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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, 2005

        [ ] 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 of                          (I.R.S. Employer
    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 is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act. Yes [_] No [X]

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 [X] No [ ]

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 April 12, 2006 was
38,158,656. The aggregate market value of the common stock (shares) held by
non-affiliates, based on the closing market price ($0.66) of the common stock as
of April 12, 2006 was $4,396,468. The issuer's revenues for the fiscal year
ended December 31, 2005 were $4,136,975.



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


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                                                   Part I

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

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

Item 3.   Legal Proceedings..............................................................................23

Item 4.   Submission of Matters to a Vote of Security Holders............................................23

                                                  Part II

Item 5.   Market for Registrant's  Common Equity and Related  Stockholder Matters and Small
            Business Issuer Purchase of Equity Securities................................................23

Item 6.   Management's Discussion and Analysis or Plan of Operation......................................27

Item 7.   Financial Statements and Supplementary Data....................................................32

Item 8.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........32

Item 8A   Controls and Procedures........................................................................32

Item 8B   Other Information..............................................................................32

                                                  Part III

Item 9.   Directors, Executive Officers, Promoters and Control Persons; Compliance with
            Section 16(a) of the Exchange Act............................................................33

Item 10.  Executive Compensation.........................................................................36

Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
            Matters......................................................................................40

Item 12.  Certain  Relationships and Related Transactions................................................41

Item 13.  Exhibits.......................................................................................42

Item 14.  Principal Accountant fees and Services.........................................................43


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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 by the
subsidiary Los Angeles community Dialysis, Inc. (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 operating income (loss) from operations of the dialysis
business has totaled approximately $714,000 and ($533,000) for the years ended
December 31, 2005 and 2004, 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.


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         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
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 2005 and
2004, we incurred approximately $1,309,000 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


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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
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) Medi-Cal, (iii) private/alternative payors, such as
private insurance and private funds, and (iv) hospital inpatient dialysis
services:

                                               Years ended December 31
----------------------------------------- ------------------ -------------------
                                          2005               2004
----------------------------------------- ------------------ -------------------
Medicare                                  49%                46%
----------------------------------------- ------------------ -------------------
Medi-Cal                                  32%                22%
----------------------------------------- ------------------ -------------------
Private/alternative payors                2%                 10%
----------------------------------------- ------------------ -------------------
Hospital inpatient dialysis services      17%                22%
----------------------------------------- ------------------ -------------------

         The Company's billing system generates contractual adjustments between
the Company's fee structure and the fee structure of third-party payors for each
patient.

         Payments for services are provided primarily by third-party payors,
rather than the patient receiving the dialysis services, including Medicare,
Medi-Cal, commercial insurance companies and contracted hospitals for inpatient
dialysis services. Payments for services not covered by third-party payors are
provided by private funds of the patient, referred to as co-payments. Billed
amounts are generally due within 45 days. Management assesses the financial
strength of its patients and their third-party payors at least quarterly and,
based upon factors surrounding their credit risk, contractual arrangements, and
history of past write-offs and collections, establishes an allowance for
uncollectible accounts. Management continuously monitors accounts receivable
balances and maintains contact with third party payors and patients,
particularly those with past due balances. Allowances are established for past
due balances when considered necessary after evaluating the information obtained
by management through its continuous monitoring. Accounts receivable are charged
off against the allowance when collectibility is determined to be permanently
impaired.

         The days sales outstanding amounted to 64 and 52 for the years ended
December 31, 2005 and 2004. The increase in days sales outstanding is due to
increased dialysis services revenue in the last quarter of 2005 compared with
2004.


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         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 & Medi-Cal
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,
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.

         MEDI-CAL REIMBURSEMENT

         Medi-Cal 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 Medi-Cal 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.


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         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 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,
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, and the final patent was issued in November, 2005. 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.


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         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;

         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 Medi-Cal, 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.


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         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
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).


                                       8


<PAGE>

         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, Medi-Cal 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, Medi-Cal 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
are severe, consisting of substantial criminal fines, imprisonment and exclusion
from participation in the Medicare and Medi-Cal 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 Medi-Cal
                  may be enough to violate the law, and no actual payout by
                  Medicare or Medi-Cal is necessary as long as the challenged
                  remuneration is for an item or service that could be paid for
                  by Medicare or Medi-Cal; and

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


                                       9


<PAGE>

         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:

         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.


                                       10


<PAGE>

         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 Medi-Cal 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 Medi-Cal 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:

         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;


                                       11


<PAGE>

         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 Medi-Cal
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.

         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.


                                       12


<PAGE>

         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.

         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.


                                       13


<PAGE>

         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 April 13, 2006 we had 31 employees, including 2 executives, 3
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, 2005
and 2004, we expended a total of approximately $ 305,000 and $527,000,
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.

         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


                                       14


<PAGE>

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 $2,344,525 during the year ended December 31, 2005. At December 31,
2005, we had an accumulated deficit of $8,023,615 and a working capital
deficiency of $3,202,980. In 2005 and 2004, approximately $1,309,072 and
$1,065,324, 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 $537,500 in net proceeds in 2005 and 2004 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
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.


                                       15


<PAGE>

         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.

         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.


                                       16


<PAGE>

         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
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, 2005 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.


                                       17


<PAGE>

         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, MEDI-CAL 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 81% of our net revenues during fiscal 2005
was funded by Medicare and comparable state programs and approximately 19% of
our net revenue during fiscal 2005 was from sources other than Medicare and
Medi-Cal. The current composite Medicare reimbursement rate is approximately
$158; 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, Medi-Cal 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


                                       18


<PAGE>

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 Medi-Cal 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.

         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


                                       19


<PAGE>

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 Medi-Cal 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.

         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.


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<PAGE>

         TRANSACTIONS WITH OUR AFFILIATES MAY CREATE 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.

         DISCLOSURE RELATING TO LOW-PRICED STOCKS. Our shares of common stock
currently are listed for trading in the over-the-counter market on the NASD
bulletin board, 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 April 13, 2006, these consist of 968,750 shares and an
additional 484,375 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.


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<PAGE>

         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.

         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 $1,400 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.


                                       22


<PAGE>

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. As of December 31, 2005 the
outstanding balance due to a former employee was $5,442

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, 2005.

                                     PART II

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

         As of April 13, 2006 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 April 19, 2006,
there were issued and outstanding 38,158,656 shares of common stock which are
held by approximately 440 shareholders of record, and options and warrants to
purchase 17,141,720 shares of common stock, of which 13,541,720 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
on the NASD Bulletin Board under the symbol "NQCI.OB". Our common stock has a
very limited trading history.

         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, 2006
         First Quarter                               $0.76               $0.40

YEAR ENDED DECEMBER 31, 2005
         First Quarter                               $0.45               $0.40
         Second Quarter                              $0.63               $0.63
         Third Quarter                               $0.69               $0.33
         Fourth 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

      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, 2005:


                                       23


<PAGE>

<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          10,076,720                     $0.75                          N/A

Totals                                10,671,720                     $0.84                        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.

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


                                       24


<PAGE>

         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

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,
2005, we did not issue any unregistered securities to our directors and
executive officers.


                                       25


<PAGE>

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

         o        On November 15, 2004, we issued warrants convertible into an
                  aggregate of 2 million shares of our common stock to certain
                  directors. These warrants have an exercise price of $0.20 per
                  share and expire in seven years.

         o        In August, 2004, we issued Dr. Gura, our former CEO and
                  Chairman, and our current Chief Scientific Officer and a
                  director, 1,814,644 shares in exchange for making a personal
                  guaranty of certain of our debt obligations.

         o        In 2004, 9,105,304 shares were issued to Dr. Gura and members
                  of the Board of Directors at prices ranging from $0.05 to
                  $0.20 per share.

         o        On November 30, 2004, we issued warrants convertible into
                  250,000 shares of our common stock to Dr. Gura. These warrants
                  have an exercise price of $0.20 per share and expire in seven
                  years.

         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 for each of
the two consultants.

         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
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 December 31, 2005,
we sold 15.5 Units totaling 968,750 shares for proceeds of $532,498 net of
offering costs of $48,750.

The common stock with detachable warrants sold under the private placement
offering is accounted for in accordance with Emerging Issues Task Force ("EITF")
Issue Nos. 00-19 and 05-04, and Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" as amended
("SFAS 133"). Due to the holder's mandatory registration rights provision
contained in the terms governing the private placement offering, and that share
settlement is not controlled by the Company, the underlying common stock and
warrants qualify as derivative instruments in accordance with EITF 00-19. At
each balance sheet date, we adjust the derivative financial instruments to their
estimated fair value and analyze the instruments to determine their
classification as a liability or equity.

As of December 31, 2005, the estimated fair value of the Company's derivative
liability was $1,367,247. This estimate includes the fair value of three
elements; common stock, detachable warrants, and share settlement. The estimated
fair value of the common stock was determined to be an amount equal to the
proceeds from their sale, or $581,248. The estimated fair value of the warrants
upon issuance of $271,191 was determined using the Black-Scholes option-pricing


                                       26


<PAGE>

model with stock prices on the respective dates of grant, an exercise price of
$1.25 per share, a term from the date of grant through March 31, 2007, and a
volatility factor relative to the date of issuance. The model uses several
assumptions including historical stock price volatility, risk-free interest
rate, remaining time till maturity, and the closing price of the Company's
common stock to determine estimated fair value of the derivative liability. In
valuing the warrants at December 31, 2005, the Company used the closing price of
$0.62 per share, an exercise price of $1.25 per share, a remaining term of 1.25
years, and a volatility of 323%. The estimated fair value of the warrants
increased from the time of grant to December 31, 2005 resulting in the
recognition of a loss from the change in this derivative liability of $16,227.
The estimated fair value of share settlement is determined by applying the
Black-Scholes option-pricing model using average factors to the quantity of
shares in excess of those authorized needed in order to settle all outstanding
contracts. At December 31, 2005, the estimated fair value of share settlement
amounted to $514,808 on 830,792 shares in excess of those needed in order to
settle all outstanding contracts. In valuing the excess shares at December 31,
2005, the Company used the closing price of $0.62 per share, an average exercise
price of $0.62 per share, an average remaining term of 3.6 years, and a
volatility of 323%.

The recorded value of the derivative liability can fluctuate significantly based
on fluctuations in the market value of the underlying securities of the issuer
as well as in the volatility of the stock price during the term used for
observation and the term remaining for the warrants.

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 obtain such capital could have a material adverse effect on our financial
condition and operations.


RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31,
2004.

         Total revenue for the year ended December 31, 2005 increased
approximately 3.4% to $4,136,975 from $4,001,232 for the year ended December 31,
2004. This increase primarily resulted from an increase in chronic patients
volume. At the same time, patients in acute and home dialysis service slightly
decreased. Total operating expenses during the year ended December 31, 2005
decreased by 4.1% to $4,311,740 from $4,534,038 during the year ended December
31, 2004.

         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:


                                       27


<PAGE>

         Cost of medical services during the year ended December 31, 2005
decreased to $2,923,806 from $2,977,683 during the year ended December 31, 2004
(a decrease of 1.8%). This decrease was primarily due to the more accurate test
results that allowed more precised dosage of drugs provided to chronic patients,
which led to a decrease in overall drug usage even though number of chronic
patients increased during the calendar year. Selling, general and administrative
expenses during the year ended December 31, 2005 decreased approximately 11.2%
to $1,327,440 from $1,494,074 during the year ended December 31, 2004. During
the year there were decreases in insurance expenses of approximately $12,000,
various other expenses of approximately $56,000, computer expenses of
approximately $13,000, bank service charges of approximately $13,000 and legal
fees of approximately $350,000, and an increase in salaries of approximately
$270,000. Legal expenses decreased primarily due to a lower level of corporate
activity requiring legal services. Salaries increased due to additional salaries
awarded the Chief Scientific Officer. Other expenses decreased in 2005 because
we did not incur as much other expenses, as was the case in 2004 Bank service
charges decreased due to the better management of our cash accounts.
Depreciation and amortization during the year ended December 31, 2005 decreased
2.8% to $60,494 from $62,281 during the year ended December 31, 2004. This
decrease is expected as property and equipment ages and becomes fully
depreciated. There were no property and equipment additions during 2005 until
the purchase of new dialysis equipment in November.

         Research and development expenses for the Wearable Kidney device in
2005 amounted to approximately $1,309,072 a 22.8% increase of $243,748 from
$1,065,324, as of December 31, 2004. 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 $2,344,525
during the year ended December 31, 2005 as compared to a net loss of $1,668,718
during the year ended December 31, 2004. Loss from operations during the year
ended December 31, 2005 was $1,483,837 compared to loss from operations of
$1,598,130 during the year ended December 31, 2004 (a decrease of 7.1 %). This
decrease in losses from operations primarily resulted from decrease in selling,
general and administrative expenses. Revenues from inpatient and outpatient
services increased during 2005 by approximately $135,743. 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, 2005, we had net operating loss carryforwards
totaling approximately $11,182,000 for federal tax purposes, expiring through
2025. 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. In addition, we had net operating loss carryforwards
of approximately $4,890,000 for state tax purposes, which begin to expire in
2015.

         LIQUIDITY AND CAPITAL RESOURCES.

         At December 31, 2005, the ratio of current assets to current
liabilities was 0.21 to 1.00, compared to 0.60 to 1.00 at December 31, 2004.

         Payments for services are provided primarily by third-party payors,
rather than the patient receiving the dialysis services, including Medicare,
Medi-Cal, commercial insurance companies and contracted hospitals for inpatient
dialysis services. Payments for services not covered by third-party payors are
provided by private funds of the patient, referred to as co-payments. Billed
amounts are generally due within 45 days. Management assesses the financial
strength of its patients and their third-party payors at least quarterly and,
based upon factors surrounding their credit risk, contractual arrangements, and
history of past write-offs and collections, establishes an allowance for
uncollectible accounts. Management continuously monitors accounts receivable
balances and maintains contact with third party payors and patients,
particularly those with past due balances. Allowances are established for past
due balances when considered necessary after evaluating the information obtained
by management through its continuous monitoring. Accounts receivable are charged
off against the allowance when collectibility is determined to be permanently
impaired.


                                       28


<PAGE>

         Our cash flow needs for the year ended December 31, 2005 were primarily
provided from proceeds from the sale of our common stock. We had a working
capital deficit of approximately $3,202,9880 at December 31, 2005 compared to a
working capital deficit of approximately $557,902 at December 31, 2004. 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 $35,005 as of December 31, 2005, as
compared to $157,707 as of December 31, 2004.

         As of December 31, 2005, we had borrowings in the aggregate amount of
$924,729, of which short-term borrowings accounted for $150,004. 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. The decrease related primarily to
payments made under long-term payment plans established in connection with the
settlement of litigation.

         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, 2006.

                  Medipace provides us with certain laboratory services at what
we believe to be fair market prices. For the year ended December 31, 2005, we
owed to Medipace $74,169 for such laboratory services. $17,757 of this amount
was applied to interest due to us from Medipace under the foregoing promissory
note, and $26,740 was applied to repayment of the principal. As of December 31,
2005, the new reduced principal amount of the note was $63,557.

         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 $2,344,525 and loss from operations of $1,483,837
during the year ended December 31, 2005.

         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, 2005. 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:


                                       29


<PAGE>

         REVENUE RECOGNITION - We comply with the provisions of Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", as
amended by SAB No. 104, and recognize revenue when all four of the following
criteria are met: (i) persuasive evidence that an arrangement exists; (ii)
delivery of the products and/or services has occurred; (iii) the selling price
is both fixed and determinable; and (iv) collectibility is reasonably assured.

Medical service revenue is recognized in the period the service is performed.
The amount of revenue recognized is based on approved fee schedules of
third-party payors of the patient receiving dialysis services, including
Medicare, Medi-Cal, commercial insurance companies and contracted hospitals for
inpatient dialysis services.

         ACCOUNTS RECEIVABLE AND ALLOWANCES - Accounts receivable are reported
at the patient's outstanding balances less any allowance for doubtful accounts.
Our billing system generates contractual adjustments between our fee structure
and the fee structure of third-party payors for each patient encounter. Interest
is not accrued on overdue accounts receivable. Payments for services are
provided primarily by third-party payors, rather than the patient receiving the
dialysis services, including Medicare, Medi-Cal, commercial insurance companies
and contracted hospitals for inpatient dialysis services. Payments for services
not covered by third-party payors are provided by private funds of the patient,
referred to as co-payments. Billed amounts are generally due within 45 days.
Management assesses the financial strength of its patients and their third-party
payors at least quarterly and, based upon factors surrounding their credit risk,
contractual arrangements, and history of past write-offs and collections,
establishes an allowance for uncollectible accounts. Management continuously
monitors accounts receivable balances and maintains contact with third party
payors and patients, particularly those with past due balances. Allowances are
established for past due balances when considered necessary after evaluating the
information obtained by management through its continuous monitoring. Accounts
receivable are charged off against the allowance when collectibility is
determined to be permanently impaired.

The following table provides information for the periods indicated regarding
payor mix concentrations in accounts receivable.

<TABLE>
                                                                  31 to 60    61 to     91 to      121 to     151 to      361 days
      Payor Classification         %       Total     0-30 days      days     90 days   120 days   150 days    360 days    and over
-------------------------------- ------- ----------- ----------- ----------- --------- ---------- ---------- ----------- -----------
<S>                               <C>      <C>         <C>           <C>       <C>        <C>        <C>        <C>          <C>
AS OF DECEMBER 31, 2005
-----------------------
    Medicare                      30%      $263,589    $227,909      $4,188    $3,334     $4,270     $4,553     $14,315      $5,021
    Medi-Cal                      40%       348,752      70,309      84,832    21,353     57,515     23,534      54,382      36,827
    Commercial insurance
         companies                 5%        45,614      17,970       3,910     5,001      5,243      1,209      12,338        (56)
    Hospital inpatient
    dialysis
         services                  -              -           -           -         -          -          -           -           -
    Patient co-payments           25%       212,367      61,274      36,625    16,825      2,625    (3,251)       9,168      89,100
                                 ------- ----------- ----------- ----------- --------- ---------- ---------- ----------- -----------
                                  100%     $870,322    $377,462    $129,555   $46,513    $69,652    $26,045     $90,202    $130,892
                                 ------- ----------- ----------- ----------- --------- ---------- ---------- ----------- -----------

AS OF DECEMBER 31, 2004
-----------------------
    Medicare                      29%      $203,336    $134,363     $21,910   $11,518     $3,341     $2,683     $26,338      $3,182
    Medi-Cal                      41%       290,450      60,599      76,851    34,882      9,203     14,321      61,250      33,345
    Commercial insurance
          companies                2%        12,704       2,379       4,710     3,234        576      4,596       3,429     (6,219)
    Hospital inpatient dialysis
          services                 -              -           -           -         -          -          -                       -
    Patient co-payments           28%       194,200      51,000      41,270    11,900      1,075          -      11,600      77,355
                                 ------- ----------- ----------- ----------- --------- ---------- ---------- ----------- -----------
                                  100%     $700,690    $248,341    $144,741   $61,534    $14,195    $21,600    $102,617    $107,663
                                 ------- ----------- ----------- ----------- --------- ---------- ---------- ----------- -----------
</TABLE>


                                       30


<PAGE>

         PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives, which range from 5 to 10 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. Leasehold improvements are amortized over the shorter of the life
of the applicable lease or the life of the asset.

         RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

                  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, 2005, The Company had
         2,600,000 stock options outstanding issued to employees which had not
         yet become vested. The amount of such charge has not been determined.

                  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 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.

                  In February 2006, FASB issued SFAS No. 155, "Accounting for
         Certain Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133,
         "Accounting for Derivative Instruments and Hedging Activities", and
         SFAF No. 140, "Accounting for Transfers and Servicing of Financial
         Assets and Extinguishments of Liabilities". SFAS No. 155, permits fair
         value remeasurement for any hybrid financial instrument that contains
         an embedded derivative that otherwise would require bifurcation,
         clarifies which interest-only strips and principal-only strips are not
         subject to the requirements of SFAS No. 133, establishes a requirement
         to evaluate interest in securitized financial assets to identify
         interests that are freestanding derivatives or that are hybrid
         financial instruments that contain an embedded derivative requiring


                                       31


<PAGE>

         bifurcation, clarifies that concentrations of credit risk in the form
         of subordination are not embedded derivatives, and amends SFAS No. 140
         to eliminate the prohibition on the qualifying special-purpose entity
         from holding a derivative financial instrument that pertains to a
         beneficial interest other than another derivative financial instrument.
         This statement is effective for all financial instruments acquired or
         issued after the beginning of the Company's first fiscal year that
         begins after September 15, 2006.

