Form 10-K





x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the Fiscal Year Ended July 31, 2010





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





For the Transition Period from _____ to _____





Commission File Number 333-130295





WELLSTAR INTERNATIONAL, INC.


(Exact name of small business issuer as specified in its charter)





Nevada

20-1834908(State or other jurisdiction of incorporation

or organization)

(IRS Employer Identification No.)





6911 Pilliod RoadHolland, Ohio

43528

419-865-0069(Address of principal executive office)

(Postal Code)

(Issuer's telephone  number)




Securities registered under Section 12(b) of the Exchange Act: None





Securities registered under Section 12(g) of the Exchange Act: None





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





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





Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes x No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo o





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


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




Large accelerated filer o                                                                                              Accelerated filer o




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




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o Nox





The aggregate market value of the voting stock held by non-affiliates as of November 10, 2010 was $ 1,474,265.





Number of outstanding shares of the registrant's par value $0.001 common stock as of November 10, 2010:


7,371,327,726


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WELLSTAR INTERNATIONAL, INC.





FORM 10-K





For the Fiscal Year Ended July 31, 2010





Part I
PageItem 1. Description of Business.
4Item 1A. Risk Factors
14Item 1B. Unresolved Staff Comments
14Item 2. Description of Property.
14Item 3. Legal Proceedings.
14Item 4. (Removed and Reserved)
14Part IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases or Equity Securities.
14Item 6. Selected Financial Data
17Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
17Item 7A. Quantitative and Qualitative Disclosures about Market Risk
25Item 8. Financial Statements and Supplementary Data
F-Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
26Item 9A. Controls and Procedures.
26Item 9A(T). Controls and Procedures.
26Item 9B. Other Information.
27Part III
PageItem 10. Directors, Executive Officers and Corporate Governance.
28Item 11. Executive Compensation.
30Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
31Item 13. Certain Relationships and Related Transactions, and Director Independence.
32Item 14. Principal Accountant Fees and Services.
33Item 15 Exhibits, Financial Statement Schedules
33Signatures.
34Financial Statements
F-1


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PART I





FORWARD-LOOKING INFORMATION





This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.





Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risks Factors” that may be included in our reports from time to time, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission ("SEC"). We make available on our Web site under "Investor Relations/SEC Filings," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.





We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.





ITEM 1.  DESCRIPTION OF BUSINESS





Corporate History





Wellstar International, Inc. ("Wellstar" or the "Company") was formed in the State of Nevada on December 5, 1997. Wellstar was a development stage company with no operating activities. On July 12, 2005, Wellstar entered into a share exchange agreement with Trillennium Medical Imaging, Inc. ("Trillennium" or "TMI"), a development stage company formed in June of 2005. As a result of the share exchange agreement, Trillennium became a subsidiary of Wellstar.





Wellstar International, Inc., through its Trillennium subsidiary, is dedicated to developing and licensing the use of advanced thermal imaging technology (TMI SYSTEM) in the consumer health care markets throughout the World.





Introduction





TMI is dedicated to placing cameras, for a monthly charge in hospitals, clinical and long care facilities throughout the United States. Management believes the Company’s current competitive advantage is derived from the state of the art technology of the camera and software it is utilizing, combined with an intimate knowledge and relationships in the markets. Although there is no guarantee that the Company will be successful in its plans to grow in these markets by expanding its imaging capabilities through  the acquisition of new imaging technologies of which there is no guarantee.


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The TMI Infrared Technology and software is approved by the FDA as an Adjunctive Diagnostic screening procedure for early breast cancer detection, differential diagnosis of pain dysfunctions, (such as Reflex Sympathetic Dystrophy, Neuromuscular Skeletal Syndromes and Neurological disorders), detection of pressure ulcers, deep tissue injuries, and bed sores, as well as orthopedic applications.  This screening modality provides a differential diagnosis to justify additional screening procedures to ensure successful patient outcome assessment. Thermal Imaging is a low cost, non-contact, non-radioactive diagnostic screening procedure designed for clinical evaluation. In addition, thermal imaging provides an ability to track the progress of therapies being utilized in a low cost, non-invasive manner.





The TMI Infrared Technology fills a need that currently exists in diagnostic medicine today. Thermal imaging provides information that is specific to the physiological and functional activity in the body. This information becomes invaluable in that conventional diagnostic screening utilizes tests such as X-Ray, MRI and CT Scans. All aspects of these tests are concerned with the anatomical and structural problems of the body. Many problems arise from not combining both diagnostic modalities of structure and physiology, in that people are missed diagnosed and considered healthy and well when the physiological information provides an earlier outcome or risk assessment of future health predictors than the structural modalities.





Our marketing will be focused on university research centers, hospitals, multidisciplinary physician practices, pain centers, long term care facilities, home health care and rehabilitation centers support the need for this type of screening modality.








History and Future of Medical Infrared Applications





The detection and estimation or measurement of heat released by the body has been a cornerstone of medicine since its beginning.  The earliest physicians knew the presence of excessive heat signaled illness.  For centuries the measurement of heat, either present in or being released by the body, required contact.  Temperature was physically felt and much later was measured with various devices such as the thermometer.





In the 1800’s Herschel demonstrated the presence of heat energy as an invisible wave, much like light.  Heat could be reflected and refracted under the right conditions.  Understanding of this heat energy wave would require years of investigation. Much later, as all with all scientific advances, these studies would provide more finite measurements of heat energy.





In the 1940’s, the electronic detector of infrared energy was developed for use in military applications.  Night vision scopes were the first applications.  The science of infrared detection owes its current development and sophistication to demands from military and industrial applications.





Medical use of infrared detection lagged behind military application due to government classification of the infrared detectors and technologies.  Only when scientific advances are released from such government restrictions are they open to general use and applications.  Once available, the scientific/medical application of the heat detector was made simultaneously by the British, the Canadians and Americans. These scientists and physicians used thermal imaging as a measurement of human physiology; the most common applications being the evaluation of cancerous tumors. The level of heat emitted was correlated to the presence and type of disease, as well as a prognostic indicator.  Many tumors were hot, and the hotter the tumor the worse the outcome.





These first infrared applications were both costly and cumbersome, therefore the infrared detection units were found mostly in research.  Like all early electronics the infrared detection systems were physically large, costly to produce and challenging to operate. These restrictions meant exposure to general medicine use was limited.





Today, through the advances in all levels of science, and driven by military funding, infrared detection devices are state-of-the art electronics.  Like all electronic components, the infrared detector has come down in cost, size and has significantly improved in general applicability.


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The continued refinement of infrared systems, both in image acquisition and data collection, has brought the use of infrared energy analysis to a new level.  Together with a better understanding of human and animal physiological thermoregulatory mechanisms, the use of infrared detection in health and illness provides a new mechanism for early disease detection.





Trillennium Medical Imaging recognized the medical need for cost-effective, non-contact physiological monitoring – and embraced the use of infrared imaging.  Trillennium is dedicated to the advancement of infrared detection in medicine. Trillennium has forged relationships with well-known manufacturers of infrared detection systems, recognizable entities in multiple medical specialties, and highly skilled computer analysts – and together are developing state-of the art infrared imaging systems, as well as investigating new uses/applications in medicine.





The focus of medicine and health care today means technology must be “faster, better, and more cost-effective.” Trillennium Medical Imaging and its partners are working to make infrared detection systems the easiest to use, applicable in the every-day clinical setting and cost-effective in its application.





The use of infrared analysis has historically been limited in clinical application.  With improved science comes improve equipment development and with computerization – the analytical evaluation of infrared information is moving to new levels.  Today’s computerization of infrared systems is overcoming the limitations of the past applications.   Trillennium Medical Imaging systems incorporate, not only objective temperature data analysis, but TMI has also taken data collection to a new level.  Today, medical device development and use is based on evidence of efficacy.  Application data collected from all TMI systems is compiled into a single database that will continue to provide the statistical analysis needed to demonstrate the efficacy of this technology in all current and future applications. TMI believes that it is currently the only company to incorporate this data collection component into their systems.





The first records of physical observation demonstrate that physiological temperature variations have signaled the presence of disease.  Today the importance of this vital physical parameter is of no less significance. Together, scientific advancements and technological improvements will demonstrate that temperature shifts can signal the earliest stages of physiological change. Through non-contact temperature analysis, Trillennium Medical Imaging and partners will continue to demonstrate the efficacy of infrared analysis in disease detection and to drive the use of infrared analysis in new medical applications.





The Future of Disease Detection





Trillennium Medical Imaging sees the future of infrared imaging moving to critical positions in early phase disease detection and monitoring.  Although currently not a diagnostic modality, infrared analysis still provides key information in health monitoring.   Management believes Trillennium’s completed research project conducted at Duke University for early detection of tissue breakdown will provide the initial data demonstrating the TMI Systems ability to detect damage prior to visible evidence.  We believe this capability – in a non-contact device – will save patients from potential disabling conditions, as well as generate a sizeable cost-savings in health care.





Markets





Skin Assessment





The early visualization of tissue damage that can lead to development of pressure ulcers and or deep tissue injury is paramount to the reduction of open sores and the deadly complications that accompany them. Currently, no method of detection is used that can identify tissue breakdown prior to the visible and palpable changes that take place.





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Trillennium Medical Imaging began investigation of this health care issue shortly after the company was formed. The ability of infrared to detect blood flow changes is well documented and the key benefit of the technology.  Association of blood flow changes to both pressure ulcers and deep tissue injury has been documented since the 1970’s when early imaging units were used to image suspicious damage. One of the original studies of pressure sores by thermal detection was conducted by Barton and Barton in 1973.  Studying existing ulcers they determined the temperature variations present with their classification of ‘indolent’ and normal pressure sores. The category of indolent was associated with a longer healing time (approximately four months) and a temperature difference of 1°C or less.  A classification of normal demonstrated a higher temperature differential of approximately 2.5oC and healed more quickly than indolent sores and the patients generally displayed a better outcome. This ‘normal’ classification of ulcer was generally attributed to the ‘otherwise healthy person’ whose pressure sore was either post operative from extended times in one position or from incorrect use of a prosthetic device. This wound usually resolved in six weeks.  This thermal evaluation has been substantiated by Hansen et al in a 1996 study.





The size, cost and availability of infrared was a limiting factor in its use for many years.  The most cost effective detection was contact thermography, and the question was if the contact alone was increasing the possible artifact of damage.  Electronic imaging provided the benefit of non-contact evaluation, but thermal artifact induced in uncontrolled environments was still a question.





Trillennium Medical Imaging began the process of incorporating computerized analysis of images to eliminate the subjective influence of previous infrared analysis.  Changes introduced in the analytical phase reduced the influence of environmental shifts.  This proprietary approach has been evaluated through a completed study at Duke University and the data / results will be released and published in the very near future.





Market Opportunities





Functional or physiological evaluation conducted with infrared imaging has applications in many areas of medicine. Initially, Trillennium Medical Imaging focused on three key markets with our current imaging system: Breast Health Monitoring, Pain Evaluation; and Sports Medicine applications.  However, recent developments indicate significant economic gains can be realized with a revised plan.





Trillennium Medical has begun investigating the use of infrared detection in early stage pressure ulcer development. Trillennium is proposing a unique approach for early detection of tissue changes that will significantly impact the wound care market.  TMI is in the initial phase for design and application of a new imaging device that incorporates software and data collection that is separate and apart from its current clinical markets.





While Trillennium Medical Imaging will continue to prove the viability of IR through its ongoing trials in existing markets (outlined under existing market profile), it is evident that a method of early detection of tissue changes related to pressure ulcers is not currently available.





Pressure ulcers have always been an area of concern for healthcare providers due to the degradation of the patient’s condition and the increased care required when pressure ulcers occur.   Pressure ulcers are responsible for over 65,000 deaths per year in the United States alone.  Aside from the human toll, the costs involved in treating this problem are enormous.   Taking into consideration all direct, indirect and peripheral costs, it is conservatively estimated that currently over $25 billion is spent annually on wound care in the United States (Columbia Surgery, Department of Surgery, H. Brem, M.D., 2006).





New regulation recently imposed by the Center for Medicare and Medicaid will reshape the approach by all health care facilities and practitioners.  In October 2008, reimbursement for the care of individuals incurring pressure ulcers during hospitalization (secondary diagnosis) will no longer be reimbursed. This edict from the government has been followed by third party payers.  This loss of revenue can cripple many health care facilities if a procedure or validated system is not put in place.





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Additionally, the potential of fines incurred for the occurrence of pressure ulcers in the long term care facilities will drive these markets with burden of proof.





We believe Trillennium Medical Imaging is ideally positioned to provide a cost-effective, non-contact method to identify the presence of early or existing tissue damage. The next step for TMI is to complete it’s original Beta Test and implement the system into a full scale usage environment for a period of 90 days to demonstrate the effectiveness in a hospital setting.





Breast Health Monitoring





Current Testing/Screening Methods





The medically accepted tool (gold standard) for breast cancer screening is x-ray mammography.  Mammography detects structural changes present in the breast tissue, indicating either the presence of dead cell structures (calcifications) or a shift in tissue density. Mammography was established as the test of choice following the Breast Cancer Detection Demonstration Project (BCDDP) study and as a result of the Health Insurance Plan (HIP) study of 1974.





According to the National Cancer Institute Fact Sheet on Mammography, “Several large studies conducted around the world show that breast cancer screening with mammograms reduces the number of deaths from breast cancer for women ages 40 to 69, especially those over age 50. Studies conducted to date have not shown a benefit from regular screening mammograms, or from a baseline screening mammogram (a mammogram used for comparison), in women under age 40.”  Regardless, it is the only medically accepted screening test to-date.





With the evolution in technology, proposals have been made to implement other modalities in the screening process. Due to associated cost, and or sensitivity and specificity of the exams (Ultrasound/MRI/PET) recommendations for screening have not changed. These tests are used as ‘adjunctive’ or in addition to mammography following a positive or questionable test.





Limitations of Current Methods





Contact, compression, ionizing radiation, limited or no options for screening other than mammography (physician restricted access) and cost are some of the primary reasons women list for limited or non-participation in breast health evaluation.





Current statistics demonstrating the number of women who participate in mammography are not readily available. 2002 studies estimated approx 60% of women over the age of 40 participated in mammography within the year.  Studies show that for the uninsured it (screening mammography) is a low priority procedure, because few programs exist to assist in the payment for or toward mammography for women less than 50 years of age as are for those who are older (Medicare).








Women reject or delay mammography for many reasons.  Fear appears to be the primary factor.  Fear of discomfort, fear of radiation and fear of finding cancer are only a few reasons that women site.





Many women falsely believe that if there is no known breast cancer within their family that there is no reason to be concerned. Few women know that approximately 75% of breast cancers found occur in women who have no known history.





Studies indicate that 40% or more of the population eligible for screening mammography do not participate in testing.  Reasons listed are economic, cultural and perception of increased harm (radiation / compression) from the exam – whether real or imagined.  These factors contribute to late-stage





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Importance of Infrared Imaging for Breast Cancer





Management defines risk as the likelihood that harm will arise coupled with consequence.  Medical assessment of ‘risk’ for developing breast cancer is linked with time/cost and effort to arrive at the benefit of risk assessment.  Risk/benefit studies determine that screening for breast cancer should begin at 40 years of age.  The cost of screening the female population younger than 40 years of age provides no reduction in life-years saved compared to costs incurred.





Although mammography screening is an effective tool for detecting the presence of breast cancer, it has inherent and well described limitations.  In addition, mathematical models such as the Gail Model have been developed to predictbreast cancerrisk, but such models are better at assessing population-based risk rather than individual risk.





Monitoring individuals with infrared imaging provides for improved individual assessment to determine the ‘at-risk’ person as indicated by physiology (versus mathematical), and therefore in a screening scenario, the ‘at-risk’ population.





