OPERATING LOSSES, OUR NEED FOR ADDITIONAL FINANCING, THE UNCERTAINTY
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN AND DEPENDENCE ON OUR CURRENT
MANAGEMENT TEAM. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH ARE MADE AS OF THE DATE THIS REPORT WAS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE TERMS "WE," "US" OR "OUR" REFER TO NATIONAL QUALITY CARE, INC, A
DELAWARE CORPORATION. AND ITS WHOLLY-OWNED SUBSIDIARY, LOS ANGELES COMMUNITY
DIALYSIS, INC., A CALIFORNIA CORPORATION, OR LACD.

         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.

                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS

         OUR TWO BUSINESS OPERATIONS

         Our business consists of two distinct operations. The first such
segment is our dialysis operation, where we act as a provider of integrated
dialysis services for patients suffering from chronic kidney failure, also known
as end-stage renal disease, or ESRD. These operations are conducted in LACD. The
second such segment is the development of a wearable artificial kidney, or
Wearable Kidney, on which we have been working for the last 3 years.

         OUR PROPOSED CHANGE IN BUSINESS FOCUS

         We currently offer dialysis services for chronic and acute care through
one dialysis center with an aggregate of 20 stations in Los Angeles, California.
In addition, we currently provide inpatient dialysis services by contract to
several hospitals in the State of California. Payment for services is primarily
provided by third party payors, including Medicare, Medi-Cal (a California State
health agency) and commercial insurance companies. Although we have been
operating this business for a number of years, we have been unable to grow for a
number of reasons:

         o        we have not been able to generate adequate cash resources,
                  either from our operations or from outside financing, to fund
                  a major expansion of our business, either by ourselves or with
                  one or more co-venturers;

         o        we are limited in our potential revenue-per-patient by federal
                  and state reimbursement rules; and

         o        the cap on the level of reimbursements by Medicare tends to
                  inhibit innovation in the dialysis industry.

         Our dialysis business in its present volume does not generate enough
positive cash flow. Our net income from operations has totaled approximately
$187,000 and $60,000 for the year ended December 31, 2004 and 2003,
respectively, and is not likely ever to generate enough cash flow to contribute
significant amounts to research and development of new technologies. This
research has led us to advanced development of our Wearable Kidney. The majority
of funds used for research during this period has come from sales of our common
stock to our affiliates and cash flow from our dialysis services business.

         While we have continued to operate our dialysis services operation, and
while this operation generates 100% of our revenues, our board of directors has
nevertheless determined that it is in the best interests of our stockholders for


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us to focus principally on completion of the development and eventual commercial
marketing of the Wearable Kidney for dialysis and other medical applications.
Moreover, we have devoted all available financial and personnel resources to
research and development. To this end, we are considering disposing completely
of our dialysis business operations in order to dedicate all of our scientific
resources to this task of bringing the Wearable Kidney to market. In 2003 and
2004, we incurred approximately $379,000 and $1,065,000, respectively, in
research and development costs associated with the Wearable Kidney. The
development costs were funded through debt and equity financing and LACD
operations.

         END-STAGE RENAL DISEASE

         Healthy kidneys clean the blood by filtering out extra water and waste.
They also make hormones that keep bones strong and blood healthy. When kidneys
fail, the body retains fluid and harmful waste, blood pressure rises and red
blood cell production falls off dramatically, resulting in the immediate need
for dialysis or for a replacement kidney.

         Kidney disease has become the ninth leading cause of death and one of
the most expensive chronic diseases to treat, with the estimated cost
approaching $30 billion per year. Approximately 60% of ESRD patients are under
the age of 65. Kidney disease can range from mild dysfunction to severe failure
and is often progressive, sometimes taking 10 to 20 years before the reduction
in function requires replacement of kidney function to preserve life.

         Since there is no cure for chronic renal failure (except for a kidney
transplant), treatment focuses on controlling the symptoms, minimizing
complications and slowing the progression of the disease. Typical treatments
include addressing blood sugar and blood pressure issues with medication;
implementing dietary changes to reduce potassium, phosphorus, sodium and
protein; and restricting fluid intake to minimize the work required of the
kidneys. However, over time, kidney damage will advance until function
essentially ceases. At this point, the patient is classified as having end-stage
renal disease and will require either a kidney transplant or regular dialysis to
avoid complications that are life threatening. According to the National
Institutes of Health:

         o        approximately 400,000 Americans suffer from ESRD, and this
                  number is expected to double by 2010;

         o        patients with ESRD are being kept alive only through dialysis
                  treatments;

         o        approximately 55,000 patients are waiting for a kidney
                  transplant; and

         o        between 70,000 and 80,000 ESRD patients die each year.

         DIALYSIS

         Most ESRD patients in the U.S. undergo dialysis 3 times per week, with
each session lasting 3 to 4 hours. Inside a dialysis machine, blood is passed
into a filter lined with a selectively permeable membrane. A complex arrangement
of many hollow fibers made of this membrane is used to increase the effective
surface area and enhance the exchange. On one side of the membrane is blood and
on the other is dialysis fluid; the process involves an osmotic interchange
between the two fluids. Due to differences in concentration, urea and other
wastes (molecularly smaller than membrane pores) cross the membrane from the
blood to the dialysis fluid. As the dialysis fluid accumulates waste, it is
purified and recycled or replaced with fresh, clean fluid. This necessitates a
constant flow of purified water to each dialysis station.

         The estimated annual cost of dialysis treatment exceeds $27,000 per
patient. Medicare pays a fixed per session fee and 80% of related treatments.
Private insurance often covers the 20% not paid by Medicare. However, the total
annual cost of keeping a patient alive averages between $50,000 and $75,000, due
to the numerous hospitalizations, surgeries and large quantities of drugs
required.

         DIALYSIS CENTER OPERATIONS

         Our dialysis facility is designed specifically for outpatient
hemodialysis, the most common form of ESRD treatment, and generally contains, in
addition to space for dialysis treatments, a nurses' station, a patient weigh-in
area, a supply room, a water treatment space used to purify the water used in
hemodialysis treatments, a dialyzer reprocessing room (where, with both the
patient's and physician's consent, the patient's dialyzer is sterilized for
re-use), staff work areas, offices and a staff lounge and kitchen. In accordance
with conditions for participation in the Medicare ESRD program, our facility has
a qualified physician director or Medical Director. We have an Administrator and


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a registered nurse, who supervise the day-to-day operations of the facility and
the staff. The staff consists of registered nurses, licensed practical or
vocational nurses, patient care technicians, a social worker, a registered
dietician, a unit clerk and bio-medical technicians.

         We also offer various forms of home dialysis, primarily continuous
ambulatory peritoneal dialysis or CAPD. Home dialysis services consist of
providing equipment and supplies, training, patient monitoring and follow-up
assistance to patients who prefer and are able to receive dialysis treatments in
their homes. Patients and their families or other patient helpers are trained by
a registered nurse to perform peritoneal dialysis at home. Our training programs
for peritoneal dialysis generally encompass two to three weeks.

         PHYSICIAN RELATIONSHIPS

         The conditions of participation in the Medicare ESRD program mandate
that treatment at a dialysis facility be under the general supervision of a
medical director who is a physician. Generally, the medical director must be
board eligible or board certified in internal medicine or pediatrics and have
had at least 12 months of experience or training in the care of patients at ESRD
facilities. The medical directors at our facility include Victor Gura, M.D. and
Ronald P. Lang, M.D., who are also officers, directors and principal
stockholders. We have agreements with both Dr. Gura and Dr. Lang, specifying
their duties and compensation. The compensation of the medical directors and
other physicians under contract depends upon competitive factors in the local
market, the physician's professional qualifications and responsibilities and the
size and utilization of the facility or relevant program. We believe, on the
basis of our experience in the practice of medicine and the operation of
dialysis clinics, that these compensation arrangements are generally no less
favorable than we could obtain from comparable independent third parties.

         SOURCES OF REVENUE REIMBURSEMENT

         The following table provides information for the periods indicated
regarding the percentage of our net operating revenues provided by: (i) the
Medicare ESRD program, (ii) Medicaid, (iii) private/alternative payors, such as
private insurance and private funds, and (iv) hospital inpatient dialysis
services:

                                                Years ended December 31
----------------------------------------- ------------------- ------------------
                                          2004                2003
                                          ----                ----
----------------------------------------- ------------------- ------------------
Medicare                                  74%                 39%
----------------------------------------- ------------------- ------------------
Medicaid                                  23%                 34%
----------------------------------------- ------------------- ------------------
Private/alternative payors                1%                  13%
----------------------------------------- ------------------- ------------------
Hospital inpatient dialysis services      2%                  14%
----------------------------------------- ------------------- ------------------

         MEDICARE REIMBURSEMENT

         In the U.S., Medicare reimburses the majority of dialysis care. The
Medicare ESRD program is unique in that it is the only federal program that
finances disease-specific services to a segment of the U.S. population on
virtually a universal basis. Medicare reimburses us under a prospective
reimbursement system for chronic dialysis services provided to ESRD patients.
Under this system, the reimbursement rates are fixed in advance and are adjusted
from time to time by Congress. Although this form of reimbursement limits the
allowable charge per treatment, it provides us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. Medicare has
established a composite rate set by the Centers for Medicare & Medicaid
Services, or CMS, that governs the Medicare reimbursement available for a
designated group of dialysis services, including the dialysis treatment,
supplies used for such treatment, certain laboratory tests and certain
medications. The Medicare composite rate is subject to regional differences
based upon certain factors, including regional differences in wages and
earnings. Certain other services and items are eligible for separate
reimbursement under Medicare and are not part of the composite rate, including
certain drugs, blood (for amounts in excess of three units per patient per year)
and certain physician ordered tests provided to dialysis patients. We generally
submit claims monthly and are usually paid by Medicare within 30 days of the
submission.

         Medicare pays for 80% of the costs of ESRD treatment by means of a
"composite reimbursement rate," or cost estimate based on an average treatment
session. This rate is capped at $143 per outpatient or home hemodialysis session
and $60 per day for peritoneal, CAPD or continuous cyclic peritoneal dialysis,


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or CCPD, treatment. Items such as physician fees, some diagnostic tests and
drugs are not covered by the composite rate. Costs of these items, which can
exceed $100 per session, are reimbursed separately. Assuming 3 weekly sessions,
the total annual treatment cost for an ESRD patient averages between $50,000 and
$75,000. Only clinics with the proper licensing are eligible for Medicare
reimbursement.

         For those patients under the age of 65 with healthcare insurance,
Medicare assumes payment liability for dialysis only 33 months after diagnosis.
During this waiting period, private payors (private insurance companies and
managed care organizations) assume payment liability. Once Medicare commences
coverage, private payors may still be responsible for the 20% of costs not
covered by the federal government.

         MEDICAID REIMBURSEMENT

         Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverages (such as
oral medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. The State of California, the only state in which we currently operate,
requires beneficiaries to pay a monthly share of the cost based upon levels of
income or assets. We are a licensed ESRD Medicaid provider in the State of
California.

         OUR WEARABLE ARTIFICIAL KIDNEY

         THE LIMITED EFFECT OF INTERMITTENT DIALYSIS

         Although spending several hours per day for 3 or 4 days per week places
an enormous burden on patients and caregivers alike, it is clear that the high
mortality and poor quality of life of patients permanently on dialysis may be
significantly mitigated by actually increasing the amount of time they spend on
the dialysis machines. However, such an increase in dialysis time is largely
impractical as well as financially and logistically impossible to accomplish for
the large majority of this population due, among other reasons, to the huge
expense required and the shortage of nurses. More importantly, dialysis, as
currently practiced, is ultimately only a stopgap, and except for the fortunate
few persons who qualify for renal transplant, persons suffering from chronic
kidney failure in the U.S. have an average death rate of 20% per year. Thus,
barriers of cost and practicality serve to make a treatment, which is only
partially effective, even less helpful to patients in the long run.

         OUR SOLUTION

         Continuous dialysis has always been possible. But, instead of 3 weekly,
3 to 4 hour dialysis sessions at a clinic, we believe that patients would be
able to have 24-hour dialysis while still maintaining a reasonable life style.
We have developed a prototype device that can provide dialysis 24 hours a day, 7
days a week, without requiring the patient to spend long hours attached to a
large machine. We believe 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.

         BACKGROUND OF THE WEARABLE KIDNEY

         Dr. Gura, our President, completed the conceptual design of the
Wearable Kidney in September 2001 and assigned all of his right, title and
interest in the technology to us in exchange for a note for $100,000 and options
to purchase up to 5,000,000 shares of our common stock. We filed our initial 3
patent applications for the Wearable Kidney technology in 2001 and have
continued pursuing the research and development since that time. On November 15,
2004, we announced that we had developed a working prototype of a Wearable
Kidney, or the Prototype, which is designed to be powered by a battery and to
operate continuously, and that a version of the Prototype has been successfully
tested in bench studies and has performed safely and effectively in animal
testing studies conducted at the research facilities of Cedars Sinai Medical
Center in Los Angeles, California, or Cedars. The results of this research were
also 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 have demonstrated the feasibility of our
device by testing it on 12 pigs. We do not currently plan to do further animal
studies since we believe that those experiments constitute all of the animal
studies normally required prior to beginning clinical studies on human subjects.
At present, we are in the process of preparing applications to initiate human
clinical trials. We believe that the U.S. food and Drug Administration, or FDA,


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will classify it as a Class III device and that one or more clinical trials on
humans will be required before we may obtain approval to bring the Wearable
Kidney to market.

         In early April, 2005, we received a Notice of Allowance from the U.S.
Patent and Trademark Office for a patent application covering the design of the
Wearable Kidney. In effect, our application has been examined and allowed for
issuance as a patent. We anticipate that the patent will issue within the next
few months. In addition, in late April, we announced the development of a
wearable ultrafiltration device to remove excess fluid from patients with
congestive heart failure. This prototype device is intended to be worn as a belt
and operated with batteries, much like our Wearable Kidney.

         HOW THE WEARABLE KIDNEY WORKS

         The Wearable Kidney is designed to be worn on a patient's belt or
carried in a small backpack. We anticipate that the final version will weigh
less than 5 pounds. We believe that the design of the Wearable Kidney addressed
the 3 key challenges that have historically impeded the viability of a wearable
artificial kidney, namely:

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

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

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

         OUR TARGET MARKET IS ESRD

         We have targeted chronic kidney failure or ESRD as the first
application of our new technology. According to the National Kidney Foundation,
20 million Americans currently suffer from kidney disease and another 20 million
are at risk of developing this condition. 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 is
actually wearable. Accordingly, the Wearable Kidney is anticipated to be able to
provide patients with continuous, 24-hours operation, which will not only
increase significantly the amount of treatment time but is also anticipated to
enable patients to achieve a quality of life much closer to that of a healthy
individual.

         THE MARKET FOR THE WEARABLE KIDNEY AND THE MARKETING OPPORTUNITY

         There are approximately 1.2 million patients suffering from ESRD
globally, with about 400,000, or 33%, receiving treatment in the U.S. The ESRD
patient numbers continue to grow steadily at approximately 8% annually. The
population of ESRD is swelling because medical improvements generally help more
patients survive longer. Other reasons for growth are the current obesity and
diabetes epidemics and the aging of the population. Nevertheless, mortality
rates from the disease are still high; in the U.S., which has very high
mortality rates. About 20% ESRD patients die each year.

         On the one hand, the use of the Wearable Kidney, if successful, would
tend to change the use of existing dialysis equipment by existing dialysis
service centers. On the other hand, these same centers are the natural outlet
for the Wearable Kidney, and it is our hope that such centers will come to see
the Wearable Kidney as a business opportunity rather than as a competitor. We
intend 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 intend to lease the Wearable Kidney mainly to existing dialysis
centers. We believe this strategy has the following advantages:

         o        a relationship with a dialysis center represents the most
                  cost-effective and rapid path to introducing the Wearable
                  Kidney to prospective patients since the majority of dialysis
                  patients receive their treatment through a clinic. Only
                  clinics with proper licensing are eligible to receive Medicare
                  reimbursement;


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         o        many nephrologists (responsible for a patient's primary care)
                  also hold ownership stakes in one or more dialysis clinics;

         o        leasing the Wearable Kidney minimizes the initial cost of
                  adopting the device;

         o        patients using the Wearable Kidney will require ongoing
                  physician care and product support and dialysis clinics are
                  well equipped to provide such services; and

         o        worldwide, there are 5,500 dialysis centers. Significant
                  consolidation has occurred in the last decade, as industry
                  leaders attempt to achieve economies of scale and leverage
                  operation expertise.

         Of equal, if not greater, importance will be the education of
representatives of government at all levels, as well as insurance companies, on
the benefits of the Wearable Kidney. In effect, our real market will be patients
on Medicare and Medicaid, as well as insurance companies and HMOs, in their role
as the principal sources of funding for the costs of dialysis.

         RESEARCH AND DEVELOPMENT

         We believe that the Wearable Kidney can be manufactured in a
lightweight, low-cost design. The Prototype was assembled with a proprietary
design that cost comparatively little to produce. The commercial version is
projected to cost substantially less to manufacture in quantity and is expected
to weigh less than 5 pounds. We will require significant funds and efforts to
advance the design from its current state to the final product design.

         We have entered into a Research Agreement and Option for License with
The Technion Research and Development Foundation, Ltd., an Israeli scientific
and technical institute. The Agreement provides for Technion to carry out a
twelve month program of research and development to evaluate new compounds to
trap and to evacuate amine and urea materials from dialysis solutions. The
Agreement provides (1) that the parties shall jointly own all patentable
inventions and other new technology developed pursuant to it, (2) that we shall
have an exclusive license to exploit such inventions and new technology in the
medical applications field, and (3) that Technion shall have an exclusive
license to exploit such inventions and technology in non-medical applications.
Technion shall pay royalties to the other party at the rate of 3% of the first
million dollars in sales, 2% of the next $500,000 of sales, and 1% of all
further sales. The term of the cross license is the life of any patented
inventions, or twenty five years for non-patented technology.

         We are in the process of hiring or contracting with personnel early in
the product development cycle. The expertise of these engineers is anticipated
to ensure that the design pursued by the engineering team meets all the
necessary parameters for high volume and low-cost manufacturing.

         At this time, we expect to outsource the manufacturing of the various
components, and to perform assembly and quality assurance testing internally.
This process is anticipated to allow us to minimize capital investments,
leverage the manufacturing expertise of third parties and maintain the high
levels of quality needed to consistently produce a reliable medical device.

         COMPETITION

         COMPETITION IN OUR DIALYSIS BUSINESS

         The dialysis industry is fragmented and highly competitive,
particularly in terms of developing relationships with referring physicians.
Competition for qualified physicians to act as medical directors is also high.
There are also a number of health care providers that have entered or may decide
to enter the dialysis business.

         COMPETITION IN CONNECTION WITH THE WEARABLE KIDNEY

         The dialysis services business is dominated by a few major companies,
with business and financial resources far greater than anything to which any
small company can aspire. It is practical for a small dialysis services company
to thrive since its success turns, in significant part, on the personal efforts
of its medical directors and their referrals and contacts with local physicians.
However, unlike the dialysis services business, the exploitation of the Wearable
Kidney will turn on the efficiency and practicality of the Wearable Kidney
itself. We are aware that certain of our competitors have introduced into the
market fully automated dialysis machines for home use. We believe that our


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Wearable Kidney, if developed and commercialized as we hope, will have
competitive advantages over the home use dialysis machines in that patients will
be able to retain their mobility and freedom with its wearable artificial kidney
and, at the same time, benefit from the much longer dialysis treatment time
without increasing the cost. We are not aware that any competitor has developed
and built a wearable artificial kidney, but we are aware of several competing
technologies that could eventually compete with ours. To our knowledge, none of
these has ever been built and tested either in a laboratory or on animals. We
are not aware whether any such devices are being developed by others. Since we
have already announced the building and preliminary testing of our prototype
Wearable Kidney, we can reasonably anticipate that the major dialysis services
companies are and will be formidable competitors, either through their existing
products or by attempting to create others.

         PATENTS AND PROPRIETARY TECHNOLOGIES

         We protect 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 is
to file patent applications and to protect 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.

         As of the date of this Report, we have filed 6 unique patent
applications in the U.S. Copies of the U.S. patent applications have been filed
under the Patent Cooperation Treaty, or PCT, and then in various foreign
countries including, Australia, Brazil, the European Community, Japan, Mexico
and Sweden. As of the date of this Report, no patent has been issued from these
patent applications. These patent applications, in general, cover the overall
Wearable Kidney system, as well as specific parts and methods, including
maintenance of the Wearable Kidney's light weight, its low power consumption and
its relative ease of operation

         INSURANCE

         We carry property and general liability insurance, professional
liability insurance and other insurance coverage in amounts deemed adequate by
management. Physicians practicing at our facilities are required to maintain
their own malpractice insurance. However, we maintain coverage for the
activities of our medical directors (but not for their individual private
medical practices).

         GOVERNMENT REGULATION

         GOVERNMENT REGULATION APPLICABLE TO OUR DIALYSIS OPERATIONS

         Our dialysis operations are subject to extensive governmental
regulations at the federal, state and local levels. These regulations require us
to meet various standards relating to, among other things, the management of
facilities, personnel, maintenance of proper records, equipment and quality
assurance programs. Our dialysis facility is subject to periodic inspection by
state agencies and other governmental authorities to determine if the premises,
equipment, personnel and patient care meet applicable standards. To receive
Medicare reimbursement, our dialysis facility must be certified by CMS. Our
dialysis facility is so certified.

         FRAUD AND ABUSE

         Our dialysis operations are subject to the illegal remuneration
provisions of the Social Security Act, sometimes referred to as the
"anti-kickback" statute, and similar state laws that impose criminal and civil
sanctions on persons who solicit, offer, receive or pay any remuneration,
whether directly or indirectly, in return for inducing the referral of a patient
for treatment or the ordering or purchasing of items or services that are paid
for in whole or in part by Medicare, Medicaid or similar state programs. The
federal anti-kickback statute provides both civil and criminal penalties for,
among other things, offering or paying any remuneration to induce someone to
refer patients to or for, or to purchase, lease or order (or arrange for or
recommend the purchase, lease or order of) any facility, item, or service for
which payment may be made by a Federal Health Care Program. The term "Federal
Health Care Program" includes Medicare, Medicaid and virtually all federally
funded healthcare programs, with the exception of the Federal Employee Health
Benefits program. The statute also prohibits soliciting or receiving any
remuneration in exchange for engaging in any of these activities. The
prohibition applies whether the remuneration is provided directly or indirectly,
or "in cash or in kind." Penalties for violations of the anti-kickback statute


                                       8
<PAGE>

are severe, consisting of substantial criminal fines, imprisonment and exclusion
from participation in the Medicare and Medicaid programs. The exclusion remedy
may be imposed in an administrative proceeding, even in the absence of any
criminal proceeding or investigation.