                  In June 2005, the EITF reached consensus on Issue No. 05-6,
         determining the Amortization Period for Leasehold Improvements ("EITF
         05-6.") EITF 05-6 provides guidance on determining the amortization
         period for leasehold improvements acquired in a business combination or
         acquired subsequent to lease inception. The guidance in EITF 05-6 will
         be applied prospectively and is effective for periods beginning after
         June 29, 2005. EITF 05-6 is not expected to have a material effect on
         its consolidated financial position or results of operations.

                  In September 2005, the Financial Accounting Standards Board
         Emerging Issues Task Force issued EITF 05-02, "The Meaning of
         `Conventional Convertible Debt Instrument' in EITF Issue No. 00-19,
         `Accounting for Derivative Financial Instruments Indexed to, and
         Potentially Settled in, a Company's Own Stock.'" EITF 05-02 is
         effective for new instruments entered into and instruments modified in
         reporting periods beginning after June 29, 2005. The Company does not
         have any convertible debt securities.

                  In September 2005, the Financial Accounting Standards Board
         Emerging Issues Task Force issued EITF 05-07, "Accounting for
         Modifications to Conversion Options Embedded in Debt Instruments and
         Related Issues." EITF 05-7 is effective for future modifications of
         debt instruments beginning in the first interim or annual reporting
         period beginning after December 15, 2005. The Company does not expect
         there to be a material impact from the adoption of EITF 05-07 on our
         consolidated financial position, results of operations, or cash flows.

                  In September 2005, the Financial Accounting Standards Board
         Emerging Issues Task Force issued EITF 05-08, "Income Tax Consequences
         of Issuing Convertible Debt with a Beneficial Conversion Feature." EITF
         05-08 is effective for financial statements beginning in the first
         interim or annual reporting period beginning after December 15, 2005.
         The Company does not expect there to be a material impact from the
         adoption of EITF 05-08 on our consolidated financial position, results
         of operations, or cash flows.

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.

         None

ITEM 8A  CONTROLS AND PROCEDURES

         Our management has evaluated the effectiveness of our disclosure
controls and procedures as of December 31, 2005. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures have been designed to ensure the effective
accumulation and communication of information required to be disclosed by us in
the reports that we file under the Securities Exchange Act of 1934 as
appropriate, to allow timely decisions regarding required disclosure. No
weaknesses in our disclosure controls and procedures were identified.

         The weakness in our internal controls which was identified in
connection with the review of our fiscal year ended December 31, 2004 has, in
the judgment of management, been corrected. This weakness had no effect on any
of our published financial statements and had no effect on the effectiveness of
our disclosure controls and procedures.

ITEM 8B  OTHER INFORMATION

         None.


                                       32


<PAGE>

                                    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:

         NAME             AGE                  POSITION
         ----             ---                  --------

Leonard Berezovsky, M.D.  61    Chairman of the Board of Directors
Robert M. Snukal          62    Interim Chief Executive Officer and Director
Victor Gura, M.D.         62    Chief Scientific Officer, Director
Ronald Lang, M.D.         55    Executive Vice-President, Secretary and Director
Jose Spiwak, M.D.         60    Director


         LEONARDO BEREZOVSKY, M.D., has been a director since 2003 and chairman
since 2005. 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.

         ROBERT SNUKAL has been a director since February 11, 2003 and Interim
CEO since 2005. 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.

         VICTOR GURA, M.D. has been our Chief Scientific Officer since 2005. He
was formerly Chirman of the Board and President and Chief Executive Officer. 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 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.

         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.


                                       33


<PAGE>

         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.

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
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 2005 and all members were
                  present.


                                       34


<PAGE>

         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 timely filed for the year ended December 31, 2005.

         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
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.


                                       35


<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The following table sets forth certain information concerning
compensation of our executive officers, including our Interim Chief Executive
Officer and Chief Financial Officer, for the years ended December 31, 2005 and
2004:

<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>       <C>              <C>
Robert M. Snukal
   (Interim CEO,
   Director)               2005           0          0                0            0            0         0                0
-----------------------------------------------------------------------------------------------------------------------------
                           2004         N/A        N/A              N/A            0            0         0                0
-----------------------------------------------------------------------------------------------------------------------------

Victor Gura (CFO, Chief
   Scientific Officer
   and Director for
   2005, and CEO and CFO
   for 2004)               2005     420,000          0                0            0            0         0                0
-----------------------------------------------------------------------------------------------------------------------------
                           2004     150,000          0                0            0            0         0                0
-----------------------------------------------------------------------------------------------------------------------------

Ronald Lang, M.D.
   (Executive V.P.,
   Secretary, Director)    2005      24,000          0                0            0            0         0                0
-----------------------------------------------------------------------------------------------------------------------------
                           2004      24,000          0                0            0            0         0                0
-----------------------------------------------------------------------------------------------------------------------------

         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, 2005:

-------------------- --------------------------------- ---------------- --------------- ------------------------------
                                                                                        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% ($)
-------------------- ---------------- ---------------- ---------------- --------------- --------------- --------------

ROBERT SNUKAL        0                0                N/A              N/A             0               0
-------------------- ---------------- ---------------- ---------------- --------------- --------------- --------------

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 $0.62 for the Common Stock, the
closing price for its Common Stock in the over-the-counter market as of December
31, 2005, as the assumed market price for the Common Stock with respect to
determining the "potential realizable value" of the shares of Common Stock


                                       36


<PAGE>

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, 2005:

<TABLE>
                                                           Number of Securities            Value of Unexercised
                                                          Underlying Unexercised           In-the-Money Options
                                                       Options at December 31, 2005        at December 31, 2005
-------------------- --------------------- ----------- -------------- ---------------- -------------- ----------------

                        SHARES ACQUIRED       VALUE                                       EXERCISABLE    UNEXERCISABLE
       NAME               OR EXERCISED      REALIZED    EXERCISABLE    UNEXERCISABLE        (1)             (2)
-------------------- --------------------- ----------- -------------- ---------------- -------------- ----------------
<S>                                     <C>         <C>      <C>              <C>            <C>              <C>
Robert Snukal                           0           0        150,000          100,000        $82,500          $55,000
-------------------- --------------------- ----------- -------------- ---------------- -------------- ----------------
Victor Gura                             0           0      2,300,000        2,000,000       $165,000                0
-------------------- --------------------- ----------- -------------- ---------------- -------------- ----------------
Ronald Lang                             0           0      1,652,500                0        $83,875                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, 2005
         ($0.62 per share) and any lesser exercise price.

         EMPLOYMENT AGREEMENTS.

         EMPLOYMENT AGREEMENT WITH VICTOR GURA. We have entered into a
three-year employment agreement with Victor Gura to serve as our Chief
Scientific Officer. Under the agreement, Dr. Gura's base salary is $420,000 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. On April 19, 2006, the board waived
the general conditions of additional equity funding noted in items (i) through
(iv) above and determined revised annual salary for Dr. Gura under the
employment agreement of $420,000 per annum retroactive to January 1, 2005.

         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.


                                       37


<PAGE>

         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
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.


                                       38


<PAGE>

         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.

         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.


                                       39


<PAGE>

         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 16,546,720 shares of
Common Stock, at exercise prices ranging from $0.07 to $1.25 per share, to
certain directors, consultants and employees of the Company, of which 12,946,720
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.

         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 April 12, 2006, 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>
         Leonardo Berezovsky (3)                                    2,634,140               6.7
         Robert Snukal (6)                                         13,187,514              30.0
         Victor Gura (2)                                           18,340,750              43.4
         Ronald Lang (4)                                            4,823,449              12.2
         Jose Spiwak (5)                                            1,455,000               3.84
         Medipace (7)                                                 800,000               2.1
         All directors and officers as a group (8)                 40,440,852              78.8
</TABLE>


                                       40


<PAGE>

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

         *        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 April 19, 2006, 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
                  38,158,656 shares of common stock outstanding as of April 29,
                  2006.

         (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
                  April 19, 2006. Dr. Gura's address is 9033 Wilshire Boulevard,
                  Suite 501, Beverly Hills, California 90211

         (3)      Includes 1,229,973 shares held in the name of Dr. Berezovsky,
                  notes convertible into 104,167 shares of common stock, options
                  to purchase up to 1,200,000 shares of common stock and
                  warrants to purchase up to 100,000 shares of common stock.
                  Does not include 2,066,660 shares and warrants to purchase up
                  to 400,000 shares of common stock held in the names of certain
                  irrevocable trusts for which Dr. Berezovsky serves as trustee,
                  but in which he has no beneficial interest. Dr. Berezovsky's
                  address is 9033 Wilshire Boulevard, Suite 501, Beverly Hills,
                  California 90211

         (4)      Includes 2,538,449 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
                  1,372,500 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 April 19, 2006. Dr. Lang's address is
                  9033 Wilshire Boulevard, Suite 501, Beverly Hills, California
                  90211

         (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 7,395,847 shares of common stock, warrants to
                  purchase up to 1,000,000 shares of common stock, notes
                  convertible into 2,291,667 shares of common stock and options
                  to purchase up to 2,500,000 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 April 19, 2006.
                  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 25,672,519 shares, warrants to purchase up to
                  1,800,000 shares of common stock and options to purchase up to
                  8,972,500 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.

         CONVERTIBLE NOTES TO DR. BEREZOVSKY AND ROBERT SNUKAL. In March, 2006
we issued $1,150,000 principal amount of convertible notes to Dr. Berezovsky and
Mr. Snukal, which may be converted at any time up to March 24, 2007, to common
stock at a price of $0.48 per share


                                       41


<PAGE>

         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 $225,000 during the year
2004 and approximately $278,000 in revenue during 2005 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, a company affiliated through common ownership, 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 note, Medipace is
obligated to make monthly interest payments in the amount of $1,480 commencing
December 31, 2001 for 24 months, with principal and accrued interest due at
maturity on December 31, 2006. Medipace has continued to make monthly payments
of from $4,500 to $5,000 and currently owes principal of approximately $63,557
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.

ITEM 13. EXHIBITS

         A.  FINANCIAL STATEMENTS

         Consolidated balance sheets of National Quality Care, Inc. and
subsidiary as of December 31, 2005, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2005 and 2004.

