U.S.
SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 FORM
10-KSB
 
 
 (Mark
One)
 
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD FROM ______________ TO
      ______________
 
 COMMISSION
FILE NUMBER: 000-33039
 
 CALBATECH,
INC.
 (Exact
name of Company as specified in its charter)
 
 Nevada
              86-0932112(State
      of incorporation)
              (I.R.S.
      Employer)Identification
      No.)
 
 23341 Del
Lago, Laguna Hills, California 92653
 (Address
of principal executive offices) (Zip Code)
 
 Company's
telephone number: (949) 450-9910
 
 Securities
registered pursuant to Section 12(b) of the Act: None
 
 Securities
registered pursuant to Section 12(g) of the Act: Common
 Stock,
$0.001 Par Value
  Indicate
by check mark whether the Company (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Company was required to
file such reports), and (2) been subject to such filing requirements for the
past 90 days. Yes x  No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB o.
  CalbaTech,
Inc. had revenue of $1,148,529 and other income of $3,523 for the fiscal year
ended on December 31, 2007. The aggregate market value of the voting stock held
by non-affiliates of the Company as of March 18, 2008: Common Stock, par value
$0.001 per share -- $168,944. As of March 18, 2007, the Company had 197,361,586
shares of common stock issued and outstanding, of which 168,943,592 were held by
non-affiliates.
 
 
  
 TABLE OF
CONTENTS
 
 PART
      IPAGEITEM
      1.
              Description
      of Business
              3ITEM
      2.
              Description
      of Property
              7ITEM
      3.
              Legal
      Proceedings
              7ITEM
      4.
              Submission
      of Matters to a Vote of Security Holders
              7PART
      IIITEM
      5.
              Market
      for Common Equity and Other Shareholder Matters
              7ITEM
      6.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              8ITEM
      7.
              Financial
      Statements
              14ITEM
      8.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              14ITEM
      8A(T).
              Controls
      and Procedures
              14PART
      IIIITEM
      9.
              Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
              15ITEM
      10.
              Executive
      Compensation
              17ITEM
      11.
              Security
      Ownership of Certain Beneficial Owners and Management
              17ITEM
      12.
              Certain
      Relationships and Related Transactions
              18ITEM
      13.
              Exhibits
      and Reports on Form 8-K
              18ITEM
      14.
              Principal
      Accountant Fees and Services
              18Signatures
              
              19
 
 
 
 PART
I.
 
 RISK
FACTORS AND CAUTIONARY STATEMENTS
 
 Forward-looking
statements in this report are made pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. The Company wishes to
advise readers that actual results may differ substantially from such forward-looking
statements. Forward-looking statements include statements concerning
underlying assumptions and other statements that are other than statements
of historical facts. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from those expressed
or implied by the statements, including, but not limited to, the following:
the ability of the Company to provide for its obligations, to provide working
capital needs from operating revenues, to obtain additional financing needed
for any future acquisitions, to meet competitive challenges and technological
changes, and other risks detailed in the Company's periodic report filings
with the Securities and Exchange Commission.
  When used
in this Form 10-KSB and in our future filings with the Securities and Exchange
Commission, the words or phrases will likely result, management expects,
or we expect, will continue, is anticipated, estimated or similar expressions
are intended to identify forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Readers are cautioned
not to place undue reliance on any such forward-looking statements, each of
which speak only as of the date made. These statements are subject to risks and
uncertainties, some of which are described below. Actual results may differ
materially from historical earnings and those presently anticipated or projected.
We have no obligation to publicly release the result of any revisions that may
be made to any forward-looking statements to reflect anticipated events or
circumstances occurring after the date of such statements.
 
 ITEM 1.
BUSINESS.
 
 Introduction
 
 CalbaTech,
Inc., (formerly Traffic Technology Inc.) ("Company") was organized on April 29,
2002 under the laws of the state of Nevada. The Company is focused on incubating
life science based companies that are developing next generation products
and technologies.
 
 The
Company acquired Molecula Research Laboratories, LLC as a subsidiary in October,
2003. On December 31, 2005, Molecula Research Laboratories, LLC was dissolved
in the state of Virginia. CalbaTech incorporated Molecula, Inc. in the State of
Nevada. Products. Molecula develops and sells numerous research reagents for
cell transfection, DNA and RNA purification,
protein expression, gene expression analysis and other innovative and
fundamental products.
 