Infrared imaging is a non-contact, non-invasive, non-ionizing imaging tool and poses no physical risk. It displays information regarding breast blood flow.  Temperature assessment of breast tissue provides for a profile as it relates to homeostasis within the breast tissue.  Any alterations are attributed to imbalance.  The presence of structural changes or tissue is not visible on the infrared image. But neither is the vascular information displayed on the mammogram.  Screening the breast with infrared provides the individual and practitioner with information not currently available as a screening modality.  Other functional imaging is prohibited by availability and cost. (fMRI/ PET/f CT). Additionally other functional modalities are most often incorporated into structural exams such as computed tomography and MRI.










Market Opportunities





Breast Health Monitoring/Screening





Today the U.S population is roughly 300 million (projection based on 2000 Census Data) and of this 150 million individuals are female. According to the Census Bureau, currently the largest segments of females are 40-44 (11.35M), 35-39 (11.34M) and 45-49 (10.27M) years of age respectively. These are closely followed by the 30-34 (10.21M) and the 10-14 (10M) years of age.





These numbers become significant when we consider the disease of breast cancer.  It is the second leading cause of cancer deaths in the female population. 1 in 8 women will be diagnosed with cancer of the breast during their lifetime.





The probability of breast cancer occurrence increases with age.  Fifty percent of all breast cancers will occur in women under 61 -- the median age of occurrence. But roughly 1/3 of all breast cancers will occur in women under the age of 50 (20 to 50 years of age.)  In the total population of breast cancers the largest percentage are found in women over 50 years of age.  The average projected growth rate (disease development prior to detection) for breast cancer is approximately 8 to 10 years.  For this reason, mammography is recommended as a screening procedure beginning at 40 years of age.




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U.S Government statistics in 2005, show an estimated 2 million women diagnosed with or living with breast cancer.  2006 estimates projected 212,920 new cases of invasive breast cancer diagnosed, along with 61,980 new cases of non-invasive breast cancer. The current medical paradigm with breast imaging is demonstrated in the inability of mammography to reduce the mortality statistics of those women found with invasive breast lesions.  Structural studies, and mammography in particular, are detecting the presence of tumors and tissue changes, but missing the functional or metabolic activity presented by the disease. Infrared has continued to demonstrate underlying metabolic changes present in tissue years in advance of mammography.  Slow growing, metabolically inactive cancers such as those with low IR signals can easily be detected with mammography. The issue of early detection is key for the women with dense breasts, especially the younger woman who would be missed by never participating in mammography until a palpable lesion is found.





Sports Medicine





Sports medicine or sport medicine is an interdisciplinary subspecialty of medicine which deals with the treatment and preventive care of athletes, both amateur and professional. The team includes specialty physicians and surgeons, athletic trainers, physical therapists, coaches, other personnel, and, of course, the athlete.








There has been a tendency for many to assume that sport-related problems are by default musculoskeletal and that sports medicine is an orthopedic specialty. It is commonly understood that there is much more to sports medicine than just musculoskeletal diagnosis and treatment. Illness or injury in sport can be caused by many factors – from environmental to physiological and psychological. Consequently, sports medicinecan encompass an array of specialties, including cardiology, pulmonology, orthopedic surgery, exercise physiology, biomechanics, and traumatology.





The risk of injury in athletic practice will never be entirely eliminated, but modifications in training techniques, equipment, sports venues and rules, based on outcomes of meaningful research have shown that it can be lowered. For these reasons sports medicine will make its most significant future contributions in the area of prevention.





Market Opportunities





When all the inclusive markets are considered, the total revenue projections for the sports medicine market are vast but illusive. Costs are measured in billions of dollars when both treatment cost and indirect costs of loss (wage and productivity) are considered.





Differential diagnosis related to sports injuries is complicated by the fact that soft tissue injuries are some of the most common and clinically challenging musculoskeletal disorders in patients presenting for treatment. Therefore, establishing clear-cut diagnostic and therapeutic objectives for these injuries is important. Current imaging methods of evaluation are structural. Flat plane x-ray, computed tomography (CT), ultrasound, and MRI are the most common examinations.  This leaves the assessment of soft tissue injury to visual, palpable and indirect visualization via the structural image.





Complication of evaluation (structure vs. tissue) results in inappropriate or ill-timed care.  Oversight of the magnitude of soft tissue injuries may result in a failure to expeditiously consider vascular injury or compartment syndrome and its resultant complications, including loss of a limb.  Misdiagnosis or mismanagement of damage may lead to chronic problems with subsequent development of degenerative joint disease and/or loss of function, including but not limited to an inability to bear weight or ambulate.





Like all areas of pain, the number of those afflicted by joint and connective tissue disorders seems to be increasing rather than under control.


Statistics taken from the U.S. government website on arthritis provides the following numbers related to occurrence.An estimated 46 million adults in the United States reported being told by a doctor that they have some form of arthritis, rheumatoid arthritis, gout, lupus, or fibromyalgia. By 2030, an estimated 67 million of Americans aged 18 years or older are projected to have doctor-diagnosed arthritis. Arthritis & Rheumatism 2006;54(1):226-229 [Data Source: 2003 NHIS]




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Importance of TMI Infrared Monitoring System





Until recently, sports medicine has been a little-explored market for infrared technology as an adjunctive to diagnostics.  Infrared imaging provides an indirect measurement of skin blood flow and a temperature measurement of the physiological response controlled by the body’s autonomic nervous system.  This information has broad application in the world of sports medicine.  Infrared evaluation can provide a new dimension to diagnostic capabilities in an adjunctive capacity (physiology vs. anatomy).  Some of these applications are:  providing a monitor for hyperthermic and hypothermic responses associated with nerve irritation, acute injuries, swelling, inflammation, infection, and atrophy.  Provide physicians and trainers with a visual and measurable reference for differential diagnosis, and a visual and objective reference relating to treatment efficacy.





TMI Solution in Sports Medicine Applications





TMI is currently involved in a pilot study with Duke University Sports Medicine evaluating infrared technology for spot-checking of core body temperatures of athletes in the field.  The preliminary study of this non-invasive technology has demonstrated temperature readings that are directly correlated with the core body temperature in a small population.  A more extensive study is being planned. The value will be an easy to use, non-invasive tool for monitoring heat exhaustion in athletics that can be easily used in the field.  All levels and types of sports organizations (schools, teams and professionals) could all benefit from using this technology.  TMI is working to develop a portable, cost-effective, handheld solution that will fit the need of this extensive market.





TMI is also exploring the use of this same assessment tool for immediate trauma evaluation on the field or in emergency rooms for monitoring deep tissue injury and assist with fast evaluation of potential compartment syndrome.





TMI Market Approach





With significant relationships in the medical industry, our initial marketing approach and main thrust will be to hospitals and long term care facilities for the early detection of pressure ulcers. The study at Duke Medical Center has been completed and was successful. The data and the publishing of the data will be released in the near future.


Rheumatology





For over forty years infrared measurement has been used in the evaluation of rheumatological disease.  Initially identified and analyzed in the 1970’s by Abernathy, Ring, and many others, joint and connective tissue disorders were an undisputed area in which infrared detection provided a non-ionizing and non-contact method of detection.





Infrared evaluation provides both an indication of abnormal blood flow in the area of pain, and as a monitoring device for the efficacy of various therapies.  Additionally infrared imaging is an ideal tool for evaluation of this peripheral blood flow and vasospastic disorders of peripheral digital vessels is often an indication of connective tissue disorders.





Research and Development





Equipment Development





We continue to interface with equipment manufacturers and medical device research and development firms to seek out state of the art thermal imaging technology. We have designed a new more effective camera and are working with a major manufacturer on initial prototypes to be delivered before year end of 2010.





In addition, we have created a Data Collection division. This will enable us in the future to keep data and compare results of images taken from all of our cameras. This will then lead to definitive conclusions for the medical community. Through a HIPPA-compliant database we plan to gather a statistically-verifiable data set from our patient population from all of our participating facilities. This information will be compared to currently known statistics and provide additional verification regarding the efficacy of infrared imaging in a variety of applications. The medical community requires "evidence" to back the use or implementation of all technologies. TMI expects that its thermal imaging operations will yield significant data. This will supply the data needed to support evidenced-based practice. This data can then be compared to the patient outcome-information held by each practitioner.




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Future Market Research/Medical





Grafts and Flaps





The use of skin grafts and local flaps can help solve some difficult wound closure problems.  Postoperative flap failure is a devastating complication that surgeons occasionally encounter when using plastic surgery techniques.





Intraoperative monitoring of flap perfusion has shown to prevent flap failure.  Infrared imaging can be used to evaluate and monitor reperfusion, and is a fast, non-contact, reliable method.





Infrared can be used preoperatively to trace perforators in the skin to be excised for reconstruction, as well as postoperatively to monitor the rewarming following attachment.





Amputation





Infrared has proven to be valuable in the area of amputation of tissue as well.  Evaluation of digits or limbs of persons undergoing amputation has improved the success by proving or disproving the viability of tissue present.  In instances of lower limb amputation due to peripheral vascular disease, amputation can often be preformed below the knee, improving the rehabilitation and mobility of the patient and therefore quality of life issues. Selection of amputation level made on the basis of laboratory criteria using skin blood flow and infrared thermography data proves to be more successful.





Diabetic Neuropathy





Diabetic peripheral neuropathy (DPN) is a condition secondary to the disease and can result in ulceration.  Of the diabetic population 0.6 % eventually require lower limb amputation.  However of those with peripheral neuropathy roughly 40% require amputation of a toe, 12% a foot, and 47% The total annual cost of DPN and its complications in the U.S. was estimated to be between $4.6 and $13.7 billion. Up to 27% of the direct medical cost of diabetes





Dermatology





“The skin is the largest organ in the body, and it is therefore not surprising that cancer of the skin is the most common of all cancers. Basal cell carcinoma and squamous cell carcinoma make up the vast majority of cases. Melanoma is the least common but the most deadly skin cancer, accounting for only about 4% of all cases but 79% of skin cancer deaths. For 2002, the American Cancer Society estimates there will be 53,600 new cases of melanoma in the United States and 7,400 deaths from the disease. The United States has experienced a dramatic increase in the number of melanoma cases over the past few decades. According to the American Cancer Society, the incidence rate for melanoma (number of new cases of melanoma per 100,000 people each year) has more than doubled since 1973. The mortality rate for melanoma (number of deaths per 100,000 people each year) has increased at a much slower pace and has remained stable over the past 10 years. During this same time period, there has been a significant rise in overall five-year survival in patients with melanoma. This may be due to thinner depth of tumors at time of diagnosis and improved surgical techniques to treat the disease. “





The study of skin and skin lesions is an area of infrared that has waxed and waned since the early studies of thermography conducted in the 1980’s by the French.  Evaluation of the thermal flare presented by the increased vascularity present in melanomas was thermally mapped prior to radiotherapy.  Infrared mapping provided information that demonstrated that the underlying vascular bed related to the visible lesion was usually significantly larger than assumed, and if not included in the area of radiation, may remain as a pathway of metastasis.





With the increase in melanoma occurrence, the use of infrared imaging in screening evaluations could add to number of cases found in the early stages.  Additionally, the use to map the underlying vascularity could again aid in mapping the underlying angiogenic blood supply to the tumor.




12





Pharmaceuticals/Vaccines





The use of infrared detection for adverse reactions resulting from administration of drugs and vaccines is an area of potential investigation.


Trillennium Medical Imaging anticipates that investigation of adverse reactions with infrared imaging may provide a non-contact, cost-effective way to monitor for adverse reactions prior to their occurrence.  Through is affiliation with Duke University, TMI plans to participate in research projects that are first isolating these drug-reaction potentials in mice.  Participation in this and other research projects will require capital investment to provide various lens and other adaptations to the existing infrared imaging device, as well as the possible development of other specific IR optical imaging devices that could revolutionize this arena.





Trillennium, through its advisors and affiliates will continue to investigate areas of medical concern where infrared imaging will possibly benefit the survival-outcome, the cost-effective delivery of non-invasive diagnostic and adjunctive imaging, as well the return-on-investment from development of such products.





FDA Regulations





Changes in Approved Devices -  The FD&C Act requires device manufacturers to obtain a new FDA 510(k) clearance when there is a substantial change or modification in the intended use of a legally marketed device or a change or modification, including product enhancements and, in some cases, manufacturing changes, to a legally marketed device that could significantly affect its safety or effectiveness. Supplements for approved PMA devices are required for device changes, including some manufacturing changes that affect safety or effectiveness. For devices marketed pursuant to 510(k) determinations of substantial equivalence, the manufacturer must obtain FDA clearance of a new 510(k) notification prior to marketing the modified device. For devices marketed with PMA, the manufacturer must obtain FDA approval of a supplement to the PMA prior to marketing the modified device.





Good Manufacturing Practices and Reporting. TMI does not manufacture the infrared cameras used in its thermal imaging system. Nevertheless, the FD&C Act requires device manufacturers to comply with Good Manufacturing Practices regulations. The regulations require that medical device manufacturers comply with various quality control requirements pertaining to design controls, purchasing contracts, organization and personnel, including device and manufacturing process design, buildings, environmental control, cleaning and sanitation; equipment and calibration of equipment; medical device components; manufacturing specifications and processes; reprocessing of devices; labeling and packaging; in-process and finished device inspection and acceptance; device failure investigations; and record keeping requirements including complaint files and device tracking. We are in compliance with the above requirements.





Current Regulatory Status-  The FDA found that the cameras utilized in the TMI thermal imaging system are substantially equivalent to an existing legally marketed device, thus permitting them to be marketed as an adjunct (supplemental) screening/diagnostic device. The cameras utilized in our system first received 510(k) clearance in September 2001 and subsequently in March 2003. Together with our software we, are marketing the TMI thermal imaging system as an adjunct (supplemental) method for the diagnosis of breast cancer and other diseases affecting the perfusion or reperfusion of blood in tissue or organs in the foreign markets, and exclusively promoting the early detection of Pressure Ulcers in the US market.





Permits and Inspections





The manufacturer of the thermal imaging cameras utilized in the TMI thermal imaging system is subject to compliance with Good Manufacturing Practices under the FD&C Act, as described above. The manufacturer is subject to government inspection and failure to comply with all applicable standards can result in suspension or termination of its ability to manufacture cameras for use in our system. In that event we would be compelled to seek thermal imaging cameras from other manufacturers.




13





Users of the TMI thermal imaging system are required to utilize protocols for accurate thermal imaging such as the "Technical Protocols for High Resolution Infrared Imaging" approved by the ACCII 5-15-99. Failure to comply with these requirements can result in suspension or termination of the facilities' authority to utilize our thermal imaging system. In that event we would experience a disruption in revenue while we removed our equipment and sought to install it in another location.





ITEM 1A. RISK FACTORS





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 1A. Risk Factors.





ITEM 1B. UNRESOLVED STAFF COMMENTS





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 1B. Unresolved Staff Comments.





ITEM 2. PROPERTIES.







We maintain our principal office at 6911 Pilliod Road, Holland OH 43528. Our telephone number at that office is (419) 865-0069 and our facsimile number is (419) 867-0829.  We currently occupy this facility on a month to month basis at a no cost arrangement with the building owner.    The facilities are in good condition.





ITEM 3. LEGAL PROCEEDINGS.





From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently only aware of the following legal proceedings or claims that we believe will not have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.





On September 20, 2010, Micro Health Systems, Inc. (“Micro”), a dissolved Florida Corporation, filed a certified summons and complaint (the “Complaint”) with the Circuit Court of the 17th Judicial Circuit in Broward County, Florida, naming the Company as the sole Defendant.  Micro alleges in the Complaint that on December 21, 2005, the Company executed and delivered a promissory note in the amount of $200,000 (the “Note”) to Micro.  Further, Micro alleges that Micro has failed to make a payment on the Note and continues to owe the principal and interest.  The Company intends to vigorously defend against the allegations stated in the Complaint.




None of our directors, officers or affiliates are involved in a proceeding adverse to our business or have a material interest adverse to our business.





ITEM 4. (REMOVED AND RESERVED).





Not applicable.





PART II





ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.





MARKET INFORMATION


14





Our common stock is quoted on the OTC Bulletin Board under the symbol "WLSI".