         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)


                                       42


<PAGE>

         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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The Company paid or accrued the following fees in each of the prior two
fiscal years to its independent certified public accountants, Pohl, McNabola,
Berg & Co., LLP:

                                    For the Year Ended December 31,
                                    2005                     2004
                         ------------------------- ------------------------
Audit fees                        $70,000                    $26,500
Audit-related fees                $43,670                     $7,500
Tax fees                               $0                     $5,200
All other fees                         $0                         $0
                         ------------------------- ------------------------
Total fees                       $113,670                    $39,200
                         ------------------------- ------------------------

"Audit Fees" consisted of fees billed for services rendered for the audit of the
Company's annual financial statements and audit related fees are for review of
the financial statements included in the Company's quarterly reports on Form
10-QSB.

         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 2005. PMB has been selected to serve as our
independent auditor for the year ended December 31, 2005.


                                       43


<PAGE>

         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.


                                       44


<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.


                                              NATIONAL QUALITY CARE, INC.

Date:  April 28, 2006                         By:   /s/  ROBERT SNUKAL
                                                 -------------------------------
                                                         ROBERT SNUKAL
                                                 INTERIM CHIEF EXECUTIVE OFFICER
                                                         AND DIRECTOR

         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.

<TABLE>
<S>     <C>
                SIGNATURE                               CAPACITY IN WHICH SIGNED                      DATE
                ---------                               ------------------------                      ----

   /s/    LEONARDO BEREZOVSKY, M.D.                                                               April 28, 2006
   --------------------------------------          Chairman of the Board of Directors
           LEONARDO BEREZOVSKY M.D.

         /s/    ROBERT SNUKAL                                                                     April 28, 2006
   --------------------------------------          Interim Chief Executive Officer and
                 ROBERT SNUKAL                       Director

          /s/    VICTOR GURA                                                                      April 28, 2006
   --------------------------------------          CFO, Chief Scientific Officer and
                  VICTOR GURA                        Director

       /s/    RONALD LANG, M.D.                                                                   April 28, 2006
   --------------------------------------          Executive Vice-President, Secretary
               RONALD LANG, M.D.                     and Director

          /s/    JOSE SPIWAK                                                                      April 28, 2006
   --------------------------------------          Director
               JOSE SPIWAK, M.D.
</TABLE>


                                       45


<PAGE>


                           NATIONAL QUALITY CARE, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005




<PAGE>

                           NATIONAL QUALITY CARE, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005



                                 C O N T E N T S

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


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

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

Consolidated Statements of Operations.....................................F-4

Consolidated Statements of Stockholders' Deficit..........................F-5

Consolidated Statements of Cash Flows..................................F-6 - F-7

Notes to Consolidated Financial Statements............................F-8 - F-28



<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Stockholders'
National Quality Care, Inc.
Beverly Hills, California


We have audited the accompanying consolidated balance sheet of National Quality
Care, Inc. ("NQCI") as of December 31, 2005, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
ended December 31, 2005 and 2004. 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 audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides 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. as of December 31, 2005 and the consolidated results
of their operations and their consolidated cash flows for the years ended
December 31, 2005 and 2004, in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the accompanying consolidated financial statements, for the year ended December
31, 2005 the Company experienced a net loss from operations of $1,483,837, and
the Company has an accumulated deficit of $8,023,615. The Company has a working
capital deficiency of $3,202,980. These conditions raise substantial doubt about
its ability to continue as a going concern. Management's plan in regard to these
matters is also discussed in Note 13. These consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.


/s/ Pohl, McNabola, Berg & Company, LLP
---------------------------------------
Pohl, McNabola, Berg & Company, LLP
San Francisco, California
March 25, 2006


                                      F-1


<PAGE>

<TABLE>
<S>     <C>
                                  NATIONAL QUALITY CARE, INC.
                                  CONSOLIDATED BALANCE SHEET
                                       DECEMBER 31, 2005


                                                                                      2005
                                                                                  ------------
                                            ASSETS
CURRENT ASSETS

      Cash and cash equivalents                                                   $     35,005
      Accounts receivable, net of allowance for doubtful accounts of $142,000          728,322
      Supplies inventory                                                                50,007
      Prepaid expenses and other assets                                                 27,940
                                                                                  ------------

         TOTAL CURRENT ASSETS                                                          841,274
                                                                                  ------------

PROPERTY AND EQUIPMENT, net                                                            391,209
                                                                                  ------------

OTHER ASSETS
   Guarantee fee, net of accumulated amortization of $24,197                            66,535
   Technology rights, net of accumulated amortization of $19,845                        80,155
                                                                                  ------------

         TOTAL OTHER ASSETS, net                                                       146,690
                                                                                  ------------


           TOTAL ASSETS                                                           $  1,379,173
                                                                                  ============


                                          (continued)


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

                                             F-2


<PAGE>

                                  NATIONAL QUALITY CARE, INC.
                            CONSOLIDATED BALANCE SHEET (CONTINUED)
                                       DECEMBER 31, 2005


                                                                                      2005
                                                                                  -----------
                             LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
     Accounts payable                                                             $ 1,448,333
     Accrued expenses                                                                 972,704
     Due to stockholders                                                              105,966
     Current portion of long-term debt                                                150,004
     Derivative liability                                                           1,367,247
                                                                                  -----------

        TOTAL CURRENT LIABILITIES                                                   4,044,254

LONG-TERM DEBT                                                                        774,725
                                                                                  -----------

           TOTAL LIABILITIES                                                        4,818,979
                                                                                  -----------


STOCKHOLDERS' DEFICIT
     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;
        37,909,072 issued and outstanding                                             379,091
     Additional paid-in capital                                                     4,268,275
     Receivables from stockholders, net                                               (63,557)
     Accumulated deficit                                                           (8,023,615)
                                                                                  -----------

           TOTAL STOCKHOLDERS' DEFICIT                                             (3,439,806)
                                                                                  -----------


           TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                            $ 1,379,173
                                                                                  ===========


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

                                             F-3


<PAGE>

                                  NATIONAL QUALITY CARE, INC.
                             CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


                                                                 2005                2004
                                                             ------------        ------------

MEDICAL SERVICES REVENUE                                     $  4,136,975        $  4,001,232
                                                             ------------        ------------


OPERATING EXPENSES
     Cost of medical services                                   2,923,806           2,977,683
     Selling, general and administrative                        1,327,440           1,494,074
     Research and development                                   1,309,072           1,065,324
     Depreciation and amortization                                 60,494              62,281
                                                             ------------        ------------

        TOTAL OPERATING EXPENSES                                5,620,812           5,599,362
                                                             ------------        ------------

            LOSS FROM OPERATIONS                               (1,483,837)         (1,598,130)
                                                             ------------        ------------

OTHER INCOME (EXPENSE)
     Interest expense                                            (103,979)            (52,236)
     Interest income                                               17,923              17,757
     Loss from change in derivative liability                    (785,999)                 --
     Litigation settlement                                             --             (20,000)
     Loan fee                                                          --             (10,120)
     Other income (expense)                                        11,367              (5,989)
                                                             ------------        ------------

        TOTAL OTHER EXPENSE                                      (860,688)            (70,588)
                                                             ------------        ------------

           LOSS BEFORE TAXES ON INCOME                         (2,344,525)         (1,668,718)
                                                             ------------        ------------

TAXES ON INCOME                                                        --                  --
                                                             ------------        ------------

           NET LOSS                                          $ (2,344,525)       $ (1,668,718)
                                                             ============        ============



BASIC AND DILUTED LOSS PER SHARE                             $      (0.06)       $      (0.05)
                                                             ------------        ------------


WEIGHTED AVERAGE COMMON SHARES
        OUTSTANDING BASIC AND DILUTED                          37,479,897          31,208,219
                                                             ============        ============


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

                                             F-4


<PAGE>

                                                     NATIONAL QUALITY CARE, INC.
                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICT
                                           FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


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

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

     Stock issued for debt guarantee        1,814,644         18,146         72,586              --              --          90,732
     Payments 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)

     Sale of common stock                     968,750          9,688        571,560              --              --         581,248
     Offering costs                                --             --        (48,750)             --              --         (48,750)
     Reclassification of derivative
     liability                                     --             --       (581,248)             --              --        (581,248)
     Payments from stockholders                    --             --             --          26,740              --          26,740
     Stock issued for exercise of
     options                                   50,000            500          4,500              --              --           5,000
     Net loss                                      --             --             --              --      (2,344,525)     (2,344,525)
                                          -----------    -----------    -----------     -----------     -----------     -----------

Balance at December 31, 2005               37,909,072    $   379,091    $ 4,268,275     $   (63,557)    $(8,023,615)    $(3,439,806)
                                          ===========    ===========    ===========     ===========     ===========     ===========


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

                                                                F-5


<PAGE>

                                     NATIONAL QUALITY CARE, INC.
                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                            FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


                                                                            2005             2004
                                                                        -----------      -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                           $(2,344,525)     $(1,668,718)
        Adjustments to reconcile net loss to net cash
            used in operating activities:
             Depreciation and amortization                                   60,494           62,281
             Amortization of guarantee fee                                   18,148            6,049
             Amortization of technology rights                               19,845               --
             Provision for doubtful accounts                                 17,750            9,516
             Expense recognized on options granted/vested                        --           86,000
             Expense recognized on warrants granted/vested                       --          692,500
             Loss from change in derivative liability                       785,999               --
             Changes in assets and liabilities
               Accounts receivable                                         (170,382)          77,600
               Supplies inventory                                           (12,288)           5,626
               Prepaid expenses and other assets                             42,134          (57,142)
               Accounts payable and accrued expenses                      1,232,835          267,426
                                                                        -----------      -----------

                Net cash used in operating activities                      (349,990)        (518,862)
                                                                        -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Payments on notes receivable from stockholders                          26,740           30,640
     Property and equipment purchased                                      (299,317)              --
     Net advances from stockholders                                         105,966               --
                                                                        -----------      -----------

                Net cash (used in) provided by investing activities        (166,611)          30,640
                                                                        -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuance of common stock, net                                          532,498          827,767
     Exercise of stock options                                                5,000               --
     Repayment of long-term borrowings                                     (143,599)        (185,853)
                                                                        -----------      -----------

                Net cash provided by financing activities                   393,899          641,914
                                                                        -----------      -----------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                    (122,702)         153,692

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                               157,707            4,015
                                                                        -----------      -----------

CASH AND CASH EQUIVALENTS - END OF YEAR                                 $    35,005      $   157,707
                                                                        ===========      ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
      Cash Paid during the year for:
         Taxes                                                          $        --      $        --
                                                                        ===========      ===========
         Interest                                                       $    57,831      $    49,761
                                                                        ===========      ===========


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

                                                 F-6


<PAGE>

                                NATIONAL QUALITY CARE, INC.
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004


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 2005, the Company reclassified $581,248 of additional paid-in capital as a
         derivative liability.