         Although the anti-kickback statute does not outlaw all financial
transactions or relationships that providers of healthcare items or services may
have with each other, interpretations of the law have been very broad. The
anti-kickback statute has been held applicable to a wide variety of financial
relationships that are quite different from an obvious kickback on a patient
referral or a bribe to recommend the purchase of specific products or services.
Federal courts and administrative bodies considering the statute in the context
of actual enforcement cases have established several important interpretive
principles:

         o        the statute is violated if even one purpose (as opposed to a
                  primary or sole purpose) of a payment is in exchange for or to
                  induce the referral of patients or the ordering, purchasing or
                  recommending of items or services;

         o        although some financial benefits may be too remote or DE
                  MINIMIS to affect referral practices, the threshold appears to
                  be relatively low, and a payment or other benefit may violate
                  the statute when the amount is sufficient to influence the
                  physician's (or other provider's) reason or judgment;

         o        giving a potential referral source the opportunity to earn a
                  fee that exceeds the reasonable value of any services provided
                  (or return on investment made) will constitute evidence that
                  the payment is unlawful. However, a reasonable fee will not in
                  itself serve as a defense if the intent underlying the
                  arrangement is to exchange payment for referrals;

         o        intent may be inferred from the circumstances of the case, and
                  there need be no proof of an agreement to make referrals, or
                  to order, purchase or recommend medical items or services, for
                  illegal intent and a violation to be found;

         o        the mere potential for increased costs to Medicare or Medicaid
                  may be enough to violate the law, and no actual payout by
                  Medicare or Medicaid is necessary as long as the challenged
                  remuneration is for an item or service that could be paid for
                  by Medicare or Medicaid; and

         o        the fact that a particular arrangement is common in the
                  healthcare industry is not a defense to an anti-kickback
                  violation.

         EXCEPTIONS AND SAFE HARBORS

         The anti-kickback statute itself contains several limited exceptions to
the prohibition on remuneration. Moreover, the Department of Health and Human
Services, or HHS, may issue regulations defining certain practices that would
not be deemed to violate the anti-kickback statute. The HHS Office of the
Inspector General, or OIG, recognizes "safe harbors" from the reach of the
anti-kickback statute.

         While those who structure their business arrangements to satisfy all of
the criteria of a safe harbor are protected from liability under the
anti-kickback statute, failure to qualify for a safe harbor does not necessarily
mean that there has been a violation of the anti-kickback statute. However, the
OIG has stated that arrangements that are of the same generic kind as those for
which a safe harbor is available may be subject to scrutiny if they fail to
satisfy all the criteria for the appropriate safe harbor.

         Where a practice does not qualify for a safe harbor, the OIG will
examine the practice to determine whether it involves any remuneration and, if
so, whether the practice appears to involve the types of abuses that the
anti-kickback statute was designed to combat. No one factor is dispositive, and
the OIG and the Department of Justice (which is responsible for criminal
enforcement of the anti-kickback statute) have considerable discretion in
selecting cases to prosecute.

         The most relevant safe harbor to dialysis services arrangements is the
"personal services and management contracts" safe harbor. An arrangement would
be protected from anti-kickback law liability if all of the following criteria
were satisfied:


                                       9
<PAGE>

         o        there is a signed written agreement for a term of not less
                  than one year which specifies the services to be performed;

         o        the aggregate compensation paid is set in advance, consistent
                  with fair market value in arms-length transactions, and is not
                  to be determined in a manner that takes into account the
                  volume or value of any referrals or business otherwise
                  generated between the parties;

         o        if services are to be performed on a part-time basis, the
                  agreement specifies exactly the schedule of intervals, their
                  precise length and the exact charge for each; and

         o        the services do not involve counseling or promotion of any
                  arrangement or other activity that violates state or federal
                  law.

         We believe our arrangements with referring physicians are in material
compliance with applicable laws. We seek wherever practicable to structure our
various business arrangements to satisfy as many safe harbor elements as
possible under the circumstances. Although we have never been challenged under
these statutes and believe we comply in all material respects with these and all
other applicable laws and regulations, there can be no assurance that we will
not be required to change our practices or experience a material adverse effect
as a result of any challenge.

         We operate our dialysis facility in the State of California, which has
enacted statutes prohibiting physicians from holding financial interests in
various types of medical facilities to which they refer patients. A California
statute makes it unlawful for a physician who has, or a member of whose
immediate family has, a financial interest with or in an entity to refer a
person to that entity for laboratory, diagnostic nuclear medicine, radiation
oncology, physical rehabilitation, psychometric testing, home infusion therapy
or diagnostic imaging goods or services. Under the statute, "financial interest"
includes, among other things, any type of ownership interest, debt, loan, lease,
compensation, remuneration, discount, rebate, refund, dividend, distribution,
subsidy or other form of direct or indirect payment, whether in money or
otherwise, between a physician and the entity to which the physician makes a
referral for the items described above. The statute also prohibits the entity to
which the referral was made from presenting a claim for payment to any payor for
a service furnished pursuant to a prohibited referral and prohibits a payor from
paying for such a service. Violation of the statute by a physician is a
misdemeanor and subjects the physician to civil fines. Violation of the
prohibition on submitting a claim in violation of the statute is a public
offense, subjecting the offender to a fine of up to $15,000 for each violation
and possible action against licensure. We do not provide remuneration to our
referring physicians for the administration of services provided to patients so
referred.

         STARK I AND STARK II

         The provisions of two federal statutes, referred to as Stark I and
Stark II, govern us. The original Stark law, or Stark I, prohibited only
self-interested referrals for clinical laboratory services. In 1993, Congress
broadened the Stark law with new provisions, or Stark II, to include referrals
of a broad array of designated health services, or DHS. In 1995, HHS promulgated
final regulations that addressed Stark II. These laws generally restrict
physician referrals for clinical laboratory services to entities with which a
physician or an immediate family member has a "financial relationship." The
entity is precluded from claiming payment for such services under the Medicare
or Medicaid programs, is liable for the refund of amounts received pursuant to
prohibited claims, can receive civil penalties of up to $15,000 per service and
can be excluded from participation in the Medicare and Medicaid programs.
Regulations interpreting Stark I have created an exception to its applicability
for services furnished in a dialysis facility if payment for those services is
included in the ESRD composite rate. We believe that our compensation
arrangements, with our medical directors and other physicians under contract are
in material compliance with the provisions of Stark I.

         A "financial relationship" under Stark II is defined as an ownership or
investment interest in, or a compensation arrangement between the physician and
the entity. We have entered into compensation agreements with our medical
directors and other referring physicians, certain of whom are our principal
stockholders. We believe that such arrangements are in material compliance with
the anti-kickback statute, Stark II and the various state statutes.

         Stark II includes certain exceptions. A personal services compensation
arrangement is excepted from Stark II prohibitions if:


                                       10
<PAGE>

         o        the arrangement is set out in writing, signed by the parties,
                  and specifies the services covered by the arrangement;

         o        the arrangement covers all of the services to be provided by
                  the physician (or an immediate family member of such
                  physician) to the entity;

         o        the aggregate services contracted for do not exceed those that
                  are reasonable and necessary for the legitimate business
                  purposes of the arrangement;

         o        the term of the arrangement is for at least one year;

         o        the compensation to be paid over the term of the arrangement
                  is set in advance, does not exceed fair market value, and is
                  not determined in a manner that takes into account the volume
                  or value of any referrals or other business generated between
                  the parties;

         o        the services to be performed do not involve the counseling or
                  promotion of a business arrangement or other activity that
                  violates any state or federal law, and

         o        the arrangement meets such other requirements that may be
                  imposed pursuant to regulations promulgated by CMS.

We believe that our compensation arrangements with medical directors and other
physicians under contract materially satisfy the personal services exception to
the Stark II prohibitions.

         Payments made to a lessor by a lessee for the use of premises are
excepted from Stark II prohibitions if:

         o        the lease is set out in writing, signed by the parties, and
                  specifies the premises covered by the lease;

         o        the space rented or leased does not exceed that which is
                  reasonable and necessary for the legitimate business purposes
                  of the lease or rental and is used exclusively by the lessee
                  when being used by the lessee, subject to certain permitted
                  payments for common areas;

         o        the lease provides for a term of rental or lease for at least
                  one year;

         o        the rental charges over the term of the lease are set in
                  advance, are consistent with fair market value, and are not
                  determined in a manner that takes into account the volume or
                  value of any referrals or other business generated between the
                  parties;

         o        the lease would be commercially reasonable even if no
                  referrals were made between the parties, and

         o        the lease meets such other requirements that may be imposed
                  pursuant to regulations promulgated by CMS.

We currently lease our dialysis facilities from unaffiliated third parties.

         For purposes of Stark II, DHS includes: clinical laboratory services,
radiology and other diagnostic services, durable medical equipment, parenteral
and enteral nutrients, equipment and supplies, prosthetics and prosthetic
devices, home health services, outpatient prescription drugs and inpatient and
outpatient hospital services. We believe that the language and legislative
history of Stark II indicate that Congress did not intend to include dialysis
services and the services and items provided incident to dialysis services
within the Stark II prohibitions. Although we do not bill Medicare or Medicaid
for hospital inpatient and outpatient services, our medical directors may
request or establish a plan of care that includes dialysis services for hospital
inpatients and outpatients that may be considered a referral to us within the
meaning of Stark II.


                                       11
<PAGE>

         MEDICARE

         Because the Medicare program represents a substantial portion of the
federal budget, Congress takes action in almost every legislative session to
modify the Medicare program for the purpose of reducing the amounts otherwise
payable from the program to health care providers. Legislation or regulations
may be enacted in the future that may significantly modify the ESRD program or
substantially reduce the amount paid for our services. Further, statutes or
regulations may be adopted which impose additional requirements in order for us
to be eligible to participate in the federal and state payment programs. Such
new legislation or regulations may adversely affect our business operations.

         GOVERNMENT REGULATION RELATING TO DEVELOPMENT AND MARKETING OF THE
         WEARABLE KIDNEY

         Due to the relatively early nature of our development efforts, we have
not yet confirmed 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 intend to make. Depending on the claims made
and the FDA's ruling regarding the regulatory status of the Wearable Kidney, it
may be designated as a device, a biologic or as a combination product. However,
we anticipate that regardless of regulatory designation, we will 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 cannot currently state the
nature of any such studies that the FDA may require due to our early stage of
product development, it is likely any product we attempt to develop will 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 may 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 3 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.

         CLEARANCE PROCEDURE. Before a new medical device can be marketed, such
as its Wearable Kidney for the treatment of ESRD, marketing clearance must be
obtained through a pre-market notification under Section 510(k) of the Federal
Food, Drug, and Cosmetic Act or the 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. A 510(k) clearance will typically be granted
by the FDA, if it can be established that the device is substantially equivalent
to a "predicate device," which is a legally marketed Class I or II device or a
pre-amendment Class III device (I.E. one that has been marketed since a date
prior to May 28, 1976), for which the FDA has not called for PMAs. The FDA has
been requiring an increasingly rigorous demonstration of substantial
equivalence, which may include a requirement to submit human clinical trial
data. It generally takes 4 to 12 months from the date of a 510(k) submission to
obtain clearance, but it may take longer.

         HUMAN CLINICAL TRIALS. An investigational device exemption, or IDE,
allows the 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.


                                       12
<PAGE>

         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,
or 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.

         ONGOING REGULATION. If clearance or approval is obtained, any device
manufactured or distributed by us will be subject to pervasive and continuing
regulation by the FDA. We will be subject to routine inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the U.S. including labeling regulations, GMP
requirements, Medical Device Reporting, or MDR, regulation (which requires a
manufacturer to report to the FDA certain types of adverse events involving its
products), and the FDA's prohibitions against promoting products for unapproved
or "off-label" uses.

         The FDA Act makes changes to the device provisions of the FDC Act and
other provisions in the FDC Act affecting the regulation of devices. Among other
things, the changes will affect the IDE and PMA processes, and also will affect
device standards and data requirements, procedures relating to humanitarian and
breakthrough devices, tracking and post-market surveillance, accredited third
party review and the dissemination of off-label information. We cannot predict
how or when these changes will be implemented or what effect the changes will
have on the regulation of our products and anticipated products.

         If the FDA believes that a company is not in compliance with law, it
can institute proceedings to detain or seize products, issue a recall, enjoin
future violations and assess civil and criminal penalties against that company,
its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on our business, financial
condition and results of operations. In addition, regulations regarding the
manufacture and sale of our products are subject to change.

         INTERNATIONAL PRODUCT REGULATION

         International Organization for Standards, or 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. This
will enable us to market our products in all of the member countries of the EU.
We also will be required to comply with additional individual national
requirements that are outside the scope of those required by the European
Economic Area.

         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

         As of August 1, 2005, we had 31 employees, including 2 executives, 4
research persons, 23 medical personnel, and 3 administrative personnel. We
retain the services of 2 consultants on a part-time basis in connection with our
research and development activities. During the years ended December 31, 2004
and 2003, we expended a total of approximately $527,000 and $184,000,
respectively, in fees and reimbursement of expenses for these consultants, and
we have granted them options to purchase up to 750,000 shares of our common
stock.


                                       13
<PAGE>

         We intend to hire additional personnel as the development of our
business makes such action appropriate. The loss of the services of key
personnel could have a material adverse effect on our business. Since there is
intense competition for qualified personnel knowledgeable of its industry, no
assurance can be given that we will be successful in retaining and recruiting
needed key personnel. We do not have key-man life insurance for any of our
employees.

         Our employees are not represented by a labor union and are not covered
by a collective bargaining agreement. We believe that our employee relations are
good.

                                  RISK FACTORS

         THIS REPORT MAY BE DEEMED TO CONTAIN FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE COMMISSION, REPORTS TO OUR
STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY US
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD
CAUSE OUR ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS
TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT
CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS INCLUDE, BUT
ARE NOT LIMITED TO, RISKS SET FORTH HEREIN, EACH OF WHICH COULD ADVERSELY AFFECT
OUR BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.

         THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. PERSONS WHO MAY
OWN OR INTEND TO PURCHASE SHARES OF COMMON STOCK IN ANY MARKET WHERE THE COMMON
STOCK MAY TRADE SHOULD CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH OTHER
INFORMATION CONTAINED ELSEWHERE IN OUR REPORTS, PROXY STATEMENTS AND OTHER
AVAILABLE PUBLIC INFORMATION, AS FILED WITH THE COMMISSION, PRIOR TO PURCHASING
SHARES OF OUR COMMON STOCK:

         WE MAY DISCONTINUE OUR SOLE REVENUE-GENERATING OPERATION AND SHIFT OUR
BUSINESS FOCUS TO UNPROVEN PRODUCT DEVELOPMENT, OUR HISTORIC OPERATING RESULTS
ARE NOT A MEANINGFUL INDICATOR OF FUTURE PERFORMANCE AND YOU HAVE LIMITED
INFORMATION WITH WHICH TO EVALUATE OUR BUSINESS AND OUR PROSPECTS. In the near
future we may sell our dialysis services business, which has generated 100% of
our revenue since inception. If we are successful in doing so, we intend to
invest the proceeds in the development of the Wearable Kidney and we will then
focus our attention solely on those portions of our business related to the
development of the Wearable Kidney. These activities have generated no revenue
and are not anticipated to do so for at least two years, if at all. If the sale
of the dialysis business is accomplished, our future revenues and success will
depend upon our successful research and development and ultimate marketing of
our proposed Wearable Kidney for the treatment of ESRD, which is unproven at
this time and not yet received approval to market from the FDA. We anticipate
that we will need to raise significant amounts of money to be able to bring the
Wearable Kidney to the point where successful human clinical trials have been
completed. Our ability to complete the development of such a product and to
successfully introduce our new products into the market based on our intended
business focus and the expected benefits to be obtained from these new products
may be adversely affected by a number of factors, such as our ability to raise
the required capital to complete the project, unforeseen costs and expenses,
technological changes, economic downturns, competitive factors or other events
beyond our control. Consequently, our historical operating results cannot be
relied upon as an indicator of our future performance, and we cannot predict
whether we will obtain or sustain positive operating cash flow or even gross
revenue in the future.

         WE ARE NOT PROFITABLE AND SUFFER FROM CASH FLOW DIFFICULTIES AND WILL
HAVE TO RAISE ADDITION CAPITAL TO FINANCE OUR OPERATIONS. We generated a net
loss of $1,800,331 during the year ended December 31, 2004. At December 31,
2004, we had an accumulated deficit of $5,810,703 and a working capital
deficiency of $689,515. In 2004 and 2003, approximately $1,065,324 and $378,000,
respectively, of revenue from our operations was used to finance the development
of the Wearable Kidney. The balance of the funding for such development was
derived from third party investment. Although we raised a total of approximately
$1,350,000 in gross proceeds in 2004 and 2003 from equity investments, we cannot
assure you that we will be able to obtain such additional financing in the
future on terms acceptable to us or at all. Our failure to obtain such a
financing may have a material adverse effect on our business and could result in
our inability to meet our obligations, which could result in a cessation of our
operations. Moreover, if we are unable to develop the Wearable Kidney to the
point of being commercially marketable, we may have to cease our business
operations completely.

         WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO COMPLETE DEVELOPMENT OF
AND OBTAIN NECESSARY APPROVALS FOR THE WEARABLE KIDNEY EVEN IF WE OBTAIN
SUFFICIENT FUNDING. We intend to build the Wearable Kidney from: (i) custom


                                       14
<PAGE>

parts specifically designed for us, and (ii) custom software, designed to enable
the device to operate electronically from a chip imbedded in the device. Even if
we obtain sufficient funding, no assurance can be given that we will be able to
design or have designed such parts or write or have written such software within
our anticipated time frames, if at all. Such a situation could have a material
adverse effect upon our ability to remain in business.

         WE MUST CLEAR A NUMBER OF HURDLES, INCLUDING HUMAN CLINICAL TRIALS,
BEFORE OUR WEARABLE KIDNEY IS APPROVED. If human clinical trials of our device
are required for a PMA application, or, in the opinion of the FDA, if our device
presents a "significant risk," the sponsor of the trial (probably us) 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 IRB, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. Submission of an IDE does not give assurance that the FDA will approve the
IDE and, if it is approved, there can be no assurance that the FDA will
determine that the data derived from the studies support the safety and efficacy
of the device or warrant the continuation of clinical studies. Our failure to
obtain such approval would have a material adverse effect on our capability to
continue in business.

         RELYING ON OUTSIDE FINANCING FOR OUR CASH NEEDS WILL HAVE THE EFFECT OF
DILUTING THE OWNERSHIP SHARE OF OUR EXISTING STOCKHOLDERS. Since we do not
expect to generate cash flow from exploitation of our Wearable Kidney for at
least 2 years, we will rely in significant part on equity financing to generate
cash for research and development costs. Even if we are successful in developing
and marketing the Wearable Kidney, the ownership share of existing stockholders
may be significantly reduced, which would result in a lower share of any
earnings we may generate.

         OUR SUCCESS IS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS HELD BY US,
AND OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT THESE
RIGHTS. Our success will depend, in part, on our ability to maintain and defend
our patents. However, we cannot give you assurance that the technologies and
processes covered by all of our patents may not be found to be obvious or
substantially similar to prior work, which could render these patents
unenforceable. Without the protection of these patents, competitors may utilize
our technology to commercialize their own method or device for treating ESRD.

         Trade secrets and other proprietary information, which are not
protected by patents, are also critical to our business. We attempt to protect
our trade secrets by entering into confidentiality agreements with third
parties, employees and consultants. However, these agreements can be breached,
and even if we are able to prove the breach or that our technology has been
misappropriated under applicable state law, there may not be an adequate remedy
available to us. Costly and time-consuming litigation could be necessary to
enforce and determine the scope of our proprietary rights, and even if we
prevail in litigation, the party we prevail over may have scant resources
available to satisfy a judgment. Also, third parties may independently discover
trade secrets and proprietary information that allow them to develop
technologies and products that are substantially equivalent or superior to our
own. Without the protection afforded by our patent, trade secret and proprietary
information rights, we may face direct competition from others commercializing
their products using our technology and that could have a material adverse
effect on our business.

         DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE
TIME-CONSUMING AND EXPENSIVE, AND IF WE ARE NOT SUCCESSFUL, COULD CAUSE
SUBSTANTIAL EXPENSES AND DISRUPT OUR BUSINESS. We cannot assure you that the
products, services, technologies and advertising we employ in our business do
not or will not infringe valid patents, trademarks, copyrights or other
intellectual property rights held by third parties. We may be subject in the
ordinary course of our business to legal proceedings and claims from time to
time relating to the intellectual property of others. Any legal action against
us claiming damages or seeking to enjoin commercial activities relating to the
affected products or our methods or processes could have a material adverse
effect on our business by:

         o        requiring us, or our collaborators, to obtain a license to
                  continue to use, manufacture or market the affected products,
                  methods or processes, and such a license may not be available
                  on commercially reasonable terms, if at all;

         o        preventing us from making, using or selling the subject matter
                  claimed in patents held by others and subject us to potential
                  liability for damages;

         o        consuming a substantial portion of our managerial and
                  financial resources; or

         o        resulting in litigation or administrative proceedings that may
                  be costly, whether we win or lose.


                                       15
<PAGE>

         WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OUTSIDE
THE U.S. Intellectual property law outside the U.S. is uncertain and in many
countries is currently undergoing review and revision. The laws of some
countries do not protect our intellectual property rights to the same extent as
laws in the U.S. The intellectual property rights we enjoy in one country or
jurisdiction may be rejected in other countries or jurisdictions, or, if
recognized there, the rights may be significantly diluted. It may be necessary
or useful for us to participate in proceedings to determine the validity of our,
or our competitors', foreign intellectual property rights, which could result in
substantial cost and divert our efforts and attention from other aspects of our
business. If we are unable to defend our intellectual property rights
internationally, we may face increased competition outside the U.S., which could
materially adversely affect our future business, operating results and financial
condition.