 The
Company, through another of its subsidiaries, KD Medical, Inc., manufactures and
distributes microbiological culture medias and other research regents. KD Medical's
products are used in genetic engineering, drug discovery, molecular biology
labs and biopharmaceutical production.
 
 The
Company, through another of its subsidiaries, LifeStem, Inc., is positioning itself to
become a leader in the adult stem cell banking business, a leading supplier
of "Cellular Logistics" by providing services and technologies to facilitate
the efficient acquisition and delivery of purified adult stem cells, development
of stem cell delivery devices for clinical applications and clinical applications
of specific stem cell based therapies.
 
 CORPORATE
MISSION AND OBJECTIVES
 
 In order
to accomplish its goals, CalbaTech is pursuing a strategy of combining products
and technologies, and the companies that provide them, into the following
divisions: 1) Molecular Applications; 2) Research Reagents; and 3) Cellular
Therapeutics. By pursuing such a strategy, each division should produce value
added and increasing returns on shareholders' investment through cross marketing
of products and geographic expansion, as well as to achieve product enhancement
and efficiency.
 
 THE
RESEARCH REAGENTS DIVISION
 
 STRATEGY
 
 The
Company's acquisition strategy is to combine several reagents providers into a
credible commercial entity.
  MOLECULA
RESEARCH LABORATORIES, LLC
 
 CalbaTech
acquired Molecula in October 2003. During 2005, Molecula Research Laboratories,
LLC was dissolved in the state of Virginia. CalbaTech incorporated Molecula,
Inc. in the state of Nevada.
 
 Molecula
develops and sells numerous research reagents for cell transfection, DNA and
RNA purification, protein expression, gene expression analysis and other innovative
and fundamental products. Molecula also sells transfection reagents, a novel
IPTG replacement for increased protein expression, neuropeptides and biochemicals.
Please see www.molecula.com.
 
 KD
MEDICAL, INC.
 
 CalbaTech
acquired KD in the last quarter of 2004. This acquisition substantially
increased both product range and revenue in the Research Reagents Division.
The product ranges of KD and Molecula are highly complementary, with little
over lap. A strength of KD is in the supply of specialized media for culture
of model research organisms such as bacteria, yeast, insects and mammalian
cell lines. It also supplies products to approximately 300 National Institutes
of Health ("NIH") laboratories, contracts invaluable for establishing new
products in a favorable government setting. Its secondary products are related
to molecular biology reagents. Conversely, Molecula's primary focus is in the
design and supply of high value molecular biology reagents such as siRNA and DNA
antisense oligonucleotides. It also has reagents such as IPTG that are complementary
to customized media.
  3
 A large
proportion of molecular biology research depends upon culture of a model organism
(bacteria, fruit fly, etc.), which is genetically manipulated by transfection
of customized oligonucleotides (siRNA). Thus, an alliance of KD and Molecula
will be well placed to provide a competitive single source for these culture
media transfection reagents and specialized modifier molecules such as siRNA.
Further, as explained above, KD's long standing and trusted position, as a major
in-house supplier to NIH may ease entry of Molecula's siRNA into that
major market. Please see www.kdmedical.com.
 
 COMPETITIVE
ANALYSIS
 
 Manufacturers
of molecular biology products can be divided into two distinct categories
within the industry. One category is the multinational companies with extensive
research and development who both out-source and have in-house manufacturing
facilities. The other category is the small, independent, local manufacturers
such as KD Medical and Molecula. While the multinationals have better
brand recognition due to greater advertising and marketing resources, a group of
smaller, independent, local companies, including KD, have been emerging over the
past ten years that are designed to compete with the three major molecular
biology companies. Companies like KD and Molecula have lower overhead and
regional shipping proximity resulting in a consistently profitable record of growth.
That, combined with customer acceptance (once products are in the various
research institutes supply stores) gives small companies an equal access to end
users which puts them on an equal footing with the large companies. Most importantly,
the smaller companies fill the consumer need for quality products that are
less expensive and available immediately. Competitors include Fisher Scientific,
Ambion, Proligo, and Qiagen.
 