For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.


Fiscal 2009

Fiscal 2010High
Low

High


LowFirst Quarter
$0.004
$0.0038

$0.03


$0.01Second Quarter
$0.0047
$0.001

$0.02


$0.0027Third Quarter
$0.002
$0.0005

$
.0049


$
.0004Fourth Quarter
$0.001
$0.001

$
.0013


$
.0001





Holders





As of November 10, 2009, there were approximately 7,371,327,726 shares of common stock outstanding.





As of November 10, 2010, there were approximately 94 active holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Pacific Stock Transfer.





Dividends





There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:




●
we would not be able to pay our debts as they become due in the usual course of business; or●
our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.


We have not declared any dividends, and we do not plan to declare any dividends in the foreseeable future.





We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.





Recent Sales of Unregistered Securities




Convertible Debenture Financing





On May 15, 2009, the Company  entered  into  a  Securities   Purchase   Agreement   with  AJW  Partners,   LLC ("Partners"),  AJW Partners II, LLC  ("Partners II "),  AJW Master Fund, Ltd. ("Master"), AJW Master Fund II, Ltd. ("Master II") and New Millennium  Capital Partners,  II, LLC  ("Millennium" and collectively with Partners, Partners II, Master and Maser II, the “Purchasers”) for the sale of 13% secured convertible notes in an aggregate principal amount of up to $79,500 (the "Notes").  The Purchasers closed on $22,000 in Notes on May 18, 2009.


15





The  Notes  bear  interest  at the rate of 13% per  annum.  Interest  is  payable monthly, unless the Company's common stock is greater than $0.045 per share for each trading day of a month,  in which event no interest is payable  during such month.  Any interest not paid when due shall bear interest of 15% per annum from the date due until the same is paid.  The Notes mature three years from the date of issuance,  and are convertible into common stock, at the Purchasers'  option, at the lesser of (i) $0.12 or (ii) a 75%  discount  to the  average of the three lowest trading prices of the common stock during the 20 trading day period prior to  conversion.  The Notes  contain a call  option  whereby,  if the Company's  stock price is below  $0.045,  the Company may prepay the  outstanding principal  amount of the Notes,  subject to the conditions set forth in the call option.  The Notes also contain a partial call option whereby,  if the Company's stock price is below $0.045,  the Company may prepay a portion of the outstanding principal amount of the Note, subject to the conditions set forth in the partial call option.





The full principal amount of Notes are due upon a default under the terms of the secured  convertible  notes.  In addition,  the Company granted the Purchasers a security  interest in substantially all of the Company's assets and intellectual property.  The Company is required to file a  registration  statement  with the Securities and Exchange Commission upon demand, which will include the common stock underlying the Notes.





The conversion  price of the Notes may be adjusted in certain  circumstances such as if the Company pays a stock dividend, subdivides  or  combines  outstanding  shares of common  stock into a greater or lesser number of shares, or takes such other action as would otherwise result in dilution of the selling stockholder's position.





The  Purchasers  have agreed to restrict their ability to convert their Notes and receive shares of common stock such that the number of shares of common  stock held by them in the  aggregate  and their  affiliates after such  conversion  or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.





Series A Preferred Stock





On May 20, 2009, the Company entered into a conversion agreement with John Antonio (“Antonio”) and Kenneth McCoppen (“McCoppen”), both executive officers and directors of the Company, pursuant to which the Company agreed to convert $30,000 in outstanding wages owed to each McCoppen and Antonio into a total of 60,000 shares of Series A Preferred Stock.





The above transactions were approved by the Board of Directors of the Company.  The Series A Preferred Stock does not pay dividends but each holder of Series A Preferred Stock shall be entitled to 100 votes for each share of common stock that the Series A Preferred Stock shall be convertible into.  The Series A Preferred Stock has a conversion price of $0.0014 (the “Conversion Price”) and a stated value of $1.00 (the “Stated Value”).  Each share of Series A Preferred Stock is convertible, at the option of the holder, into such number of shares of common stock of the Company as determined by dividing the Stated Value by the Conversion Price.  The Series A Preferred Stock has no liquidation preference.





Series B Preferred Stock





On October 1, 2009, the Company entered into a conversion agreement with John Antonio (“Antonio”) and Kenneth McCoppen (“McCoppen”), both executive officers and directors of the Company, pursuant to which the Company agreed to convert $50,000 in outstanding wages owed to each McCoppen and Antonio into a total of 100,000 shares of Series B Preferred Stock.





The above transactions were approved by the Board of Directors of the Company.  The Series B Preferred Stock does not pay dividends but each holder of Series B Preferred Stock shall be entitled to 100 votes for each share of common stock that the Series B Preferred Stock shall be convertible into.  The Series B Preferred Stock has a conversion price of $0.001 (the “Conversion Price”) and a stated value of $1.00 (the “Stated Value”).  Each share of Series B Preferred Stock is convertible, at the option of the holder, into such number of shares of common stock of the Company as determined by dividing the Stated Value by the Conversion Price.  The Series B Preferred Stock has no liquidation preference.


16





JMJ Financing





On May 22, 2009, the Company issued a Convertible Promissory Note to JMJ Financial (“JMJ”) in aggregate principal amounts of $575,000 (the “Initial JMJ Note”).  In consideration for Wellstar’s issuing of the Initial JMJ Note, JMJ issued Wellstar a Secured and Collateralized Promissory Note in the principle amount of $500,000 (the “Initial Wellstar Note”).





In addition, on August 19, 2009 Wellstar issued a Convertible Promissory Note to JMJ in aggregate principal amounts of $1,150,000 (the “Second JMJ Note” and together with the Initial JMJ Note, the “JMJ Notes”).  In consideration for Wellstar’s issuing of the Second JMJ Note, JMJ issued Wellstar  a Secured and Collateralized Promissory Note in the principle amounts of $1,000,000 (the “Second Wellstar Note” and together with the Initial Wellstar Note, the “Wellstar Notes”).





The JMJ Notes bear interest at 12%, mature three years from the date of issuance, and are convertible into our common stock, at JMJ’s option, at a conversion price, equal to 70% of the lowest trade for our common stock during the 20 trading days prior to the conversion.  Prior to the conversion of the JMJ Notes, JMJ must make a payment to Wellstar reducing the amount owed to Wellstar under the Wellstar Notes.  As of November 10, 2010, the lowest trade for our common stock during the 20 trading days as reported on the Over-The-Counter Bulletin Board was $.0001 and, therefore, the conversion price for the JMJ Notes was $.00007. Based on this conversion price, the JMJ Notes in the aggregate amount of $1,725,000, excluding interest, are convertible into 24.6 billion shares of our common stock.





JMJ has agreed to restrict their ability to convert the JMJ Notes and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.





The Wellstar Notes bear interest at the rate of 13.8% per annum and mature three years from the date of issuance.    No interest or principal payments are required until the maturity date, but both principal and interest may be prepaid prior to Maturity Date.  The Wellstar Notes are secured by units of STIC AIM Liquidity Portfolio Select Investment Select Investment Fund (the “JMJ Collateral”).  On each of the Wellstar Notes, JMJ has agreed to pay down the principal of the Wellstar Notes commencing 210 days after the original issuance of the Wellstar Notes, However, JMJ may adjust the payment schedule within its sole discretion.  In the event that JMJ defaults on the Wellstar Notes, Wellstar may take possession of the JMJ Collateral.





* All of the above offerings and sales were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended.  No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Company or executive officers of the Company, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933.  In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.





ITEM 6. SELECTED FINANCIAL DATA





As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 6. Selected Financial Data.





ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS.


17





The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 6, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-K that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties including those discussed in the “Risk Factors” section contained elsewhere in this report, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements in this report.





Plan of Operation and Financing Needs





We are seeking financing in different amounts and up to 12 million dollars.  Currently the company has exhausted its funding from it’s past agreements with JMJ Financial and is actively trying to secure financing to continue operations. If the company is successful in securing financing the company will continue to develop its camera and complete the Beta Test that is currently in operation in a Long Term Care Facility.


We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable.  In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.





We will still need additional capital in order to continue operations until we are able to achieve positive operating cash flow. Additional capital is being sought, but we cannot guarantee that we will be able to obtain such investments. This money would be used for the roll out of our TMI System to the long term care market and for the development and production of a new camera that will save the company money as well as be more effective in its diagnosis..





Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the North American stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing.  Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.





If We Are Unable to Obtain Additional Funding, Our Business Operations Will be Harmed. In Addition, Section 4e of the October 2005 Securities Purchase Agreements Contains Certain Restrictions and Limitations on Our Ability to Seek Additional Financing. If We Do Obtain Additional Financing, Our Then Existing Shareholders Will Suffer Substantial Dilution.


18





Results of Operations





Year Ended July 31, 2010 compared to Year Ended July 31, 2009 (all references are to the Year Ended July 31)





Revenue: We did not have revenue during the years ended July 31, 2010 and 2009.





Cost of Sales and Gross Profit:  There was no Cost of Sales for the years ended July 31, 2010 and 2009 as we did not generate revenue during these periods.





Operating, Selling, General and Administrative Expenses:  Operating, selling, general and administrative expenses decreased by $368,977, or 17% in the 2010 fiscal year to $1,794,696 from $2,163,673 in 2009.  This decrease reflects decreases in stockholder relations expenses by $377,550. In addition, salaries decreased by $206,200 from $735,500 to $529,300, rentals decreased by $53,152 from $55,391 to $2,239, and insurance decreased by $32,931 from $85,436 to $52,506for the same period in 2009.





Loss from Operations:  Loss from operations for the 2010 fiscal year was $1,794,696, a decrease of $368,977 or 17% from the loss from operations in 2009 of $2,163,673 as a result of the aforementioned decrease in operating, sales and administrative expenses.





Other Income and Expense:  Total other expenses of $1,313,772 in the 2010 fiscal year represent a decrease of $38,355,076 from the expense of $39,668,848 in 2009 as a result of a decreased expense from derivative instrument expense for the period related to a decrease in derivative instrument liabilities caused by lower stock prices.





Net Income:  Net loss of $3,108,468 for the 2010 fiscal year was $38,724,053 less than the net loss of $41,832,521 for the same period in 2009 due to the lesser amount of derivative instrument expense.





Liquidity and Capital Resources





It is Managements opinion that the current financial position of the company is in dire straits and the Company will need to obtain additional funding to continue operations.  The Company expects that it will be able to continue operating through January 2011.  If the Company does not obtain financing at this time, it will be required to cease operations.





As of July 31, 2010, we had a working capital deficit of approximately $37,109,113, and a cash overdraft of $6,103. We do not have the funds necessary to maintain our operations for the coming fiscal year, and will need to raise additional funding.





The liquidity impact of our outstanding debt is as follows:


Our unsecured demand note with Michael Sweeney (the "Sweeney Note"), in the principal amount of $150,000, matured on August 1, 2006 and remains outstanding. In addition to the outstanding principal, we also owe accrued interest in the amount of $45,625. We are in default pursuant to the terms of the Sweeney Note and we have not received a notice of default from Mr. Sweeney, nor has Mr. Sweeney indicated to the Company that he intends to place the Company in default under the note.


19





Our unsecured demand note with Micro Health Systems (the "MHS Note"), dated December 21, 2005 in the principal amount of $200,000, with interest at 8% per annum, has two maturity dates: at the 180th day and the 365th day following issuance. A payment of $100,000.00 is due at each maturity date. We did not make the first or second payment. There is an acceleration provision in the MHS Note stipulating that the entire $200,000.00 was due upon non-payment of the first $100,000. The interest rate then goes to the highest rate allowed by Florida law. We received a notice of default from MHS on November 28, 2006 and a complaint was filed on September 2, 2010 in which MHS demands for judgment for damages. The MHS Note is secured by a pledge of 1.5 million shares of the Company's treasury stock.





To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with four accredited investors - AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium Partners II, LLC on October 31, 2005 for the sale of (i) $3,000,000 in secured convertible notes and (ii) warrants to buy 5,000,000 shares of our common stock. The gross financing proceeds were paid to the Company in three separate tranches of $1,000,000 each. The first tranche of the financing, in the amount of $1,000,000, was received by the Company upon closing. The second tranche was received on January 20, 2006. The third tranche was received as follows:


$500,000 in July 2006 and $500,000 in August 2006.





The secured convertible notes issued pursuant to our October 2005 through June 2008 Securities Purchase Agreements bear interest originally at 8% but increasing to 13% effective September 8, 2009, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholders' option, at the lower of (i) $0.12 or (ii) generally a 75% discount to the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date. As of July 28, 2010, the average of the three lowest intraday trading prices for our common stock during the preceding 20 trading days as reported on the Over-The-Counter Bulletin Board was $ .0001 and, therefore, the conversion price for the secured convertible notes was $ .000025. Based on this conversion price, the $4,798,835 outstanding principal amount of the secured convertible notes, excluding interest, were convertible into approximately 191,953,400,000 shares of our common stock. The stock purchase warrants have an exercise price of $0.0001 and $0.50 per share. If the lender converts, the Company will issue the appropriate number of shares and will not be required to use cash to liquidate the debt. Additionally, the Company will receive cash proceeds in the amount of $3,055,000 if the lender exercises the warrants. If the lender converts, the Company will issue the appropriate number of shares and will not be required to use the cash to liquidate the debt.





The registration statement we filed to register the shares underlying the convertible notes and warrants was declared effective by the Securities & Exchange Commission on August 4, 2006 (File No. 333-130295).


To obtain additional funding for our ongoing operations, we entered into a loan agreement with JMJ Financial a loan in the principal sum of $ 575,000 and $ 1,000,000, of which $ 75,000 and $150,000 is a loan acquisition cost. The note provides for a one time 12% interest charge on the principal sum. The convertible note is convertible into our common stock, at the selling stockholders' option, at 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date. As of July 31, 2010 the principal balance of the loan is $ 1,551,219.


20





On May 15, 2009, the Company  entered  into  a  Securities   Purchase   Agreement   with  AJW  Partners,   LLC ("Partners"),  AJW Partners II, LLC  ("Partners II "),  AJW Master Fund, Ltd. ("Master"), AJW Master Fund II, Ltd. ("Master II") and New Millennium  Capital Partners,  II, LLC  ("Millennium" and collectively with Partners, Partners II, Master and Maser II, the “Purchasers”) for the sale of 13% secured convertible notes in an aggregate principal amount of up to $79,500 (the "Notes").  The Purchasers closed on $22,000 in Notes on May 18, 2009.





The  Notes  bear  interest  at the rate of 13% per  annum.  Interest  is  payable monthly, unless the Company's common stock is greater than $0.045 per share for each trading day of a month,  in which event no interest is payable  during such month.  Any interest not paid when due shall bear interest of 15% per annum from the date due until the same is paid.  The Notes mature three years from the date of issuance,  and are convertible into common stock, at the Purchasers'  option, at the lesser of (i) $0.12 or (ii) a 75%  discount  to the  average of the three lowest trading prices of the common stock during the 20 trading day period prior to  conversion.  The Notes  contain a call  option  whereby,  if the Company's  stock price is below  $0.045,  the Company may prepay the  outstanding principal  amount of the Notes,  subject to the conditions set forth in the call option.  The Notes also contain a partial call option whereby,  if the Company's stock price is below $0.045,  the Company may prepay a portion of the outstanding principal amount of the Note, subject to the conditions set forth in the partial call option.





The full principal amount of Notes are due upon a default under the terms of the secured  convertible  notes.  In addition,  the Company granted the Purchasers a security  interest in substantially all of the Company's assets and intellectual property.  The Company is required to file a  registration  statement  with the Securities and Exchange Commission upon demand, which will include the common stock underlying the Notes.





The conversion  price of the Notes may be adjusted in certain  circumstances such as if the Company pays a stock dividend, subdivides  or  combines  outstanding  shares of common  stock into a greater or lesser number of shares, or takes such other action as would otherwise result in dilution of the selling stockholder's position.