         OUR FAILURE TO RESPOND TO RAPID CHANGES IN TECHNOLOGY AND ITS
APPLICATIONS AND INTENSE COMPETITION IN THE MEDICAL DEVICES INDUSTRY OR THE
DEVELOPMENT OF WAYS TO TREAT ESRD DIFFERENTLY THAN WE DO, COULD MAKE OUR
TREATMENT SYSTEM OBSOLETE. The medical devices industry is subject to rapid and
substantial technological development and product innovations. To be successful,
we must respond to new developments in technology, new applications of existing
technology and new treatment methods. Our response may be stymied if we require,
but cannot secure, rights to essential third-party intellectual property. We may
compete against companies offering alternative treatment systems to ours, some
of which have greater financial, marketing and technical resources to utilize in
pursuing technological development and new treatment methods. Our financial
condition and operating results could be adversely affected if our medical
device products fail to compete favorably with these technological developments,
or if we fail to be responsive on a timely and effective basis to competitors'
new devices, applications, treatments or price strategies.

         OUR BUSINESS PLAN FOR THE WEARABLE KIDNEY INVOLVES MARKETING THROUGH
UNRELATED BUSINESSES, WHICH ARE ALSO OUR NATURAL COMPETITORS AND WHO MAY NOT
CHOOSE TO MARKET OUR WEARABLE KIDNEY WHEN IT IS AVAILABLE TO BE MARKETED. We
intend to market the Wearable Kidney through existing dialysis service centers,
which are primarily operated by 4 large companies, none of which are affiliated
with us. We believe that such centers are the best outlet for the Wearable
Kidney, not only because they provide the clearest tie to patients and their
principal physicians, but also because the Wearable Kidney may offer the
opportunity to generate higher gross profits than does the use of standard
dialysis units. However, the dialysis industry is dominated by these 4 large
companies, two of which account for approximately 40% of the market. We would
have very little leverage in endeavoring to make distribution arrangements with
such companies. Our efforts could stimulate one or more of these large companies
to spend significant resources to develop alternatives to the Wearable Kidney.
These efforts could result in severely contracting any market share which we
might have obtained, or even stopping us from entering into the market at all.
Such situations could have a material adverse effect on our business and our
business plans.

         POTENTIAL DEVELOPMENT OF COMPETING DEVICES. Although we are not aware
that any other company has built and tested a device that would accomplish the
same ends as our Wearable Kidney, we cannot assure you that no such device
exists or that it will not exist in the near future. Thus, even if we are
successful in raising enough funds to build and test the Wearable Kidney and
begin production of a commercial version, we cannot assure you that other
companies, who are likely to be larger and better financed than we are, will not
be able to design a product which will provide dialysis treatment in a
convenient portable form and will not be able to bring such a product market
quickly enough to constitute a major competitor to the Wearable Kidney. Our
inability to withstand such competition could have a material adverse effect on
our business.

         WE MAY BE DEPENDENT ON THIRD PARTIES TO MANUFACTURE AND MARKET OUR
WEARABLE KIDNEY. We cannot assure you that we will be able to turn our
development models into practical commercial devices, that are suitable for
manufacture and use by patients as we intend. In addition, we have no experience
or expertise in the manufacture or marketing of medical devices. We may attempt
to build our own manufacturing and sales capability or we may have to rely upon
third parties to manufacture, service, maintain and market our devices , if we
receive FDA marketing approval. In connection with the manufacturing of the
Wearable Kidney, we cannot assure you that any third party would be willing or
able to meet our needs in a satisfactory and timely manner, if at all for
production or timely delivery of devices to customers. Should we be unable to
locate third parties willing or able to meet our needs, management may have to
suspend or discontinue our business activities or certain components thereof or
cease operations altogether, as they relate to the Wearable Kidney.

         We anticipate that the Wearable Kidney would compete with the use of
existing dialysis equipment by existing dialysis service centers, which we
believe are a natural outlet for the Wearable Kidney. It is our expectation that
such centers will come to see the Wearable Kidney as a business opportunity
rather than as a competitor. However, we can give you no assurance that dialysis


                                       16
<PAGE>

service centers will become the outlet for the marketing of our Wearable Kidney.
If dialysis service providers do not agree to become outlets for our Wearable
Kidney, we would have to market the Wearable Kidney through existing dialysis
service centers, which means that we will be relying on the services of persons
outside of our control for the generation of revenue. In addition , we would
have to build a distribution network for our Wearable Kidney to service patients
that are on dialysis. Such a situation would likely require us to obtain and
expend a significant amount of capital to capture a significant portion of the
market for our device. Our inability to create business relationships with
dialysis service centers to market our Wearable Kidney could have a material
adverse effect upon our business and our business plan.

         WE HAVE NOT COMMISSIONED OR OBTAINED MARKETING STUDIES WHICH SUPPORT
THE LIKELIHOOD OF SUCCESS OF OUR BUSINESS PLAN. No independent studies with
regard to the feasibility of our proposed business plan have been conducted by
any independent third parties with respect to our present and future business
prospects and our capital requirements. In addition, there can be no assurances
that our products or our treatment modality for ESRD will find sufficient
acceptance in the marketplace to enable us to fulfill our long and short term
goals, even if adequate financing is available and our products are approved to
come to market, of which there can be no assurance.

         THE AUDITED FINANCIAL STATEMENTS INCLUDED AS PART OF THIS ANNUAL REPORT
CONTAIN A "GOING CONCERN" OPINION FROM OUR INDEPENDENT AUDITOR. The report of
our independent auditors issued in connection with our audited financial
statements included in this Annual Report on Form 10-KSB for the year ended
December 31, 2004 includes a paragraph which generally provides that the
financial statements accompanying such auditor's report were prepared assuming
that we will continue as a going concern, that expresses that our historical
operating losses and accumulated deficit raise substantial doubt about our
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability of our recorded assets and
classification of liabilities that might be necessary in the event that we
cannot continue in existence. The independent auditor's report assumes that the
establishment of our continued business operations are dependent upon receipt of
significant additional outside financing and our ability to complete the
development of the Wearable Kidney and bringing to market. We cannot assure you
that that we will be able to obtain such outside financing on terms favorable to
us or at all, or establish future profitable operations from the Wearable Kidney
or otherwise. If we do not succeed, then we may be forced to discontinue our
operations and close our business.

         OUR ABILITY TO DEVELOP, MARKET, LICENSE AND/OR SELL PRODUCTS COULD BE
HARMED IF WE ARE UNABLE TO RETAIN OR HIRE KEY PERSONNEL. Our success depends
upon the continued services of our executive officers and other key medical,
engineering, financial and marketing personnel. None of our officers or key
employees is bound by an employment agreement for any specific term. The loss of
the services of any of our key employees, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers, could seriously delay, or even prevent, the development
and introduction of the Wearable Kidney.

         POTENTIAL REFORMS IN THE REGULATION OF THE HEALTH CARE INDUSTRY COULD
HAVE AN ADVERSE EFFECT UPON OUR BUSINESS. Regulatory bodies in the U.S. and the
EC are continuously revising their rules. Fundamental reforms in the healthcare
industry in the U.S. and the EC continue to be considered, although we cannot
predict whether or when any healthcare reform proposals will be adopted and what
impact such proposals might have. Moreover, management is unable to predict what
additional legislation or regulation, if any, relating to the healthcare
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have.

         PRODUCT DEFECTS AND LIMITS OF PRODUCT LIABILITY INSURANCE COULD HAVE AN
ADVERSE EFFECT UPON OUR BUSINESS. One or more of our products may be found to be
defective after it has already been shipped in volume, requiring a product
replacement. Product returns and the potential need to remedy defects or provide
replacement products or parts could impose substantial costs on us and have a
material adverse effect on our operations. The clinical testing, manufacturing
and use of our Wearable Kidney may expose us to product liability claims. There
can be no assurance that the coverage limits of our insurance policies will be
adequate or that one or more successful claims brought against us would not have
a material adverse effect on our business.

         WE ARE CURRENTLY DEPENDENT ON MEDICARE, MEDICAID AND OTHER SOURCES OF
REIMBURSEMENT FOR OUR REVENUES AND EXPECT TO REMAIN RELIANT ON THEM WHEN THE
WEARABLE KIDNEY IS DEVELOPED AND IN USE. At the present time, we are reimbursed
for dialysis services primarily at fixed rates established in advance under the
Medicare ESRD program. Approximately 97% of our net revenues during fiscal 2004
was funded by Medicaid or comparable state programs and approximately 34% of our
net revenue during fiscal 2003 was from sources other than Medicare and


                                       17
<PAGE>

Medicaid. The current composite Medicare reimbursement rate is approximately
$143; we are not able to predict whether future rate changes will be made or
whether this rate will keep up with operating costs for the provision of
dialysis services and supplies. Moreover, we are unable to predict how and at
what rate Medicare and the other sources for reimbursement will pay for the
costs of usage of the Wearable Kidney, if at all.

         Maintenance or reductions in composite rates could have a material
adverse effect on our revenues and net earnings. Furthermore, increases in
operating costs that are subject to inflation, such as labor and supply costs,
without a compensating increase in prescribed rates, may adversely affect our
earnings in the future. We are also unable to predict whether certain services,
as to which we are currently separately reimbursed, may in the future be
included in the Medicare composite rate. All of these programs and other sources
of payment (such as third party, non-government payors) are subject to changes,
including statutory and regulatory changes, administrative ruling,
interpretations of policy and governmental funding restrictions, all of which
may have the effect of decreasing program payments, increasing costs or
modifying the way we operate our dialysis business. Any restriction or reduction
of our ability to charge for such services at rates in excess of those paid by
Medicare would adversely affect our net operating revenues and net income. We
believe that once the Wearable Kidney is introduced to the market, payment for
its use will be similarly governed by this set of systems. We do not know what
rates of reimbursement will be available and whether those rates will result in
profitable operations for us. In the event that the amount reimbursed for the
use of the Wearable Kidney is inadequate, it may not be feasible to execute our
business plan profitably.

         OUR OPERATIONS IN THE DIALYSIS SERVICES BUSINESS ARE SUBJECT TO
EXTENSIVE GOVERNMENT REGULATION. We are subject to extensive regulation by both
the federal government and the states in which we conduct our business. We are
subject to the illegal remuneration provisions and similar state laws which
impose civil and criminal sanctions on persons who solicit, offer, receive or
pay any remuneration, directly or indirectly, for referring a patient for
treatment that is paid for in whole or in part by Medicare, Medicaid or similar
state programs.

         The federal government has established "safe harbors" for certain
business transactions. We believe that the arrangements between us and our
medical directors fall within the protection afforded by these safe harbors. We
believe that the language and legislative history of Stark I and Stark II
indicate that Congress did not intend to include laboratory services provided
incidental to dialysis services within the Stark I prohibition or that Congress
intended to include dialysis services and the services and items provided
incident to dialysis services within the Stark II prohibitions. However, due to
the breadth of these statutory provisions, it is possible that our practices
might be challenged under the law. Any such interpretation would also apply to
our competitors as well.

         Although we have never been challenged under any of these statutes and
believe we comply in all material respects with these and all other applicable
laws and regulations, there can be no assurance that we will not be required to
change our practices or relationships or that we will not experience material
adverse effects as a result of any such challenge. Violations of many of these
regulatory schemes are punishable by civil penalties, which may include
exclusion or suspension of the provider from future participation in Medicare
and Medicaid programs and substantial fines.

         A number of proposals for health care reform have been made in recent
years, some of which have included radical changes in the health care system.
Health care reform could result in material changes in the financing and
regulation of the health care business, and we are unable to predict the effect
of such changes on our future operations. It is uncertain what legislation on
health care reform, if any, will ultimately be implemented or whether other
changes in the administration or interpretation of governmental health care
programs will occur. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
results of our operations.

         OUR BUSINESS WILL ALWAYS BE STRICTLY REGULATED BY THE FEDERAL AND OTHER
GOVERNMENTS, AND WE CANNOT ASSURE YOU THAT WE WILL REMAIN IN COMPLIANCE WITH ALL
OF THAT REGULATION. Clinical testing, manufacture, promotion and sale of our
Wearable Kidney and related accessories are subject to extensive regulation by
numerous governmental authorities in the U.S., principally the FDA, and
corresponding foreign regulatory agencies. Changes in existing regulations or
adoption of new regulations or policies could prevent us from obtaining, or
affect the timing of, future regulatory approvals or clearances. We cannot
assure you that we will be able to obtain necessary regulatory clearances or
approvals on a timely basis, or at all, or that we will not be required to incur
significant costs in obtaining or maintaining such foreign regulatory approvals.
Delays in receipt of, or failure to receive, such approvals or clearances, the
loss of previously obtained approvals or clearances or the failure to comply
with existing or future regulatory requirements could have a material adverse
effect on our business, financial condition and results of operations.


                                       18
<PAGE>

         Once we have sufficient information to design our pre-clinical and
clinical development plans, we will seek the FDA's input on those plans and,
more specifically, are subject to the FDA's requirements for approval. However,
even if such a plans are developed and agreed to with the FDA, the FDA may
insist upon changes to a development plan previously agreed to, if new
information shows that the plans may present safety or effectiveness concerns.
The FDA also retains considerable leverage to require changes in study protocols
from the sponsors of clinical investigations even after an FDA meeting and
agreement has been reached.

         Any enforcement action by regulatory authorities with respect to past
or future regulatory noncompliance could have a material adverse effect on our
business, financial condition and results of operations. 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. If the Wearable Kidney successfully
completes all laboratory, animal and human testing, we will be required to
obtain the approval and consent of the FDA to distribute and market it. We
cannot assure you that we will be able to obtain the necessary approvals or that
the product will be accepted in the market place or that a competing product
will not have already been developed and made commercially available to the
public in laboratory tests and animal and human trials within our anticipated
time periods, if at all.

         Even if our Wearable Kidney is approved for market, we will be subject
to continuing regulation. If clearance or approval is obtained so that we may
bring the Wearable Kidney to market, any device manufactured or distributed by
us will be subject to pervasive and continuing regulation by the FDA. We will
continuously be subject to routine inspection by the FDA and will have to comply
with the host of regulatory requirements that usually apply to medical devices
marketed in the U.S. including labeling regulations, GMP requirements, MDR
regulation (which requires a manufacturer to report to the FDA certain types of
adverse events involving its products), and the FDA's prohibitions against
promoting products for unapproved or "off-label" uses. Our failure to comply
with applicable regulatory requirements could result in enforcement action by
the FDA, which could have a material adverse effect on our business, financial
condition and results of operations.

         In addition, failure to comply with applicable international regulatory
requirements can result in fines, injunctions, civil penalties, recalls or
seizures of products, total or partial suspensions of production, refusals by
foreign governments to permit product sales and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations or
policies could prevent us from obtaining, or affect the timing of, future
regulatory approvals or clearances. There can be no assurance that we will be
able to obtain necessary regulatory clearances or approvals on a timely basis,
or at all, or that we will not be required to incur significant costs in
obtaining or maintaining such foreign regulatory approvals. Delays in receipt
of, or failure to receive, such approvals or clearances, the loss of previously
obtained approvals or clearances or the failure to comply with existing or
future regulatory requirements could have a material adverse effect on our
business, financial condition and results of operations. Any enforcement action
by regulatory authorities with respect to past or future regulatory
noncompliance could have a material adverse effect on our business, financial
condition and results of operations.

         Finally, any loss by us of our various federal certifications, our
authorization to participate in the Medicare or Medicaid programs or our
licenses under the laws of any state or other governmental authority from which
all of our revenues are derived or a change resulting from healthcare reform
reducing dialysis reimbursement or reducing or eliminating coverage for dialysis
services, would have a material adverse effect on our business. We cannot assure
you that our activities will not be reviewed and challenged or that healthcare
reform will not result in a material adverse change to us.

         WE FACE COMPETITION FROM COMPANIES THAT HAVE SIGNIFICANTLY GREATER
RESOURCES THAN OURS. We directly and indirectly compete with other businesses,
including businesses in the dialysis industry. In many cases, these competitors
are larger and more firmly established than we are. In addition, many of such
competitors have greater marketing and development budgets and greater capital
resources than we have. Accordingly, there can be no assurance that we will be
able to achieve and maintain a competitive position in our industry in the
market that we compete in. The dialysis industry is fragmented and highly
competitive, particularly in terms of developing relationships with referring
physicians.


                                       19
<PAGE>

         WE ARE DEPENDENT ON PHYSICIAN REFERRALS AND REFERRALS FROM AFFILIATES
FOR OUR BUSINESS OPERATIONS. Our dialysis facility is dependent upon referrals
of ESRD patients for treatments by physicians specializing in nephrology and
practicing in the communities served by our dialysis facility. As is generally
true in the dialysis industry, at our facility, one or a few physicians account
for all or a significant portion of the patient referral base. The loss of one
or more key referring physicians could have a material adverse effect on our
operations. We primarily receive referrals of our ESRD patients from our
affiliates, who have interests in an affiliated entity, which is not one of our
subsidiaries. If such interests are deemed to violate applicable federal or
state law, such physicians may be forced to dispose of their ownership
interests. We cannot predict the effect such dispositions would have on our
business.

         WE OWE SUBSTANTIAL AMOUNTS TO ONE OF OUR AFFILIATES UNDER A SECURED
PROMISSORY NOTE. In 2001 we issued to Dr. Gura a promissory note in the amount
of $100,000, which is secured by technology related to development of our
Wearable Kidney. The note matures on December 18, 2009, and will be due and
payable at that time unless the trading price of our common stock equals or
exceeds $5.00 per share. The note is secured by the rights to the technology;
thus, if we do not meet our obligation, we will lose all such rights, which
would have a material adverse effect on our ability to carry on our business of
developing our Wearable Kidney.

         POTENTIALLY UNINSURED LIABILITY CLAIMS COULD HAVE AN ADVERSE AFFECT
UPON OUR BUSINESS. We maintain, and intend to continue to maintain, insurance,
including insurance relating to personal injury and medical professional
liability in amounts we consider adequate and customary for the industry we
operate in. We have had only one claim, which was covered by our insurance,
asserted against us notwithstanding the extensive dialysis treatments we have
provided over the years. Nevertheless, a partially or wholly uninsured claim
against us, if successful and of sufficient magnitude could have a material
adverse effect on us. There can be no assurance that such insurance will
continue to be available to us, or if so, that it will provide adequate coverage
against potential liabilities or that a liability claim will not have a material
adverse effect on us.

         IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS,
OUR BUSINESS COULD BE HARMED. We are dependent upon the skills of our management
team and certain key scientists, in particular Drs. Gura and Lang. There is
strong competition for qualified personnel in the dialysis industry, and the
loss of key personnel or an inability to continue to attract, retain and
motivate key personnel could adversely affect our business and our research and
development activities. There can be no assurances that we will be able to
retain our existing key personnel or to attract additional qualified personnel.
We do not have key-man life insurance on any employees.

         OUR CHARTER DOCUMENTS LIMIT THE LIABILITY OF OUR DIRECTORS. Our
Certificate of Incorporation provides, as permitted by governing Delaware law,
that our directors shall not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions. In addition, our Certificate of Incorporation and Bylaws provide for
mandatory indemnification of directors and officers to the fullest extent
permitted by Delaware law. Further, we have adopted certain forms of
indemnification agreements, which may be entered into with our officers and
directors. These provisions and agreements may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders on our behalf
against a director.

         TRANSACTIONS WITH OUR AFFILIATES MAY CONFLICTS OF INTEREST. We have
entered into certain financial agreements with certain of our affiliates.
Further, we are dependent on referrals of ESRD patients from such affiliates. We
believe that these agreements were negotiated at arms' length. However, the
enforcement of these agreements may create conflicts of interests in the event
of a dispute between us and any such parties. Should these agreements be
determined to be violations of certain regulatory schemes, such physicians may
be forced to dispose of their ownership interests. We cannot predict the effect
such dispositions would have on our business.

         THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. There is
currently a limited public market for our common stock. Holders of our common
stock may, therefore, have difficulty selling their shares, should they decide
to do so. In addition, there can be no assurances that such markets will
continue or that any shares, which may be purchased, may be sold without
incurring a loss. Any such market price of our shares may not necessarily bear
any relationship to our book value, assets, past operating results, financial
condition or any other established criteria of value, and may not be indicative
of the market price for the shares in the future. Further, the market price for
our common stock may be volatile depending on a number of factors, including
business performance, industry dynamics, and news announcements or changes in
general economic conditions.


                                       20
<PAGE>

         DISCLOSURE RELATING TO LOW-PRICED STOCKS. Our shares of common stock
currently are listed for trading in the over-the-counter market on the "pink
sheets" maintained by the National Quotation Bureau, Inc., which is generally
considered to be a less efficient market than markets such as NASDAQ or other
national exchanges, and which may cause difficulty in conducting trades and
difficulty in obtaining future financing. Further, our securities are subject to
the "penny stock rules" adopted pursuant to Section 15 (g) of the Securities
Exchange Act of 1934, as amended or the Exchange Act. The penny stock rules
apply to companies, other than companies that trade on certain national
securities exchanges or an automated quotation system that meet certain initial
listing requirements (such as those currently applicable to Nasdaq listed
companies) or whose common stock trades at less than $5.00 per share or which
have tangible net worth of less than $5,000,000 ($2,000,000 if we have been
operating for three or more years). Such rules require, among other things, that
brokers who trade "penny stock" to persons other than "established customers"
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade "penny stock" because of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited. In
the event that we remain subject to the "penny stock rules" for any significant
period, there may develop an adverse impact on the market, if any, for our
securities. Because our securities are subject to the "penny stock rules,"
investors will find it more difficult to dispose of our securities. Further, for
companies whose securities are traded in the Over-The-Counter Market, it is more
difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for
significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies, and (iii)
for companies whose shares are traded in the Over-The-Counter Market to obtain
needed capital.

         OUR PRINCIPAL STOCKHOLDERS HAVE VOTING CONTROL. Our principal
stockholders, directors and executive officers and their affiliates control the
voting power of approximately 66% of our outstanding common stock. As a result
of such common stock ownership, such persons will be in a position to exercise
significant control with respect to our affairs and the election of directors.