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

                                           F-7
</TABLE>


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Nature of business
         ------------------

         National Quality Care, Inc., ("the Company" or "NQCI"), through its
         subsidiary, Los Angeles Community Dialysis, Inc.-, the dialysis clinic
         located in Los Angeles, California, provides dialysis services for
         patients suffering from chronic kidney failure 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 Company is also developing a wearable
         artificial kidney.

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 accounts,
         transactions and profits have been eliminated in consolidation. The
         financial statements and notes are representations of the management
         and the Board of Directors, who are responsible for their integrity and
         objectivity.

         Cash and cash equivalents
         -------------------------

         The Company considers all highly liquid investments purchased with a
         maturity of three months or less when acquired to be cash equivalents

         Property and equipment
         ----------------------

         Property and equipment are stated at cost. Depreciation and
         amortization are provided using the straight-line method over the
         estimated useful lives, which range from 5 to 10 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. Leasehold improvements are
         amortized over the shorter of the life of the applicable lease or the
         life of the asset.

         Accounts receivable and allowances
         ----------------------------------

         Accounts receivable are reported at the patient's outstanding balances
         less any allowance for doubtful accounts. The Company's billing system
         generates contractual adjustments between the Company's fee structure
         and the fee structure of third-party payors for each patient encounter.
         Interest is not accrued on overdue accounts receivable. Payments for
         services are provided primarily by third-party payors, rather than the
         patient receiving the dialysis services, including Medicare, Medi-Cal,
         commercial insurance companies and contracted hospitals for inpatient
         dialysis services. Payments for services not covered by third-party
         payors are provided by private funds of the patient, referred to as
         co-payments. Billed amounts are generally due within 45 days.
         Management assesses the financial strength of its patients and their
         third-party payors at least quarterly and, based upon factors
         surrounding their credit risk, contractual arrangements, and history of
         past write-offs and collections, establishes an allowance for
         uncollectible accounts. Management continuously monitors accounts
         receivable balances and maintains contact with third party payors and
         patients, particularly those with past due balances. Allowances are
         established for past due balances when considered necessary after
         evaluating the information obtained by management through its
         continuous monitoring. Accounts receivable are charged off against the
         allowance when collectibility is determined to be permanently impaired.

                                                                     (Continued)

                                      F-8


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Derivative liabilities
         ----------------------

         The Company has issued common stock with detachable warrants under a
         private placement offering and accounts for such securities in
         accordance with Emerging Issues Task Force ("EITF") Issue Nos. 00-19
         and 05-04, and Statement of Financial Accounting Standards No. 133,
         "Accounting for Derivative Instruments and Hedging Activities" as
         amended ("SFAS 133"). In 2005, certain common stock and warrants sold
         by the Company granted the holder's mandatory registration rights which
         was contained in the terms governing the private placement offering.
         The mandatory rights provision results in share settlement not being
         controlled by the Company, accordingly they qualify as derivative
         instruments in accordance with EITF 00-19. At each balance sheet date,
         the Company adjusts the derivative financial instruments to their
         estimated fair value and analyzes the instruments to determine their
         classification as a liability or equity.

         Revenue recognition
         -------------------

         The Company complies with the provisions of Staff Accounting Bulletin
         ("SAB") No. 101, "Revenue Recognition in Financial Statements", as
         amended by SAB No. 104, and recognizes revenue when all four of the
         following criteria are met: (i) persuasive evidence that an arrangement
         exists; (ii) delivery of the products and/or services has occurred;
         (iii) the selling price is both fixed and determinable; and (iv)
         collectibility is reasonably assured.

         Medical service revenue is recognized in the period in which the
         service is performed. The amount of revenue recognized is based on
         approved fee schedules of third-party payors of the patient receiving
         dialysis services, including Medicare, Medi-Cal, commercial insurance
         companies and contracted hospitals for inpatient dialysis services.

         Income taxes
         ------------

         The Company accounts for income taxes under Statement of Financial
         Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
         109"). SFAS No. 109 requires recognition of deferred tax assets and
         liabilities for the expected future tax consequences attributable to
         differences between the financial statement carrying amounts of
         existing assets and liabilities 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 or settled. 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.

         Concentration of credit risk
         ----------------------------

         Financial instruments that potentially subject the Company to
         significant concentrations of credit risk are primarily cash
         equivalents and accounts receivable. The Company has placed its cash
         and cash equivalents with one major financial institution. At times,
         the cash and cash equivalents in the financial institution are
         temporarily in excess of the amount insured by the Federal Deposit
         Insurance Corporation (FDIC). Management assesses the financial
         strength of its patients and their third-party payors at least
         quarterly. Exposure to losses on receivables is principally dependent
         on the patient's third-party payor's financial condition. Management
         monitors its exposure to credit losses and maintains allowances for
         anticipated losses.

                                                                     (Continued)


                                      F-9


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Concentration of credit risk (Continued)
         ----------------------------------------

         The Medicare and Medi-Cal programs, which are the largest third-party
         payors for services rendered by the Company, combine to account for
         approximately 81% and 68% of the Company's net revenues for the years
         ended December 31, 2005 and 2004, 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.

         Research and development, and advertising
         -----------------------------------------

         Research and development, and advertising costs are charged to expense
         as incurred.

         Advertising
         -----------

         Advertising expense for the years ended December 31, 2005 and 2004
         amounted to approximately $5,900 and $1,700, respectively.

         Impairment of long-lived assets and long-lived assets to be disposed of
         -----------------------------------------------------------------------

         The Company accounts for the impairment of long-lived assets under the
         provisions of SFAS No. 144, "Accounting for the Impairment of
         Long-Lived Assets." SFAS No. 144 establishes the accounting for
         impairment of long-lived tangible and intangible assets other than
         goodwill and for the disposal of a business. Pursuant to SFAS No. 144,
         the Company periodically evaluates, at least annually, whether facts or
         circumstances indicate that the carrying value of its long-lived assets
         to be held and used, including intangible assets, may not be
         recoverable. 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. The Company evaluates its
         estimates on an on-going basis, including those related to provisions
         for doubtful accounts, third-party contractual adjustments, valuation
         of derivative instruments, valuation of warrants and options, analysis
         of deferred taxes and provision for income taxes, contingencies and
         litigation.

         Stock based compensation
         ------------------------

         SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
         the use of the fair value based method of accounting for stock-based
         compensation arrangements under which compensation cost is determined
         using the fair value of the stock as of the date of grant and is
         recognized over the periods in which the related services are rendered.
         The statement also permits companies to elect to

                                                                     (Continued)

                                      F-10


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Stock based compensation (Continued)
         ------------------------------------

         continue using the intrinsic value accounting method specified in
         Accounting Principles Bulletin Opinion No. 25, or APB Opinion No. 25,
         "Accounting for Stock Issued to Employees," to account for stock-based
         compensation issued to employees. The Company has elected to use the
         intrinsic value based method and to disclose the pro forma effect of
         using the fair value based method to account for its stock-based
         compensation. As a result of the recent adoption by the Financial
         Accounting Standards Board of SFAS No. 123 (revised 2004) "Share-Based
         Payment," or SFAS No. 123(R), the Company will be required, beginning
         in the quarter ending March 31, 2006, to apply the fair value method as
         prescribed in SFAS No. 123(R). See "Recent Accounting Pronouncements"
         below.

         The Company has adopted the disclosure only provisions of SFAS No. 148,
         which is an amendment to SFAS No. 123. The Company applies APB Opinion
         No. 25, "Accounting for Stock Issued to Employees," and related
         interpretations in accounting for its plans and generally does not
         recognize compensation expense for its stock-based compensation plans,
         as all options granted under those plans are intended to have an
         exercise price equal to or greater than the market value of the
         underlying common stock at the date of grant.

         If the Company had elected to recognize compensation expense based upon
         the fair value of the share price (determined by the approximate market
         price at the time of grant) at the grant date for stock option awards
         consistent with the methodology prescribed by SFAS No. 123, the
         Company's net loss and loss per share would be adjusted to the pro
         forma amounts indicated below:

<TABLE>
                                                                2005             2004
                                                            -----------      -----------
<S>                                                         <C>              <C>
               Net loss as reported                         $(2,344,525)     $(1,668,718)
               Deduct: Total stock-based employee
               compensation, net of tax related effects          (6,250)         (99,000)
                                                            -----------      -----------
         Pro forma net loss                                 $(2,350,775)     $(1,767,718)
                                                            ===========      ===========

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

         For purposes of computing the pro forma disclosures required by SFAS
         No. 123, the fair value of each option granted to employees and
         directors is estimated using the Black-Scholes option-pricing model
         with the following weighted-average assumptions for the years ended
         December 31:

                                                                      2004
                                                                 ---------------
                  Dividend yield                                           0.00%
                  Expected volatility                               520% to 774%
                  Risk-free interest rate                         3.90% to 4.15%
                  Expected lives (in years)                               3 to 7

         The fair value of each option awarded to consultants is estimated on
         the date of grant using the Black-Scholes option valuation model that
         uses the assumptions as noted above. Expected volatilities are based on
         historical volatility of the Company's stock. The risk-free rate for
         periods within the contractual life of the option is based on the U.S.
         Treasury yield curve in effect at the time of grant.

                                                                     (Continued)

                                      F-11


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Stock based compensation (Continued)
         ------------------------------------

         The Black-Scholes option valuation model was developed for use in
         estimating the fair value of traded options. In addition, option
         valuation models require the input of highly subjective assumptions
         including the expected stock price volatility. Because the Company's
         stock options have characteristics significantly different from those
         of traded options, and because changes in the subjective assumptions
         can materially affect the fair value estimate, in management's opinion,
         the existing models do not necessarily provide a reliable single
         measure of the fair value of its employee stock options.

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

         Certain amounts in the 2004 financial statements have been reclassified
         to conform to the 2005 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
         -------------------------

         The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings
         (loss) per share are computed by dividing earnings (loss) available to
         common stockholders by the weighted-average number of common shares
         outstanding. Diluted earnings (loss) per share is computed similar to
         basic earnings (loss) per share except that the denominator is
         increased to include additional common shares available upon exercise
         of stock options and warrants using the treasury stock method, except
         for periods of operating loss for which no common share equivalents are
         included because their effect would be anti-dilutive. For the years
         ended December 31, 2005 and December 31, 2004, 13,406,095 and
         13,781,720 potentially dilutive securities are excluded from the
         computation because they are anti-dilutive.