 CUSTOMERS
 
 KD
Medical and Molecula service five distinct customer types: 1) Federally funded
research centers such as the National Institutes of Health, the Naval Medical
Center, and the National Cancer Institute; 2) Federally funded "Supply Stores"
such as at the National Institutes of Health; 3) University and private research
centers such as Glaxo Smith-Kline, Johnson & Johnson, Merck & Co., Pfizer
Research, and Wyeth Pharmaceuticals; 4) Medical distributors such as Fisher
Scientific and VWR International; and 5) OEMs such as Genetix, Ltd. and PML
Microbiologicals, Inc.
 
 MARKET
SIZE
 
 The
general laboratory supplies industry is $12 Billion to $14 Billion, and the molecular
biology market to which the Company provides products and services for medical
research and drug discovery on which billions of dollars are spent each year.
Specifically, the molecular biology market is approximately $600 Million per year,
and the RNAi market is estimated to be $328 Million by 2010.
 
 GROWTH
POTENTIAL
 
 Growth
within the Research Reagents Division will be accomplished through the complementary
nature of the subsidiaries within the division and the division of labor.
 
 KD has a
state-of-the-art ISO 9002 certified and FDA compliant facility
featuring two class 100 clean rooms. It is believed that this facility
will provide additional growth opportunities to KD, not only in expanding
product lines to existing customers but by providing contract manufacturing
and leasing opportunities to pharmaceutical companies.
 
 FINANCIAL
PROJECTIONS
 
 The
Reagents Division has two companies with combined 2007 revenues of approximately
$1.224 Million in gross revenues. CalbaTech projects that combined revenues
within the division will be $1.6 Million in 2008.
 
 THE
CELLULAR THERAPIES DIVISION
 
 STRATEGY
 
 The
Cellular Therapies Division was created to house CalbaTech's emerging interests
in cellular applications, particularly those relating to the use of adult
stem cells. The Company believes this is an emerging market in which there are major
opportunities for new entrants to establish new standards through novel
stem cell research techniques and business models. The Company is positioning
itself through strategic alliances to identify and take advantage of such
opportunities as they emerge from the interaction between fundamental research
and an evolving regulatory environment.
 
 CalbaTech's
wholly owned subsidiary LifeStem, Inc. was established take advantage
of this rapidly expanding market. In addition to advancing its unique business
model for stem cell banking and the provision of purified stem cells to researchers,
CalbaTech has filed two patent application for intellectual property
relating to (1) a device for the efficient and effective delivery of stem
cells to diseased or dead areas of the heart (2) a method of collecting and storing
two different types of stem cells in micro quantities for autologous use.
  4
 LIFESTEM,
INC.
 
 The
market for stem cell technology is currently $500 million, and has been estimated
to grow to $30 billion by the year 2010 (Source DMD). This is projected
due to the growth of new cellular therapeutics (both embryonic and adult
stem cells), as well as clinical applications to compete with, or complement,
existing pharma-based solutions. LifeStem's strategy is to leverage CalbaTech's
infrastructure of companies to obtain a leadership position in the fast
emerging stem cell collection arena and become the preferred provider of adult
stem cells to the clinical researcher as part of a comprehensive package of stem
cell based services.
 
 LifeStem
believes that over time it can position itself to become a leader of "Cellular
Logistics" in this large new market. The company is focused on the following:
(1) Providing a Stem Cell Microbank(TM) service to individuals; (2) Providing
services and technologies to facilitate the efficient acquisition and delivery
of purified adult stem cells to the research market and; (3) Developing delivery
devices for clinical applications.
 
 Stem Cell MicroBank(TM)
Service
 
 The
therapeutic possibilities that may be provided by collecting and preserving healthy
adult stem cells on a pre-disease basis may revolutionize the practice of
medicine. The power and promise of stem cell therapies is just emerging, and the
corresponding development of new clinical applications and therapies are expected
to follow. LifeStem's Stem Cell Microbank(TM) Service focuses on refining
existing collection processes that are gaining significant acceptance. The focus
will be providing a stem cell collection process and storage service that
maintains adult stem cells for future use and broadens the availability of a
collection and storage service.
 