The  Purchasers  have agreed to restrict their ability to convert their Notes and receive shares of common stock such that the number of shares of common  stock held by them in the  aggregate  and their  affiliates after such  conversion  or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.





JMJ Financing





On May 22, 2009, the Company issued a Convertible Promissory Note to JMJ Financial (“JMJ”) in aggregate principal amounts of $575,000 (the “Initial JMJ Note”).  In consideration for Wellstar’s issuing of the Initial JMJ Note, JMJ issued Wellstar a Secured and Collateralized Promissory Note in the principle amount of $500,000 (the “Initial Wellstar Note”).





In addition, on August 19, 2009 Wellstar issued a Convertible Promissory Note to JMJ in aggregate principal amounts of $1,150,000 (the “Second JMJ Note” and together with the Initial JMJ Note, the “JMJ Notes”).  In consideration for Wellstar’s issuing of the Second JMJ Note, JMJ issued Wellstar  a Secured and Collateralized Promissory Note in the principle amouns of $1,000,000 (the “Second Wellstar Note” and together with the Initial Wellstar Note, the “Wellstar Notes”).





The JMJ Notes bear interest at 12%, mature three years from the date of issuance, and are convertible into our common stock, at JMJ’s option, at a conversion price, equal to 70% of the lowest trade for our common stock during the 20 trading days prior to the conversion.  Prior to the conversion of the JMJ Notes, JMJ must make a payment to Wellstar reducing the amount owed to Wellstar under the Wellstar Notes.  As of October 8, 2010, the lowest trade for our common stock during the 20 trading days as reported on the Over-The-Counter Bulletin Board was $.0001 and, therefore, the conversion price for the JMJ Notes was $.00007. Based on this conversion price, the JMJ Notes in the aggregate amount of $1,551,219, excluding interest, are convertible into 22.16 billion shares of our common stock.


21





JMJ has agreed to restrict their ability to convert the JMJ Notes and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.





The Wellstar Notes bear interest at the rate of 13.8% per annum and mature three years from the date of issuance.    No interest or principal payments are required until the maturity date, but both principal and interest may be prepaid prior to Maturity Date.  The Wellstar Notes are secured by units of STIC AIM Liquidity Portfolio Select Investment Select Investment Fund (the “JMJ Collateral”).  On each of the Wellstar Notes, JMJ has agreed to pay down the principal of the Wellstar Notes commencing 210 days after the original issuance of the Wellstar Notes, However, JMJ may adjust the payment schedule within its sole discretion.  In the event that JMJ defaults on the Wellstar Notes, Wellstar may take possession of the JMJ Collateral.





We presently do not have any additional available credit, bank financing or other external sources of liquidity. Due to our brief operating history as a start up company, our operations have not been a source of liquidity. We will need to obtain additional capital in order to maintain and expand our operations. We are currently investigating other financial alternatives, including additional equity and/or debt financing. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. However, there can be no assurance that that any additional financing will become available to us, and if available, on terms acceptable to us.




Sources and Uses of Cash





Year Ended July 31,(In thousands)
2010

2009Cash flow data:Net cash (used in) investing activities

(416
)

(0
)Net cash provided (used) by financing activities

1269


659Net increase (decrease) in cash and cash equivalents

(30
)

4Cash and cash equivalents, beginning of period

30


26Cash and cash equivalents, end of period

0


30





Operating Activities





Net cash used in operating activities for the year ended July 31, 2010 was $893,003, an increase of $238,419 from the same period in 2009 reflecting the decrease in operating expenses.





Investing Activities


Cash used in investing activities for the year ended July 31, 2010 was $405,697, up $405,353 from the same period in 2009 represented principally by an increase in the development costs of new equipment.





Financing Activities


22





Net cash provided by financing activities for the year ended July 31, 2010 was $1,269,136 as compared with $658,932 for the same period last year.  The increase is attributed to an increase in the proceeds from the issuance of convertible notes.





As of July 31, 2010 the Company had cash and cash equivalents in the amount of none as compared with $29,564 at July 31, 2009.





Critical Accounting Policies





The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements and accompanying notes. Management bases its estimates on historical information and assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and circumstances that may impact the Company in the future, actual results may differ from these estimates.





Our critical accounting policies are those that affect our financial statements materially and involve a significant level of judgment by management.





The Company has adopted the policy of capitalizing the cost of its imaging equipment and depreciating the cost against earnings over the straight line method using an estimated useful life of five years. Because the useful life of any new technology is difficult to estimate due to factors such as competition, obsolescence, government regulations, etc., this accounting estimate is reasonably likely to change from period to period with a material impact on our financial statements. The significance of the accounting estimate to the Company's financial statements is that the equipment on the balance sheet is stated at cost less accumulated amortization and the corresponding depreciation is an expense on the statement of operations. The estimate as to the useful life of these assets will directly affect the carrying amount on the balance sheet and the expense for depreciation recorded in the statement of operations. Accordingly, shareholders' equity and earnings will be materially affected.





Revenue Recognition





Revenue will be recognized as earned per the licensing agreements which provide for a fixed fee for each thermal imaging camera we install. The revenue is recognized in the month that the camera is in use at the customer's facility.




Derivative Instruments





In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.


23





The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For options, warrants and bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black-Scholes option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. Because of the limited trading history for our common stock, we have estimated the future volatility of our common stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.





Registration Rights Agreements





In connection with the sale of debt or equity instruments, we may enter into registration rights agreements. Generally, these registration rights agreements require us to file registration statements with the Securities and Exchange Commission to register common shares that may be issued on conversion of debt or preferred stock, to permit re-sale of common shares previously sold under an exemption from registration or to register common shares that may be issued on exercise of outstanding options or warrants.





The registration rights agreements usually require us to pay penalties for any time delay in filing the required registration statements, or in the registration statements becoming effective, beyond dates specified in the registration rights agreement. These penalties are usually expressed as a fixed percentage, per month, of the original amount we received on issuance of the debt or preferred stock, common shares, options or warrants. We account for these penalties as a contingent liability and not as a derivative instrument. Accordingly, we recognize the penalties when it becomes probable that they will be incurred. Any penalties are expensed over the period to which they relate.





Recent Accounting Pronouncements





Emerging Issues Task Force Pronouncement 00-27, relating to certain convertible instruments, requires the discounting of certain debt instruments when the conversion feature meets certain criteria. FASB 123R, Stock Options To Employees And Consultants. This pronouncement relates to employees and consultants who receive stock based pay.





The Company will account for the fair value of employee and non-employee options and warrants in accordance with SFAS No. 123R, "Share-Based Payment", which is effective for options and warrants during the annual reporting period beginning after December 15, 2005. The compensation cost will be measured after the grant date based on the value of the reward and is recognized over the service period. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes stock option pricing model. The Company has not yet adopted a stock option plan but is evaluating the affect of a stock option plan on its financial position and results of operations in future periods.


24





In September, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 provides a new single authoritative definition of fair value and enhanced guidance in measuring the fair value of assets and liabilities. It requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurement on earnings. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. On August 1, 2008, the company adopted SFAS 157, which did not have a material impact on its financial statements.





On December 21, 2006, the Financial Accounting Standards Board (FASB) posted FASB Staff Position (FSP) FSPEITF00-19-2, Accounting For Registration Payment Arrangements. The FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting For Contingencies. This FSP further clarifies that the financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles (GAAP) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. We have accounted for registration payments as required under its securities purchase agreement and will follow this pronouncement effect from date of issue.





In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option For Financial Assets And Financial Liabilities” (SFAS 159). SFAS 159 expands the use of fair value accounting but does not affect the existing standards that require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, accounts payable and issued debt. If the use of fair value is elected, any up-front costs and fees related to the item must be recognized in earnings and can not be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS 159 will have on our financial position and results of operations.




ITEM 7A     QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK




As a Smaller Reporting Company, the Company is not required to include the disclosure under this Item 7A. Quantitative and Qualitative Disclosures about Market Risk.




25




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .
 WELLSTAR INTERNATIONAL, INC.
 
 CONSOLIDATED FINANCIAL STATEMENTS
 
 JULY 31, 2010 AND 2009
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 
 CONSOLIDATED FINANCIAL STATEMENTS
 
 JULY 31, 2010 AND 2009
 CONTENTSPAGEREPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM
F-iCONSOLIDATED BALANCE SHEETS
F-1 - F-2CONSOLIDATED STATEMENTS OF OPERATIONS
F-3CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)
F-4CONSOLIDATED STATEMENTS OF CASH FLOWS
F-5, F-6NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7 - F-31
 To The Board of Directors
 Wellstar International, Inc.
 Holland, Ohio 43528
 
 
 Report of Independent Registered Public Accounting Firm
 
 We have audited the accompanying consolidated balance sheets of Wellstar International, Inc. and Subsidiary as of July 31, 2010 and 2009  and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the years ended July 31, 2010 and 2009.  The financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements based on our audits.
 
 We conducted our audits in accordance with the Standards of the Public Company Accounting Oversite Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the financial statements referred to above presents fairly, in all material respects, the financial position of Wellstar International, Inc. and Subsidiary as of July 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended July 31, 2010 and 2009 in conformity with accounting principles generally States of America accepted in the United.
 
 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 9 to the consolidated financial state-ments, the Company had a net loss of $3,108,468, negative cash flow from operations of  $893,003,  negative working capital of $37,109,113, and a stockholders’ deficiency of $55,032,654 at July 31, 2010.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plan in regards to these matters is also described in Note 9.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 Simontacchi, Miller & DeAngelis, PA
 Rockaway, New Jersey
 November 12, 2010
 
 F- i
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
 JULY 31, 2010 AND 2009
 ASSETS
 2010


2009Current Assets:Cash

$
—


$
29,564Prepaid Expenses


19,837



5,186Total Current Assets


19,837



34,750Fixed Assets:Imaging Equipment


829,169



802,169Office Equipment and Fixtures


157,213



154,884Subtotal


986,382



957,053Less: Accumulated Depreciation


748,925



552,985Net Fixed Assets


237,457



404,068Development of New Medical Camera, in Progress


380,893



—Intangible Assets:Manufacturing and Distribution Agreement


700,000



700,000Subtotal


700,000



700,000Less: Accumulated Amortization


586,849



459,577Net Intangible Assets


113,151



240,423Other Assets:Loan Acquisition Cost (net of amortization of $358,999 @ 7/31/10 and $261,880 @ 7/31/09)


206,526



110,645Software and Manuals (net of amortization of $55,372 @ 7/31/09 and $37,892 @ 7/31/09)


28



17,508Security Deposit


—



4,525Total Other Assets


206,554



132,678Total Assets

$
957,892


$
811,919
 See Accompanying Notes to Consolidated Financial Statements
  F-1
  
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
 JULY 31, 2010 AND 2009
 
 LIABILITIES LESS SHAREHOLDERS’ DEFICIT
  2010


2009Current Liabilities:Cash Book Overdraft

$
6,103


$
—Due to Employees


7,136



—Accounts Payable


866,615



616,537Accrued Expenses


3,749,839



2,879,727Note & Loan Payable - Other


63,382



63,382Notes Payable


350,000



750,000Derivative Instrument Liability - Loan


—



422,243Derivative Instrument Liability - Convertible Notes


28,093,659



23,072,247Convertible Debt


3,992,216



2,861,918Total Current Liabilities


37,128,950



30,666,054Long Term Liabilities:Convertible Debt


2,959,105



2,697,938Derivative Instrument Liability - Convertible Notes


15,902,472



20,564,516Derivative Instrument Liability - Warrants


19



15,373Total Long-Term Liabilities


18,861,596



23,277,827Total Liabilities


55,990,546



53,943,881Stockholders’ Deficit:Preferred StockSeries A, Authorized 100,000 Shares, par value .001 per share Issued and Outstanding Shares, 60,000

$
60


$
60Paid in Surplus


59,940



59,940Series B, Authorized 1,000,000 Shares, par value .001 per share Issued and Outstanding Shares, 200,000 Shares,


200



—Paid in Surplus


199,800



—Common StockAuthorized 5,000,000,000 Shares, par value .001 per share Issued Shares, 3,565,369,384 - Outstanding Shares, 3,565,354,384 (7/31/10) and 39,481,147 (7/31/09)


3,565,354



39,481Paid in Surplus


396,351



2,914,448Retained Earnings (Deficit)


(59,254,359
)


(56,145,891
)Total Shareholders’ Deficit


(55,032,654
)


(53,131,962
)Total Liabilities Less Stockholder’s Deficit

$
957,892


$
811,919
 
 
 See Accompanying Notes to Consolidated Financial Statements
  F-2
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED JULY 31, 2010 AND 2009
  2010


2009Income:Revenue from License Agreement

$
- 0 -


$
- 0 -Revenue from Medical Imaging


- 0 -



- 0 -Total Revenue


- 0 -



- 0 -Cost of Sales


- 0 -



- 0 -Gross Profit (Loss)


- 0 -



- 0 -Operating Expenses:Selling, General and Administrative


1,356,885



1,774,569Depreciation and Amortization


437,811



389,104Total Operating Expenses


1,794,696



2,163,673Loss from Operations


(1,794,696
)


(2,163,673
)Other Expense (Income):Interest Income


(367
)


(182
)Interest Expense


956,768



778,470Loss on Disposal of Furniture


—



15,931Derivative Instrument (Income) Expense, Net


(78,229
)Delinquent Stock Registration






38,420,029Penalty - Convertible Debentures


435,600



454,600Total Other Expenses (Income)


1,313,772



39,668,848Loss before Provision for Taxes


(3,108,468
)


(41,832,521
)Provision for Taxes


—



—Net Loss

$
(3,108,468
)


(41,832,521
)Net Loss Per Share, Basic and Diluted

$
(.0
)

$
(.33
)Weighted Average Number of Common Shares Outstanding, Basic and Diluted


667,762,275


$
127,814,436
 Note:
Effective January 15, 2010, the Company had a reverse Split of their Common Shares of 100%.  The above average number of Common Shares Outstanding reflects the split.  The shares shown for the year ended July 31, 2009 have been restated to reflect the split, and the net loss per share has also been restated.
 
 See Accountants' Report and Accompanying Notes to Financial Statements
  F - 3
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CHANGES IN
 STOCKHOLDERS’ EQUITY (DEFICIT)
 FOR THE YEARS ENDED JULY 31, 2010 AND 2009
 Preferred Stock





Common StockShares


Amount


Additional Paid in Capital


Shares


Amount


Additional Paid in Capital


Accumulated Deficit


TotalBalance, August 1, 2008


—


$
—


$
—



4,600,402


$
4,600


$
1,553,701


$
(14,313,370
)

$
(12,755,069
)Preferred Stock Issued - For Wages


60,000



60



59,940



















60,000Stock Issued to Consultants and Others for Services and Expenses














2,300,654



2,301



549,071







551,372Conversion of Debentures














30,709,216



30,709



469,997







500,706Stock Issued for Cash














2,032,000



2,032



341,518







343,550Company Stock Donated














(161,125
)


(161
)


161







—Net (Loss) for the Period


























(41,832,521
)


(41,832,521
)Balance, July 31, 2009


60,000


$
60


$
59,940



39,481,147


$
39,481


$
2.914,448


$
(56,145,891
)

$
(53,131,962
)Balance, August 1, 2009


60,000


$
60


$
59,940



39,481,147


$
39,481


$
2,914,448


$
(56,145,891
)

$
(53,131,962
)Series B, Preferred


100,000



100



99,900



















100,000Series B, Preferred Additional Shares


100,000



100



99,900



















100,000Conversion of Debentures














3,525,873,237



3,525,873



(2,518,097
)






1,007,776Net Income for the Period


























(3,108,468
)


(3,108,468
)Balance, July 31, 2010


260,000


$
260


$
259,740



3,565,354,384


$
3,565,354


$
396,351


$
(59,254,359
)

$
(55,032,654
)
  The Common Stock Shares and Related Dollar amounts at July 31, 2009 have been adjusted to reflect a 100 to 1 reverse Common Stock Split on January 15, 2010.
 