         Guarantee fee
         -------------

         In August 2004, the Company reached an agreement whereby its Chief
         Executive Officer personally guaranteed notes payable to two vendors
         amounting to approximately $907,000. In exchange for the guaranty, the
         Company issued 1,814,644 shares of common stock to the Chief Executive
         Officer. The fair value of the Company's stock on August 7, 2004, the
         date the stock was issued, was $0.05 per share. The fair value of the
         stock issued for this guarantee amounted to $90,732 and has been
         capitalized as a guarantee fee. The fee is being amortized to interest
         expense as the related note payable to the vendor is paid down. As of
         December 31, 2005 and 2004 the guaranteed notes payable amounted to
         approximately $611,000 and $678,000, respectively.

                                                                     (Continued)

                                      F-12


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Technology rights
         -----------------

         Purchased technology rights for a wearable artificial kidney are being
         amortized over an estimated useful life of approximately 20 years.
         Amortization is included in research and development expense.
         (See Note 4)

         Recent accounting pronouncements
         --------------------------------

         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, 2005, the
         Company had 2,600,000 stock options outstanding issued to employees
         which had not yet become vested. The amount of such charge has not been
         determined.

         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 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

                                                                     (Continued)

                                      F-13


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Recent accounting pronouncements (Continued)
         --------------------------------------------

         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.

         In February 2006, FASB issued SFAS No. 155, "Accounting for Certain
         Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133,
         "Accounting for Derivative Instruments and Hedging Activities", and
         SFAF No. 140, "Accounting for Transfers and Servicing of Financial
         Assets and Extinguishments of Liabilities". SFAS No. 155, permits fair
         value remeasurement for any hybrid financial instrument that contains
         an embedded derivative that otherwise would require bifurcation,
         clarifies which interest-only strips and principal-only strips are not
         subject to the requirements of SFAS No. 133, establishes a requirement
         to evaluate interest in securitized financial assets to identify
         interests that are freestanding derivatives or that are hybrid
         financial instruments that contain an embedded derivative requiring
         bifurcation, clarifies that concentrations of credit risk in the form
         of subordination are not embedded derivatives, and amends SFAS No. 140
         to eliminate the prohibition on the qualifying special-purpose entity
         from holding a derivative financial instrument that pertains to a
         beneficial interest other than another derivative financial instrument.
         This statement is effective for all financial instruments acquired or
         issued after the beginning of the Company's first fiscal year that
         begins after September 15, 2006.

         In June 2005, the EITF reached consensus on Issue No. 05-6, determining
         the Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF
         05-6 provides guidance on determining the amortization period for
         leasehold improvements acquired in a business combination or acquired
         subsequent to lease inception. The guidance in EITF 05-6 will be
         applied prospectively and is effective for periods beginning after June
         29, 2005. EITF 05-6 is not expected to have a material effect on its
         consolidated financial position or results of operations.

         In September 2005, the Financial Accounting Standards Board Emerging
         Issues Task Force issued EITF 05-02, "The Meaning of `Conventional
         Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting for
         Derivative Financial Instruments Indexed to, and Potentially Settled
         in, a Company's Own Stock.'" EITF 05-02 is effective for new
         instruments entered into and instruments modified in reporting periods
         beginning after June 29, 2005. The Company does not have any
         convertible debt securities.

         In September 2005, the Financial Accounting Standards Board Emerging
         Issues Task Force issued EITF 05-07, "Accounting for Modifications to
         Conversion Options Embedded in Debt Instruments and Related Issues."
         EITF 05-7 is effective for future modifications of debt instruments
         beginning in the first interim or annual reporting period beginning
         after December 15, 2005. The Company does not expect there to be a
         material impact from the adoption of EITF 05-07 on our consolidated
         financial position, results of operations, or cash flows.

                                                                     (Continued)

                                      F-14


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Recent accounting pronouncements (Continued)
         --------------------------------------------

         In September 2005, the Financial Accounting Standards Board Emerging
         Issues Task Force issued EITF 05-08, "Income Tax Consequences of
         Issuing Convertible Debt with a Beneficial Conversion Feature." EITF
         05-08 is effective for financial statements beginning in the first
         interim or annual reporting period beginning after December 15, 2005.
         The Company does not expect there to be a material impact from the
         adoption of EITF 05-08 on our consolidated financial position, results
         of operations, or cash flows.


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

         As of December 31, 2005 property and equipment consisted of the
         following:

                                                                        2005
                                                                    -----------
                  Automobile                                        $    11,215
                  Medical equipment                                     980,177
                  Office equipment, furniture and fixtures               89,756
                  Leasehold improvements                                158,372
                                                                    -----------
                                                                      1,239,520
                  Less accumulated depreciation and amortization       (848,311)
                                                                    -----------
                                                                    $   391,209
                                                                    ===========

4.       INTANGIBLE ASSETS
         -----------------

         Components of the Company's identifiable amortizable intangible assets
         at December 31, 2005 are as follows:

                                  Gross Carrying   Accumulated     Net Carrying
                                      Amount       Amortization       Amount
                                   ------------    ------------    ------------

             Guarantee fee         $     90,732    $     24,197    $     66,535
             Technology rights          100,000          19,845          80,155
                                   ------------    ------------    ------------
             Total                 $    190,732    $     44,042    $    146,690
                                   ============    ============    ============

         Amortization expense of intangible assets for the years ended December
         31, 2005 and 2004 amounted to $37,993 and $6,049, respectively.
         Amortization expense of intangible assets for the next five succeeding
         years is approximately $21,500 (2006); $21,500 (2007); $21,500 (2008);
         $13,800 (2009); and $11,200 (2010).

                                                                     (Continued)

                                      F-15


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


5.       LONG-TERM DEBT
         --------------

<TABLE>
         As of December 31, 2005 long-term debt consisted of the following:

                                                                                    2005
                                                                               --------------
<S>                                                                            <C>
         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.                         $     289,488

         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.                   321,673

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

         Note payable to related party, interest at 7% per annum and
         principal due December 18, 2009,collateralized by technology
         rights. The note 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.                                                                 100,000
                                                                               --------------
                                                                                      924,729
         Less current portion                                                        (150,004)
                                                                               --------------
         Long-term debt                                                        $      774,725
                                                                               ==============
</TABLE>

         Annual payments under long-term obligations, for future years ending
         December 31, are as follows:

                  2006                                $      199,000
                  2007                                       204,000
                  2008                                       226,500
                  2009                                       230,500
                  2010                                        96,000
                  Thereafter                                 194,855
                                                      --------------
                                                           1,150,855
                  Amount representing interest              (226,126)
                                                      --------------
                                                      $      924,729
                                                      ==============


6.       INCOME TAXES
         ------------

         Income taxes have been recorded under SFAS No. 109, "Accounting for
         Income Taxes." There is no significant income tax expense for 2005 and
         2004 due to losses incurred by the Company. 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, 2005 the Company's deferred tax
         assets are comprised of the following items:

                                                                     (Continued)

                                      F-16


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


6.       INCOME TAXES (CONTINUED)
         ------------------------

                                                                   2005
                                                             ---------------
                  Deferred tax assets (liabilities)
                        Net operating loss carryforwards     $     4,102,000
                        Note receivable reserve                      288,000
                        Allowance for doubtful accounts               53,000
                        Other                                         (3,000)
                                                             ---------------

                                                                   4,440,000
                        Less valuation allowance                  (4,440,000)
                                                             ---------------

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

         In assessing the realizability of the deferred tax asset, management
         considered whether it is more likely than not that some portion or all
         of the deferred tax assets will be realized. The ultimate realization
         of deferred tax assets is dependent upon the generation of future
         taxable income during the periods in which those temporary differences
         become deductible. Management considers the scheduled reversal of
         deferred tax liabilities, the projected future taxable income and tax
         planning strategies in making this assessment. Based on the Company's
         analysis in 2005, management concluded not to retain a deferred tax
         asset since it is uncertain whether the Company can utilize this asset
         in future periods. Therefore, the Company has established a full
         reserve against this asset.

         A reconciliation of the expected tax computed at the U.S. statutory
         federal income tax rate to the total for income taxes at December 31,
         2005 and 2004 follows:

<TABLE>
                                                                        Percent of                         Percent of
                                                                         Pre-tax                             Pre-tax
                                                        2005             Income              2004            Income
                                                    ------------      -------------      ------------      ----------
<S>                                                 <C>                 <C>              <C>                 <C>
         Expected tax at 34%                        $   (797,000)       (34.0)   %       $   (621,000)       (34.0) %
         State income tax, net of federal tax           (144,000)        (6.14)  %           (104,000)        (5.8) %
         Change in valuation allowance                   499,000         21.0    %            707,000         37.4  %
         Non deductible expenses and other,              442,000         19.1    %             18,000          2.4  %
                                                    ------------      -------------      ------------      ----------
                                                    $          -          0.0    %       $          -          0.0 %
                                                    ============      =============      ============      ==========
</TABLE>

         At December 31, 2005, the Company had net operating loss carryforwards
         of approximately $11,182,000 for federal tax purposes, expiring through
         2025. 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. In addition, the Company had
         net operating loss carryforwards of approximately $4,890,000 for state
         tax purposes, which begin to expire in 2015.

                                                                     (Continued)

                                      F-17


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


7.       STOCKHOLDERS' DEFICT
         --------------------

         Common stock - 2004 activity
         ----------------------------

         In 2004, the Company sold 9,805,340 shares of its common stock at
         prices between $0.05 and $0.20 per share. Cash proceeds from the sale
         of $827,767 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.

         In August 2004, the Company reached an agreement whereby its Chief
         Executive Officer personally guaranteed notes payable to two vendors
         amounting to approximately $907,000. In exchange for the guaranty, the
         Company issued 1,814,644 shares of common stock to the Chief Executive
         Officer. The fair value of the Company's stock on August 7, 2004, the
         date the stock was issued, was $0.05 per share. The fair value of the
         stock issued for this guarantee amounted to $90,732 and has been
         capitalized as a guarantee fee. The fee is being amortized to interest
         expense as the related note payable to the vendor is paid down.
         Amortization expense recorded in during 2005 and 2004 amounted to
         $18,148 and $6,049, respectively. As of December 31, 2005 and 2004 the
         guaranteed notes payable amounted to approximately $611,000 and
         $678,000, respectively.

         Common stock - 2005 activity
         ----------------------------

         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 December 31, 2005, the Company sold 15.5 Units
         totaling 968,750 shares for proceeds of $532,498 net of offering costs
         of $48,750.