 LifeStem
believes that preserving one's healthy cells for future use for treatments,
both known and those yet to be developed, is of utmost importance. The
benefits of stem cell therapies have shown great success in the treatment of life
threatening disease such as chronic heart failure and cancer. There is also significant
promise that stem cells will play a prominent role in cures for other
diseases such as Parkinsons, Alzheimers and Diabetes and others. According to the
American Cancer Society, cancer is now the number one killer of Americans surpassing
heart disease. This concept has great promise not only for the cure of such
diseases but also in the prevention of disease though the periodic re-injection
of one's own healthy stem cells in effect giving the immune system a "boost"
of healthy stem cells.
 
 The
Patent Pending Stem Cell MicroBank process is based on the theory that it is not
necessary to harvest a quantity of stem cells
capable of regenerating the ENTIRE immune system at the time of collection,
but rather that these cells can be collected in micro quantities and cryo-preserved
for future cellular expansion prior to reintroduction into the recipient,
or in the alternative, that the number of stem cells necessary for a therapy
does not necessitate using a number of stem cells necessary to regenerate
one's complete immune system. The company further believes that it is in the
client's best interest to store a stem cell samples from two tissue sources.
This concept is defined as a Stem Cell Microbank(TM). LifeStem has been
granted a trademark for the term "Stem Cell Microbank". LifeStem is the only
company that is collecting and storing adult stem cells from two different
cell sources.
 
 Delivery
Devices
 
 LifeStem
recognizes that the demand for efficient and minimally invasive methods of
delivering stem cells into diseased and/or injured tissue will be critical to any
successful stem cell based therapy. To this end, LifeStem, through CalbaTech,
has acquired a unique and novel method for the delivery of stem cells.
 
 To date,
researchers have been necessarily focused on elucidating the complex science
of identifying, isolating, and understanding stem cells. The outcome of this body
of research has been a tremendous advance in medical science, giving rise to a
whole new field of medical treatment. However with the preponderance of stem
research dedicated to basic science, very little work has been done in developing
clinical delivery systems for stem cells. Most stem cell research and development
has concentrated on cellular therapeutics as opposed to the delivery of stem
cells.
 
 Addressing
the need for alternatives to existing catheter based delivery options is
LifeStem's stem cell delivery device. This device is a patent pending proprietary
system developed for the regeneration of cardiac muscle post myocardial
infarction. This device is designed for the targeted delivery of peripheral
blood-derived autologous stem cells to diseased tissue for the purpose
of regenerating healthy functional tissue. The device is a disposable sheath
placed over a rigid fiber optic endoscope with attached diagnostic and delivery
mechanisms. Our device allows the physician to detect dead and diseased cardiac
tissue and deliver a precise amount of stem cells thereby promoting regeneration.
The device is intended to be compatible with endoscopes from various
manufactures.
 
 Although
the device has been initially designed for cardiac applications, its applicability
extends beyond cardiac applications. The device has the capability of
delivering stem cells into all areas of the body that are accessible via an endoscope.
As other stem cell related therapies are developed, LifeStem's stem cell
delivery device should be well positioned to facilitate the targeted delivery
of stem cells into other damaged tissues of the body. LifeStem is currently
seeking a collaborative partner to develop a prototype of the device and is
discussing this possibility with several of the nation's leading medical device
manufacturers.
  5
 FINANCIAL
PROJECTIONS
 
 CalbaTech,
Inc. has entered into a Joint Venture Agreement with Keller Medical Institute,
whereby CalbaTech will, through its subsidiary, LifeStem, Inc. provide its Stem
Cell MicrobankTM Service, processes and protocols, to Keller Medical Institute
(KMI), for KMI medical professionals to be trained in the procedures of the Stem
Cell MicrobankTM Service.Pursuant to the Joint Venture Agreement with KMI,
LifeStem is no longer actively involved in pursuing medspas through Solana
Medspas.
 
 The
training and protocols will allow KMI clinics, including its Medizone and dental
sites, to market and sell the Stem Cell MicrobankTM Service.  KMI will
also teach the Stem Cell MicrobankTM Service to visiting doctors, surgeons and
dentists on an ongoing basis.  These doctors come to KMI to learn about the
newest advancements and the LifeStemTM service will be taught to
each.  KMI is also dedicated to bringing the service to Fortune 1000
companies that self insure and are interested in keeping down their costs by
using health and wellness programs, for which the LifeStemTM service could play a
unique role.  KMI is also in the process of expanding to eight new
locations throughout the U.S., all of which will offer this adult stem cell
collection service.
 