 See Accountants' Report and Accompanying Notes to Financial Statements
  F - 4
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED JULY 31, 2010 AND 2009
 2010


2009Cash Flows from Operating Activities:Net Loss

$
(3,108,468
)

$
(41,832,521
)Adjustments to Reconcile Net Loss to Net Cash used in Operating Activities:Depreciation and Amortization


437,811



389,104Delinquent Registration Penalty Convertible Debentures


435,600



454,600Services Paid in Stock


—



551,372Issuance of Preferred Stock in lieu of Salary


200,000



60,000Derivative Instrument Expense, Net


(78,229
)


38,420,029Loss on Disposal of Property


—



15,931Changes in Operating Assets and Liabilities:(Increase) Prepaid Expenses


(14,651
)


(5,146
)Decrease Rent Refund Receivable


—



1,580Increase (Decrease) Accounts Payable


256,181



(82,758
)Increase Accrued Expenses


978,753



1,373,225Net Cash Used in Operating Activities


(893,003
)


(654,584
)Cash Flows from Investing Activities:Purchase of Equipment


(29,329
)


(344
)Development of New Medical Camera


(380,893
)


—Security Deposit - Reduction


4,525



—Net Cash Used in Investing Activities


(405,697
)


(344
)Cash Flows From Financing Activities:Sale of Stock for Cash


—



343,550Payments of Financing Costs


(43,000
)


—Proceeds from Issuance of Convertible Notes


1,305,000



265,000Other Loan


7,136



50,382Net Cash Provided by Financing Activities


1,269,136



658,932Net Increase (Decrease) in Cash


(29,564
)


4,004Cash at Beginning of Period


29,564



25,560Cash at End of Period

$
- 0 -


$
29,564Cash Paid for Interest

$
- 0 -


$
- 0 -Cash Paid for Taxes

$
- 0 -


$
- 0 -
  See Accountants' Report and Accompanying Notes to Financial Statements
  F - 5
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED JULY 31, 2010 AND 2009
 
 Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 
 1.
During the year ended July 31, 2010, convertible debentures in the amount of $1,007,776 were converted into 3,525,873,237 shares of Common Stock.
 
 2.
During the year ended July 31, 2010, two officers were issued Series B Preferred Stock in lieu of salaries for a value of $200,000, no cash was expended.
 
 3.
There was an assignment of Convertible Notes Payable of 400,000 from one Lender to new Lenders, which had no effect on cash.
 
 4.
During the year ended July 31, 2009, convertible debentures in the amount of $500,706 were converted into 30,709,216 shares of Common Stock after reflecting a reverse split of 100-1 on January 15, 2010.
 
 5.
2,300,653 shares of Common Stock after reflecting a reverse split of 100-1 in January 2010, was issued for services rendered in the year ended July 31, 2009.  The amount was $551,372.
 
 6.
During the year ended July 31, 2009, two officer/stockholders donated 161,125 shares after reflecting a reverse stock split of 100-1 in January 2010, of the Company stock they owned to the Company.  This transaction has no effect on cash.
 
 7.
During the year ended July 31, 2009, two officers were issued Preferred Stock in lieu of salaries for a value of $60,000, no cash was expended.
  See Accountants' Report and Accompanying Notes to Financial Statements
  F - 6
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 1          Summary of Significant Accounting Policies and Organization
 
 a)
Organization and Recent Company History
 
 Wellstar International, Inc. (the “Company”) was incorporated December 15, 1997, under the laws of the State of Nevada.  Through its wholly owned subsidiary, Trillennium Medical Imaging, Inc. (“TMI”), is developing and licensing the use of advanced thermal imaging technology.
 b)
Principles of Consolidation
  The consolidated financial statements include the accounts of Wellstar International, Inc. and its wholly owned subsidiary, Trillennium Medical Imaging, Inc. (collectively, the “Company”).
  c)
Revenue Recognition
 
 The Company recognizes revenues utilizing the accrual method of accounting.  More specifically, the Company enters into licensing agreements for its advanced thermal imaging technology.  Under the licensing agreements, the Company supplies the camera equipment, related software and training for each facility.  Once the facility is operational, the licensing agreement provides for a fixed fee monthly fee for the use of the camera.  Accordingly, the revenue is recognized in the month that the camera is in use at the customer’s facility, which represents the Company’s right to receive the fixed fee.  The Company’s revenue recognition policy is in compliance with the provisions of EITF 00-21.
 
 d)
Use of Estimates
 
 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
 e)
Cash
 For the purpose of the Statements of Cash Flows, cash is defined as balances held in corporate checking accounts and money market accounts.
 F-7
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 1          Summary of Significant Accounting Policies and Organization(cont’d)
  f)
Loss Per Share
 
 Basic and diluted net loss per common share for the years ended July 31, 2010 and 2009 are computed based upon the weighted average number of common shares outstanding.  The assumed conversion of Common Stock equivalents was not included in the computation of diluted loss per share because the assumed conversion and exercise would be anti-dilutive due to the net loss incurred.  Based on the conversion formula in the Agreements (see Note 2, 3 and 4) on the conversion of its convertible notes would have resulted in the issuance of additional common shares in the amount of 284,890,195,530 on July 31, 2010.
  g)
Stock Based Compensation
 
 Stock based compensation will be valued in accordance with the Fair Valued based method.  Compensation cost is measured at the grant date based on the value of the award and is recognized over the service period which is usually the vesting period.  Transactions with non-employees shall be accounted for based on the Fair Value of the consideration received or Fair Value of the equity installments issued, whichever is more reliably measurable.
 
 h)
Derivative Instruments
 
 In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our Common Stock.  In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity.  Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
 
 The identification of, and accounting for, derivative instruments is complex.  Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur.  For options, warrants and bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black -Scholes option pricing model.  That model requires assumptions related to the remaining term of the instrument and risk-free rates of return, our current Common Stock price and expected dividend yield, and the expected volatility of our Common Stock price over the life of the option.
  F-8
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 1          Summary of Significant Accounting Policies and Organization(cont’d)
 
 i)
Income Taxes
 
 The Company will provide for income taxes in accordance with U.S. GAAP, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns in different years.  Under this method, deferred income tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
 
 The Company has had operating losses each year throughout it’s existence.  The Company has a Federal loss carry forward in the approximate amount of $12,151,147.  Expiring for it’s year end July 31, between 2020 and 2025.
 
 j)
Concentration of Credit Risk
 
 Financial instruments which potentially subject the Company to concentrations of credit risk consists of a checking account with a financial institution in excess of insured limits.  There was no excess above insured limits at July 31, 2010 or 2009.  The Company does not anticipate non-performance by the financial institution.
 
 k)
Fair Value of Financial Instruments
 
 Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short maturities.
  l)
Equipment
 
 Imaging and office equipment are recorded at cost and depreciated on the straight line method with an estimated life of five (5) years.  Imaging equipment is at the customers facility where the equipment is used or stored by the Company until placed in use.  The Company retains title to the imaging equipment while it is at the customers location.  Depreciation expense for the years ended July 31, 2010 and 2009 were $195,340 and $198,345, respectively.
 
 The Company is in the process of having a new camera manufactured which will be owned by the Company with updated technology to be used in various medical facilities.
 
 F-9
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 1          Summary of Significant Accounting Policies and Organization(cont’d)
 
 m)           Intangible Assets
 
 Loan acquisition costs are stated at cost and relate to the costs of acquiring the convertible notes (see Note 2) and to obtaining the $400,000 Note Payable (see Note 3).  Amortization is provided for under the straight line method over three (3) years, which is the term of the convertible notes and six months for the original term of the Note Payable. Total amortization for the years ended July 31, 2010 and 2009 were $97,118 and $45,020, respectively.
 
 Software and manuals, Covenant Not To Compete and Manufacturing & Distribution Agreement acquired from Micro Health Systems, Inc. (See Note 3) with cost of $80,000, $20,000 and $700,000 respectively are being amortized over a 24 month period for the software and the Covenant and 5 1⁄2 years for the manufacturing and distribution agreement. The total amortization expense for the years ended July 31, 2010 and 2009 were $144,753 and $145,739, respectively.
 
 n)
Long-lived Assets
 
 Estimates of future cash flows used to test recoverability of long-lived assets shall be based on the existing service potential of the asset or asset group at the date it is tested.  The testing will be done annually prior to July 31st, the Company’s fiscal year end, but will also be tested whenever events or changes in circumstances indicate that its carrying value may not be recoverable.
 
 Management, in reviewing the value, is of the opinion that its carrying values of its imaging equipment are not higher than fair value to sell.  It also is of the opinion that it’s exclusive Mikron Manufacture and Distribution Agreement which is at a carrying value approximately 16% of its cost less than five years ago, is a low value.  Current tests of its imaging equipment were recently completed by a major medical facility and management is of the opinion the tests will yield positive results to effect future revenue and cash flow.
 
 o)
Derivative Instruments
 
 Because of the limited trading history of our Common Stock, we have estimated the future volatility of our Common Stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us.  The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.
 
 F-10
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 1          Summary of Significant Accounting Policies and Organization(cont’d)
 
 p)           Registration Rights Agreements
 
 In connection with the sale of debt or equity instruments, we may enter into Registration Rights Agreements.  Generally, these Agreements require us to file registration statements with the Securities and Exchange Commission to register common shares that may be issued on conversion of debt or preferred stock, to permit re-sale of common shares previously sold under an exemption from registration or to register common shares that may be issued on exercise of outstanding options or warrants.
 
 The Agreements usually require us to pay penalties for any time delay in filing the required registration statements, or in the registration statements becoming effective, beyond dates specified in the Agreement.  These penalties are usually expressed as a fixed percentage, per month, of the original amount we received on issuance of the debt or preferred stock, common shares, options or warrants.  We account for these penalties as a liability and not as a derivative instrument.  Accordingly, we recognize the penalties when it becomes probable that they will be incurred.  Any penalties are expenses over the period to which they relate.
  NOTE 2          Convertible Notes
 
 On September 5, 2008, The Company and AJW partners, LLC and it’s related entities amended their agreement related to all the notes, which are convertible, into shares of the Company’s Common Stock.  The applicable percentage shall be 25% of the computed conversion price and the interest rate, as defined in each of the notes, shall be 13%.  All other provisions, as amended from time to time, shall remain in full force and effect.
 
 On October 31, 2005, the Company entered into a Securities Purchase Agreement with AJW Partners, LLC and its related entities for the sale of $3,000,000 of 8% (amended to 13%) secured convertible notes, each advance is evidenced by a note which is due three years from the date of the advance, and for stock purchase warrants exercisable for a total of  5,000,000 shares of Common Stock each issuance of warrants expiring on the fifth anniversary from the date of issue.  The warrants are issued at the time funds are advanced at 1,666,667 per $1 million advanced.  The notes are convertible, at the holder’s option, into shares of Common Stock, in whole or in part, at any time after the original issue date.  No interest shall be due and payable for any month in which the Company’s stock trading price is greater than $0.1125 for each trading day of the month.
  F-11
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 2          Convertible Notes(cont’d)
 
 The number of shares of Common Stock issuable upon a conversion is to be determined by dividing the outstanding principal amount of the notes to be converted, plus related accrued interest, by the conversion price.  The conversion price in effect on any conversion date will be at the selling stockholder’s option, at the lower of (i) $0.12 or (ii) as amended 75% discount to the average of the three lowest intraday trading prices for the Common Stock on a principal market for the twenty trading days preceding, but not including, the conversion date for all notes.  The total shares available for conversion at July 31, 2010 were 223,839,520,000.           .
 
 The stock purchase warrants have an exercise price of $0.50 per share.
 The Company has closed on the entire $3,000,000 of convertible notes contemplated by the Securities Purchase Agreement and issued stock purchase warrants exercisable for 5,000,000 shares of Common Stock in connection therewith.  The dates of the advance of the funds of $1 million each were October 31, 2005 and January 20, 2006 and $500,000 each on July 25, 2006 and August 8, 2006. The stock registration was effective August 4, 2006. $270,500 of the $500,000 Notes issued August 8, 2006 have been sold to JMJ Financial by the holder in an agreement dated June 18, 2009 (See Note 4).
 
 On November 30, 2006, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $400,000 of 8% (amended to 13%) secured convertible notes due November 30, 2009, and for stock purchase warrants of 4,000,000 shares of Common Stock exercisable at anytime at $.08 per share, expiring on the seventh anniversary from the date of issue, November 30, 2013.
 
 The funds were advanced on November 30, 2006, in the amount of $392,500, less a $7,500 charge as a loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of Common Stock, in whole or in part, at any time after the original issue date.
 
 No interest shall be due on any payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On March 26, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $165,000 of 8% (amended to 13%) secured convertible notes due March 26, 2010, and for stock purchase warrants of 1,000,000 shares of Common Stock exercisable at anytime at $.03 per share, expiring on the seventh anniversary from the date of issue, March 26, 2014.
  F-12
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 2          Convertible Notes(cont’d)
 
 The funds were advanced on March 26, 2007, in the amount of $150,000, less a $15,000 charge as a loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of Common Stock, in whole or in part, at any time after the original issue date.
 
 No interest shall be due on any payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On May 30, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $435,000 of 8% (amended to 13%) secured convertible notes due May 30, 2010, and for stock purchase warrants of 10,000,000 shares of Common Stock exercisable at anytime at $.02 per share, expiring on the seventh anniversary from the date of issue, May 30, 2014.
 
 The funds were advanced on May 30, 2007, in the amount of $415,000, less a $20,000 charge as a loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of Common Stock, in whole or in part, at any time after the original issue date.   No interest shall be due on any payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On October 12, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $175,000 of 8% (amended to 13%) secured convertible notes due October 12, 2010, and for stock purchase warrants of 15,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue October 12, 2014.
 
 The funds were advanced on October 12, 2007 in the amount of $170,000, less a $5,000 charge as loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date.  No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 F-13
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 2          Convertible Notes(cont’d)
 
 On November 15, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $325,000 of 8% (amended to 13%) secured convertible notes due November 15, 2010, and for stock purchase warrants of 10,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue November 15, 2014.
 
 The funds were advanced on November 15, 2007 in the amount of $310,000, less a $15,000 charge as loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date.  No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On December 14, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $315,000 of 8% (amended to 13%) secured convertible notes due December 14, 2010, and for stock purchase warrants of 10,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue December 14, 2014.
 
 The funds were advanced on December 14, 2007 in the amount of $300,000, less a $15,000 charge as loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date.  No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On December 31, 2007, the Lender issued the Company a new note for all accrued unpaid interest.  The Lender applied all of its conversions from convertible notes into stock to the principal of its original note issued October 31, 2005.  The Company which had been applying the conversions to interest first then principal made this adjustment to be in agreement with the Lender and will apply all conversion to principal beginning January 1, 2008.  The Callable Secured Convertible Note dated December 31, 2007 in the amount of $427,759.61 bears interest at 2% (amended to 13%) per annum, payable quarterly.  The note is due December 31, 2010.  All of the terms are identical to the above notes, including the conversion options.
 
 F-14
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 2          Convertible Notes(cont’d)
 
 On April 22, 2008, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $190,000 of 8% (amended to 13%) secured convertible notes due April 22, 2011, and for stock purchase warrants of 20,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue April 22, 2015.  On May 19, 2009, $76,000 of these notes were sold to JMJ Financial by the Holder (See Note 4).
 
 The funds were advanced on April 22, 2008 in the amount of $185,000, less a $5,000 charge as loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date.  No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On June 12, 2008, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $135,000 of 8% (amended to 13%) secured convertible notes due June 12, 2011.
 
 The funds were advanced on June 12, 2008 in the amount of $115,000, less a $20,000 charge as loan acquisition cost, amortized over the loan period of 36 months.  The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date.  No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On August 29, 2008, AJW Partners, LLC and its related entities (the Lender) issued the Company a new Note for all accrued unpaid interest from January 1, 2008 through August 29, 2008.  The accrued interest has been reclassified to a convertible note payable.  The Callable Secured Convertible Note, dated August 29, 2008, in the amount of $235,113.84, bears interest at 2% (amended to 13%) per annum, payable quarterly.  The Note is due on August 29, 2011.  The conversion price is the average of the three (3) lowest trading prices in the 20 days prior to conversion (before the conversion date) X 32.5% (amended to X 25%) = conversion price.  All other terms are identical with the other Note.
 