         The common stock with detachable warrants sold under the private
         placement offering is accounted for in accordance with Emerging Issues
         Task Force ("EITF") Issue Nos. 00-19 and 05-04, and Statement of
         Financial Accounting Standards No. 133, "Accounting for Derivative
         Instruments and Hedging Activities" as amended ("SFAS 133"). Due to the
         holder's mandatory registration rights provision contained in the terms
         governing the private placement offering, the Company concluded that
         share settlement is not controlled by the Company, accordingly they
         qualify as derivative instruments in accordance with EITF 00-19. At
         each balance sheet date, the Company adjusts the derivative financial
         instruments to their estimated fair value and analyzes the instruments
         to determine their classification as a liability or equity.

                                                                     (Continued)

                                      F-18


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


7.       STOCKHOLDERS' DEFICT (CONTINUED)
         --------------------------------

         Common stock - 2005 activity (Continued)
         ----------------------------------------

         As of December 31, 2005, the estimated fair value of the Company's
         derivative liability was $1,378,689. This estimate includes the fair
         value of three elements; common stock, detachable warrants, and share
         settlement. The estimated fair value of the common stock was determined
         to be an amount equal to the proceeds from their sale, or $581,248. The
         estimated fair value of the warrants upon issuance of $266,406 was
         determined using the Black-Scholes option-pricing model with stock
         prices on the respective dates of grant, an exercise price of $1.25 per
         share, a term from the date of grant through March 31, 2007, and a
         volatility factor relative to the date of issuance. The model uses
         several assumptions including historical stock price volatility,
         risk-free interest rate, remaining time till maturity, and the closing
         price of the Company's common stock to determine estimated fair value
         of the derivative liability. In valuing the warrants at December 31,
         2005, the Company used the closing price of $0.62 per share, an
         exercise price of $1.25 per share, a remaining term of 1.25 years, and
         a volatility of 362%. The estimated fair value of the warrants
         increased from the time of grant to December 31, 2005 resulting in the
         recognition of a loss from the change in this derivative liability of
         $16,227. The estimated fair value of share settlement is determined by
         applying the Black-Scholes option-pricing model using average factors
         to the quantity of shares in excess of those authorized needed in order
         to settle all outstanding contracts. At December 31, 2005, the
         estimated fair value of share settlement amounted to $514,808 on
         830,792 shares in excess of those needed in order to settle all
         outstanding contracts. In valuing the excess shares at December 31,
         2005, the Company used the closing price of $0.62 per share, an average
         exercise price of $0.62 per share, an average remaining term of 3.6
         years, and a volatility of 362%.

         The recorded value of the derivative liability can fluctuate
         significantly based on fluctuations in the market value of the
         underlying securities of the issuer as well as in the volatility of the
         stock price during the term used for observation and the term remaining
         for the warrants.

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

         As of December 31, 2005, the Company was owed $63,557 from an entity
         controlled by an officer/shareholder of the Company. This note
         receivable is presented in the accompanying balance sheet as an offset
         to shareholders' equity. Interest earned on this note receivable
         amounted to $17,757 for each of the years ended December 31, 2005 and
         2004, respectivly.

         Stock options activity
         ----------------------

         Pursuant to SFAS 123, if an award is for past services, as indicated
         when the options are immediately exercisable by the holders,
         compensation cost is fully expensed at the date of grant, which is the
         measurement date. The options granted during 2004 had a performance
         condition stipulated in the option agreement, and the options will not
         be exercisable until the condition is met. The options granted had
         counter-party performance conditions, thus at the measurement date, the
         equity instruments are valued at the lowest of the defined alternative
         amounts. The value of the options under the success outcome was
         $110,666 at that date, and the value of the failure outcome was zero.
         Accordingly, we will recognize the additional cost when the performance
         outcome is known or determinable by us. Pursuant to SFAS 123, when a
         counter party performance condition exist, then interim measurements
         should be based on the lowest of the alternative values as of each
         date, with subsequent changes in this same measure assigned to later
         periods. As of December 31, 2005, the parties have not met the
         performance conditions for vesting of the options.

                                                                     (Continued)

                                      F-19


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


7.       STOCKHOLDERS' DEFICIT (CONTINUED)
         ---------------------------------

         Stock options activity (continued)
         ----------------------------------

         On July 7, 2004 and December 31, 2004, the Company's Board of Directors
         approved the grant of stock options to independent consultants to
         purchase 500,000 and 250,000 shares of its common stock, respectively.
         These options have an exercise price of $0.07 per share, expire five
         years after becoming exercisable, and vest over the following
         milestones: (i) 20% upon completion of the design and draft of the
         wearable artificial kidney, (ii) 20% upon completion of the
         construction of a working prototype, (iii) 20% upon completion of
         animal studies, (iv) 20% upon completion of human studies, and (v) 20%
         upon first commercial sale of the device in the market. As of December
         31, 2005 and 2004, 450,000 of these option shares were vested. The
         Company has recorded $70,000 in compensation expense in 2004. These
         options were not issued as part of any of the Company's registered
         Stock Option Plans.

         On August 7, 2004 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 per share and expire five years after becoming
         exercisable. Of these options, 100,000 vested immediately, and 400,000
         vest upon obtaining government funding. As of December 31, 2005 and
         2004, 100,000 of these option shares were vested. As a result, the
         Company has recorded $6,000 in compensation expense in 2004. These
         options were not issued as part of any of the Company's registered
         Stock Option Plans.

         On December 31, 2004, 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 per share and expire five years after becoming
         exercisable. Of these options, 50,000 vested immediately, and 200,000
         vest upon obtaining government funding. As of December 31, 2005 and
         2004, 50,000 of these option shares were vested. As a result, the
         Company has recorded $10,000 in compensation expense in 2004. These
         options were not issued as part of any of the Company's registered
         Stock Option Plans.

         During 2004, the Company recognized $86,000 in expense related to the
         issuance of the options which were vested as of December 31, 2004. As
         of December 31, 2005, the parties have not met the performance
         conditions for vesting of the options. The Company did not grant stock
         options during the year ended December 31, 2005.

         The Company has granted options to acquire common stock under three
         plans and various other grants made directly to certain parties for
         incentive compensation and as compensation for services rendered. As of
         December 31, 2005 and 2004, 10,671,720 and 11,531,720 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.

                                                                     (Continued)

                                      F-20


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


7.       STOCKHOLDERS' DEFICIT (CONTINUED)
         ---------------------------------

         Stock options activity (continued)
         ----------------------------------

         A summary of the Company's stock option activity and related
         information is as follows:

<TABLE>
<S>     <C>
                                                        2005                                    2004
                                         -----------------------------------     --------------------------------
                                                               Wt Average                            Wt Average
                                             Options         Exercise Price         Options        Exercise Price
                                         --------------      --------------      ------------      --------------
Outstanding - beginning of year              11,531,720      $         0.93        10,031,720      $         1.05
Granted                                               -      $            -         1,500,000      $         0.09
Exercised                                      (50,000)      $         0.10                 -      $            -
Forfeited                                     (810,000)      $         2.20                 -      $            -
                                         --------------      --------------      ------------      --------------
Outstanding - end of year                    10,671,720      $         0.84        11,531,720      $         0.93
                                         ==============      ==============      ============      ==============

         The following table summarizes the number of option shares, the
         weighted average exercise price, and weighted average life (by years)
         by price range for both total outstanding options and total exercisable
         options as of December 31, 2005:

                                           Total Outstanding                         Total Exercisable
                               ----------------------------------------       -----------------------------
                                   # of          Wt Average                        # of        Wt Average
Price Range                       Shares       Exercise Price     Life          Shares       Exercise Price
------------------------------ ------------    --------------    ------       -----------    --------------
$0.05 - $0.99                     3,771,720    $        0.09      4.26          2,771,720    $         0.09
$1.00 - $3.50                     6,900,000    $        1.24      0.95          4,300,000    $         1.24
                               ------------    --------------    ------       -----------    --------------
                                 10,671,720    $        0.84      2.12          7,071,720    $         0.79
                               ============    ==============    ======       ===========    ==============
</TABLE>

         Stock warrant activity
         ----------------------

         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. During 2004, 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. During 2004, the Company recorded the estimated fair value
         of these warrants of $92,500.

         During 2005, the Company issued 484,375 warrants to stockholders under
         the private placement described above in Note 7 under the caption
         "Common stock - 2005 activity". These warrants have an exercise price
         of $1.25 per share, vest immediately upon issuance and expire March 31,
         2007.

                                                                     (Continued)

                                      F-21


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


7.       STOCKHOLDERS' DEFICIT (CONTINUED)
         ---------------------------------

         Stock warrants activity (continued)
         -----------------------------------

         A summary of the Company's warrant activity and related information is
         as follows:

<TABLE>
<S>     <C>
                                                       2005                               2004
                                          -------------------------------     ------------------------------
                                                             Wt Average                           Wt Average
                                             Warrant       Exercise Price        Warrant      Exercise Price
                                          -------------    --------------     ------------    --------------
Outstanding - beginning of year               2,250,000    $         0.20                -    $            -
Granted                                         484,375    $         1.25        2,250,000    $         0.20
Exercised                                             -    $            -                -    $            -
Forfeited                                             -    $            -                -    $            -
                                          -------------    --------------     ------------    --------------
Outstanding - end of year                     2,734,375    $         0.39        2,250,000    $         0.20
                                          =============    ==============     ============    ==============

         The following table summarizes the number of warrants, the weighted
         average exercise price, and weighted average life (by years) by price
         range for both total outstanding warrants and total exercisable
         warrants as of December 31, 2005:

                                            Total Outstanding                        Total Exercisable
                               ----------------------------------------       ------------------------------
                                   # of          Wt Average                       # of          Wt Average
Price Range                       Shares       Exercise Price     Life           Shares       Exercise Price
------------------------------ ------------    --------------    ------       ------------    --------------
$0.20 - $0.99                     2,250,000    $         0.20     5.88           2,250,000    $         0.20
$1.00 - $1.25                       484,375    $         1.25     1.25             484,375    $         1.25
                               ------------    --------------    ------       ------------    --------------
                                  2,734,375    $         0.39     5.06           2,734,375    $         0.39
                               ============    ==============    ======       ============    ==============
</TABLE>

8.       RELATED PARTY TRANSACTIONS
         --------------------------

         Office space
         ------------

         The Company leases its corporate administrative offices on a
         month-to-month basis from Medipace Medical Group, Inc., a company in
         which the Company's chief executive officer is a majority shareholder.
         Total rent paid by the Company for each of the years ended December 31,
         2005 and 2004 amounted to $16,800.