 The
process of bringing the Stem Cell MicrobankTM Service has been difficult, and has
had to overcome numerous legal, technical and administrative hurdles, however,
LifeStem, through its service provided in the Atlanta area, has scheduled the
first two clients for its service in the first week of May, 2008.
 
 THE
MOLECULAR APPLICATIONS DIVISION
 
 The
Molecular Applications Division currently consists of one company, MolecularWare
and the bulk of the other R&D projects in various stages of development.
 
 CTI
acquired MolecularWare, Inc., to provide services in the bioinformatics sector.
MolecularWare had developed software that offers data management software
solutions for high throughput biology.
 
 BUSINESS
DEVELOPMENT AND CROSS MARKETING OPPORTUNITIES
 
 The
CalbaTech strategy brings together several product lines that complement each
other, both in their application areas and in their target markets. This affords
considerable opportunity for co-marketing and cross marketing opportunities
not yet available to the individual companies.
 
 In
addition, the strategy brings together developing technologies and intellectual
property that, combined, promise the development of future products for the
research, diagnostic and therapeutic markets.
 
 Implementation
of the strategy immediately generates expanded opportunities for cross
marketing such that the new portfolio of products and technologies can generate
an accelerated revenue stream while minimizing marketing costs. Additionally,
an infrastructure has been built that enables the "plug-in" of new products
or brands.
 
 The keys to realizing the
potential of the complementary products are:
 
 o
              The
      customers for one product are also potential customers for
      another;o
              Exposure
      to one product results in exposure to the others;o
              Brand
      recognition of each product line is retained and leveraged to expose loyal
      customers to the other brands;o
              The
      internet and electronic marketing facilitate this much more than
      "traditional" marketing; ando
              Joint
      promotions linking brands and/or product
lines.
 
 Leveraging Brand Recognition
and Existing Customer Base
 
 Each of
the CalbaTech companies already each has created brand recognition and
a satisfied
customer base. These can all be leveraged to cross market the products of the
others. Joint promotions to each other's customer base further cements these
links. The scenario is one of sister companies/brands working together, although
there may be additional value in building equity in an overall marketing
banner above the different entities.
 
 PATENTS
AND PROPRIETARY TECHNOLOGY
 
 It is the
Company's intention to protect its proprietary property through the filing of
U.S. and international patent applications, both broad and specific, where
necessary and reasonable. The Company believes it will attain strong and broad
patent protection for its technologies. It is the Company's intention that all its
products be protected under various pending patents, issued patents, copyrights
and trademarks.
 
 The
Company has the policy of disclosing its proprietary information only under a
Confidentiality Agreement. This Agreement has a special clause regarding ownership
by the Company of all inventions related to, or based in any way upon, the
Company's technologies.
 
 FILINGS
 
 CalbaTech
has continued to develop its intellectual property portfolio in the past
year. This aims to protect novel concepts owned by the Company and developed
by scientists associated with CalbaTech.
 
 The first
patent application entitled "Device and methods for processing
sample and detecting analytes at low concentration" has been abandoned by
CalbaTech.
  6
  The
second patent application was provisional application entitled "Cardiac Stem Cell
Delivery Apparatus" number 60/571,510 filed 06/10/2004 inventor Jason Van Tassel,
M.D. This has been converted to full US application. This application is now
entitled "Device and methods for treatment of necrotic tissue using" Serial No
11/149/960 filed June 10th 2005. This patent describes a modification of endoscope
technology which will facilitate the targeted delivery of adult stem cells to
specific tissues. This approach focusing on the process of adult stem cell
delivery provides CalbaTech with an entry into the field of adult stem cells
services.
 
 Finally,
CalbaTech has filed a third US provisional application entitled "methods
for harvesting and storing autologous stem cells including blood derived
hematopoeitic stem cell and adipose derived mesenchymal stem cells" CTEC provisional
00106 filed October 31st 2005. This describes specific methods and processes
associated with adult stem cell storage which will be incorporated into
LifeStem's business model.
 