         A SIGNIFICANT NUMBER OF OUR SHARES ARE SUBJECT TO REGISTRATION RIGHTS.
We have entered into various agreements pursuant to which certain holders of our
outstanding common stock, including persons who are our affiliates, have been
granted the right, under various circumstances, to have common stock that is
currently outstanding registered for sale in accordance with the registration
requirements of the Securities Act upon demand or "piggybacked" to a
registration statement which may be filed by us. Of the currently issued and
outstanding common stock, certain shares sold in a private placement are the
subject of future registration statements pursuant to the terms of such
agreements; as of August 10, 2005, these consist of 700,000 shares and an
additional 350,000 shares underlying warrants. Any such registration statement
may have a material adverse effect on the market price for our common stock
resulting from the increased number of free trading shares of common stock in
the market. There can be no assurances that such registration rights will not be
enforced or that the enforcement of such registration rights will not have a
material adverse effect on the market price for the common stock.

         CERTAIN PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE POTENTIAL
ANTI-TAKEOVER EFFECTS S. Our Certificate of Incorporation includes certain
provisions, which are intended to protect our stockholders by rendering it more
difficult for a person or persons to obtain control of us without cooperation of
our management. These provisions include certain super-majority requirements for
the amendment of our Certificate of Incorporation and Bylaws. Such provisions
are often referred to as "anti-takeover" provisions. The inclusion of such
"anti-takeover" provisions in the Certificate of Incorporation may delay, deter
or prevent a takeover which our stockholders may consider to be in their best
interests, thereby possibly depriving holders of our securities of certain
opportunities to sell or otherwise dispose of their securities at above-market
prices, or limit the ability of stockholders to remove incumbent directors as
readily as the stockholders may consider to be in their best interests.

         SHARES ELIGIBLE FOR FUTURE SALE, ISSUANCE OF ADDITIONAL SHARES. Future
sales of shares of common stock by us and our stockholders could adversely
affect the prevailing market price of our common stock. There are currently
7,836,804 shares of common stock which are free trading shares or are eligible
to have the restrictive legend removed pursuant to Rule 144(k) promulgated under
the Securities Act. Further, 800,000 shares may be the subject of future
registration statements pursuant to the terms of certain agreements between us
and certain of our stockholders. Sales of substantial amounts of common stock in
the public market, or the perception that such sales may occur, could have a
material adverse effect on the market price of our common stock. Pursuant to our
Certificate of Incorporation, we have the authority to issue additional shares
of common stock and preferred stock. The issuance of such shares could result in
the dilution of the voting power of our currently issued and outstanding common
stock.


                                       21
<PAGE>

         OUR STOCK PRICE HAS BEEN AND CONTINUES TO BE VOLATILE. The market price
for our common stock could fluctuate due to various factors. These factors
include:

         o        announcements related to our efforts to develop the Wearable
                  Kidney;

         o        changes in government regulations;

         o        fluctuations in our quarterly and annual operating results;
                  and

         o        general market conditions.

         In addition, the stock markets have, in recent years, experienced
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded.
Market fluctuations, as well as economic conditions, have adversely affected,
and may continue to adversely affect, the market price of our common stock.

         WE MAY ISSUE PREFERRED STOCK IN THE FUTURE. Our Certificate of
Incorporation, as amended, authorizes the issuance of preferred stock with such
designation, rights and preferences as may be determined from time to time by
our Board of Directors, without stockholder approval. In the event of the
issuance of additional series of preferred stock, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of us.

         WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK. We have paid no
dividends on our common stock to date and there are no plans for paying
dividends on our common stock in the foreseeable future. We intend to retain
earnings, if any, to provide funds for the expansion of our business.

ITEM 2.           DESCRIPTION OF PROPERTIES

         We lease office space located at 9033 Wilshire Boulevard, Suite 501,
Beverly Hills, California 90211, which serves as our principal executive
offices. We pay $1,100 per month on a month-to-month basis.

         We also lease a laboratory located at 110 George Burns Road, Suite
D-3059, Los Angeles, CA 90048. We pay $4,191 per month on a month-to-month
basis.

ITEM 3.           LEGAL PROCEEDINGS

         In June 2005, we settled a legal action brought by a former employee.
Under the settlement, we have agreed to provide monetary relief in the amount of
approximately $20,000, to be paid in installments.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to our stockholders, through the solicitation
of proxies or otherwise, during the fourth quarter of the year ended December
31, 2004.

                                     PART II

ITEM 5.          MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                 MATTERS AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES

         As of August 15, 2005 our authorized capital stock consisted of
50,000,000 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 August 15, 2005,
there were issued and outstanding 37,590,322 shares of common stock which are
held by approximately 430 shareholders of record, and options and warrants to
purchase 14,681,720 shares of common stock, of which 7,931,720 are exercisable.
There were no shares of preferred stock issued and outstanding.

         Our common stock is listed for trading in the over-the-counter market
and is quoted in the "pink sheets" maintained by the National Quotation Bureau,
Inc. under the symbol "NQCI.PK" Our common stock has a very limited trading
history.


                                       22
<PAGE>

         The following table sets forth quotations for the high and low closing
sale prices for the common stock for the periods indicated below, based upon
quotations between dealers, without adjustments for stock splits, dividends,
retail mark-ups, mark-downs or commissions, and therefore, may not represent
actual transactions:

                                                       HIGH              LOW
                                                       ----              ---

YEAR ENDING DECEMBER 31, 2005
         First Quarter                                 $0.69             $0.33
         Second Quarter                                $0.69             $0.40

YEAR ENDED DECEMBER 31, 2004
         First Quarter                                 $0.25             $0.00
         Second Quarter                                $0.20             $0.03
         Third Quarter                                 $0.20             $0.02
         Fourth Quarter                                $0.39             $0.12

YEAR ENDED DECEMBER 31, 2003
         First Quarter                                 $0.05             $0.025
         Second Quarter                                $0.03             $0.02
         Third Quarter                                 $0.01             $0.001
         Fourth Quarter                                $0.10             $0.001

      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, 2004:

<TABLE>
                                                                                             (C)
                                                                                     NUMBER OF SECURITIES
                                          (A)                     (B)              REMAINING AVAILABLE FOR
                                 NUMBER OF SECURITIES       WEIGHTED-AVERAGE        FUTURE ISSUANCE UNDER
                                   TO BE ISSUED UPON       EXERCISE PRICE OF         EQUITY COMPENSATION
                                      EXERCISE OF             OUTSTANDING              PLANS (EXCLUDING
                                 OUTSTANDING OPTIONS,      OPTIONS, WARRANTS       SECURITIES REFLECTED IN
                                 WARRANTS AND RIGHTS          AND RIGHTS                 COLUMN (A))
                                ---------------------     -------------------     -------------------------
<S>                                     <C>                      <C>                       <C>
Equity compensation plans
approved by security holders            595,000                  $0.09                     405,000

Equity compensation plans not
approved by security holders          15,202,500                 $0.75                       N/A

Totals                                15,797,500                 $0.73                     405,000
</TABLE>

         Most warrants issued by us have been to investors and not pursuant to
equity compensation plans. On the other hand, virtually all options have been
issued as compensation for benefits inuring to us other than for benefits from
capital-raising activities.

DIVIDEND POLICY

         We have not declared or paid any dividend 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, (801) 355-5740.


                                       23
<PAGE>

CERTAIN ANTI-TAKEOVER PROCEDURAL REQUIREMENTS

         Our Certificate of Incorporation adopts certain measures, which are
intended to protect our stockholders by rendering it more difficult for a person
or persons to obtain control of us without cooperation of our management. These
measures include the potential implementation of certain supermajority
requirements for the amendment of our Certificate of Incorporation and Bylaws.
Such measures are often referred to as "anti-takeover" provisions.

         The inclusion of such "anti-takeover" provisions in the Certificate of
Incorporation may delay, deter or prevent a takeover of us which the
stockholders may consider to be in their best interests, thereby possibly
depriving holders of our securities of certain opportunities to sell or
otherwise dispose of their securities at above-market prices, or limit the
ability of stockholders to remove incumbent directors as readily as the
stockholders may consider to be in their best interests.

         BUSINESS COMBINATIONS WITH SUBSTANTIAL STOCKHOLDERS. Delaware law
contains a statutory provision, which is intended to curb abusive takeovers of
Delaware corporations. Section 203 of the Delaware General Corporation Law
addresses the problem by preventing certain business combinations of the
corporation with interested stockholders within three years after such
stockholders become interested. Section 203 provides, with certain exceptions,
that a Delaware corporation may not engage in any of a broad range of business
combinations with a person or an affiliate, or associate of such person, who is
an "interested stockholder" for a period of 3 years from the date that such
person became an interested stockholder unless:

         o        the transaction resulting in a person becoming an interested
                  stockholder, or the business combination, is approved by the
                  Board of Directors of the corporation before the person
                  becomes an interested stockholder;

         o        the interested stockholder acquired 85% or more of the
                  outstanding voting stock of the corporation in the same
                  transaction that makes such person an interested stockholder
                  (excluding shares owned by persons who are both officers and
                  directors of the corporation, and shares held by certain
                  employee stock ownership plans); or

         o        on or after the date the person becomes an interested
                  stockholder, the business combination is approved by the
                  corporation's board of directors and by the holders of at
                  least 66-2/3% of the corporation's outstanding voting stock at
                  an annual or special meeting, excluding shares owned by the
                  interested stockholder

         Under Section 203, an "interested stockholder" is defined as any person
who is: (i) the owner of 15% or more of the outstanding voting stock of the
corporation or (ii) an affiliate or associate of the corporation and who was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the 3 year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.

         SUPERMAJORITY REQUIRED FOR AMENDMENT. In order to insure that the
substantive provisions set forth in the Certificate of Incorporation are not
circumvented by the amendment of such Certificate of Incorporation pursuant to a
vote of a majority of the voting power of its outstanding shares, the
Certificate of Incorporation also provides that any amendment, change or repeal
of the provisions contained in the Certificate of Incorporation with respect to:

         o        our capitalization;

         o        an amendment of the Bylaws;

         o        a determination by the Board of the number of directors;

         o        filling Board vacancies;

         o        the requirement that stockholder action be taken at an annual
                  or special meeting;

         o        requirements with respect to appraisal rights for
                  stockholders, or

         o        the amendment of the provision imposing such supermajority
                  requirement for amendment of the Certificate of Incorporation


                                       24
<PAGE>

shall require the affirmative vote of the holders of at least 66 2/3% of the
voting power of all outstanding shares of voting stock, including, in any
instance where the repeal or amendment is proposed by an interested stockholder
(as such term is defined in Section 203 of the Delaware General Corporation Law)
or its affiliate or associate, the affirmative vote of a majority of the voting
power of all outstanding shares of voting stock held by persons other than such
interested stockholder or its affiliates or associates. However, only the
affirmative vote of the majority of the voting power of all outstanding shares
of voting stock is required if the amendment of any of the foregoing provisions
is approved by a majority of the Continuing Directors (as such term is defined
in the Certificate of Incorporation).

         Our Certificate of Incorporation permits the Board of Directors to
adopt, amend or repeal any or all of our bylaws without stockholder action and
provide that such bylaws may also be adopted, amended or repealed by our
stockholders, but only if approved by holders of 66 2/3% or more of the voting
power of all outstanding shares of voting stock, including in any instance in
which the alteration is proposed by an interested stockholder or by affiliates
or associate of any interested stockholder, the affirmative vote of the holders
of at least a majority of voting power of all outstanding shares of voting stock
held by persons other than the interested stockholder who proposed such action.
However, the only stockholder vote required if the modification is approved by a
majority of the continuing directors is the affirmative vote of the majority of
the voting power of all outstanding shares of voting stock.

RECENT ISSUANCES OF UNREGISTERED SECURITIES

         SECURITIES ISSUANCES TO AFFILIATES. During the year ended December 31,
2004, we issued the following unregistered securities to our directors and
executive officers:

         o        7,808,260 shares and 250,000 warrants to Victor Gura, our
                  Chief Executive Officer and a director, at prices ranging from
                  $0.05 to $0.20 per share. In addition, in August, 2004, we
                  issued Dr. Gura 1,814,644 shares in exchange for making a
                  personal guaranty of certain of our obligations.

         o        7,166,680 shares and 1,000,000 warrants to Robert Snukal, one
                  of our directors, at prices ranging from $0.05 to $0.20 per
                  share.

         CERTAIN SHARE ISSUANCES TO CONSULTANTS. Effective January 6, 2004, we
granted to each of two consultants, who have performed and continue to perform
significant services in development of the Wearable Kidney, options to purchase
250,000 restricted shares of our common stock, which options are exercisable in
the amount of 50,000 upon each of the following milestones:

         o        completion of all designs and drafts of the Wearable Kidney;

         o        completion of the construction of the first prototype;

         o        completion of animal studies;

         o        completion of human studies required by the FDA to grant
                  marketing approval; and

         o        the first commercial sale of the Wearable Kidney in the
                  market.

As of the date of this Report, 150,000 of these options had vested.

         PRIVATE PLACEMENT. In April 2005, we began conducting a private
placement of 134 units of our securities. Each Unit consists of: (i) 50,000
shares of our Common Stock, or the Shares, at a purchase price of $0.75 per
Share and (ii) 25,000 Class A Common Stock Purchase Warrants, or the Warrants.
Each Warrant entitles the holder to purchase one Share at an exercise price of
$1.25 per Share from the date of purchase through March 31, 2007. The number of
Shares and Warrants which make up each Unit will increase if, on August 31,
2005, the closing price, or the Adjusted Closing Price of our Common Stock on
the market on which our Common Stock normally trades is less than $0.75 per
share. Upon occurrence of such event, we will issue an additional number of
Shares per Unit so that, when added to the original 50,000 Shares, the new


                                       25
<PAGE>

total, when multiplied by the Adjusted Closing Price, will equal $37,500 per
Unit, PROVIDED, HOWEVER, that the Adjusted Closing Price will in no event be
lower than $0.50 per Share. At the same time, an additional number of Warrants
equal to fifty percent of the additional number of Shares will be issued. No
value will be assigned to the Warrants. Under certain circumstances, we will
file a registration statement with the Commission in respect of the Shares and
the shares underlying the Warrants, or Warrant Shares. As of August 10, 2005, we
have sold 14 Units for total gross proceeds of $525,000.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


Our plan of operation is to:

         o        complete the clinical studies in humans with the Wearable
                  Artificial Kidney in order to apply to the FDA for permission
                  to market the device.

         o        consider restructuring our dialysis services business to
                  improve cash flow efficiency.

Short Term Goals

         o        continue the research and development of the Wearable Kidney.
         o        complete a new round of financing to raise up to $5,000,000.

Long Term Goals

         o        recapitalize our company by selling equity securities.
         o        introduce the first generation of the Wearable Kidney to the
                  marketplace.

         We believe that we do not have sufficient working capital from
operations to meet our obligations in the next twelve months. Therefore, we will
seek outside sources to meet the commitments. Historically we have been
successful in securing working capital through private placements of our common
stock. But we cannot assure you that we will be successful in the future in
obtaining any additional capital on terms favorable to us or at all. the failure
to obrtan such capital could have a material adverse effect on our financial
condition and operations.


RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31,
2003.

         Total revenue for the year ended December 31, 2004 increased
approximately 22.3% to $4,001,232 from $3,272,029 for the year ended December
31, 2003. This increase primarily resulted from an increase in volume due to
hospitalization in hemodialysis services. At the same time, patient volume in
acute and home dialysis service slightly increased. Total operating expenses
during the year ended December 31, 2003 increased by 39.5% to $5,599,362 from
$4,014,114 during the year ended December 31, 2003.

         Total operating expenses include: (i) cost of medical services, (ii)
selling, general and administrative expenses, (iii) depreciation and
amortization, and (iv) rental expenses, as follows:

         Cost of medical services during the year ended December 31, 2004
increased to $2,977,683 from $2,454,082 during the year ended December 31, 2003
(an increase of 21.3%). This increase was primarily due to the increase in usage
and cost of drugs and medication as well as lower payments to temporary
personnel. Selling, general and administrative expenses during the year ended
December 31, 2004 increased approximately 34.3% to $1,494,074 from $1,112,206
during the year ended December 31, 2003. This increase was primarily the result
of an increase in consulting expenses of approximately $778,500. During the year
there were decreases in insurance expenses of approximately $102,000, bad debt
expense of approximately $143,000, other expenses of approximately $106,000,
computer expenses of approximately $13,000, bank service charges of
approximately $18,000 and legal fees of approximately $100,000. Consulting
expenses increased due to warrants granted in connection with purchases of
common stock. Insurance expense and legal expense decreased due primarily to a
temporary suspension of an extra layer of insurance coverage with respect to the
dialysis operations and a lower level of corporate activity requiring legal
services. Bad debt expense decreased due to improved collections in accounts


                                       26
<PAGE>

receivable. Other expenses decreased in 2004 because we did not incur other
expenses, as was the case in 2003. These were isolated events and did not occur
in the current year. Computer expenses decreased due to canceling services from
software developers. Bank service charges decreased due to an increase in our
cash accounts. Depreciation and amortization during the year ended December 31,
2004 decreased 9.5% to $62,281 from $68,805 during the year ended December 31,
2003.

         Research and development expenses for the Wearable Kidney device in
2004 amounted to approximately $1,065,324, a 181.1% increase of $686,303 from
$379,021, as of December 31, 2003. These expenses include: legal fees; payments
to 3 part-time physicians and engineers working on the project; expenses to
conduct bench and animal tests and to construct a prototype of the Wearable
Kidney. In addition, since Dr. Gura devotes 70% of his time to the R&D project,
that percentage of his payroll expenses was allocated to research and
development expenses. Prior to the research and development endeavor, Dr. Gura's
time was devoted primarily to our operations and therefore his salary and
related expenses were included in selling, general and administrative expenses.

         As a result of the foregoing, we generated a net loss of $1,668,718
during the year ended December 31, 2004 as compared to a net loss of $950,789
during the year ended December 31, 2003. Loss from operations during the year
ended December 31, 2004 was $1,598,130 compared to loss from operations of
$742,085 during the year ended December 31, 2003 (an increase of 115.4 %). This
increase in losses from operations primarily resulted from research and
development expenses. Revenues from inpatient and outpatient services increased
during 2004 by approximately $1,500,000. However, margins between medical
revenues and medical expenses have decreased from recent years due to increased
costs of medical services in patient treatments. We will need to control our
costs of expenses and our selling, general and administrative expenses, both in
amounts and as a percentage of revenues, in order to move toward profitable
operations.

         As of December 31, 2004, we had net operating loss carryforwards
totaling approximately $9,690,000 and $3,400,000 for federal and state income
tax purposes, respectively, which are available to offset future federal taxable
income, if any, through 2024. The federal net operating loss carryforwards
include $3,700,000 of losses, which are limited the income tax rules governing
consolidated tax returns; however, the annual effects of such limitations have
not yet been determined.

         LIQUIDITY AND CAPITAL RESOURCES.

         At December 31, 2004, the ratio of current assets to current
liabilities was 0.60 to 1.00, compared to 0.60 to 1.00 at December 31, 2003.

         Our cash flow needs for the year ended December 31, 2004 were primarily
provided from proceeds from the sale of our common stock. We had a working
capital deficit of approximately $557,902 at December 31, 2004 compared to a
working capital deficit of approximately $474,380 at December 31, 2003. Unless
we establish profitable operations, we may need to obtain a working line of
credit and/or an external financing to satisfy cash flow needs in the future.

         In addition to efforts to solve collection problems, we have taken
several other measures designed to return our operations back to profitability.

         First, operating costs have been reduced by eliminating certain staff
positions. Second, efficiencies in operations are being improved by shifting
service days to certain patients in order to yield a more steady flow of service
revenue and thereby minimize the cost of patient service.

         Cash and cash equivalents were $157,707 as of December 31, 2004, as
compared to $4,015 as of December 31, 2003.

         As of December 31, 2004, we had borrowings in the aggregate amount of
$1,068,326, of which short-term borrowings accounted for $210,890. As of
December 31, 2003, we had borrowings in the aggregate amount of $1,254,179, of
which short-term borrowings accounted for $274,699. The decrease related
primarily to payments made under long-term payment plans established in
connection with the settlement of litigation.


                                       27
<PAGE>

         Medical Group, Inc., or Medipace, a medical group in Los Angeles,
California, of which Victor Gura is a director, had executed a demand promissory
note in our favor in the principal amount of $121,151, dated September 17, 1997,
bearing interest at the rate of 8% per annum. Medipace did not make any payments
on the promissory note in 1998 and 1999. During 1999, we transferred the $75,000
obligation underlying a second promissory note in the same amount to a separate
lease receivable in connection with a purchase and leaseback arrangement with
Medipace. Medipace had been in default on the lease payable since October 1999.
In July 2001, Medipace executed a demand promissory note in our favor in the
principal amount of $85,000, bearing interest at the rate of 10%. $35,750 of the
note has been repaid, leaving a remaining balance in the amount of $47,505
(including interest). In November 2001 all debts owing by Medipace to us were
consolidated into a single promissory note in the principal amount of $218,919,
bearing interest at the rate of 8% per annum. Under the new note, Medipace is
obligated to make monthly interest payments in amount of $1,480, commencing
December 31, 2001 for 24 months, with principal and accrued interest due at
maturity on December 31, 2003.

         In February 2003, we extended to Medipace a short-term loan in the
principal amount of $12,000 at an interest rate of 8%. As of the date of this
Report, we have accrued $17,757 in interest on such note.

         Medipace also provides us with certain laboratory services at what we
believe to be fair market prices. For the year ended December 31, 2002, we owed
to Medipace $51,874 for such laboratory services. $17,757 of the interest due to
us from Medipace under the foregoing promissory note, and the remaining $34,118
was applied to repayment of the principal. As of December 31, 2004, the new
reduced principal amount of the note was $143,013.

         As of the date of this filing we are provided laboratory services by
Medipace in exchange for the balance due on the note receivable.

         We had a net loss of $1,668,718 and loss from operations of $1,598,130
during the year ended December 31, 2004.

         Based on the acquisition of new contracts to provide inpatient services
and the increase in patient visits overall, we believe that we will be able to
finance the costs of operations, including the payment of obligations as they
come due, from existing cash, cash generated by operations and from loans
currently in place. However, we experienced losses from operations during the
year ended December 31, 2004. If we do not develop profitable operations, we
will require financing from external sources to finance ongoing operations.