 On May 15, 2009, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $79,500 of 13% secured convertible notes due May 15, 2012.
 
 F-15
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 2          Convertible Notes(cont’d)
 
 The funds were advanced on May 15, 2009 in the amount of $79,500.  The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date.  No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .045 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 On June 30, 2009, AJW Partners, LLC and its related entities (the Lender) issued the Company a new Note for all accrued unpaid interest from August 30, 2008 through June 30, 2009. The accrued interest has been reclassified to a convertible note payable.  The Callable Secured Convertible Note, dated June 30, 2009 in the amount of $551,564.55 bears interest at 2% per annum, payable quarterly.  The Note is due on June 30, 2012.  The conversion price is the average of the three (3) lowest trading prices in the 20 days prior to conversion (before the conversion date) X 25% = conversion price.  All other terms are identical with the other Notes.
 
 On December 7, 2009, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $50,000 of 13% secured convertible notes due December 7, 2012.
 
 The funds were advanced on December 7, 2009 in the amount of $50,000.  The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date.  No interest shall be due or payable for any month in which the Company’s stock trading price is greater than
 $0.00438 for each trading day of the month.  The notes are secured by all the assets and intellectual property of the Company.
 
 See Paragraph 2 of this note related to the terms of conversion.  The total shares at July 31, 2010, included in Paragraph 2 above, includes all additional convertible notes.
 
 All notes include a Registration Rights Agreement.  The Company was required to register additional shares in relation to all the additional agreements listed above, this was not done.  There is a penalty of 2% per month of the note amount, a penalty of $1,585,774 was accrued through July 31, 2010.
 
 F-16
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 2          Convertible Notes(cont’d)
 
 In connection with the aforementioned issuance of the $1,000,000 of convertible notes, on October 31, 2005, the Company granted a first priority security interest in all the assets of the Company.  The issuance of convertible notes resulted in conversion features being accounted for as embedded derivative liabilities in accordance with U.S. GAAP (see Note 5).  The note holder’s have converted notes of $1,098,604 into 875,520,961 shares of Common Stock as of July 31, 2010 after reflecting a 100-1 reverse stock split.  The balance of the notes are $4,798,834 at July 31, 2010.  Interest due of $797,154 is included in Accrued Expenses.
 
 The classification as short-term and long-term derivative instrument liabilities-convertible notes, derivative instrument liabilities warrants and convertible debt is based upon the due date of the notes and the date the warrants expire.  Some of the notes have passed their due dates and others are due within one year; these are shown as current liabilities, the other are shown as long-term liabilities.  The warrants are shown as long-term as the expiration dates are over one year.
 
 NOTE 3          Notes Payable
 
 a)
The Company has borrowed $150,000 from an unrelated individual.  The Note is dated August 1, 2005.  The outstanding balance of the loan shall bear monetary interest at the fixed rate of six percent (6%) simple, non-compounding interest payable in arrears per annum.
 
 The outstanding balance of principal and interest is due and payable on demand on or after August 1, 2006.  All payments shall apply first to interest accrued and then principal.  The Company may prepay all or part without a pre-payment penalty.  The loan was not paid on August 1, 2006 and was extended under the same terms by mutual agreement.  Interest due of $45,625 is included in Accrued Expenses.
 
 Default shall occur upon (1) failure to make payment on the note or transfer of stock when due, (2) Company institutes bankruptcy or solvency proceedings or make an assignment for the benefit of creditors.
 
 Note Payable - July 31, 2010
$150,000
 
 b)
The Company has entered into a loan agreement with an unrelated individual.  The note is dated October 11, 2005.  The note provides for a total loan of $400,000, the Company received $190,000 by October 31, 2005.  The balance of $210,000 was subsequently received on November 29, 2005.  The note bears interest at a fixed rate of 8%, plus the prevailing variable margin rate charged to the lender.  As of July 31, 2010, the margin rate was 7.625%.  The lender was paid a loan acquisition cost on December 5, 2005, in Common Stock of 1 million shares.
 
 F-17
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 3          Notes Payable(cont’d)
 
 The cost was recorded at market value at the date of the loan which was $ .12 per share, for a total of $120,000.  The outstanding balance of principal and accrued interest was due and payable on April 11, 2006.  The note has been extended to February 28, 2007 by addendum under the current terms and interest is being accrued.  The addendum was signed on November 11, 2006.  In consideration of the waiver and extension, the Company, with the signing, paid the lender $20,000.  The lender was also issued additional warrants to purchase 400,000 shares of common stock, 200,000 at $0.10 per share and 200,000 at $0.20 per share, which expire on February 28, 2008. As of April 30, 2010, the note has not been paid.
 
 As security for the loan, the Company has pledged all of its tangible and intangible assets.  Commencing on January 1, 2006, the Company shall establish an escrow account and shall deposit 25% of all proceeds generated by the thermal imaging cameras purchased with $210,000 of proceeds from the loan.  The funds shall remain in escrow for use in paying all sums due to the lender.  To July 31, 2010, no funds have been put into escrow.
 
 In addition, the lender has the option to convert the loan into fully registered, unsecured Common Stock of the Company at a conversion price on the day of conversion, minus 40%.  The total shares at July 31, 2010 were - 0 -.  The lender shall have the right to convert on the prepayment date or the due date, whichever occurs first.  The issuance of the notes and warrants resulted in conversion features being accounted for as embedded derivative liabilities in accordance with U.S. GAAP (see Note 5).
 
 Balance due at July 31, 2010
$ - 0 -
 
 On August 20, 2009, the Lender assigned $70,000 of its Notes Receivable to two individuals for $30,000 and $40,000 and assigned $80,000 in December 2009 to a company and an individual and $60,000 in March 2010 to a different company and individual.  In May and July 2010, he assigned $80,000 to an individual and a company.  The balance of the Notes of $110,000 and accrued interest of $245,344 was assigned to another company.  The Company accepted the assignment of the Notes and drew an agreement with the New Lenders, (see Note 3-E and Note 4).
 
 c)
On December 21, 2005, the Company completed the purchase of certain assets of Micro Health Systems, Inc. (“MHS”) under a definitive agreement.
 
 Total consideration paid by the Company was $600,000, plus 2,000,000 shares of Restricted  Common Stock.  The Company paid $400,000 at closing.  A promissory note was executed for $200,000 with interest at 8% per annum. $100,000 was due with accrued interest on or before the 180th day following the date of the Note which is June 19, 2006, with the balance of principal and interest due and payable on or before the 365th day following the date of the note.
 
 F-18
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 3          Notes Payable(cont’d)
 
 The 2,000,000 shares of Restricted Common Stock were issued on December 21, 2005 and priced at the market price of $ .10 per share for a total value of $200,000.  The cost was allocated as follows:
 
 Mikron Manufacturing Distribution Agreement
 Customer List and Intangible Assets
$700,000
 Tangible Assets    80,000
 Covenant Not-To-Compete20,000
 Total
$800,000
 
 In addition, 1,500,000 shares of Restricted Common Stock are being held in escrow as security for the note payable of $200,000.  These shares have been shown as issued but not outstanding.  The Company is in default on $200,000 of the Note Payable and interest of $4,000 which was due June 19, 2006 on the first $100,000 of notes due.  Due to the default, the interest charged from June 19, 2006 is 18% on the $200,000 Note Payable.  Interest expense of $150,245 is included in Accrued Expenses at July 31, 2010.
 
 On November 28, 2006, the Company received a letter due to the default, giving it ten (10) days to pay the note and accrued interest or the 1,500,000 shares held in escrow will be issued to the shareholder of Micro Health Systems, Inc.  As of July 31, 2010 and through November 9, 2010,  nothing has transpired.
 
 Balance due at July 31, 2010
$200,000
 
 d)
The Company has borrowed $16,912 from an unrelated party.  The note is dated January 16, 2009, and was due on February 16, 2009 (maturity date).  The note has an interest rate of 12% per annum. Per the terms of the note, the Company is in default as it failed to pay the principal and interest due upon the maturity date.  In the event of default, the lender, by notice given to the borrower, may declare the unpaid principal and accrued interest owing to be paid.  The Company (borrower) has not received any demand for payment as of May 26, 2010.  The note is included as a current liability in Notes and Loans Payable - Other in the amount of $16,912.
 
 e)
See Note 3(b), this Lender assigned $290,000 of his Notes Receivable to two individuals and two Companies and entered into agreements with them.  The Notes are convertible into the Company’s Common Stock and are being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (See Note 5).  The Lenders have converted $230,440 of these Notes into 634,162,474 shares of Common Stock after reflecting a reverse split of 100 - 1 in January 2010.  The Notes have an interest rate of 0.0% and mature August 20, 2011.  Total shares available for conversion at July 31, 2010 are 1,798,087,912.
  F-19
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 3          Notes Payable(cont’d)
 
 On July 13, 2010, the Lender assigned the balance of the Notes due him of $110,000 and accrued interest of $245,344 to Aguna Networks, Inc.  The total due of $355,344 plus $40,000 loan acquisition cost, equaling $395,345 is a convertible debenture into the Company’s Common Stock.  The Conversion price shall be 35% of the lowest trading price in 20 days previous to conversion.  In order to determine the number of shares issuable, the conversion amount shall be divided by the conversion price.  The issuance of notes resulted in conversion features being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP
 (See Note 5).  Total shares available for conversion at July 31, 2010 are 11,348,711,428.
 
 NOTE 4          Convertible Notes - Other
 
 a)
On June 18, 2009, JMJ Financial purchased $270,500 of certain Convertible Notes from AJW Partner and related entities (see Note 2).  Through April 30, 2010, $270,500 of these Notes were converted to Common Stock.  These Notes bear interest at 8% per annum.  The Company has consented to the sale of these Notes.  The Notes bear the same terms as in the hands of the seller, AJW Partners, and related entities.
 
 Balance Due at July 31, 2010                                                                $   - 0 -
 
 b)
The Company has entered into an agreement with JMJ Financial, the Lender, and the Company as the Borrower.  They will loan to the Company the principal sum of $575,000 of which $75,000 has been recorded as a loan acquisition cost and is being amortized over 36 months.  The loan has a 12% one time interest charge on the principal sum of $69,000 which is included in the balance due.  No interest or principal payments are required until the maturity date three (3) years from the effective date (May 22, 2009).  Both principal and interest may be included in conversion prior to maturity date.  The conversion formula, the number of shares issued through conversion, is the conversion amount, divided by the conversion price which is 70% which was amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion, as applied to the Company’s voting Common Stock.  Prepayment of the loan is not permitted, unless approved by Holder.
 
 The Company entered into an additional agreement to borrow up to $1,150,000 from JMJ Financial of which $150,000 has been recorded as a loan acquisition cost and is being amortized over 36 months.  The interest rate will be 12% one time interest charge on the principal sum of $138,000 which is included in the balance due.  No interest or principal payments are required until the maturity date, but both principal and interest may be included in the conversion prior to maturity.  Maturity is three (3) years from the effective date (August 19, 2009).  The loan is convertible into voting common stock of the Company.  The conversion formula, the number of shares issued through conversion is the conversion amount, divided by the conversion price which is 70% amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion.  Prepayment of the loan is not permitted, unless approved by holder.
 
 F-20
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 4          Convertible Notes - Other(cont’d)
 
 a)
The Company has an additional commitment to borrow up to $1,725,000 from JMJ Financial of which $225,000 will be recorded as a loan acquisition cost and will be amortized over 36 months.  The interest rate will be 12% one time interest charge on the principal sum of $207,000 interest.  No interest or principal payments are required until the maturity date, but both principal and interest may be included in the conversion prior to maturity.  Maturity is three (3) years from the effective date.  The loan is convertible into voting common stock of the Company.  The conversion formula, the number of shares issued through conversion is the conversion amount, divided by the conversion price which is 70% amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion.  Prepayment of the loan is not permitted unless approved by holder.
 Balance Due at July 31, 2010                                                                $1,551,219
 
 b)
On July 26, 2010, JMJ assigned $25,000 of its $1,150,000 convertible notes receivable to Redwood Management, LLC.  The assignment was accepted by the Company.
 
 c)
On July 28, 2010, JMJ assigned $75,000 of its $1,150,000 convertible notes receivable to Black Mountain Equities, Inc.  The terms of conversion are the same as JMJ Financial.  There is no interest on this note.  The assignment was accepted by the Company.
 
 Black Mountain Equities, Inc. has not converted any of its notes to stock as of July 31, 2010.  The conversion features are being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (see Note 5).  Total shares available for conversion are 2,142,857,143 at July 31, 2010.
 
 In December 2009, JMJ Financial was assigned a note of $40,000 from another lender (see Note 3 (b).  The Lender converted $40,000 into Common Stock, there is a balance due as of July 31, 2010 is $ - 0 -.
 
 The issuance of convertible notes resulted in conversion features being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (See Note 5).
 Total shares available for conversion on all Notes A & B above, are 44,320,542,857 at July 31, 2010.
 
 The Company entered into an agreement to borrow $50,000 from Asher Enterprises, Inc.  The loan is dated May 5, 2010, and has an interest rate of 8%.  The Company promises to pay the accrued and unpaid interest and the balance of principal due on the maturity date of February 5, 2011.  Any amount not paid when due shall bear an interest rate of 22%, the default rate.
 
 The holder may convert principal and interest into shares of the Company’s Common Stock at any time to the maturity date.  The conversion price means the average of the lowest three (3) trading prices for the Common Stock in the ten (10) trading day period ending one trading day prior to the conversion date X 60%.
 
 F-21
  
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 4          Convertible Notes - Other(cont’d)
 
 Events of default are (1) failure to pay principal or interest at maturity, and (2) failure to issue stock upon conversion.
 
 The Company has instructed the stock transfer agent to reserve a sufficient number of shares of Common Stock for the conversion, initially 441,176,471 shares.
 
 There were no conversions through July 31, 2010.  The conversion features are accounted for as Embedded Derivative Liabilities (See Note 5).
 
 Total shares available for conversion are 833,333,333 at July 31, 2010.
 
 Balance due at July 31, 2010
$50,000
 
 On July 26, 2010, JMJ Financial assigned $25,000 of its convertible note receivable to Redwood Management, LLC (See Note 4(d)).  The terms are the same as the assigner.  Redwood has converted $5,500 of the notes for 157,142,857 shares of the Company’s Common Stock.  The conversion features are being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (See Note 5) total shares available for conversion are 557,140,857 at July 31, 2010.
 
 Balance due at July 31, 2010
$19,500
 
 NOTE 5          Derivative Financial Instrument Liabilities
 
 We use the Black-Scholes option pricing model to value options and warrants, and the embedded conversion option components of any bifurcated embedded derivative instruments that are recorded as derivative liabilities.  See Note 1, related to embedded derivative instruments accounting policy.
 
 In valuing the options and warrants and the embedded conversion option components of the bifurcated embedded derivative instruments, at the time they were issued and at April 30, 2010, we used the market price of our Common Stock on the date of valuation, an expected dividend yield of 0% and the remaining period to the expiration date of the options or warrants or repayment date of the convertible debt instrument.  All options, warrants and conversion options can be exercised by the holder at any time.
 
 Because of the limited historical trading period of our Common Stock, the expected volatility of our Common Stock over the remaining life of the options and warrants has been estimated at 123%, based on a review of the historical volatility and of entities considered by management as comparable.  The risk-free rates of return used ranged from 0.03% to 0.15%, based on constant maturity rates published by the U.S. Treasury Department, applicable to the remaining life of the options or warrants.
 