 Additionally,
it was released that the Company had provided a Letter of Intent to acquire
intellectual property from a group of doctors at Harvard.  This Letter
of Intent was never signed and has expired.  The Company may or may
not determine in the future to pursue this intellectual property in the
future.
 
 Employees
 
 The
Company currently has sixteen employees. The Company does not have any collective
bargaining agreements covering any of its employees, has not experienced
any material labor disruption and is unaware of any efforts or plans to
organize its employees. The Company considers relations with its employees to be
good.
 
 ITEM 2.
PROPERTIES.
 
 Corporate
 
 The
Company's principal executive and administrative offices are located at 23341 Del
Lago, Laguna Hills, California and at 1740 East Katella, Orange
California.  The Company considers these offices to be adequate
and suitable for its current needs, but as the Company expands, it expects
to expand its facilities and as such, will look for larger facilities when
necessary.
 
 KD
Medical
 
 KD's
facility is located at 6935-A Oakland Mills Road, Columbia, MD. It is a 7,000
square foot facility conveniently located between Baltimore and Washington near the
NIH. The facility has two clean rooms for sterile production, a medical packaging
room for contract medical packaging, a large warehouse and a walk in cold box.
KD currently capability manufactures over a half million liters of molecular
biology reagents and buffers, and close to three quarters of a million bacterial
and yeast biological media products yearly. KD anticipates moving into its new
state-of-the-art ISO 9002 certified and FDA compliant facility featuring two class
100 clean rooms by the end of the second quarter of 2006.
 
 ITEM 3.
LEGAL PROCEEDINGS.
 
 Other
than as set forth below, the Company is not a party to any material pending
legal proceedings and, to the best of its knowledge, no such action by or
against the Company has been threatened. The Company is subject to legal proceedings
and claims that arise in the ordinary course of its business. Although
occasional adverse decisions or settlements may occur, the Company believes
that the final disposition of such matters will not have material adverse
effect on its financial position, results of operations or
liquidity.
 
 ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
 During
the last quarter of fiscal year-ended December 2007, the Company did not submit
any matters to a vote of security holders.  The Company did submit a
matter to the vote of security holders in February of 2008.  There
were three proposals, all of which passed.  The Company reports the
results below next to each proposed amendment.
 
 1. The
first amendment was to amend the Articles of Incorporation to change the name of
the Company to LifeStem International, Inc.  This amendment was passed
by a percentage of 99.9% of the votes cast.
 
 2. The
second amendment was to amend the Articles of Incorporation to authorize the
Board of Directors to enact a reverse-split of the common stock of the
Company.  This amendment was passed by a percentage of 71.6% of the
votes cast.
 
 3.  The
third amendment was to amend the Articles of Incorporation to authorize
300,000,000 shares of common stock of the Company.  This amendment was
passed by a percentage of 82.1% of the votes cast.
 
 
 PART
II.
 
 ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
  Market
Information
 
 The
Company's Common Stock has been and is currently traded on the over-the-counter
market and quotations are published on the OTC Bulletin Board under the
symbol "CLBE". The following table sets forth the range of high and low bid
prices of the Common Stock for each fiscal quarterly period. Prices reported
represent prices between dealers, do not include retail markups, markdowns
or commissions and do not represent actual transactions.
 
 Per Share
Common Stock Bid Prices by Quarter For the
Fiscal Year Ended on December 31, 2007
 
 High
              
              
              LowQuarter
      Ended December 31, 2007
              
              
              .017
              
              
              
              .003Quarter
      Ended September 30, 2007
              
              
              .026
              
              
              
              .010Quarter
      Ended June 30, 2007
              
              
              .037
              
              
              
              .013Quarter
      Ended March 31, 2007
              
              
              .050
              
              
              
              .033
  7
 Per Share
Common Stock Bid Prices by Quarter For the
Fiscal Year Ended on December 31, 2006
 
 High
              
              
              LowQuarter
      Ended December 31, 2006
              
              
              .054
              
              
              
              .035Quarter
      Ended September 30, 2006
              
              
              .10
              
              
              
              .041Quarter
      Ended June 30, 2006
              
              
              .10
              
              
              
              .025Quarter
      Ended March 31, 2006
              
              
              .137
              
              
              
              .023
 
 The
ability of individual stockholders to trade their shares in a particular state may
be subject to various rules and regulations of that state. A number of states
require that an issuer's securities be registered in their state or appropriately
exempted from registration before the securities are permitted to trade in
that state. Presently, the Company has no plans to register its securities
in any particular state. Further, most likely the Company's shares will be
subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred
to as the "penny stock" rule. Section 15(g) sets forth certain requirements
for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the
definition of penny stock as that used in Rule 3a51-1 of the Exchange
Act.
 