         SIGNIFICANT ACCOUNTING POLICIES

         The accounting policies applied in the financial reporting process are
described in Note 2 to the financial statements included as part of this Report.
We consider those accounting policies to be appropriate, and such accounting
policies have been consistently applied. The accounting policies considered most
significant to our operations include the following:

         REVENUE RECOGNITION - Medical service revenue is recognized in the
period the service is performed. The amount of revenue is based on our
established billing rates less allowances and discounts principally for patients
covered by Medicare, Medi-Cal and other contractual programs. Payments under
these programs are based on either predetermined rates or the costs of services.
Retroactive adjustments are accrued on an estimated basis in the period the
related services are rendered and adjusted in future periods as final
settlements are determined. These contractual allowances and discounts are
charged to accounts receivable in the accompanying consolidated balance sheets.

         ACCOUNTS RECEIVABLE AND ALLOWANCES - Accounts receivable are stated at
gross amounts billed, less contractual and estimated allowances. A significant
portion of our accounts receivable involves third-party payors. The collection
cycle on accounts receivable from continuing operations extends up to 12 months.

         PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Equipment under capital leases is stated at the present value of minimum lease
payments at lease inception. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives, which range from 5 to
30 years. Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or losses on the
sale of property and equipment are reflected in the consolidated statements of
operations, if and when incurred.


                                       28
<PAGE>

         RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.

         In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.
FIN 46 addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003 the
provisions of FIN 46 must be applied for the first interim period beginning
after June 15, 2003. The application of FIN 46 is not expected to have a
material effect on our consolidated financial statements. We do not have any
variable interest entities; therefore, this Interpretation is not expected to
have an impact on our consolidated financial statements.

         In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component, (3) amends the definition of
an underlying instrument to conform it to language used in FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," and (4) amends certain
other existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. We do not expect the adoption of SFAS 149 will have a material
impact on our financial position, cash flows or results of operations.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 changes the accounting for certain financial instruments
that under previous guidance issuers could account for as equity. It requires
that those instruments be classified as liabilities in balance sheets. The
guidance in SFAS 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise is effective on July
1, 2003. We do not expect that the adoption of SFAS 150 will have a material
impact on our financial position, cash flows or results of operations.

         In December 2004, the FASB issued a revision to SFAS 123, "Share-Based
Payment, an amendment of FASB Statements Nos. 123 and 95," that addresses the
accounting for share-based payment transactions in which a company receives
employee services in exchange for either equity instruments of the company or
liabilities that are based on the fair value of our equity instruments or that
may be settled by the issuance of such equity instruments. This statement would
eliminate the ability to account for share-based compensation transactions using
the intrinsic method that we currently uses and generally would require that
such transactions be accounted for using a fair-value-based method and
recognized as expense in the consolidated statement of operations. The effective
date of this standard is for periods beginning after June 15, 2005. We adopted
the provisions of SFAS 123 in 2004. This will result in us having to expense
option and warrant grants to employees.

         In July 2004, the EITF issued a draft abstract for EITF Issue No.
04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per
Share" ("EITF 04-08"). EITF 04-08 reflects the Task Force's tentative conclusion
that contingently convertible debt should be included in diluted earnings per
share computations regardless of whether the market price trigger has been met.
If adopted, the consensus reached by the Task Force in this Issue will be
effective for reporting periods ending after December 15, 2004. Prior period
earnings per share amounts presented for comparative purposes would be required
to be restated to conform to this consensus and we would be required to include
the shares issuable upon the conversion of the Notes in the diluted earnings per
share computation for all periods during which the Notes are outstanding
Management does not expect the implementation of this new standard to have a
material impact on our computation of diluted earnings per share.

         In September 2004, the EITF delayed the effective date for the
recognition and measurement guidance previously discussed under EITF Issue No.
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. We are currently evaluating the
effect of this proposed statement on our financial position and results of
operations.


                                       29
<PAGE>

         In December 2004, the Financial Accounting Standards Board Statement
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4",
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and charges regardless of whether they meet the
criterion of "so abnormal" that was originally stated in Accounting Research
Bulletin No. 43, chapter 4. In addition, SFAS No. 151 requires that the
allocation of fixed production overheads to conversion costs be based on the
normal capacity of the production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not expect the implementation of this new standard to have a
material impact on our financial position, results of operations and cash flows.

         In December 2004, the Financial Accounting Standards Board Statement
issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB
Opinion No. 29", which amends Opinion 29 by eliminating the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 151 is effective for a fiscal year beginning after
June 15, 2005, and implementation is done prospectively. Management does not
expect the implementation of this new standard to have a material impact on our
financial position, results of operations and cash flows.

         In May 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes
and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS No. 154 also requires that retrospective application
of a change in accounting principle be limited to the direct effects of the
change. Indirect effects of a change in accounting principle, such as a change
in nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. Management does not expect the implementation of this new
standard to have a material impact on our financial position, results of
operations and cash flows.

         Effective April 1, 2004, the SEC adopted Staff Accounting Bulletin No.
105, "Application of Accounting Principles to Loan Commitments" ("SAB 105"). SAB
105 clarifies the requirements for the valuation of loan commitments that are
accounted for as derivatives in accordance with SFAS 133. Management does not
expect the implementation of this new bulletin to have a material impact on our
financial position, results of operations and cash flows.

         In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment"("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June 15,
2005. Management has adopted SFAS 123(R) for share-based payments.

ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements required by this Item 7 are included elsewhere
in this Report and incorporated herein by this reference.

ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE.

         On February 20, 2004, Moss Adams LLP, or Moss Adams, resigned as our
independent auditor. On July 20, 2004, we engaged Pohl McNabola Berg & Company
as our principal independent public accountants. Pohl McNabola Berg & Company
issued its report as our principal independent public accountants with respect
to our audited consolidated financial statements for the year ended December 31,
2003, which were included in our Annual Report on Form 10-KSB for the year ended
December 31, 2003, as filed with the Commission on April 7, 2005.


                                       30
<PAGE>

ITEM 8A.          CONTROLS AND PROCEDURES

         We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to management, including our Chief Executive Officer (and Principal
Financial and Accounting Officer), as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c).

         In connection with our audit for the year ended December 31, 2004, our
auditors proposed several adjusting journal entries which we recorded in our
2004 financial statements. These adjustments included bad debt expense, paid-in
capital, and accounts payable. We believe that the need for these adjustments
have demonstrated a weakness in our internal control system related to our
closing process.

         From February, 2004, when we ended our relationship with our prior
outside auditor, until July, 2004, when we engaged our current auditor, we did
not have sufficient resources available to review and test the effectiveness of
our internal controls. In January, 2005, with the assistance of our current
outside auditor, we retained the services of an outside financial consultant who
will serve as our chief financial officer and who assisted us in closing the
year ended December 31, 2004.

         As of the end of the period covered by this Report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer (and Principal Financial and Accounting
Officer), of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer
(and Principal Financial and Accounting Officer) concluded that our disclosure
controls and procedures were effective except as describe above.

ITEM 8B. OTHER INFORMATION

         None.


                                    PART III

ITEM 9.           DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         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 its directors and executive officers.

         The following reflects certain biographical information on our current
directors and executive officers:

<TABLE>
NAME                               AGE          POSITION
----                               ---          --------
<S>                                <C>          <C>
Victor Gura, M.D.                  62           Chief Executive Officer, Chairman of the Board of Directors
Leonard Berezovsky, M.D.           61           Vice-Chairman of the Board of Directors
Ronald Lang, M.D.                  55           Executive Vice-President, Secretary and Director
Jose Spiwak, M.D.                  60           Director
Robert M. Snukal                   62           Director
</TABLE>

         VICTOR GURA, M.D. has been a director and our President and Chief
Executive Officer since May 11, 1996. Dr. Gura is a medical doctor who is board
certified in internal medicine/nephrology. He has been a director of Medipace
Medical Group, Inc., a medical group in Los Angeles, California, since 1980. He
has been an attending physician at Cedars-Sinai Medical Center since 1984 and
the medical director of Los Angeles Community Dialysis since 1985. Dr. Gura also
serves as a Clinical Assistant Professor at UCLA School of Medicine. Dr. Gura


                                       31
<PAGE>

graduated from the School of Medicine, Buenos Aires University in 1966,
completed his residency in internal medicine and nephrology in Israel, and was a
fellow at the nephrology departments at Tel Aviv University Medical School and
USC Medical Center.

         LEONARDO BEREZOVSKY, M.D., has been a director since 2003. Dr.
Berezovsky is the Chairman and CEO of AssistMed, Inc., which digitizes medical
records and related information for 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.

         RONALD P. LANG, M.D. has been a director and the Secretary of the
Company since May 11, 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.

         JOSE SPIWAK M.D. has been a director since March 15, 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 (Bogota, 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.

         ROBERT SNUKAL has been a director since February 11, 2003. Mr. Snukal
is a director of the Pacific Asian Museum in Pasadena, California. 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.

CORPORATE GOVERNANCE AND BOARD COMMITTEES

         INDEPENDENT DIRECTORS. The Board of Directors has determined that Drs.
Spiwak and Lang are independent under the criteria established by Nasdaq Stock
Market for independent board members. In addition, the Board of Directors has
determined that Drs. Spiwak and Lang of the Audit Committee meet the additional
independence criteria required for audit committee membership.

         COMPENSATION COMMITTEE. The Board has a Compensation Committee and an
Audit Committee, each comprised of the following members of the Board of
Directors: Dr. Jose Spiwak and Dr. Ronald Lang. The Board has no standing
committee on nominations or any other committees performing equivalent
functions.

         Our Compensation Committee reviews and approves the annual salary and
bonus for each executive officer (consistent with the terms of any applicable
employment agreement), reviews, approves and recommends terms and conditions for
all employee benefit plans (and changes thereto) and administers our stock
option plans and such other employee benefit plans as may be adopted by us from
time to time.

         AUDIT COMMITTEE. Our Audit Committee reports to the Board of Directors
regarding the appointment of our independent auditors, the scope and fees of the
prospective annual audit and the results thereof, compliance with our accounting
and financial policies and management's procedures and policies relative to the


                                       32
<PAGE>

adequacy of our system of internal accounting controls. We intend to include a
copy of the Audit Committee charter in our next Annual Meeting Proxy Statement.
Currently, neither member of the Audit Committee is an audit committee financial
expert as that term is described in Item 401(e) of Regulation S-B under the
Exchange Act. We have been conducting a search for additional persons to serve
on our Board, including persons with the requisite expertise in financial
matters, as well as persons with expertise in medicine, biochemistry and
engineering. We are in preliminary discussions with at least one candidate and
we expect to conclude the entire process of identifying and appointing new board
members within the next few months.

         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. No
interlocking relationship exists between any member of our Board or Compensation
Committee and any member of the board of directors or compensation committee of
any other companies, nor has such interlocking relationship existed in the past.

         CODE OF ETHICS. We have adopted a Code of Ethics for directors,
executive officers and other employees. We have filed a copy of our Code of
Ethics, which is included as an exhibit to our Annual Report on Form 10-KSB for
the year ended December 31, 2003 and incorporated by reference as an exhibit to
this Report.

         COMPENSATION OF DIRECTORS. We pay the following compensation to our
outside Directors:

         o        cash payment of $500 for attendance at each meeting of the
                  Board of Directors; and

         o        stock options of 20,000 shares per year, earned at a rate of
                  5,000 shares per quarter, with an exercise price based on the
                  fair market value of our common stock as of the last trading
                  day of the preceding year.

         DIRECTOR ATTENDANCE AT MEETINGS. The Board of Directors met once during
2004; all directors attended.

         o        There was only one board meeting in 2004 (August) and all
                  members were present.

         COMPLIANCE WITH SECTION 16 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 or the Commission initial reports of
ownership and reports of changes in ownership of our equity securities. The
Change in Beneficial Ownership Reports on Form 4 and Annual Reports of
Beneficial Ownership on Form 5 for our officers, directors, and greater than 10%
beneficial owners were not timely filed for the year ended December 31, 2004. We
intend to use all reasonable efforts to ensure that all reports of beneficial
ownership are filed on timely basis in the future.

         DIRECTORS AND OFFICERS LIABILITY INSURANCE

         We carry directors' and officers' liability insurance with an aggregate
limit of liability for the policy year, inclusive of costs of defense, in the
amount of $2,000,000. The current policy expires on November 15, 2005.

         LIMITATION OF DIRECTORS' LIABILITIES; INDEMNIFICATION OF OFFICERS AND
         DIRECTORS

         Pursuant to our Certificate of Incorporation and under Delaware law,
our directors are not liable to us or our stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.

         Our Certificate of Incorporation and Bylaws designate the relative
duties and responsibilities of our officers and establish procedures for actions
by directors and stockholders and other items. Our Certificate of Incorporation
and Bylaws also contain extensive indemnification provisions, which will permit
us to indemnify our officers and directors to the maximum extent, provided by
Delaware law.

         In addition, we have adopted a form of indemnification agreement, or
the Indemnification Agreement, which provides the indemnitee with the maximum
indemnification allowed under applicable law. Since the Delaware statute is
non-exclusive, it is possible that certain claims beyond the scope of the
statute may be indemnifiable. The Indemnification Agreements provide a scheme of
indemnification, which may be broader than that specifically provided by


                                       33
<PAGE>

Delaware law. It has not yet been determined, however, to what extent the
indemnification expressly permitted by Delaware law may be expanded, and
therefore the scope of indemnification provided by the Indemnification
Agreements may be subject to future judicial interpretation.

         The Indemnification Agreement provides, in pertinent part, that we
shall indemnify an indemnitee who is or was a party or becomes a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding whether civil, criminal, administrative or investigative by reason of
the fact that the indemnitee is or was a director, officer, key employee or
agent of us or any of our subsidies. We may advance all expenses, judgments,
fines, penalties and amounts paid in settlement (including taxes imposed on
indemnitee on account of receipt of such payouts) incurred by the indemnitee in
connection with the investigation, defense, settlement or appeal of any civil or
criminal action or proceeding as described above. The indemnitee shall repay
such amounts advanced only if it shall be ultimately determined that he or she
is not entitled to be indemnified by us. The advances paid to the indemnitee by
us shall be delivered within 20 days following a written request by the
indemnitee. Any award of indemnification to an indemnitee, if not covered by
insurance, would come directly from our assets, thereby affecting a
stockholder's investment.

ITEM 10.          EXECUTIVE COMPENSATION

         The following table sets forth certain information concerning
compensation of our executive officers, including our Chief Executive Officer
and Chief Financial Officer, for the years ended December 31, 2004 and 2003:

<TABLE>
                        ANNUAL COMPENSATION                       LONG TERM COMPENSATION AWARDS
--------------------------------------------------------------------------------------------------------------------
                                                       OTHER                     SECURITIES               PAYOUTS
                                                       ANNUAL      RESTRICTED    UNDERLYING     LTIP     ALL OTHER
                                                    COMPENSATION      STOCK       OPTIONS/    PAYOUTS  COMPENSATION
     NAME          YEAR    SALARY ($)   BONUS ($)       ($)        AWARDS ($)     SARS (#)      ($)         ($)
--------------------------------------------------------------------------------------------------------------------
<S>                <C>      <C>                                         <C>       <C>            <C>         <C>
Victor Gura
   (CEO and CFO)   2004     150,000                                     0         125,000        0           0
--------------------------------------------------------------------------------------------------------------------
                   2003     150,000                                     0            0           0           0
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       34
<PAGE>

         OPTION/SAR GRANTS TABLE

         The following table sets forth certain information concerning grants of
stock options to certain of its executive officers, including the Named
Executives for the year ended December 31, 2004:

<TABLE>
------------------ ---------------------------------- --------------- ---------------- -------------------------------
                                                                                       POTENTIAL REALIZABLE
                                                                                       VALUE AT ASSUMED
                                                                                       ANNUAL RATE OF
                                                                                       STOCK PRICE APPRECIATION
                   INDIVIDUAL GRANTS                                                   FOR OPTION TERM (1)
------------------ ---------------------------------- --------------- ---------------- -------------------------------

(a)                (b)              (c)               (d)             (e)              (f)             (g)
------------------ ---------------- ----------------- --------------- ---------------- --------------- ---------------
                   NUMBER OF        % OF TOTAL
                   SECURITIES       OPTIONS/SARS
                   UNDERLYING       GRANTED TO        EXERCISE OR
                   OPTIONS/SARS     EMPLOYEES IN      BASE PRICE      EXPIRATION
NAME               GRANTED (#)      FISCAL YEAR       ($/SHARE) (1)   DATE (1)         5% ($)          10% ($)
------------------ ---------------- ----------------- --------------- ---------------- --------------- ---------------
<S>                <C>              <C>               <C>             <C>              <C>             <C>
VICTOR GURA        0                0                 N/A             N/A              0               0
------------------ ---------------- ----------------- --------------- ---------------- --------------- ---------------
RONALD LANG        0                0                 N/A             N/A              0               0
------------------ ---------------- ----------------- --------------- ---------------- --------------- ---------------
</TABLE>

         1. This chart assumes a market price of $0.20 for the Common Stock, the
closing price for its Common Stock in the over-the-counter market as of December
31, 2004, as the assumed market price for the Common Stock with respect to
determining the "potential realizable value" of the shares of Common Stock
underlying the options described in the chart, as reduced by any lesser exercise
price for such options. Each of the options reflected in the chart was granted
at exercise prices, which we believe to have been determined at the fair market
value as of the date of grant. Further, the chart assumes the annual compounding
of such assumed market price over the relevant periods, without giving effect to
commissions or other costs or expenses relating to potential sales of such
securities. Its Common Stock has a very limited trading history. These values
are not intended to forecast the possible future appreciation, if any, of the
price or value of our Common Stock.

      OPTION EXERCISES AND YEAR-END VALUES

      The following table sets forth information with respect to the exercised
and unexercised options to purchase shares of common stock for certain of the
Named Executives held by them at December 31, 2004:

<TABLE>
                                                             Number of Securities           Value of Unexercised
                                                            Underlying Unexercised          In-the-Money Options
                                                        Options at December 31, 2004        at December 31, 2004
------------------------- ---------------- ----------- -------------- ---------------- -------------- ----------------
                          SHARES
                          ACQUIRED ON      VALUE
NAME                      EXERCISE         REALIZED    EXERCISABLE    UNEXERCISABLE    EXERCISABLE(1) UNEXERCISABLE(2)
------------------------- ---------------- ----------- -------------- ---------------- -------------- ----------------
<S>                       <C>              <C>         <C>            <C>              <C>            <C>
Victor Gura               0                0           4,087,500      2,000,000        $400,000       0
------------------------- ---------------- ----------- -------------- ---------------- -------------- ----------------
Ronald Lang               0                0           1,235,000         600,000       $160,325       0
------------------------- ---------------- ----------- -------------- ---------------- -------------- ----------------
</TABLE>

-----------------
(1)  Represents an amount equal to the number of options multiplied by the
     difference between the average of the closing bid and asked prices for the
     common stock in the over-the-counter market on the date of exercise and
     any lesser exercise price.

(2)  Represents an amount equal to the number of options multiplied by the
     difference between the average of the closing bid and asked prices for the
     common stock in the over-the-counter market on December 31, 2004 ($0.20 per
     share) and any lesser exercise price.


                                       35
<PAGE>

         EMPLOYMENT AGREEMENTS.

         EMPLOYMENT AGREEMENT WITH VICTOR GURA. We have entered into a
three-year employment agreement with Victor Gura to serve as our Board Chairman,
Chief Executive Officer and Chief Scientific Officer. If and when the FDA
approves the final clinical study of the Wearable Kidney, we are to initiate a
search for a new CEO. Under the agreement, Dr. Gura's base salary is $450,000
per year, payable as follows: (i) $150,000 annualized as a base amount; (ii)
$300,000 annualized after the date on which we have received at least $2,000,000
in net proceeds from a placement of our securities; (iii) $350,000 annualized
after the date on which we have received at least $3,000,000 in net proceeds;
and (iv) $420,000 annualized after the date on which we have received at least
$4,000,000 in net proceeds. Any amounts accrued but not paid to Dr. Gura will be
paid as and when we receive the appropriate amount of net proceeds. If we
terminate Dr. Gura other than for cause, then he will receive severance pay
equal to $420,000, payable over 12 months.

         Dr. Ronald Lang, a director, executive officer and one of our principal
stockholders, receives $2,000 per month in his capacity as Secretary of the
Corporation.

         STOCK OPTION PLANS.

         We have adopted 3 stock option plans for the benefit of officers,
directors, employees, independent contractors and consultants of the Company and
its subsidiaries. These plans include: (i) the 1998 Stock Option Plan, (ii) the
1996 Stock Option Plan, and (iii) the 1996 Employee Compensatory Stock Option
Plan.

         1998 AND 1996 STOCK OPTION PLANS. As of July 7, 1998, our Board of
Directors and stockholders approved our 1998 Stock Option Plan or the 1998 Stock
Option Plan. Our Board of Directors amended the 1998 Stock Option Plan on
December 18, 2001. As of May 12, 1996, its Board of Directors and stockholders
approved its 1996 Stock Option Plan or the 1996 Stock Option Plan.

         We reserved for issuance up to 1,000,000 shares of Common Stock under
the 1996 Stock Option Plan. We granted options to purchase 994,739 shares of
Common Stock under the 1996 Stock Option Plan. All of the 994,739 options have
been exercised and this plan is considered fully utilized. The Board of
Directors approved a provision in the 1996 Stock Option Plan, which will place a
300,000 share limit on the number of options that may be granted under the 1996
Stock Option Plan to an employee in each fiscal year.

         We reserved for issuance up to 1,000,000 shares of Common Stock under
the 1998 Stock Option Plan. As of the date of this Report, there are outstanding
options to purchase up to 712,500 shares of Common Stock under the 1998 Stock
Option Plan, 75,000 shares of which have been exercised and all of which have
vested.

         In 2000, we canceled 637,500 unexercised options and reissued 637,500
options to the same persons at a reduced exercise price of $0.10 per share.
Then, on December 18, 2001, we canceled the 637,500 options and again reissued
the 637,500 options to the same persons at an exercise price of $0.07 per share.