 F-22
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010
 
 
 NOTE 5         Derivative Financial Instrument Liabilities(cont’d)
 
 At July 31, 2010, the following derivative liabilities related to Common Stock options and warrants and embedded derivative instruments were outstanding (see Notes 2, 3 and 4):
 IssueDate
Expiry Date
No.  of Warrants
Issued To
Exercise Price 
Per Share
Value - IssueDate
Value - July 31,201010/31/05



01/20/06



07/25/06



08/04/06



11/30/06



03/26/07



05/30/07



10/12/07



11/15/07



12/14/07



04/22/08
10/31/10



01/20/11



07/25/11



08/04/11



11/30/13



03/26/14



05/30/14



10/12/14



11/15/14



12/14/14



04/22/15
16,667



16,667



8,333



8,333



40,000



10,000



100,000



150,000



100,000



100,000



200,000
AJW Partners



AJW Partners



AJW Partners



AJW Partners



AJW Partners



AJW Partners



AJW Partners



AJW Partners



AJW Partners



AJW Partners



AJW Partners
$ .50



$ .50



$ .50



$ .50



$ .08



$ .03



$ .02



$ .0001



$.0001



$.0001



$.0001
$    169,629



81,321



146,197



102,816



158,741



25,433



163,409



179,353



39,649



24,000



17,540
$         0



0



0



0



0



0



0



8



6



5



0
 Fair value of derivative instrument liabilities for warrants
$1,108,088                                                                       $       19
 The number of shares have been adjusted to reflect the 100 - 1 reverse split.
 
 F-23
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010
 NOTE 5          Derivative Financial Instrument Liabilities(cont’d)
 Issue Date
Due

Date
Note

Amount
Instrument
Exercise Price Per Share
Value - Issue Date
Value - July 31, 201010/31/05



01/20/06



07/25/06



08/04/06



11/30/06



03/26/07



05/30/07



10/12/07



11/15/07



12/14/07



12/31/07



04/22/08



06/12/08



08/29/08
10/31/08



01/20/09



07/25/09



08/04/09



11/30/09



03/26/10



05/30/10



10/12/10



11/15/10



12/14/07



12/31/10



04/22/11



06/12/11



08/29/11
$1,000,000



1,000,000



500,000



500,000



400,000



165,000



435,000



175,000



325,000



315,000



427,760



190,000



135,000



235,114
Convertible Notes

Convertible Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes
Various



Various



Various



Various



Various



Various



Various



Various



Various



Various



Various



Various



Various



Various
$2,681,204



1,363,058



791,994



616,127



523,047



274,500



825,801



711,289



465,052



631,254



894,835



569,394



555,374



875,919
$           0



6,490,049



3,600,000



1,652,400



2,448,000



237,600



2,786,400



1,225,063



2,275,286



2,205,832



2,995,898



800,829



950,513



1,662,387
 Fair value of bifurcated embedded derivative instrument liabilities carry forward

$
12,149,037   $29,330,257
 
 
 F-24
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010
 
 
 NOTE 5          Derivative Financial Instrument Liabilities(cont’d)
 Issue Date
Due

Date
Note

Amount
Instrument
Exercise Price Per Share
Value -

Issue Date
Value - July 31, 2010Carry Forward
05/15/09



06/30/09



05/27/09



08/20/09



12/07/09



08/19/09



05/05/10



05/19/10



07/13/10



07/26/10



07/27/10



07/28/10



07/25/10
05/15/12



06/30/12



05/27/12



08/20/11



12/07/12



08/19/12



02/05/11



05/19/12



07/13/12



08/19/12



07/27/12



07/28/12



07/25/13
$    79,500



551,565



575,000



70,000



50,000



1,188,000



50,000



40,000



395,344



25,000



40,000



75,000



20,000
Convertible Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes

Convertible

Notes Convertible

Notes

Convertible

Notes
Various



Various



Various



Various



Various



Various



Various



Various



Various



Various



Various



Various



Various
$12,149,037



79,500



551,565



575,000



70,000



177,486



1,188,000



165,721



40,000



395,344



25,000



40,000



75,000



20,000
$29,330,257



571,387



3,976,655



1,702,975



75,760



364,127



5,150,321



119,731



151,256



1,906,497



96,755



79,042



372,133



99,235
 Fair value of bifurcated embedded derivative instrument liabilities

$
15,551,653$43,996,131
 Total derivative financial instruments


$
16,659,741$43,996,150
 
 F-25
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 NOTE 6         Accrued Expenses
 
 The following are the components of Accrued Expenses:
 July 31, 2010


July 31, 2009Penalties - Registrations

Interest on Debt

Payroll and Payroll Taxes

Professional Fees

Accrued Trade Payables

$
1,585,774

993,977

1,158,835

11,000

253


$
1,150,174

495,313

1,222,486

10,000

1,754$
3,749,839


$
2,879,727
  NOTE 7        Stockholders’ Equity (Deficit)
 
 The following resolutions were duly adopted by the Board of Directors of the Corporation by unanimous written consent on September 10, 2009:
 
 WHEREAS, the Board of Directors is authorized within the limitations and restrictions stated in the Articles of Incorporation of the Corporation, to provide by resolution or resolutions for the issuance of 10,000,000 shares of Preferred Stock of the Corporation, in such series and with such designations and such powers, preferences, rights, qualifications, limitations and restrictions thereof as the Corporation’s Board of Directors shall fix by resolution or resolutions providing for the issuance thereof duly adopted by the Board of Directors; and
 
 WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to designate the terms of the Series B Preferred Stock and the number of shares constituting such series;
 
 NOW, THEREFORE, BE IT RESOLVED, that the certificate of designation for the Series B Preferred Stock of the Corporation be amended and restated in its entirety as follows:
 
 (1)
Designation and Authorized Shares.  The Corporation shall be authorized to issue 1,000,000 shares of Series B Preferred Stock, par value $.001 per share (the “Series B Preferred Stock”).
 
 (2)
Stated Value.  The stated value of each issued share of Series B Preferred Stock shall be deemed to be $1.00 (the “Stated Value”).
 
 F-26
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 NOTE 7        Stockholders’ Equity (Deficit)(cont’d)
 
 (3)
Voting.  Except as otherwise expressly required by law, each holder of Series B Preferred Stock shall be entitled to vote on all matters submitted to shareholder of the Corporation and shall be entitled to one hundred (100) votes for each share of Common Stock that each holder is entitled to receive upon conversion of the Series B Preferred Stock in full at the record date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited.  The holders of shares of Series B Preferred Stock shall vote together with the holders of Common Stock on all matters.
 
 (4)
Liquidation. The holders of Series B Preferred Stock shall not be entitled to receive any preference upon the liquidation, dissolution or winding up of the business of the Corporation, whether voluntary or involuntary, each holder of Series B Preferred Stock shall share ratably with the holders of the common stock of the Corporation.
 
 (5)
Conversion.  The holder of Series B Preferred Stock shall have the following conversion rights (the “Conversion Rights”):
 
 5.1
Right to Convert.  Each share of Series B Preferred Stock shall be convertible at the option of the Holder thereof, at any time and from time to time from and after the Original Issue Date into that number of shares of Common Stock determined by dividing the Stated Value by the Conversion Price.  For purposes of this Section, the conversion price for the Series B Preferred Stock shall equal $0.001 (the “Conversion Price”).
 
 On October 1, 2009, with the unanimous written consent of the Directors, the Chief Executive Officer John Antonio and the Vice President Ken McCopper, each converted $50,000 of accrued salary owed to them into shares of the Company’s Series B Preferred Stock.  Each received 50,000 shares of Series B Preferred Stock, par value $.001 per share, $1.00 stated value.
 
 On October 2, 2009, the Company amended its Certificate of Incorporation to increase its authorized shares of common stock from 10 billion to 20 billion.  The increase amendment was approved by the Board of Directors as well as the Shareholders holding a majority of the issued and outstanding voting shares of the Company.
 
 F-27
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 7        Stockholders’ Equity (Deficit)(cont’d)
 
 The Board of Directors has adopted a resolution pursuant to NRS 78.209, of Nevada Regulations and have obtained required approval of the Stockholders.  The number of shares of Common Stock authorized 20,000,000,000 par value .001 per share is changed to 200,000,000 shares of Common Stock, par value .001 per share.  One share of Common Stock shall be issued after the exchange for each 100 shares of Common Stock issued.  This is effective January 15, 2010.
 
 Effective January 21, 2010, by a vote of a majority of the outstanding shares the Company is hereby authorized and directed to amend the Articles of Incorporation to increase the Company’s authorized shares of Common Stock from 200,000,000 shares to 5,000,000,000 shares.  This was done and effective January 21, 2010.
 
 On January 19, 2010, with the unanimous written consent of the Directors, the Chief Executive Officer, John Antonio, and the Vice President, Ken McCopper, each converted $50,000 of accrued salary owed to them into shares of the Company’s Series B Preferred Stock.  Each received 50,000 shares of Series B Preferred Stock, par value $.001 per share, $1.00 stated value.
 
 NOTE 8            Derivative Instruments Income, Net
 
 Derivative instruments income of $78,229 represents the net unrealized (non-cash) change during the year ended July 31, 2010, in the fair value of our derivative instrument liabilities related to certain warrants and embedded derivatives in our convertible debt that have been bifurcated and accounted for separately.
 
 NOTE 9          Going Concern
 
 The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
 
 As reflected in the accompanying consolidated financial statements, the Company had a net loss of  $3,108,468 and a negative cash flow from operations of $893,003 for the year ended July 31, 2010, negative working capital of $37,109,113, and a stockholders’ deficiency of $55,032,654 at July 31, 2010.
 
 The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional funds and implement its business plan.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
 Management’s plans include the raising of additional capital through private or public transactions and implementation of its business and marketing plan to increase revenues.
  F-28
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENT
 AS OF JULY 31, 2010 AND 2009
 
 
 NOTE 10       Employee Compensation Plan
 
 In December 2006, the Company filed a Form S-8 to register 5,000,000 shares of common stock with a proposed offering price of $ .075 per share related to the formation of the Wellstar International, Inc. 2006 Employee Compensation Plan.  In August 2007, the Company filed a Form S-8 and registered 8,500,000 shares of Common Stock with a projected offering price of $ .013 per share related to the formation of the 2007 Employee Compensation Plan.  In August 2008, the Company filed Form S-8 and registered 47,000,000 shares of Common Stock at a proposed maximum offering price of $ .019 per share, issuable pursuant to the Company’s 2008 Compensation Plan, dated August 7, 2008.
 
 To date, no shares have been issued under either plan.
 
 NOTE 11       Compensated Absences
 
 There has been no liability accrued for compensated absences as the Company does not meet the conditions of SFAS43, Paragraph 6, for accrual.  The Company only has four employees and three are officers.  There are no retirement plans and no plans related to future absences.
 
 NOTE 12       Recently Issued Accounting Pronouncements
 
 In May 2008, the FASB released FSP APB 14-1 Accounting For Convertible Debt Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash Settlement)(FSP APB 14-1) that alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements.
 
 FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company has adopted FSP APB 14-1 for the fiscal year beginning August 1, 2009 and is not expected to be significant to our financial statements.
 
 During the third quarter of 2009, the Company adopted the FASB Accounting Standards Codification (ASC or Codification) and the Hierarchy of Generally Accepted Accounting Principles (GAAP) which established the Codification as the sole source for authoritative U.S. GAAP and will supersede all accounting standards in U.S. GAAP, aside from those issued by the SEC.  The adoption of the Codification did not have an impact on the Company’s results of operations, cash flows or financial position.  Since the adoption of the Accounting Standards Codification (ASC) the Company’s notes to the consolidated financial statements will no longer make reference to Statement of Financial Accounting Standards (SFAS) or other U.S. GAAP pronouncements.
  F-29
  
 
 WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 
 NOTE 12       Recently Issued Accounting Pronouncements(cont’d)
 
 During the fiscal first quarter of 2010, in accordance with U.S. GAAP, the Company adopted the standards on subsequent events.  This pronouncement establishes standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  See Note 14 for related disclosure.
 
 In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets, which is effective January 1, 2010.  The amendment eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets.  The effect of adoption on the Company’s financial position and results of operations is not expected to be material.
 
 Also in June 2009, the FASB amended the existing accounting and disclosure guidance for the consolidation of variable interest entities, which is effective January 1, 2010.  The amended guidance requires enhanced disclosures intended to provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  The effect of adoption on the Company’s financial position and results of operations is not expected to be material.
 
 In October 2009, the FASB issued new guidance for revenue recognition with multiple deliverables, which is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted.  This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement.  The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price shall be used.  If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable.  After adoption, this guidance will also require expanded qualitative and quantitative disclosures.  The Company is currently assessing any future impact of adoption on its financial position and results of operations.
 
 In January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which is effective January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective January 1, 2011.  Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and require certain Level 3 disclosures on a gross basis.
 
 F-30
  
  WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AS OF JULY 31, 2010 AND 2009
 NOTE 12       Recently Issued Accounting Pronouncements(cont’d)
 
 Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements.  Since the amended guidance requires only additional disclosures and the Company currently does not have any assets requiring disclosure, the adoption will not affect the Company’s financial position or results of operations.
 
 NOTE 13      Lease Agreement
 
 On July 17, 2007, Trillenium Medical Imaging, Inc., a wholly owned subsidiary, entered into a lease agreement with an unrelated party for a facility in New York City.  The lease replaced a prior lease in the same facility.  The lease is for a period of one year with a monthly rent of $4,435.  The lease expired July 16, 2009 and was not renewed.  The Company incurred a rent expense of approximately $55,391 in the year ended July 31, 2009.
 
 NOTE 14        Subsequent Events
 
 (A)
AJW Partners, LLC and related entities converted a portion of their notes (see
 Note 2) into 383,387,501 shares of Common Stock during the period August 1, 2010 through October 2010.  From August 1, 2010 through November 5, 2010, JMJ Financial converted a portion of their notes in 1,239,000,000 shares of Common Stock (see Note 4).  During the period August 1, 2010 through November 10, 2010, 3,806,058,342 shares of Common Stock were issued through conversion of Convertible Notes Payable.
 
 (B)
On August 20, 2010, the authorized shares of Common Stock were increased to
 15 billion shares.
 
 (C)
Litigation
 
 “On September 20, 2010, Micro Health Systems, Inc. (“Micro”), a dissolved Florida Corporation, filed a certified summons and complaint with the Circuit Court on the 17th Judicial Circuit in Broward County, Florida, naming the Company as the sole Defendant.  Micro alleges in the Complaint that on December 21, 2005, the Company executed and delivered a promissory note in the amount of $200,000 to Micro.  Further, Micro alleges that Wellstar has failed to make a payment on the Note and continues to owe the principal and interest.  The Company intends to vigorously defend against the allegations stated in the Complaint.”  (See Note 3c)
  F-31


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.





None.





ITEM 9A - CONTROLS AND PROCEDURES





Not applicable.





ITEM 9A(T) - CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the applicable period to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.





Managements Report on Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:





·
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of our assets;





·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and





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





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations and provide only reasonable assurance, not absolute assurance, with respect to financial statement preparation and presentation. The design of an internal control system reflects resource constraints and the benefits must be considered relative to the costs of implementing and maintaining the system.





Management assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2010. This assessment was based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we believe that as of July 31, 2009 the Company’s internal control over financial reporting was effective based on those criteria.


26





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





Changes in Internal Control over Financial Reporting





There were no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




ITEM 9B - Other Information





None.


27




PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPROATE GOVERNANCE.




The following are the names and certain other information regarding or current directors and executive officers.





Name

Position

Position Held SinceJohn Antonio

President, Chief Executive Officer, Director

June   2005Ken McCoppen

Senior Vice President, Director

June   2005Howard Bielski

Chief Financial Officer

August 2005Dr. McKinley Boston

Director

July   2005





For directors, the term of office is until the next annual meeting of shareholders. For officers, the term of office is until the next annual meeting of the Board of Directors, presently scheduled to be held immediately following the annual meeting of the shareholders.