         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 Note 2,
         Technology Rights, and Note 5). 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. 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 employee 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.

                                                                     (Continued)

                                      F-22


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         Laboratory services
         -------------------

         The Company obtains laboratory services from an entity controlled by an
         officer/shareholder of the Company. Laboratory service fees charged by
         the entity for the year ended December 31, 2005 amounted to $74,169. Of
         this amount $18,000 is included in research and development expense,
         and $56,169 is included in cost of medical services. Laboratory service
         fees charged by the entity for the year ended December 31, 2004
         amounted to $51,874 included in cost of medical services.

         Dialysis services
         -----------------

         The Company provides dialysis services to patients at facilities
         operated by an entity owned approximately 15% by an officer/shareholder
         of the Company. Fees for dialysis services charged to the entity during
         the years ended December 31, 2005 and 2004 amounted to approximately
         $278,000 and $288,000, respectively.

         Due to stockholders
         -------------------

         As of December 31, 2005, the Company owed $105,966 to two of its
         stockholders which are due on demand. No interest was charged on these
         advances for the year ended December 31, 2005. Interest expense for the
         year ended December 31, 2005, and accrued expenses at December 31, 2005
         include $28,000 of interest charged on the related party note payable.


9.       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 leases provide 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
         approximately are:

                           2006             $     183,000
                           2007                    76,000
                                            -------------

                                            $     259,000
                                            =============

         Total rent expense, including equipment rentals, for the years ended
         December 31, 2005 and 2004 amounted to approximately $192,000 and
         $171,000 respectively.

         Litigation
         ----------

         In 2005 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. At December 31, 2005, an amount of $5,000 was
         outstanding on account of this settlement and is included in current
         liabilities in the accompanying Balance Sheet.

                                                                     (Continued)

                                      F-23


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


10.      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 $690 and $794 for 2005 and 2004,
         respectively.


11.      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, 2005.


12.      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.

         The Company's reportable operating segments include dialysis services
         and development of a wearable artificial kidney. The accounting
         policies of the operating segments are the same as those described in
         the summary of significant accounting policies.

<TABLE>
                 December 31, 2005             Dialysis Services    Artificial Kidney          Total
         ----------------------------------    -----------------    -----------------    ----------------
<S>                                            <C>                  <C>                  <C>
         Total income                          $      4,136,975     $              -     $     4,136,975
         Operating income (loss)               $        713,523     $     (2,197,360)    $    (1,483,837)
         Property and equipment, net           $        391,209     $              -     $       391,209
         Interest income (expense)             $        (86,056)    $              -     $       (86,056)

                 December 31, 2004
         ----------------------------------
         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)
</TABLE>

13.      GOING CONCERN
         -------------

              For the past several years, the Company has experienced net
              operating losses, and as of December 31, 2005 has an accumulated
              deficit of $8,023,615 and a working capital deficiency (defined as
              current assets minus current liabilities) of $3,202,980. In
              addition, total liabilities exceed total assets by $3,439,806.
              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.

                                                                     (Continued)

                                      F-24


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


13.      GOING CONCERN (CONTINUED)
         -------------------------

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

         o        Conducting a private placement beginning in April, 2005, with
                  maximum possible offering proceeds from the sale of its common
                  stock of $5,025,000. As of December 31, 2005, the Company
                  raised net proceeds of $532,498 relating to this offering. The
                  Company is actively seeking investors under this offering.

         o        As described in Note 14, stockholders have loaned $1,150,000
                  to the Company.

         o        The Company is currently negotiating reductions in amounts due
                  its creditors.

         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.


14.      RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS UNAUDITED
         -------------------------------------------------------

         The Company has restated its previously issued interim consolidated
         financial statements as of June 30, 2005 and September 30, 2005 to
         properly reflect the accounting for common stock issued with detachable
         warrants under a private placement offering with mandatory registration
         rights pursuant to EITF Nos. 00-19 and 05-04, and SFAS No. 133, and the
         related income tax effects. The effect on the interim financial
         statements for June 30, 2005 and September 30, 2005 is noted below:

         Three and six months ended June 30, 2005
         ----------------------------------------

         The following is a summary of the restatements for the six months ended
         June 30, 2005 (unaudited):

         Fair value of debt derivative liability                $      (645,899)
                                                                ================


         The following is a summary of the restatements for the six months ended
         June 30, 2005:

         Income tax effect of restatement                       $             -
         Total increase in net loss                             $       645,899

                                                                     (Continued)

                                      F-25


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


14.      RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS UNAUDITED (CONTINUED)
         -------------------------------------------------------------------

         Three and six months ended June 30, 2005 (Continued)
         ----------------------------------------------------

         The effect on the Company's previously issued June 30, 2005 financial
         statements is summarized as follows:

<TABLE>
                                                         Previously
                                                          reported          Change           Restated
                                                         -----------      -----------      -----------
                                                         (unaudited)                       (unaudited)
<S>                                                      <C>              <C>              <C>
         Balance Sheet
            Derivative liability                         $        --      $ 1,133,399      $ 1,133,399
            Total current liabilities                    $ 1,352,752      $ 1,133,399      $ 2,486,151
            Total liabilities                            $ 2,193,804      $ 1,133,399      $ 3,327,203
            Additional paid-in capital                   $ 4,757,337      $  (487,500)     $ 4,269,837
            Accumulated deficit                          $(6,223,559)     $  (645,899)     $(6,869,458)
            Total stockholders' deficit                  $(1,175,145)     $(1,133,399)     $(2,308,544)

         Statement of Operations - three months
            Loss from change in derivative liability     $        --      $  (645,899)     $  (645,899)
            Total other expense                          $   (26,963)     $  (645,899)     $  (672,862)
            Loss before income taxes                     $  (232,921)     $  (645,899)     $  (878,820)
            Net Loss                                     $  (232,921)     $  (645,899)     $  (878,820)
            Basic and diluted loss per share             $     (0.01)     $     (0.01)     $     (0.02)

         Statement of Operations - six months
            Loss from change in derivative liability     $        --      $  (645,899)     $  (645,899)
            Total other expenses                         $   (45,946)     $  (645,899)     $  (691,845)
            Loss before income taxes                     $  (544,469)     $  (645,899)     $(1,190,368)
            Net Loss                                     $  (544,469)     $  (645,899)     $(1,190,368)
            Basic and diluted loss per share             $     (0.01)     $     (0.02)     $     (0.03)
</TABLE>

         The net loss for the three and six months ended June 30, 2005 increased
         $645,899 relating to an increase in the loss from change in derivative
         liability of $645,899.

         On the June 30, 2005 balance sheet, the restatement resulted in an
         increase to the derivative liability of $1,133,399, a decrease in
         additional paid in capital of $487,500, and an increase in the
         accumulated deficit of $645,899.

         Three and nine months ended September 30, 2005
         ----------------------------------------------

         The following is a summary of the restatements for the nine months
         ended September 30, 2005 (unaudited):

         Fair value of debt derivative liability                 $     (760,037)
                                                                 ===============


         The following is a summary of the restatements for the nine months
         ended September 30, 2005:

         Income tax effect of restatement                        $            -
         Total increase in net loss                              $      760,037

                                                                     (Continued)

                                      F-26


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


14.      RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS UNAUDITED (CONTINUED)
         -------------------------------------------------------------------

         Three and nine months ended September 30, 2005 (Continued)
         ----------------------------------------------------------

         The effect on the Company's previously issued September 30, 2005
         financial statements are summarized as follows:

<TABLE>
                                                         Previously
                                                          reported          Change           Restated
                                                         -----------      -----------      -----------
                                                         (unaudited)                       (unaudited)
<S>                                                      <C>              <C>              <C>
         Balance Sheet
            Derivative liability                         $        --      $ 1,341,285      $ 1,341,285
            Total current liabilities                    $ 1,634,239      $ 1,341,285      $ 2,975,524
            Total liabilities                            $ 2,421,571      $ 1,341,285      $ 3,762,856
            Additional paid in capital                   $ 4,850,424      $  (581,248)     $ 4,269,176
            Accumulated deficit                          $(6,589,900)     $  (760,037)     $(7,349,937)
            Total stockholders' deficit                  $(1,432,122)     $(1,341,285)     $(2,773,407)

         Statement of Operations - three months
            Loss from change in derivative liability     $        --      $  (760,037)     $  (760,037)
            Total other expense                          $    (9,921)     $  (760,037)     $  (769,958)
            Loss before income taxes                     $  (366,342)     $  (760,037)     $(1,126,379)
            Net Loss                                     $  (366,342)     $  (760,037)     $(1,126,379)
            Basic and diluted loss per share             $     (0.01)     $     (0.02)     $     (0.03)

         Statement of Operations - nine months
            Loss from change in derivative liability     $        --      $  (760,037)     $  (760,037)
            Total other expenses                         $   (55,870)     $  (760,037)     $  (815,907)
            Loss before income taxes                     $  (910,810)     $  (760,037)     $(1,670,847)
            Net Loss                                     $  (910,810)     $  (760,037)     $(1,670,847)
            Basic and diluted loss per share             $     (0.02)     $     (0.02)     $     (0.04)
</TABLE>

         The net loss for the three and nine months ended September 30, 2005
         increased $760,037 relating to an increase in the loss from change in
         derivative liability of $760,037.

         On the September 30, 2005 balance sheet, the restatement resulted in an
         increase to the derivative liability of $1,341,285, a decrease in
         additional paid in capital of $581,248, and an increase in accumulated
         deficit of $760,037.

                                                                     (Continued)

                                      F-27


<PAGE>

                           NATIONAL QUALITY CARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

         On March 24, 2006, amounts due to stockholders totaling $1,150,000,
         including $100,000 of the amount due as of December 31, 2005, were
         converted to uncollateralized convertible promissory notes, bearing
         interest at 8% per annum. Under the terms of the notes, for a period of
         one year through March 24, 2007, the principal amount of the notes,
         plus any accrued interest thereon, may be converted into shares of the
         Company's common stock at a conversion price of $0.48 per share.

         On February 3, 2006, the Company converted $300,000 of accounts payable
         into a note, collateralized by dialysis equipment and guaranteed by a
         stockholder, payable $9,000 per month commencing March 5, 2006,
         including interest at 0.50% over the bank's index rate, as defined (8%
         initially), maturing February 5, 2009 when all remaining unpaid
         principal is due.


                                      F-28