         The general provisions of the 1998 Stock Option Plan and the 1996 Stock
Option Plan, collectively, the Stock Option Plans are virtually identical. A
description of each of the Stock Option Plans is set forth below. To the extent
that any material differences between each of the Stock Option Plans exist, such
differences are summarized below. The description is intended to be a summary of
the material provisions of the Stock Option Plans and does not purport to be
complete.

         ADMINISTRATION AND ELIGIBILITY UNDER OUR STOCK OPTION PLANS. Each of
our Stock Option Plans, as adopted, provides for the issuance of options to
purchase shares of our Common Stock to our officers, directors, employees,
independent contractors and consultants and our subsidiaries as an incentive to
remain in our employ or to provide services to our subsidiaries and us. Our
Stock Option Plans authorize the issuance of incentive stock options or ISOs,
non-qualified stock options or NSOs and stock appreciation rights or SARs to be
granted by a committee or the Committee to be established by our Board of
Directors to administer each of our Stock Option Plans.

         Subject to the terms and conditions of each of our Stock Option Plans,
the Committee will have the sole authority to determine: (a) the persons or
optionees to whom options to purchase shares of our Common Stock and SARs will
be granted, (b) the number of options and SARs to be granted to each such
optionee, (c) the price to be paid for each share of our Common Stock upon the
exercise of each option, (d) the period within which each option and SAR will be


                                       36
<PAGE>

exercised and any extensions thereof, and (e) the terms and conditions of each
such stock option agreement and SAR agreement which may be entered into between
us and any such optionee.

         All of our officers, directors and employees and those of our
subsidiaries and certain consultants and other persons providing significant
services to us and our subsidiaries will be eligible to receive grants of
options and SARs under each of our Stock Option Plans. However, only our
employees and employees of LACD are eligible to be granted ISOs.

         STOCK OPTION AGREEMENTS. All options granted under each of our Stock
Option Plans will be evidenced by an option agreement or SAR agreement between
us and the optionee receiving such option or SAR. Provisions of such agreements
entered into under each of our Stock Option Plans need not be identical and may
include any term or condition which is not inconsistent with each of our Stock
Option Plans and which the Committee deems appropriate for inclusion.

         INCENTIVE STOCK OPTIONS. Except for ISOs granted to stockholders
possessing more than 10% of the total combined voting power of all classes of
our securities or our subsidiaries to whom such ownership is attributed on the
date of grant or the Ten Percent Stockholders, the exercise price of each ISO
must be at least 100% of the fair market value of our Common Stock as determined
on the date of grant. ISOs granted to Ten Percent Stockholders must be at an
exercise price of not less than 110% of such fair market value.

         Each ISO must be exercised, if at all, within 10 years from the date of
grant, but, within five 5 years of the date of grant in the case of ISO's
granted to Ten Percent Stockholders.

         The aggregate fair market value (determined as of time of the grant of
the ISO) of the Common Stock with respect to which the ISOs are exercisable for
the first time by the optionee during any calendar year shall not exceed
$100,000. As of the date of this Report, no ISOs have been granted under the
1998 Stock Option Plan.

         NON-QUALIFIED STOCK OPTIONS. The Committee will determine the exercise
price of each NSO on the date of grant. However, the exercise price for the NSOs
under the 1996 Stock Option Plan will in no event be less than 85% of the fair
market value of the Common Stock on the date the option is granted, or not less
than 110% of the fair market value of the Common Stock on the date such option
is granted in the case of an option granted to a Ten Percent Stockholder.

         The Committee will determine the exercise period for each NSO at the
time such option is granted, but in no event will such exercise period exceed 10
years from the date of grant.

         As of the date of this Report, NSOs have been granted under the 1996
Stock Option Plan to purchase up to 969,739 shares of Common Stock, all of which
have been exercised. These options had the following per share exercise prices:
174,739 shares ($1.00), 700,000 shares ($0.50), 25,000 shares ($0.38) and 70,000
shares ($0.25).

         As of the date of this Report, NSOs have been granted under the 1998
Stock Option Plan to purchase up to 712,500 shares of Common Stock, 75,000
shares of which have been exercised. The remaining 637,500 options have a per
share exercise price of $0.07.

         STOCK APPRECIATION RIGHTS. Each SAR granted under each of our Stock
Option Plans will entitle the holder thereof, upon the exercise of the SAR, to
receive from us, in exchange therefor, an amount equal in value to the excess of
the fair market value of the Common Stock on the date of exercise of one share
of Common Stock over its fair market value on the date of exercise of one share
of Common Stock over its fair market value on the date of grant (or in the case
of an SAR granted in connection with an option, the excess of the fair market of
one share of Common Stock at the time of exercise over the option exercise price
per share under the option to which the SAR relates), multiplied by the number
of shares of Common Stock covered by the SAR or the option, or portion thereof,
that is surrendered.

         SARs will be exercisable only at the time or times established by the
Committee. If an SAR is granted in connection with an option, the SAR will be
exercisable only to the extent and on the same conditions that the related
option could be exercised. The Committee may withdraw any SAR granted under each
of our Stock Option Plans at any time and may impose any conditions upon the
exercise of an SAR or adopt rules and regulations from time to time affecting
the rights of holders of SARs.


                                       37
<PAGE>

         As of the date of this Report, no SARs have been granted under each of
the Company Stock Option Plans.

         TERMINATION OF OPTIONS AND TRANSFERABILITY. In general, any unexpired
options and SARs granted under each of our Stock Option Plans will terminate:
(a) in the event of death or disability, pursuant to the terms of the option
agreement or SAR agreement, but not less than 6 months or more than 12 months
after the applicable date of such event, (b) in the event of retirement,
pursuant to the terms of the option agreement or SAR agreement, but no less that
30 days or more than 3 months after such retirement date, or (c) in the event of
termination of such person other than for death, disability or retirement, until
30 days after the date of such termination. However, the Committee may in its
sole discretion accelerate the exercisability of any or all options or SARs upon
termination of employment or cessation of services.

         The options and SARs granted under each of our Stock Option Plans
generally will be non-transferable, except by will or the laws of descent and
distribution.

         ADJUSTMENTS RESULTING FROM CHANGES IN CAPITALIZATION. The number of
shares of Common Stock reserved under each of our Stock Option Plans and the
number and price of shares of Common Stock covered by each outstanding option or
SAR under each of our Stock Option Plans will be proportionately adjusted by the
Committee for any increase or decrease in the number of issued and outstanding
shares of Common Stock resulting from any stock dividends, split-ups,
consolidations, recapitalizations, reorganizations or like event.

         AMENDMENT OR DISCONTINUANCE OF STOCK OPTION PLANS. The Board of
Directors has the right to amend, suspend or terminate the Stock Option Plans at
any time. Unless sooner terminated by the Board of Directors, the 1996 Stock
Option Plan will terminate on May 11, 2006, and the 1998 Stock Option Plan will
terminate on April 8, 2008.

         1996 EMPLOYEE COMPENSATORY STOCK OPTION PLAN. As of February 7, 1996,
its Board of Directors adopted the 1996 Employee Compensatory Stock Option Plan
or the Employee Stock Option Plan. We have reserved for issuance thereunder an
aggregate of 500,000 shares of Common Stock 64,000 remaining unissued options.

         OTHER OPTIONS AND WARRANTS. We also have warrants and options issued in
addition to those issued pursuant to the 3 stock option plans referenced above,
which includes options and warrants to purchase up to 14,044,220 shares of
Common Stock, at exercise prices ranging from $0.042 to $3.50 per share, to
certain directors, consultants and employees of the Company, of which 7,344,220
are currently exercisable.

         MATTHIAS & BERG OPTIONS

         On February 12, 2003, we granted to Matthias & Berg, LLP, our former
law firm, options to purchase up to 1,284,220 shares of Common Stock at a per
share price of $0.10 in consideration of legal services rendered by M&B to the
Company, which options expire February 12, 2013. The options may be exercised
against credit for a payable of $128,422 for legal services rendered by M&B.
Jeffrey P. Berg and Michael Matthias, the partners of M&B, are also shareholders
in Jenkens & Gilchrist, LLP our current legal counsel.

         RESEARCH AND DEVELOPMENT TEAM OPTION ISSUANCES

         Effective January, 2004, we granted to 2 members of our research and
development team options to purchase up to an aggregate of 750,000 shares of
Common Stock at a per share price of $0.10. These options vest upon the
achievement of certain performance-based milestones and expire 5 years after
vesting. As of the date of this Report, 450,000 of these options have vested.

         TECHNOLOGY PURCHASE AGREEMENT

         We have granted options to Drs. Gura and Lang pursuant to the
Technology Purchase Agreement, exercisable into an aggregate of 6,500,000 shares
of Common Stock, with an exercise price of $1.25 per share. Of these options,
3,900,000 options have vested, with an expiration date of December 18, 2006.


                                       38
<PAGE>

         TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS

         We have no compensatory plans or arrangements which relate to the
resignation, retirement or any other termination of any of our executive
officers or key employees or a change in control of us or a change in such
executive officer's or key employee's responsibilities following a change in
control.

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND RELATED STOCKHOLDER MATTERS

         The following table reflects, as of August 15, 2005, the beneficial
Common Stock ownership of: (a) each director of the Company, (b) each current
executive officer named in the Summary Compensation Table in this Report, (c)
each person known by us to be a beneficial owner of 5% or more of its Common
Stock, and (d) all executive officers and directors of the Company as a group:

<TABLE>
                                                                    Number of            Percentage of
                                                                      Shares                Shares
                                                                   Beneficially           Beneficially
         Name and Address of Beneficial Owner (1)                     Owned                Owned (1)
         ----------------------------------------                     -----                ---------
<S>                                                                 <C>                      <C>
         Victor Gura (2)                                            18,340,750               44.06
         Leonardo Berezovsky (3)                                     3,786,216                9.95
         Ronald Lang (4)                                             4,573,449               11.79
         Jose Spiwak (5)                                             1,455,000                3.84
         Robert Snukal (6)                                           8,266,680               21.39
         Medipace (7)                                                  800,000                2.13
         All directors and officers as a group (8)                  36,422,095               81.19
</TABLE>

-------------------------

         *        Less than 1%.

         (1)      Beneficial ownership is determined in accordance with the
                  rules of the SEC. Shares of common stock subject to options or
                  warrants currently exercisable or exercisable within 60 days
                  of August 15, 2005, are deemed outstanding for computing the
                  percentage ownership of the stockholder holding the options or
                  warrants, but are not deemed outstanding for computing the
                  percentage ownership of any other stockholder. Unless
                  otherwise indicated in the footnotes to this table, we believe
                  stockholders named in the table have sole voting and sole
                  investment power with respect to the shares set forth opposite
                  such stockholder's name. Unless otherwise indicated, the
                  officers, directors and stockholders can be reached at our
                  principal offices. Percentage of ownership is based on
                  37,540,322 shares of common stock outstanding as of August 15,
                  2005.

         (2)      Includes 13,453,250 shares held in the name of Dr. Gura,
                  800,000 shares owned by Medipace Medical Group, Inc., an
                  affiliate of Dr. Gura, warrants to purchase up to 587,500
                  shares of common and options to purchase up to 3,500,000
                  shares of common stock. Includes 2,000,000 shares pledged to
                  an unaffiliated third party as security for obligations of Dr.
                  Gura. Does not include options to purchase up to 2,000,000
                  shares of common stock, which may vest more than 60 days after
                  February 1, 2005. Dr. Gura's address is 9033 Wilshire
                  Boulevard, Suite 501, Beverly Hills, California 90211

         (3)      Includes 1,219,556 shares held in the name of Dr. Berezovsky
                  and 2,066,660 shares and warrants to purchase up to 500,000
                  shares of common stock held in the names of certain
                  irrevocable trusts of which Dr. Berezovsky is trustee. Dr.
                  Berezovsky's address is 9033 Wilshire Boulevard, Suite 501,
                  Beverly Hills, California 90211

         (4)      Includes 2,538449 shares held in the name of Dr. Lang, 800,000
                  shares owned by Medipace Medical Group, Inc., an affiliate of
                  Dr. Lang, warrants to purchase up to 112,500 shares of common
                  stock, and options to purchase up to 1,122,500 shares of
                  common stock. Does not include options to purchase up to
                  600,000 shares of common stock, which may vest more than 60
                  days after February 1, 2005. Dr. Lang's address is 9033
                  Wilshire Boulevard, Suite 501, Beverly Hills, California 90211


                                       39
<PAGE>

         (5)      Includes 1,055,000 shares and options to purchase up to
                  400,000 shares of common stock. Dr. Spiwak's address is 3628
                  East Imperial Highway, Suite 201, Lynwood, California 90262.

         (6)      Includes 7,166,680 shares of common stock, warrants to
                  purchase up to 1,000,000 shares of common stock, and options
                  to purchase up to 100,000 shares of common stock. Does not
                  include options to purchase up to 150,000 shares of common
                  stock, which may vest more than 60 days after February 1,
                  2005. Mr. Snukal's address is 8489 West Third Street, Suite
                  1001, Los Angeles, California 90048.

         (7)      Includes 800,000 shares of common stock. The address for
                  Medipace is 9033 Wilshire Boulevard, Suite 501, Beverly Hills,
                  California 90211.

         (8)      Includes 27,499,595 shares, warrants to purchase up to
                  2,100,000 shares of common stock and options to purchase up to
                  5,122,500 shares of common stock. Does not include options to
                  purchase up to 2,750,000 shares of common stock.

ITEM 12.          CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS.

         PROMISSORY NOTE TO DR. GURA. In 2001 we issued to Dr. Gura a promissory
note in the amount of $100,000, which is secured by some of our technology. The
note matures on December 18, 2009, and may be canceled in the event that the per
share price of our Common Stock equals or exceeds $5.00 per share up to the
maturity date of the note.

         CONSULTING CONTRACT WITH DR. BEREZOVSKY. On August 5, 2003 we
contracted with Dr. Berezovsky to provide us with certain services relating to
formulating our business plan and arranging for outside financing. In
consideration for these services, we granted Dr. Berezovsky options to purchase
up to 619,556 shares of our common stock.

         SERVICES AGREEMENT WITH SKILLED NURSING GROUP. We provide certain
dialysis services to patients at facilities operated by the Skilled Nursing
Group, in which Robert Snukal, one of our directors, holds approximately 15%
equity interest. We received revenues of approximately $100,000 during the year
2003 and approximately $225,000 in revenue during 2004 for these services.

         PLEDGE OF SHARES BY PRINCIPAL STOCKHOLDER. Dr Gura has pledged
2,000,000 shares of Common Stock as collateral for certain obligations to an
unaffiliated third party. As long as such obligations are not in default, Dr.
Gura retains the power to vote the shares.

         LOANS TO AND TRANSACTIONS WITH AFFILIATES. In November 2001 the debts
owing by Medipace to us were consolidated into a single promissory note in the
principal amount of $218,919.32, bearing interest at the rate of 8% per annum.
Under the note, Medipace is obligated to make monthly interest payments in the
amount of $1,479.73 commencing December 31, 2001 for 24 months, with principal
and accrued interest due at maturity on December 31, 2003. Medipace has
continued to make monthly payments of from $4,000 to $4,500 and currently owes
principal of approximately $140,000 on this obligation.

         FORECLOSURE ON NOTE. In connection with a transaction that was
completed on October 18, 1996, on April 15, 1997, certain promissory note payors
assigned 630,206 shares of Common Stock to Isaac Flombaum, who executed a
promissory note payable to us in the principal amount of approximately $865,000
As of December 31, 2002, the obligations owing to us by Mr. Flombaum were
secured by 270,206 shares of Common Stock, which were held in escrow. On May 15,
2003, we foreclosed upon the note and obtained the return of the 270,206 shares
of Common Stock.

         TRANSACTIONS WITH MEDIPACE. In November 2001 the debts owing by
Medipace, our affiliate, to us were consolidated into a single promissory note
in the principal amount of $218,919.32, bearing interest at the rate of 8% per
annum. Under the note, Medipace is obligated to make monthly interest payments
in the amount of $1,479.73 commencing December 31, 2001 for 24 months, with
principal and accrued interest due at maturity on December 31, 2003. Medipace
has continued to make monthly payments of from $4,000 to $4,500 and currently
owes principal of approximately $140,000 on this obligation.


                                       40
<PAGE>

ITEM 13.          EXHIBITS

         A.  FINANCIAL STATEMENTS

         Consolidated balance sheets of National Quality Care, Inc. and
subsidiary as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended.

         B.  REPORTS ON FORM 8-K.

         We did not file a Report on Form 8-K during the quarter ended December
31, 2004.

         C.  OTHER EXHIBITS

         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     Employment Agreement between the Company and Victor Gura,
                  M.D., April 12, 1996 (3)
         10.2     1996 Employee Compensation Stock Option Plan (4)
         10.3     1996 Stock Option Plan (5)
         10.4     1998 Stock Option Plan (6)
         10.5     Technology Purchase Agreement, dated as of December 18, 2001,
                  between the Company and Victor Gura, M.D. (7)
         10.6     Non-Qualified Stock Option Agreement, dated as of December 18,
                  2001, between the Company and Victor Gura, M.D. (7)
         10.7     Non-Qualified Stock Option Agreement, dated as of December 18,
                  2001, between the Company and Ronald P. Lang, M.D. (7)
         10.8     Employment Agreement, dated as of January 1, 2005, between the
                  Company and Victor Gura.
         14.1     Code of Ethics. (8)
         23.1     Consent of Pohl, McNabola, Berg & Company.
         31.1     Certification of CEO and 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.
         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.       Filed as part of its Current Report on Form 8-K dated May 24,
                  1996.
         2.       Filed as part of the Company Quarterly Report on Form 10-QSB
                  for the quarterly period ended April 30, 1996.
         3.       Filed as part of its Annual Report on Form 10-KSB for the year
                  ended December 31, 1996.
         4.       Filed as part of its Registration Statement on Form S-8 dated
                  April 6, 1996.
         5.       Filed as part of its Quarterly Report on Form 10-QSB for the
                  quarterly period ended June 30, 1996.
         6.       Filed as part of its Registration Statement on Form S-8 dated
                  March 5, 1999.
         7.       Filed as part of its Annual Report on Form 10-KSB for the year
                  ended December 31, 2001.
         8.       Filed as part of its Annual Report on Form 10-KSB for the year
                  ended December 31, 2003.


                                       41
<PAGE>

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

         AUDIT FEES. The aggregate fees billed to us by the independent
auditors, Pohl, McNabola, Berg & Company or PMB, for professional services
rendered in connection with the audit of our financial statements included in
this Annual Report on Form 10-KSB for 2004, and for review of our statements
included in our Quarterly Reports on Form 10-Q during 2004, totaled
approximately $46,675. The aggregate fees billed to us by PMB for professional
services rendered in connection with the audit of our financial statements
included in our Annual Report on Form 10-KSB for 2003, and for review of our
statements included in our Quarterly Reports on Form 10-Q during 2003, totaled
approximately $75,396.

         ALL OTHER FEES. The aggregate fees billed to us by PMB for services
rendered for tax consulting and audit-related services were $5,200 and none for
2004 and 2003, respectively.

         ENGAGEMENT OF THE INDEPENDENT AUDITOR. The Audit Committee is
responsible for approving every engagement of PMB to perform audit or non-audit
services for us before PMB is engaged to provide those services. The Audit
Committee's pre-approval policy provides as follows:

         o        First, once a year when the base audit engagement is reviewed
                  and approved, management will identify all other services
                  (including fee ranges) for which management knows it will
                  engage PMB for the next 12 months. Those services typically
                  include quarterly reviews, specified tax matters,
                  certifications to the lenders as required by financing
                  documents, consultation on new accounting an disclosure
                  standards and, in future years, reporting on management's
                  internal controls assessment.

         o        Second, if any new "unlisted" proposed engagement comes up
                  during the year, engagement will require approval of the Audit
                  Committee.

         AUDITOR SELECTION FOR FISCAL 2004. PMB has been selected to serve as
our independent auditor for the year ended December 31, 2004.

         AVAILABLE INFORMATION

         We are a reporting company and file annual, quarterly and special
reports, proxy statements and other information with the Commission. You may
inspect and copy these materials at the Public Reference Room maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., 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.


                                       42
<PAGE>

                                   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.

<TABLE>
<S>     <C>
                                                                  NATIONAL QUALITY CARE, INC.

Date: August 25, 2005                                             By: /s/ VICTOR GURA, M.D.
                                                                      --------------------------------------
                                                                      VICTOR GURA, M.D.
                                                                      PRESIDENT, CHIEF EXECUTIVE OFFICER AND
                                                                      CHAIRMAN OF THE BOARD OF DIRECTORS

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

                SIGNATURE                              CAPACITY IN WHICH SIGNED                   DATE
                ---------                              ------------------------                   ----

         /s/  VICTOR GURA, M.D.                  President, Chief Executive Officer and      August 25, 2005
-------------------------------------------        Chairman of the Board of Directors
              VICTOR GURA, M.D.

           /s/  VICTOR GURA                      Chief Financial Officer                     August 25, 2005
-------------------------------------------
                VICTOR GURA

         /s/  RONALD LANG, M.D.                  Director                                    August 25, 2005
-------------------------------------------
              RONALD LANG, M.D.

         /s/  JOSE SPIWAK, M.D.                  Director                                    August 25, 2005
-------------------------------------------
              JOSE SPIWAK, M.D.

          /s/  ROBERT SNUKAL                     Director                                    August 25, 2005
-------------------------------------------
               ROBERT SNUKAL

     /s/  LEONARDO BEREZOVSKY, M.D.              Director                                    August 25, 2005
-------------------------------------------
          LEONARDO BEREZOVSKY, M.D.


                                                     43
</TABLE>

<PAGE>



                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY
                        CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004



<PAGE>

                           NATIONAL QUALITY CARE, INC.
                                 AND SUBSIDIARY
                        CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004




                                 C O N T E N T S

--------------------------------------------------------------------------------


         Report of Independent Registered Public Accounting Firm...............1

         Consolidated Balance Sheet........................................2 - 3

         Consolidated Statements of Operations.................................4

         Consolidated Statements of Stockholders' Equity.......................5

         Consolidated Statement of Cash Flows..............................6 - 7

         Notes to Consolidated Financial Statements.......................8 - 27


<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the stockholders and Board of Directors of
National Quality Care, Inc. and Subsidiary


We have audited the accompanying consolidated balance sheet of National Quality
Care, Inc. and Subsidiary as of December 31, 2004, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 2004 and 2003. 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 consolidated financial position of
National Quality Care, Inc. and Subsidiary as of December 31, 2004, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with U.S. 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 incurred substantial net
losses and utilized substantial amounts of cash in its operating activities over
the past several years and as of December 31, 2004, has an accumulated deficit
of $5,679,090 and a net asset deficiency of $1,078,271. These matters, among
others, raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are described in Note 1.
These consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.