John Antonio, President, Chief Executive Officer and Director. John Antonio has served as our President, Chief Executive Officer, and a Director since June 2005. From March of 2004 until present, Mr. Antonio has been involved in the establishment of Trillennium Medical Imaging, Inc. and its merger with Wellstar International, Inc. From January 2003 until present, Mr. Antonio has been the Vice President of Network Technologies International, Inc. From 1996 to present Mr. Antonio has been the manager of Intertel LLC, which is engaged in the distribution of prepaid phone cards in Mexico. Mr. Antonio graduated from Bowling Green State University with a BLS Degree.





Ken McCoppen, Senior Vice President and Director. Ken McCoppen has served as our Senior Vice President and a Director since June 2005. From September 2002 until September 2004, Mr. McCoppen was Executive Vice President of Sales for Arista Communications, a provider of telecommunications services. From June 1999 until September 2002, Mr. McCoppen was Vice President of the National Partners Program for Qwest Communications. From 1982 to 1999, Mr. McCoppen held sales positions at the following companies: Toshiba America; Samsung America; Micronics; Mantech International; and GTE.





Howard Bielski, Chief Financial Officer. Mr. Bielski has served as our Chief Financial Officer since August 2005. Mr. Bielski is the managing member of Bielski & Bielski, LLC, an accounting firm located in West Orange, New Jersey and is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants.





Dr. McKinley Boston, Director. Dr. Boston has served as a Director since July 2005. Since December 2004, Dr. Boston has served as Athletic Director and Vice President of New Mexico State University. Since September 2000, Dr. Boston has served as an Education Consultant at the Consortium of Minneapolis Board of Education, Minneapolis Youth Coordinating Board, and Minneapolis Park Board.





Audit Committee





At present we do not have an audit committee and consequently the entire Board serves as the audit committee. The Board presently consists of 3 members, one of whom is independent. We have interviewed several qualified individuals for the position of Audit Committee Financial Expert on the Board of Directors. All have declined to serve, with the primary reason being personal liability issues, especially the perceived view that being the "financial expert" increases the individual's personal exposure over that of being a regular Board member.


28





Code of Ethics





The Board of Directors has not adopted a Code of Business Conduct and Ethics that is applicable to our directors, principal executive and financial officer, principal accounting officer or controller, and persons performing similar functions.





Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires  executive officers and directors, and persons who beneficially own more than ten percent of the Company’s common stock, to file initial reports of ownership and reports of changes in ownership with the SEC for Companies registered under Section 12 of the Exchange Act (“Section 12”) . Since we are not registered under Section 12, the executive officers, directors and greater than ten percent beneficial owners were not required by SEC regulations to file forms under 16(a).




FAMILY RELATIONSHIPS




There are no family relationships between any of our directors or executive officers.




INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS




Other than as discussed herein, none of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:




1. any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;




2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);




3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or




4. being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.




AUDIT COMMITTEE FINANCIAL EXPERT





We do not have an Audit Committee, as our board of directors during 2009 performed the same functions of an Audit Committee, such as: recommending a firm of independent certified public accountants to audit the annual financial statements; reviewing the independent auditors independence, the financial statements and their audit report; and reviewing management's administration of the system of internal accounting controls. We do not currently have a written audit committee charter or similar document.  As the Company does not have an Audit Committee, it does not have an Audit Committee Financial Expert.


29





ITEM 11. EXECUTIVE COMPENSATION.




The following table sets forth information concerning the total compensation that we have paid or that has accrued on behalf of our chief executive officer and our other executive officers during the fiscal years ended July 31, 2009 and 2008.





Name and

principal position

Year

Salary

($)
Bonus

($)
Stock

Awards

($)
Option Awards

($)
Non-Equity Incentive Plan

Compensation

($)
Nonqualified Deferred

Compensation Earnings

($)
All Other

Compensation

($)

Total

($)C John Antonio


2010


$
240,000


0
0
0
0
0
$
240,0002009



240,000


-0-
0
0
0
0

240,000Ken McCoppen


2010


$
201,600



0
0
0
0

201,6002009



240,000



0
0
0
0
$
240,000





Options Grants in Last Fiscal Year





None.





Aggregate Option Exercises In Last Fiscal Year and Fiscal Year End Option Values





None.





Employment Agreements





As previously disclosed on, August 5, 2005, we entered into separate employment agreements with John A. Antonio, our President and CEO; and Kenneth B. McCoppen, our Vice President and Corporate Secretary. These agreements provide for base annual salaries of $240,000 and 201,600, respectively. Further, each agreement has a base term of five (5) years.




DIRECTORS COMPENSATION


Our directors do not receive any set compensation.





Limitation of Liability of Directors





Our Articles of Incorporation, as amended, provide to the fullest extent permitted by Nevada law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.


30





Election of Directors and Officers.





Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.





No Executive Officer or Director has been the subject of any order, judgment, or decree of any Court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring suspending or otherwise limiting him from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any securities.





No Executive Officer or Director has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding which is currently pending.





No Executive Officer or Director is the subject of any pending legal proceedings.





Compensation Discussion and Analysis





Currently, the Company’s philosophy is to align compensation with its short-term and long-term goals: short term - development of products, sales, and generating positive cash flow, and providing expertise to develop long-term development of markets for the Company to pursue. Our plan was determined by a combination of upper management, finance and operations departments, based on research available from NCEO (the National Center for Employee Ownership) and other research management is familiar with. The current plan has the flexibility to be changed as the needs of the Company and the circumstances surrounding it change. The Company has designed its compensation structure to provided its core people base compensation to insure they maintain (but not necessarily upgrade) the lifestyle each has built from past business successes. We feel this is appropriate due to the fact we are in the development stage. Certain consultants have elected to be paid in shares only.





We may elect to award a cash bonus to key employees, directors, officers and consultants based on meeting individual and corporate planned objectives. We currently have written employment agreements with our officers, and the following shows additional information, including the annual salaries, bonuses and stock awards for our officers and executives.





ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.





The following table indicates beneficial ownership of our common stock as of November 11, 2010 by each person or entity known by us to beneficially own more than 5% of the outstanding shares of our common stock; each of our executive officers and directors; and all of our executive officers and directors as a group.





Name and Address of Beneficial Owner (1)(2)

Common Shares

Beneficially

Owned (1)


Percentof

Class(3)John A. Antonio (4)


79,128,571
(4)



*Howard Bielski


3,000,000




*McKinley Boston


500,000



*Ken McCoppen


81,541,071
(5)


*All directors and executive officers


164,169,642




*





*Less than 1%


31





(1)
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of June 19, 2008 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.





(2)
Unless otherwise indicated, the address of each beneficial owner is c/o Wellstar International, Inc., 6911 Pilliod Road, Holland, Ohio 43528.





(3)
Based on 7,371,327,726 shares issued and outstanding as of November 10, 2010.





(4) Includes (i) 21,428,571 shares of common stock issuable upon conversion of the Series A Preferred Shares, (ii) 50,000,000 shares of common stock issuable upon conversion of the Series B Preferred Shares and (iii) 7,700,000.





(5) Includes (i) 21,428,571 shares of common stock issuable upon conversion of the Series A Preferred Shares, (ii) 50,000,000 shares of common stock issuable upon conversion of the Series B Preferred Shares and (iii) 10,112 5000.





Equity Compensation Plan Information





The Company does not have an equity compensation plan.





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.





Series A Preferred Stock





On May 20, 2009, the Company entered into a conversion agreement with John Antonio (“Antonio”) and Kenneth McCoppen (“McCoppen”), both executive officers and directors of the Company, pursuant to which the Company agreed to convert $30,000 in outstanding wages owed to each McCoppen and Antonio into a total of 60,000 shares of Series A Preferred Stock.





The above transactions were approved by the Board of Directors of the Company.  The Series A Preferred Stock does not pay dividends but each holder of Series A Preferred Stock shall be entitled to 100 votes for each share of common stock that the Series A Preferred Stock shall be convertible into.  The Series A Preferred Stock has a conversion price of $0.0014 (the “Conversion Price”) and a stated value of $1.00 (the “Stated Value”).  Each share of Series A Preferred Stock is convertible, at the option of the holder, into such number of shares of common stock of the Company as determined by dividing the Stated Value by the Conversion Price.  The Series A Preferred Stock has no liquidation preference.





Series B Preferred Stock





On October 1, 2009, the Company entered into a conversion agreement with Antonio and McCoppen, both executive officers and directors of the Company, pursuant to which the Company agreed to convert $50,000 in outstanding wages owed to each McCoppen and Antonio into a total of 100,000 shares of Series B Preferred Stock.





The above transactions were approved by the Board of Directors of the Company.  The Series B Preferred Stock does not pay dividends but each holder of Series B Preferred Stock shall be entitled to 100 votes for each share of common stock that the Series B Preferred Stock shall be convertible into.  The Series B Preferred Stock has a conversion price of $0.001 (the “Conversion Price”) and a stated value of $1.00 (the “Stated Value”).  Each share of Series B Preferred Stock is convertible, at the option of the holder, into such number of shares of common stock of the Company as determined by dividing the Stated Value by the Conversion Price.  The Series B Preferred Stock has no liquidation preference.


32




ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.





Audit fees


The aggregate fees billed for professional services rendered by our independent auditors for the audit of our financial statements, for the reviews of the financial statements included in our annual report on Form 10K, and for other services normally provided in connection with statutory filings were $35,787 and $12,852 for the years ended July 31, 2010 and July 31, 2009, respectively.





Audit-Related Fees


No audit-related fees were incurred for the years ended July 31, 2010 and July 31, 2009.





Tax Fees


No tax fees were incurred for the years ended July 31, 2010 and July 31, 2009.





All Other Fees


We did not incur any fees for other professional services rendered by our independent auditors during the years ended July 31, 2010 and July 31, 2009.





Audit Committee


At present we do not have an audit committee and consequently the entire Board serves as the audit committee. The Board presently consists of 4 members, two of whom are independent. We have interviewed several qualified individuals for the position of Audit Committee Financial Expert on the Board of Directors. All have declined to serve, with the primary reason being personal liability issues, especially the perceived view that being the "financial expert" increases the individual's personal exposure over that of being a regular Board member.





ITEM 15. EXHIBITS, Financial Statement Schedules.


Exhibit





3.1
Articles of Incorporation of Wellstar International, Inc. **





3.2
Certificate of Amendment to Articles of Incorporation of Wellstar International, Inc.*****





3.3
Bylaws of Wellstar International, Inc. **





3.4                 Certificate of Amendment to the Certificate of Incorporation (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





3.5                 Amendment to Certificate of Designation – Series A Preferred Stock  (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





3.6                Certificate of Correction to the Amendment to Certificate of Designation – Series A Preferred Stock (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





3.7                 Certificate of Amendment to the Certificate of Incorporation (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on October 5, 2009)





33





3.8                 Certificate of Designation – Series B Preferred Stock (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on October 5, 2009)





4.1                 Securities  Purchase  Agreement,  dated  May 15, 2009, by and among the Company and the Purchasers (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





4.2                 Form of Callable Secured Convertible Note (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





4.3Registration Rights Agreement (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





4.4                 Security Agreement  (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





4.5 Intellectual Property Security Agreement  (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





4.6 Subsidiary Guarantee (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





4.7                 Form of Convertible Promissory Note issued by Wellstar International Inc. to JMJ Financial (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on October 9, 2009)





4.8                 Form of Secured and Collateralized Promissory Note issued by JMJ Financial to Wellstar International, Inc. (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on October 9, 2009)





10.1
Securities Purchase Agreement dated October 31, 2005, by and among Wellstar International Inc. and the investors named on the signature pages thereto. ****





10.2
Form of Callable Secured Convertible Note dated October 31, 2005. **





10.3
Form of Stock Purchase Warrant dated October 31, 2005. **





10.4
Registration Rights Agreement dated October 31, 2005, by and among Wellstar International Inc. and the investors named on the signature pages thereto. **





10.5
Security Agreement dated October 31, 2005, by and among Wellstar International Inc. and the investors named on the signature pages thereto. **





10.6
Intellectual Property Security Agreement dated October 31, 2005, by and among Wellstar International Inc. and the investors named on the signature pages thereto. **





10.7
Technical Services Agreement by and between Trillennium Medical Imaging, Inc. and Surgicenters of America, Inc. dated October 4, 2005.**





10.9
Term Loan Agreement dated October 11, 2005. **




34





10.10
Commercial Cognovit Promissory Note dated October 17, 2005. **





10.11
Commercial Cognovit Promissory Note dated November 28, 2005. **





10.12
Security Agreement dated October 11, 2005. **





10.13
Demand Note dated August 1, 2005. **





10.14
Employment Agreement by and between Wellstar International, Inc. and John A. Antonio * *





10.15
Employment Agreement by and between Wellstar International, Inc. and Ken McCoppen**





10.16
Definitive Agreement dated December 12, 2005, by and among Wellstar International, Inc., Micro Health Systems, Robert Barnes and Terri Cmorey.***





10.17
Marketing Agreement between Trillennium Medical Imaging, Inc., and Allevia Medical.*





10.18
Addendum to Commercial Cognovit Promissory Note between Wellstar International, Inc., Trillennium Medical Imaging, Inc., and Andrew M. Thompson.*





10.19
Second Addendum to Commercial Cognovit Promissory Note between Wellstar International, Inc., Trillennium Medical Imaging, Inc., and Andrew M. Thompson. ******





10.20
Securities  Purchase  Agreement,  dated  November 30, 2006, by and among Wellstar  International,  Inc. and AJW  Offshore,  Ltd.,  AJW  Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC.





10.21
Form of Callable Secured Convertible Note.*******





10.22
Form of Stock Purchase Warrant.*******





10.23
Registration Rights Agreement by and among Wellstar International Inc. and the secured parties signatory thereto.*******





10.24
Security Agreement by and among Wellstar International Inc. and the secured parties signatory thereto. *******





10.25
Intellectual Property Security Agreement by and among Wellstar International Inc. and the secured parties signatory thereto. *******





10.26
Limited Technology License Agreement by and between Trillennium Medical Imaging, Inc. and Maclath Ltda





10.27             Limited Technology License Agreement dated July 9th, 2007, by and between Trillennium Medical Imaging, Inc. and Maclath Ltda. (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on March 19, 2009)





10.28             Notice of Default dated September 27,2007 sent by Trillennium Medical Imaging, Inc. to Maclath Ltda (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on March 19, 2009)


35





10.29
Conversion Agreement between the Company and John Antonio (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





10.30
Conversion Agreement between the Company and Ken McCoppen (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on May 27, 2009)





10.31            Conversion Agreement between the Company and John Antonio – October 2009 (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on October 5, 2009)





10.32            Conversion Agreement between the Company and Ken McCoppen – October 2009 (Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission filed with Securities and Exchange Commission on October 5, 2009)





31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. *





31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. *





32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and the Chief Financial Officer). *





* Filed herewith.





** Incorporated by reference to Form SB-2 filed with the Commission on December 13, 2005.





*** Incorporated by reference to Form SB-2/A filed with the Commission on February 1, 2006.





**** Incorporated by reference to Form SB-2/A filed with the Commission on April 4, 2006.





***** Incorporated by reference to Form SB-2/A filed with the Commission on June 20, 2006.





****** Incorporated by reference to Form 8-K filed with the Commission on November 24, 2006





******* Incorporated by reference to Form 8-K filed with the Commission on December 6, 2006





******* Incorporated by reference to Form 8-K filed with the Commission on July 12, 2007





SIGNATURES





In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





WELLSTAR INTERNATIONAL, INC.Dated:   November 15, 2010
By:
/s/ John AntonioJohn Antonio


President and Chief Executive Officer(Principal Executive Officer)





Dated:   November 15, 2010
By:
/s/ Howard BielskiHoward BielskiChief Financial Officer(Principal Financial and Accounting Officer)





PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:





Signature

Title

Date/s/ John Antonio

President and Chief Executive Officer, Director

November 15, 2010John Antonio

(Principal Executive Officer)/s/ Ken McCoppen

Senior Vice President, Director

November 15, 2010Ken McCoppen/s/ McKinley Boston

Director

November 15, 2010McKinley Boston