/S/ POHL, MCNABOLA, BERG AND COMPANY, LLP
SAN FRANCISCO, CALIFORNIA
AUGUST 17, 2005


                                       -1-
<PAGE>

<TABLE>
<S>     <C>
                   NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2004


                                                                         2004
                                                                      ----------
                                     ASSETS
Current Assets

      Cash and cash equivalents                                       $  157,707
      Accounts receivable, net of allowance for doubtful
        accounts of $125,000                                             575,690
      Supplies inventory                                                  37,719
      Prepaid expenses and other assets                                   70,074
                                                                      ----------

         Total Current Assets                                            841,190
                                                                      ----------

Property and Equipment, net of accumulated depreciation of $787,817      152,384

Accrued Financial Cost, net of accumulated amortization of $6,049         84,683

Intangible Asset - Technology Rights                                     100,000
                                                                      ----------


           Total Assets                                               $1,178,257
                                                                      ==========



                                   (continued)


   The accompanying notes are an integral part of these financial statements.

                                      -2-
<PAGE>

                   NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                     CONSOLIDATED BALANCE SHEET (CONTINUED)
                                DECEMBER 31, 2004


                                                                        2004
                                                                     -----------

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities
     Accounts payable                                                $   646,951
     Accrued expenses                                                    541,251
     Notes payable and current portion of long-term debt                 210,890
                                                                     -----------

        Total Current Liabilities                                      1,399,092

Long-term Debt, Net of Current Portion                                   857,436
                                                                     -----------

           Total Liabilities                                           2,256,528
                                                                     -----------


Stockholders' Equity
     Preferred stock, $.01 par value; 5,000,000 shares authorized;
        no shares issued and outstanding                                      --
     Common stock, $.01 par value; 50,000,000 shares authorized;
        36,890,322 issued and outstanding                                368,903
     Additional paid-in capital                                        4,322,213
     Receivables from stockholders, net                                  (90,297)
     Accumulated deficit                                              (5,679,090)
                                                                     -----------

           Total Stockholders' Equity (Deficit)                       (1,078,271)
                                                                     -----------



           Total Liabilities and Stockholders' Equity (Deficit)      $ 1,178,257
                                                                     ===========


   The accompanying notes are an integral part of these financial statements.

                                      -3-
<PAGE>


                           NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                              CONSOLIDATED STATEMENTS OF OPERATIONS
                         FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


                                                            2004              2003
                                                         ------------    ------------
Revenue
      Medical service revenue                            $  4,001,232    $  3,272,029
                                                         ------------    ------------

         Total Revenue                                      4,001,232       3,272,029

Operating Expenses
      Cost of medical services                              2,977,683       2,454,082
      Selling, general and administrative                   1,494,074       1,112,206
      Research and development                              1,065,324         379,021
      Depreciation and amortization                            62,281          68,805
                                                         ------------    ------------

         Total Operating Expenses                           5,599,362       4,014,114
                                                         ------------    ------------

             Loss from Operations                          (1,598,130)       (742,085)
                                                         ------------    ------------

Other Income (Expense)
      Interest expense                                        (52,236)       (165,058)
      Interest income                                          17,757          19,236
      Litigation settlement                                   (20,000)        (62,048)
      Loan fee                                                (10,120)             --
      Other income (expense)                                   (5,989)           (834)
                                                         ------------    ------------

         Total Other Income (Expense)                         (70,588)       (208,704)
                                                         ------------    ------------

            Loss Before Provision for Income Taxes         (1,668,718)       (950,789)
                                                         ------------    ------------

Provision for Income Taxes                                         --              --
                                                         ------------    ------------

            Net Loss                                     $ (1,668,718)   $   (950,789)
                                                         ============    ============


Loss Per Share
            Basic                                        $      (0.05)   $      (0.05)
                                                         ============    ============
            Diluted                                      $      (0.05)   $      (0.05)
                                                         ============    ============

Number of shares used in calculation of loss per share
            Basic                                          31,208,219      17,158,692
                                                         ============    ============
            Diluted                                        31,208,219      17,158,692
                                                         ============    ============



           The accompanying notes are an integral part of these financial statements.

                                              -4-
<PAGE>


                                           NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                                         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                         FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


                                           Common Stock          Additional    Receivable                       Total
                                    -------------------------     Paid-in        From         Accumulated   Stockholders'
                                      Shares         Amount       Capital     Stockholders      Deficit         Equity
                                    -----------   -----------   -----------    -----------    -----------    -----------

Balance at December 31, 2002          9,939,878   $    99,398   $ 2,182,907    $  (283,469)   $(3,059,583)   $(1,060,747)
                                    ===========   ===========   ===========    ===========    ===========    ===========

     Sale of common stock            10,500,260       105,003       420,010             --             --        525,013
     Issued for services                619,556         6,196        (1,363)            --             --          4,833
     Issued for employees
     compensation                     4,210,644        42,106        63,160             --             --        105,266
     Change in receivables from
     stockholders                            --            --            --        162,532             --        162,532
     Fair value of options
     granted                                 --            --        64,200             --             --         64,200
     Fair value of options vested            --            --        12,500             --             --         12,500
     Net loss                                --            --            --             --       (950,789)      (950,789)
                                    -----------   -----------   -----------    -----------    -----------    -----------

Balance at December 31, 2003         25,270,338   $   252,703   $ 2,741,414    $  (120,937)   $(4,010,372)   $(1,137,192)
                                    ===========   ===========   ===========    ===========    ===========    ===========

     Sale of common stock             9,805,340        98,054       729,713             --             --        827,767
     Issued for debt guarantee        1,814,644        18,146        72,586             --             --         90,732
     Change in receivables from
     stockholders                            --            --            --         30,640             --         30,640
     Fair value of warrants
     granted                                 --            --       692,500             --             --        692,500
     Vested value of options
     granted                                 --            --        86,000             --             --         86,000
     Net loss                                --            --            --             --     (1,668,718)    (1,668,718)
                                    -----------   -----------   -----------    -----------    -----------    -----------

Balance at December 31, 2004         36,890,322   $   368,903   $ 4,322,213    $   (90,297)   $(5,679,090)   $(1,078,271)
                                    ===========   ===========   ===========    ===========    ===========    ===========


                           The accompanying notes are an integral part of these financial statements.

                                                              -5-
<PAGE>

                           NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                         FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


                                                                          2004            2003
                                                                       -----------    -----------

Cash Flows from Operating Activities:
     Net loss                                                          $(1,668,718)   $  (950,789)
        Adjustments to reconcile net loss to net cash
            used in operating activities:
              Depreciation and amortization                                 62,281         68,805
              Amortization of financing fees                                 6,049             --
              Provision for doubtful accounts                                9,516         20,516
              Expense recognized on options granted/vested                  86,000         76,700
              Expense recognized on warrants granted/vested                692,500             --
              Issuance of common stock for employees compensation               --        105,266
              Issuance of common stock for services                             --          4,833

        Changes in certain assets and liabilities
              Accounts receivable                                           77,600       (184,371)
              Supplies inventory                                             5,626         10,181
              Prepaid expenses                                             (37,900)        53,958
              Other assets                                                 (19,242)        10,820
              Bank overdraft                                               (40,900)        40,900
              Accounts payable                                             218,265        (34,734)
              Accrued expenses                                              90,061        (24,790)
                                                                       -----------    -----------

                 Net Cash Used in Operating Activities                    (518,862)      (802,705)
                                                                       -----------    -----------

Cash Flows from Investing Activities:
     Changes in receivable from stockholder, net                            30,640        162,532
     Purchase of property and equipment                                         --         (3,687)
                                                                       -----------    -----------

                 Net Cash Provided by Investing Activities                  30,640        158,845
                                                                       -----------    -----------

Cash Flows from Financing Activities:
     Sale of common stock                                                  827,767        525,013
     Borrowings on notes payable, long-term debt and capital leases             --        199,415
     Repayment of notes payable, long-term debt and capital leases        (185,853)       (91,740)
                                                                       -----------    -----------

                 Net Cash Provided by (Used in) Financing Activities       641,914        632,688
                                                                       -----------    -----------


                                           (continued)


           The accompanying notes are an integral part of these financial statements.

                                              -6-
<PAGE>

                   NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


                                                              2004       2003
                                                            --------   --------

Net Increase (Decrease) in Cash and Cash Equivalents         153,692    (11,172)

Cash and Cash Equivalents - Beginning of Year                  4,015     15,187
                                                            --------   --------

Cash and Cash Equivalents - End of Year                     $157,707   $  4,015
                                                            ========   ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Cash Paid during the year for:
         Interest expense                                   $ 49,761   $ 90,174
                                                            ========   ========
         Income taxes                                       $     --   $  5,154
                                                            ========   ========


  SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

         In 2004, the Company recognized an expense of $778,500 for the fair
              value of options and warrants granted.

         In 2004, the Company issued stock for debt guarantee valued at
              $90,732.


         In 2003, the Company issued common stock for services valued at
              $4,833.

         In 2003, the Company issued common stock as compensation to employees
              valued at $105,266.

         In 2003, the Company recognized an expense of $76,700 for the fair
              value of options and warrants granted.

         In 2003, the Company converted $593,131 of accounts payable into
              long-term debt.


   The accompanying notes are an integral part of these financial statements.

                                      -7-
</TABLE>
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


1.       ORGANIZATION
         ------------

Nature of Business
------------------

National Quality Care, Inc. ("the Company" or "NQCI") provides dialysis services
for patients suffering from chronic kidney failure through one dialysis clinic
located in Los Angeles, California, and for patients suffering acute kidney
failure through a visiting nursing program contracted to several Los Angeles
County hospitals. Payments for services are provided primarily by third-party
payors including Medicare, Medi-Cal, commercial insurance companies and by the
contracted hospitals.

The subsidiary is Los Angeles Community Dialysis, Inc. which operates the
dialysis clinic.



2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         ------------------------------------------

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of National Quality
Care, Inc. and its wholly owned subsidiary, Los Angeles Community Dialysis, Inc.
All material intercompany transactions and balances have been eliminated in
consolidation.


Financial Condition
-------------------

For the past several years, the Company has experienced net operating losses,
and as of December 31, 2004 has accumulated losses of $5,679,090 and a working
capital deficiency (defined as current assets minus current liabilities) of
$557,902. In addition, total liabilities exceed total assets by $1,078,271. Such
deficiencies indicate the Company may not be able to meet its current
obligations as they come due without additional financing or positive cash flow
from operating activities.

Management has taken certain actions and is pursuing additional measures to
support the Company's immediate operating plan, including the following:

         o    Operating costs have been reduced by eliminating certain staff
              positions.

         o    Efficiencies in operations have been improved by shifting service
              days to certain patients in order to yield a more steady flow of
              service revenue and thereby minimize the cost of patient service.


Cash and Cash Equivalents
-------------------------

For purposes of cash flows, the Company considers all highly liquid investments
purchased with a maturity of three months or less when acquired to be cash
equivalents.


                                      -8-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

Property and Equipment
----------------------

Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of minimum lease payments at lease inception.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives, which range from 5 to 30 years. Expenditures for
maintenance and repairs are charged to operations as incurred while renewals and
betterments are capitalized. Gains or losses on the sale of property and
equipment are reflected in the consolidated statements of operations, if and
when incurred.


Accounts Receivable and Allowances
----------------------------------

The Company carries its accounts receivable at billed amounts less allowances
for contractual adjustments and doubtful accounts. The Company does not accrue
interest on its receivables. On a periodic basis, the Company evaluates its
accounts receivable and establishes allowances based on contractual
arrangements, history of past write-offs and collections and current credit
conditions. The Company's policy for writing off receivables as uncollectible
varies based on the payor arrangements and management's estimate of the
customer's ability to pay.


Revenue Recognition
-------------------

Medical service revenue is recognized in the period the service is performed.
The amount of revenue is based on the Company's established billing rates less
allowances and discounts principally for patients covered by Medicare, Medi-Cal
and other contractual programs. Payments under these programs are based on
either predetermined rates or the costs of services. Retroactive adjustments are
accrued on an estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are determined. These
contractual allowances and discounts are charged to accounts receivable in the
accompanying consolidated balance sheet.

The Medicare and Medi-Cal programs, which are the largest payors for services
rendered by the Company, combined to account for approximately 97% and 73% of
the Company's gross revenues for the years ended December 31, 2004 and 2003,
respectively. The Company is a party to nonexclusive agreements with certain
third-party payors and termination of such third-party agreements could have an
adverse effect on the Company.


Income Taxes
------------

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. Income taxes are further explained in Note 7.

                                      -9-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

Concentration of Credit Risk
----------------------------

Financial instruments that potentially subject the Company to credit risk are
primarily cash equivalents and accounts receivable. The Company has placed its
cash with one major financial institution. At times, the cash in the financial
institution is temporarily in excess of the amount insured by the Federal
Deposit Insurance Corporation (FDIC).

With respect to accounts receivable, the Company routinely assesses the
financial strength of its customers and third-party payors and, based upon
factors surrounding their credit risk, establishes an allowance for
uncollectible accounts. Management believes that its accounts receivable credit
risk exposure, beyond allowances that have been provided, is minimal.


Research and Development, and Advertising
-----------------------------------------

Research and development, and advertising costs are charged to expense as
incurred. There were no advertising costs for the years ended December 31, 2004
and 2003.


Comprehensive Income
--------------------

The Company has adopted the provisions of Financial Accounting Standards Board's
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING OF
COMPREHENSIVE INCOME. SFAS No. 130 established standards for the display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from the issuance of shares of stock and distributions to
shareholders.


Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
the Company periodically evaluates the carrying value of long-lived assets to be
held and used, including intangible assets, when events and circumstances
warrant such a review. The carrying value of a long-lived asset is considered
impaired when the anticipated discounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair market values are reduced for the cost to
dispose.


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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.


                                      -10-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

Stock Based Compensation
------------------------

The Company has several stock-based compensation plans. The Company applies
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees," also known as APB 25, and related interpretations in accounting for
qualifying options granted to its employees under its plans and applies
Statement of Financial Accounting Standards, or SFAS, No. 123 "Accounting for
Stock Issued to Employees," also known as SFAS 123 (as amended by SFAS 148
"Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment
of FASB Statement No. 123," also known as SFAS 148), for disclosure purposes
only. The SFAS 123 and SFAS 148 disclosures include pro forma net loss and loss
per share as if the fair value-based method of accounting had been used.
Stock-based compensation to non-employees is accounted for in accordance with
SFAS 123, SFAS 148 and related interpretations.


Reclassifications
-----------------

Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 presentations. These reclassifications had no effect on
previously reported results of operations or retained earnings.


Fair Value of Financial Instruments
-----------------------------------

The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, the carrying amounts approximate fair value due to
the nature of the item and their short maturities. The amounts shown for
long-term debt also approximate fair value because current interest rates
offered to the Company for debt of similar maturities are substantially the
same.


Earnings (Loss) per Share
-------------------------

Earnings per share are based upon the weighted average number of shares of
common stock and common stock equivalents outstanding. Diluted earnings per
share is calculated using the "Treasury Stock Method", whereby the potential
dilutive effect of common stock equivalents is considered. Common stock
equivalents, which consist of options and warrants convertible into 6,331,220
and 4,831,220 shares of common stock at December 31, 2004 and 2003,
respectively, have been excluded in the calculation of diluted earnings per
share because their effect would be antidilutive. However, these instruments
could potentially dilute earnings per share in future years.


                                      -11-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

Recent Accounting Pronouncements
--------------------------------

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". Until this interpretation, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
requires a variable interest entity, as defined, to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns. The adoption of FIN 46 will not have an impact on the
financial position of the Company.

In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component, (3) amends the definition of
an underlying instrument to conform it to language used in FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," and (4) amends certain
other existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. Management does not expect the adoption of SFAS 149 to have any
impact on the Company's financial position, cash flows or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments that under
previous guidance issuers could account for as equity. It requires that those
instruments be classified as liabilities in balance sheet. The guidance in SFAS
150 is generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective on July 1, 2003.
Management does not expect the adoption of SFAS 150 to have a material impact on
the Company's financial position, cash flows or results of operations.

Effective April 1, 2004, the SEC adopted Staff Accounting Bulletin No. 105,
"Application of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105
clarifies the requirements for the valuation of loan commitments that are
accounted for as derivatives in accordance with SFAS 133. Management does not
expect the implementation of this new bulletin to have a material impact on the
Company's financial position, results of operations and cash flows. The Company
currently has no loan commitments.

In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF
04-08"). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met. If
adopted, the consensus reached by the Task Force in this Issue will be effective
for reporting periods ending after December 15, 2004. Prior period earnings per
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding. Management does not expect the implementation of this new standard
to have a material impact on its computation of diluted earnings per share.

                                      -12-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

Recent Accounting Pronouncements (continued)
--------------------------------------------

In September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-01") as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. The Company is currently
evaluating the effect of this proposed statement on its financial position and
results of operations.

In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4", which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and charges regardless of whether they meet the criterion of "so
abnormal" that was originally stated in Accounting Research Bulletin No. 43,
chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
production overheads to conversion costs be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not expect
the implementation of this new standard to have a material impact on its
financial position, results of operations and cash flows.

In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29",
which amends Opinion 29 by eliminating the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 151 is effective for a fiscal year beginning after June 15, 2005, and
implementation is done prospectively. Management does not expect the
implementation of this new standard to have a material impact on its financial
position, results of operations and cash flows.

In December 2004, the Financial Accounting Standards Board, also known as the
FASB, issued a revision to SFAS 123 "Share-Based Payment," also known as SFAS
123R, that amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R, together with guidance included in Staff Accounting Bulletin No. 107
issued by the SEC on March 29, 2005, also known as SAB 107, eliminates the
ability to account for share-based compensation transactions using APB 25 and
generally requires such transactions be accounted for using a fair-value-based
method. SFAS 123R applies to awards that are granted, modified, or settled in
periods beginning after its applicable effective date. In April 2005, the SEC
issued a release amending the effective date of SFAS 123R for each registrant to
the start of the registrant's first fiscal year beginning after June 15, 2005.
SFAS 123R allows for three alternative transition methods. The Company intends
to adopt the prospective application method. The Company currently intends to
adopt SFAS 123R and SAB 107 in the first quarter of fiscal 2006. The adoption of
SFAS 123R will cause the Company to record a non-cash accounting charge as an
expense each quarter in an amount approximating the fair value of such
share-based compensation meeting the criteria outlined in the provisions of SFAS
123R. As of December 31, 2004, The Company had approximately 6,331,220 stock
options and 1,700,000 warrants outstanding (issued to employees) which had not
yet become vested. The amount of such charge has not been determined.

                                      -13-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         ------------------------------------------------------

Recent Accounting Pronouncements (continued)
--------------------------------------------

In May 2005, the FASB Emerging Issues Task Force, or EITF, issued EITF No.
00-19-1 "Application of EITF Issue No. 00-19 to Freestanding Financial
Instruments Originally Issued as Employee Compensation". This pronouncement
clarifies existing accounting guidance relative to freestanding financial
instruments originally issued as employee compensation. EITF No. 00-19-1 becomes
effective concurrent with the effective date of SFAS 123R. The Company believes
the adoption of this pronouncement will not have a material impact on our
results of operations or financial condition.

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154 also
requires that a change in depreciation, amortization or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. Management does not expect the implementation of this new
standard to have a material impact on the Company's financial position, results
of operations and cash flows.


3.       PROPERTY AND EQUIPMENT
         ----------------------

Property and equipment and accumulated depreciation and amortization as of
December 31, 2004:

                                                                        2004
                                                                      ---------
         Automobile                                                   $  11,215
         Medical equipment                                              680,858
         Office equipment, furniture and fixtures                        89,756
         Leasehold improvements                                         158,372
                                                                      ---------

                                                                        940,201
         Less accumulated depreciation and amortization                (787,817)
                                                                      ---------

                                                                      $ 152,384
                                                                      =========


Depreciation and amortization expense on property and equipment for the years
ended December 31, 2004 and 2003 was $62,281 and $68,805, respectively. Medical
equipment includes $542,234 of equipment under capital lease as of December 31,
2004 with accumulated depreciation of $435,445.


                                      -14-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


4.       LEASE RECEIVABLE
         ----------------

During fiscal 2000, the Company entered into a purchase and leaseback
arrangement for $75,000 of equipment with a shareholder affiliate, financing
such equipment through a third party. The transaction resulted in a receivable
from the shareholder affiliate replacing a portion of the note receivable from
that affiliate (see Note 9) and a capital lease liability of an equal amount, at
lease inception, to the third party. The receivable is recorded in stockholder's
equity. The shareholder affiliate has been in default on the lease receivable
during 2004 and 2003. Interest earned on the lease receivable has been fully
reserved.

Minimum payments under the capital lease receivable are as follows:

         2005                                                         $ 105,622
                                                                      ---------

         Total minimum payments                                         105,622
         Amount representing interest at 36%                            (57,651)
                                                                      ---------

         Present value of net minimum lease payments                  $  47,971
                                                                      =========


5.       INTANGIBLE ASSET
         ----------------

Dr. Gura, the President of NQCI, had completed the conceptual design of the
Wearable Kidney in September 2001, and he assigned all of his right, title and
interest in the technology to the Company in exchange for a $100,000 note and
options to purchase up to 5,000,000 shares of its common stock. The Company has
commenced the legal process to obtain a patent in the US. Amortization of the
technology rights to the Wearable Kidney will not commence until FDA approval is
obtained.

                                      -15-
<PAGE>

                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


6.       NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
         ------------------------------------------------

Notes payable, long-term debt and capital lease obligations at December 31, 2004
consist of the following:

                                                                        2004
                                                                    -----------
Settlement payable, due in monthly installments of $7,000 based on
Judgment from US District Court, Central District of California
dated May 12, 2004 to settle a lawsuit from a creditor on two
outstanding promissory notes                                        $   329,528

Settlement payable, due in monthly installments of $4,000 based on
Judgment from Superior Court, County of Los Angeles dated March
24, 2004 to settle a lawsuit from a creditor                            348,450

Settlement payable, due in monthly installments of $1,000 per
month to a vendor                                                       213,568

Note payable to related party (Note 10) interest at 7% per annum
and principal due December 18, 2006,collateralized by technology
rights                                                                  100,000

Settlement payable based on Judgment from Superior Court of
California County of Los Angeles - Central District dated July 19,
2004 to settle a lawsuit from a lessor                                   48,463

Capitalized lease obligations, due in monthly installments of
$3,694 including interest at 12% due monthly, collateralized by
equipment                                                                28,317
                                                                    -----------

                                                                      1,068,326

Less current portion                                                   (210,890)
                                                                    -----------

Long-term debt                                                      $   857,436
                                                                    ===========


Annual payments under long-term obligations, exclusive of capital leases, for
future years ending December 31, are:

         2005                                                       $   204,463
         2006                                                           299,000
         2007                                                           204,000
         2008                                                           226,500
         2009                                                           130,500
         Thereafter                                                     264,343
                                                                    -----------

                                                                      1,328,806
         Amount representing interest                                  (288,796)
                                                                    -----------

                                                                    $ 1,040,010
                                                                    ===========


                                      -16-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


6.       NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
         ------------------------------------------------------------

Minimum lease payments under capital leases for future years ending December 31
are:

         2005                                                          $ 30,540
                                                                       --------

         Total minimum payments                                          30,540
         Amount representing interest at 12%                             (2,223)
                                                                       --------

         Present value of net minimum lease payments                     28,317
         Less current portion                                           (28,317)
                                                                       --------

         Long-term minimum lease payments                              $     --
                                                                       ========


The Company's term loans have a financial covenant which requires net income on
a quarterly basis. The Company was not in compliance with this covenant during
2004. The total outstanding balance under these term loans was $6,648 at
December 31, 2004.


7.       INCOME TAXES
         ------------

Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and tax reporting purposes. At December 31, 2004 and 2003,
the Company's deferred tax assets are comprised of the following items:

                                                                       2004
                                                                   -----------
         Deferred Tax Assets
               Net operating loss carryforward                     $ 3,550,000
               Note receivable reserve                                 288,000
               Allowance for doubtful accounts                          50,000
               Intangible assets                                        51,000
               Other                                                     2,000
                                                                   -----------

                                                                     3,941,000
               Less valuation allowance                             (3,941,000)
                                                                   -----------

         Net deferred tax assets                                   $        --
                                                                   ===========

                                      -17-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


7.       INCOME TAXES (CONTINUED)
         ------------------------

The current income tax provision consists of the following at December 31:

                                                          2004           2003
                                                         -------        ------
         Current tax provision
               Federal                                   $    --        $   --
               State                                          --            --
                                                         -------        ------

         Change in deferred income taxes, net                 --            --
                                                         -------        ------

                                                         $    --        $   --
                                                         =======        ======


A reconciliation between the effective tax rate and the statutory tax rates for
the years ended December 31, 2004 and December 31, 2003 follows:

<TABLE>
<S>     <C>
                                                                  Percent of             Percent of
                                                                   Pre-tax                Pre-tax
                                                         2004      Income         2003    Income
                                                     -----------   -------     ---------  -------
         Federal tax expense (benefit)               $  (621,000)   (34.0)%    $(323,000)  (34.0)%
         State tax expense (benefit)                    (104,000)    (5.8)%      (55,000)   (5.8)%
         Change in valuation allowance on deferred
         taxes                                           707,000     37.4 %      386,000    40.6 %
         Change in allowance for doubtful accounts        30,000      4.1 %      (27,000)   (2.8)%
         Other, net                                      (12,000)    (1.7)%       19,000     2.0 %
                                                     -----------   -------     ---------  -------

                                                     $        --      0.0 %   $      --      0.0 %
                                                     ===========   =======    =========   =======
</TABLE>


At December 31, 2004, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $9,690,000 and
$3,400,000, respectively, which for federal purposes are available to offset
future taxable income, if any, begin expiring in 2024. The federal net operating
loss carryforwards include $3,700,000, which are limited by IRC Section 1502;
however, the annual effects of such limitations have not been determined. The
Company is subject to a California State franchise fee of $2,400.


8.       STOCK OPTIONS AND WARRANTS
         --------------------------

The Company has adopted the provisions of Financial Interpretation No. 44.
Effective January 1, 2006, the Company will adopt the fair value recognition
provisions of SFAS No. 123(R), "SHARE-BASED PAYMENTS," using the prospective
transition method.


                                      -18-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


8.       STOCK OPTIONS AND WARRANTS (CONTINUED)
         --------------------------------------

The Company has adopted the provisions of SFAS No. 148 and Financial
Interpretation No. 44. Accordingly, in 2004 the Company applies APB Opinion No.
25 and related interpretations in accounting for its plans for employees. If the
Company had elected to recognize compensation expense based upon the fair value
at the grant date for awards under this plan consistent with the methodology
prescribed by SFAS No. 123 and SFAS 123(R), the Company's net loss and loss per
share would be reduced to the pro forma amounts indicated below for the years
ended December 31:

<TABLE>
<S> <C>
                                                                 2004            2003
                                                              -----------    -----------
         Net Loss
               As reported                                    $(1,668,718)   $  (950,789)
               Compensation recognized under APB 25                    --             --
               Compensation recognized under SFAS 123(R)          (99,000)            --
                                                              -----------    -----------

         Pro Forma                                            $(1,767,718)   $  (950,789)
                                                              ===========    ===========

         Basic and diluted earnings per share
               As reported                                    $     (0.05)   $     (0.03)
                                                              ===========    ===========
               Pro Forma                                      $     (0.06)   $     (0.03)
                                                              ===========    ===========
</TABLE>

The Company granted options convertible into 1,500,000 shares of common stock at
a weighted average exercise price of $0.09 per share, and the weighted average
fair value of these options was $0.12 per share. Options exercisable into
600,000 shares were immediately vested. As of December 31, 2004, approximately
$99,000 of deferred stock-based compensation expense remains to be amortized
over the remaining vesting periods of the options and restricted stock, and is
included in additional paid-in capital on the consolidated balance sheet. The
Company recorded $692,500 and $0 for warrants expense in the years ended
December 31, 2004 and 2003, respectively.

The Black-Scholes fair value based method has been applied in measuring stock
compensation expense. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options.

The following assumptions were used to value grants:

                                        December 31, 2004     December 31, 2003
                                        ------------------    ------------------
         Dividend yield                             0.00%                 0.00%
         Expected volatility                 520% to 774%                  250%
         Risk-free interest rate           3.90% to 4.15%                 5.50%
         Expected lives (in years)                 3 to 7               5 to 10

Options and warrants are granted at prices that are equal to the current fair
value of the Company's common stock at the date of grant. The Company records
compensation expense on options granted at prices below the current fair market
value. The vesting period is usually related to the length of employment or
consulting contract period.

                                      -19-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


8.       STOCK OPTIONS AND WARRANTS (CONTINUED)
         --------------------------------------

On February 11, 2003, the Company issued 1,284,220 options to certain creditors.
The options have an exercise price of $0.10 per share, vest immediately upon
issuance and expire ten years after becoming exercisable. As of the date of this
report, no options had yet been exercised. As the agreement provided for the
option to be exercised at below the Company's market price at the date of grant,
the Company recorded additional legal fees relating to the estimated value of
the these options of $64,200.

On February 13, 2003, the Company issued 250,000 options to a certain director.
The options have an exercise price of $0.07 per share, vest over a five-year
period beginning February 13, 2004, and expire five years after becoming
exercisable. As of the date of this report, no options had yet been exercised.
As the agreement provided for the options to be exercised at below the Company's
market price at the date of grant, the Company recorded additional consulting
fees relating to the estimated fair value of these vested options of $12,500.

On November 15, 2004, the Company issued 2,000,000 warrants to certain
directors. These warrants have an exercise price of $0.20 per share, vest
immediately upon issuance and expire seven years after becoming exercisable. The
Company recorded the estimated fair value of these warrants of $600,000.

On November 30, 2004, the Company issued 250,000 warrants to a director. These
warrants have an exercise price of $0.20 per share, vest immediately upon
issuance and expire seven years after becoming exercisable. The Company recorded
the estimated fair value of these warrants of $92,500.

The weighted-average fair value of options and warrants granted during the year
ended December 31, 2004 were $0.12.


Independent Consultant Stock Options
------------------------------------

The Company's Board of Directors approved the grant of stock options to
independent consultants to purchase an aggregate of 750,000 shares of its common
stock. These options have an exercise price of $0.07 and as of December 31,
2004, 450,000 of these option shares were vested. As a result, the Company has
recorded $63,000 in "Deferred compensation," which will be amortized to expense
over the vesting period (milestones) of the options. These options were not
issued as part of any of the Company's registered Stock Option Plans.

The Company's Board of Directors approved the grant of stock options to
independent consultants to purchase an aggregate of 500,000 shares of its common
stock. These options have an exercise price of $0.05 and as of December 31,
2004, 100,000 of these option shares were vested. As a result, the Company has
recorded $6,000 in "Deferred compensation," which will be amortized to expense
over the vesting period (milestones) of the options. These options were not
issued as part of any of the Company's registered Stock Option Plans.

The Company's Board of Directors approved the grant of stock options to
independent consultants to purchase an aggregate of 250,000 shares of its common
stock. These options have an exercise price of $0.20 and as of December 31,
2004, 50,000 of these option shares were vested. As a result, the Company has
recorded $10,000 in "Deferred compensation," which will be amortized to expense
over the vesting period (milestones) of the options. These options were not
issued as part of any of the Company's registered Stock Option Plans. The
Company recognized $86,000 in expense related to the issuance of the options
which were vested as of December 31, 2004.

                                      -20-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


8.       STOCK OPTIONS AND WARRANTS (CONTINUED)
         --------------------------------------

Stock Based Compensation
------------------------

The Company has granted options and warrants to acquire common stock under two
plans and various other grants made directly to certain parties for incentive
compensation and as compensation for services rendered. As of December 31, 2004
and 2003, approximately 6,331,220 and 4,831,220 shares of stock have been
authorized for issuance under these arrangements and all instruments authorized
have been issued. The vesting requirements and the terms of the options vary
widely based on the specific plan or grant. Stock options granted to date expire
between 2 and 6 years after the original date of grant and vest at date of
grant.

Activity in the Company's stock option arrangements are as follows:

                                                          Outstanding
                                                  ----------------------------
                                                  Number of        Weighted
                                                   Shares          Average
                                                                Exercise Price
                                                  ----------     -------------
         Balance, December 31, 2002                3,367,000     $        1.17
         Granted                                   1,534,220     $        0.10
         Exercised, expired and canceled             (70,000)    $        0.04
                                                  ----------     -------------

         Balance, December 31, 2003                4,831,220     $        0.84
         Granted                                   1,500,000     $        0.12
         Exercised, expired and canceled                  --     $          --
                                                  ----------     -------------

         Balance, December 31, 2004                6,331,220     $        0.67
                                                  ==========     =============


The following summarizes information about stock options outstanding at December
31, 2004:

                                        Outstanding Options
                             -------------------------------------------
                                             Weighted
                                              average
                                             remaining        Weighted
         Range of exercise      Number      contractual       average
               price         Outstanding       life       exercise price
         -----------------   -----------   ------------   --------------
           $0.05 - $1.00      4,281,220      4.6 years    $         0.13
           $1.01 - $3.50      2,050,000      1.5 years    $         1.80
                             -----------   ------------   --------------
                              6,331,220      3.6 years    $         0.67
                             ===========   ============   ==============


                                      -21-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


8.       STOCK OPTIONS AND WARRANTS (CONTINUED)
         --------------------------------------

Stock Based Compensation (continued)
------------------------------------

The following summarizes information about stock options outstanding at December
31, 2003:

                                       Outstanding Options
                            ----------------------------------------
                                           Weighted
                                           average
                                          remaining     Weighted
            Range of          Number     contractual     average
         exercise price     Outstanding     life      exercise price
         ---------------    ------------ -----------  --------------
         $0.07 - $1.00        2,781,220   5.8 years   $       0.14
         $1.01 - $3.50        2,050,000   2.5 years   $       1.80
                            ------------ -----------  --------------

                              4,831,220   4.1 years   $       0.84
                            ============ ===========  ===============


9.       CAPITAL STOCK TRANSACTIONS
         --------------------------

Issuance of Common Stock
------------------------

During 2001, the Company's Board of Directors authorized the issuance of
4,210,644 shares of common stock and warrants to purchase up to 500,000 shares
of common stock, at $3.50 per share, to three shareholders in connection with
the 1996 Agreement for the Exchange of Stock between Los Angeles Community
Dialysis, Inc. and National Quality Care, Inc. (formerly Sargent, Inc.). In that
exchange agreement, these 3 shareholders received rights to receive up to
4,210,644 shares of restricted common stock of the Company. The issuance of
these shares and warrants was contingent upon the Company's achievement of
certain measures of financial performance through December 31, 2001. During
2003, the Company's Board of Directors made a determination that the Company had
not met the specific financial performance criteria as stipulated in the merger
agreement. However, the Board of Directors concluded that the reason for this
failure was beyond the control of these individuals. Therefore, in 2003 the
Company elected to issue these additional shares in consideration for the value
of services provided to the Company by these three individuals.


Common Stock Awarded as Compensation
------------------------------------

During 2003, the Company issued 4,210,644 shares of its common stock with an
aggregate fair market value of $105,266 to key executives in lieu of
compensation.


Sale of Common Stock
--------------------

In 2004, the Company sold 9,805,340 shares of its common stock at a price
between $0.05 and $0.20 per share. The $827,767 cash proceeds were used for
working capital purposes. The Chief Executive Officer and members of the Board
of Directors purchased 9,105,304 shares of this common stock.

                                      -22-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


9.       CAPITAL STOCK TRANSACTIONS (CONTINUED)
         --------------------------------------

Common Stock Issued in Full Settlement of Debt Restructuring
------------------------------------------------------------

In 2004, the Company reached an agreement, whereby its Chief Executive Officer
personally guaranteed a debt to a vendor totaling $90,732. The vendor agreed to
the transfer of the amount owed. Furthermore, in 2004 Company issued 1,814,644
shares of its common stock having a value of $90,732 to its Chief Executive
Officer in order to reach a full settlement with the vendor. The $90,732 appears
on the balance sheet as "Accrued financial cost", which is being amortized
across the remaining life of the associated debt. Amortization expense recorded
in association with the accrued financial cost in 2004 totaled $6,049.


Note Receivable
---------------

The following related party notes receivable are presented in the accompanying
balance sheet as offset to shareholders' equity:

                                                                          2004
                                                                         -------
         Note receivable for advances to an entity controlled
         by an officer/shareholder, interest at 8% per annum,
         due on demand                                                   $34,932

         Note receivable created in sale/leaseback transaction
         (see Note 4) to an entity controlled by an officer/
         shareholder                                                      55,365
                                                                         -------

                                                                         $90,297
                                                                         =======


10.      RELATED PARTY TRANSACTIONS
         --------------------------

Office Space
------------

The Company provides a portion of its corporate office space to an affiliated
entity. The Company leases this facility for $1,700 per month and provides the
space to the affiliate at no charge.

The Company leases its corporate administrative offices on a month-to-month
basis from a company in which the Company's chief executive office is a majority
shareholder. Total rent paid to the Company was $16,800 for the year ended
December 31, 2004. The lease is a month-to-month lease.

                                      -23-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


10.      RELATED PARTY TRANSACTIONS (CONTINUED)
         --------------------------------------

Technology Purchase Agreement
-----------------------------

In December 2001, the Company entered into an agreement for the purchase of
certain technology from its president, Victor Gura, M.D. The $100,000 purchase
price was paid by a promissory note (see Notes 5 and 6). In connection with this
agreement, Dr. Gura assigned his rights to two pending United States Patents
Applications relating to a Wearable Peritoneal Dialysis System and a Wearable
Renal Replacement Therapy Device. The Company issued to Dr. Gura options to
purchase up to 5,000,000 shares of Common Stock, with an exercise price of $1.25
per share. Of the 5,000,000 options, 3,000,000 options have vested with the
achievement of certain prospective milestones with respect to the development of
a marketable product relating to the technology. The remaining options will vest
upon the achievement of further milestones. The Company issued Dr. Gura a
promissory note in the amount of $100,000, which is secured by the transferred
technology. The note matures on December 18, 2006, and may be canceled in the
event that the per-share price of the Company's Common Stock equals or exceeds
$5.00 per share at any time through the maturity date of the note. In addition,
the Company granted options to purchase up to 1,500,000 shares of Common Stock,
with an exercise price of $1.25 per share, to Ronald P. Lang for his
contributions to the development of the technology. Of the 1,500,000 options,
900,000 options have vested with the achievement of certain prospective
milestones with respect to the development of a marketable product relating to
the technology. The remaining options will vest upon the achievement of further
milestones.



11.      COMMITMENTS AND CONTINGENCIES
         -----------------------------

Operating Leases
----------------

The Company leases various operating facilities and certain medical equipment
under operating leases expiring through 2007. Certain leases contain renewal
options and escalation clauses based primarily on the prevailing consumer price
index. In addition to specified rent, the property lease provides for the
payment of certain building operating expenses over base year amounts. Minimum
annual payments under non-cancelable operating leases for future years ending
December 31 are:

                         2005                $   179,143
                         2006                    179,543
                         2007                     74,643
                                             -----------

                                             $   433,329
                                             ===========


Total rent expense, including equipment rentals, for the years ended December
31, 2004 and 2003 amounted to approximately $171,000 and $176,000 respectively.

                                      -24-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


11.      COMMITMENTS AND CONTINGENCIES (CONTINUED)
         -----------------------------------------

Litigation
----------

In 2004 the Company settled a legal action brought by an employee. The company
has agreed to provide monetary relief in the amount of approximately $20,000.
The company has recorded the cost of the settlement at present value of $20,000.
At December 31, 2004, the liability recorded is $20,000 and is included in
"Current Liabilities" in the accompanying Balance Sheet.

In 2003 the Company settled a legal action brought by a vendor. Under the
settlement, the Company has agreed to provide monetary relief in the amount of
approximately $474,000, to be paid in installments over a five-year period. The
present value of the cost of the settlement is $348,450, which is approximately
the past due amount to this vendor. At December 31, 2004, the current portion of
the liability recorded is $26,777 and is included in "Current Liabilities." The
remaining $321,673 is classified as a non-current liability in the accompanying
Balance Sheet.


12.      EMPLOYEE BENEFIT PLAN
         ---------------------

The Company has a 401(k) and profit-sharing plan that covers substantially all
employees who meet the eligibility requirements of the plan. Contributions to
the profit-sharing plan are made at the discretion of management and were $794
and $1,056 for 2004 and 2003, respectively.


13.      MALPRACTICE INSURANCE
         ---------------------

The Company and healthcare providers employed by the Company are insured by
American Healthcare Indemnity. The Company's financial obligation is limited to
its premiums for malpractice insurance coverage. American Healthcare Indemnity
provides claims-based malpractice insurance coverage which covers only asserted
malpractice claims within policy limits. The Company purchases tail insurance
coverage when necessary. Management does not believe there is material uninsured
malpractice exposure at December 31, 2004.


14.      SEGMENT INFORMATION
         -------------------

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The operating segments are managed
separately because each operating segment represents a strategic business unit
whose function and purpose differ from the other segments.

                                      -25-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


14.      SEGMENT INFORMATION (CONTINUED)
         -------------------------------

The Company's reportable operating segments include medical services and therapy
device. The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.

          December 31, 2004       Medical Services  Therapy Device     Total
     ---------------------------  ----------------  --------------  -----------
     Total income                 $    4,001,232    $         --    $ 4,001,232
     Operating income (loss)            (532,806)     (1,065,324)    (1,598,130)
     Property and equipment, net         152,384              --        152,384
     Interest income (expense)           (34,479)             --        (34,479)

          December 31, 2003
     ---------------------------
     Total income                 $    3,272,029    $         --    $ 3,272,029
     Operating income (loss)            (363,064)       (379,021)      (742,085)
     Property and equipment, net         216,666              --        216,666
     Interest income (expense)          (145,822)             --       (145,822)


15.      SUBSEQUENT EVENTS
         -----------------

Issuance of Options and Warrants
--------------------------------

In April 2005, the Company began conducting a private placement of 134 units of
its securities. Each Unit consists of: (i) 50,000 shares of the Company's Common
Stock ("the Shares") at a purchase price of $0.75 per Share and (ii) 25,000
Class A Common Stock Purchase Warrants ("the Warrants"). Each Warrant entitles
the holder to purchase one Share at an exercise price of $1.25 per Share from
the date of purchase through March 31, 2007. The number of Shares and Warrants
which make up each Unit will increase if, on August 31, 2005, the closing price,
or the Adjusted Closing Price of the Company's Common Stock on the market on
which the Company's Common Stock normally trades is less than $0.75 per share.
Upon occurrence of such event, the Company will issue an additional number of
Shares per Unit so that, when added to the original 50,000 Shares, the new
total, when multiplied by the Adjusted Closing Price, will equal $37,500 per
Unit, PROVIDED, HOWEVER, that the Adjusted Closing Price will in no event be
lower than $0.50 per Share. At the same time, an additional number of Warrants
equal to fifty percent of the additional number of Shares will be issued. No
value will be assigned to the Warrants. Under certain circumstances, the Company
will file a registration statement with the Commission in respect of the Shares
and the shares underlying the Warrants, or Warrant Shares. As of August 15,
2005, the Company has sold 14 Units for total gross proceeds of $525,000.


Litigation
----------

In June 2005, the Company settled a legal action brought by a former employee.
Under the settlement, the Company has agreed to provide monetary relief in the
amount of approximately $20,000, to be paid in installments. During the three
months ended September 30, 2004, the Company has accrued a liability of $20,000
related to this matter.

                                      -26-
<PAGE>


                      NATIONAL QUALITY CARE AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2004


15.      SUBSEQUENT EVENTS (CONTINUED)
         -----------------------------

Employment Agreement
--------------------

Effective January 1, 2005, the Company executed an employment agreement with its
Chief Executive Officer. The agreement is effective until December 31, 2008. The
agreement defines a base salary plus incentive compensation.


                                      -27-