 The
Commission generally defines penny stock to be any equity security that has a market
price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1
provides that any equity security is considered to be a penny stock unless
that security is: registered and traded on a national securities exchange meeting
specified criteria set by the Commission; authorized for quotation on The
NASDAQ Stock Market; issued by a registered investment company; excluded from the
definition on the basis of price (at least $5.00 per share) or the issuer's
net tangible assets (at least $2 million); or exempted from the definition
by the Commission. If the Company's shares are deemed to be a penny stock,
trading in the shares will be subject to additional sales practice requirements
of broker-dealers who sell penny stocks to persons other than established
customers and accredited investors.
 
 For
transactions covered by these rules, broker-dealers must make a special suitability
determination for the purchase of such securities and must have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt,
the rules require the delivery, prior to the first transaction, of a risk
disclosure document relating to the penny stock market. A broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information for the penny
stocks held in the account and information on the limited market in penny stocks.
Consequently, these rules may restrict the ability of broker-dealers to trade
and/or maintain a market in the Company's Common Stock and may affect the ability
of stockholders to sell their shares.
 
 Holders
of Common Equity
 
 As of
December 31, 2007, the Company's transfer agent shows 230 shareholders of record of
the Company's common stock.
 
 Dividend
Information
 
 The
Company has not declared or paid cash dividends on its Common Stock or made distributions
in the past, and the Company does not anticipate that it will pay cash
dividends or make cash distributions in the foreseeable future, other than non cash
dividends described below. The Company currently intends to retain and invest
future earnings, if any, to finance its operations.
 
 Transfer
Agent
 
 The
Company has designated Transfer Online as its transfer agent for the common stock.
 
 ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
 
 When used
in this Form 10-KSB and in our future filings with the Securities and Exchange
Commission, the words or phrases will likely result, management expects,
or we expect, will continue, is anticipated, estimated or similar expressions
are intended to identify forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Readers are cautioned
not to place undue reliance on any such forward-looking statements, each of
that speak only as of the date made. These statements are subject to risks and
uncertainties, some of which are described below. Actual results may differ
materially from historical earnings and those presently anticipated or projected.
We have no obligation to publicly release the result of any revisions that may
be made to any forward-looking statements to reflect anticipated events or
circumstances occurring after the date of such statements.
 
 General
Overview
 
 CalbaTech
is focused on providing products and platforms to the life sciences research
market, both for biotech and pharmaceutical companies, as well as academic
and government institutions. Currently, CalbaTech contains four wholly owned
subsidiaries, Molecula, Inc. ("Molecula"), KD Medical, Inc. ("KD"), LifeStem,
Inc. ("LifeStem") and Molecularware, Inc. ("Molecularware") that serve niche
markets in the life sciences research market. Molecula and Molecularware were
acquired by CTI in 2003, KD was acquired in November 2004, and LifeStem was incorporated
in September 2004 to pursue opportunities in the rapidly expanding stem cell
market.
  8
 
 Results
of Operations
 
 The
Company's revenues are difficult to forecast and may vary significantly from
quarter to quarter and year to year. In addition, the Company's expense levels
for each quarter are, to a significant extent, fixed in advance based upon the
Company's expectation as to the net revenues to be generated during that
quarter. The Company therefore is generally unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in net
revenues.  Further as a result of these factors any delay in product
introductions, whether due to internal delays or delays caused by third party
difficulties, or any significant shortfall in demand in relation to the
Company's expectations, would have an almost immediate adverse impact on the
Company's operating results and on its ability to maintain profitability in a
quarter.
 
 Comparison
of the Year Ended December 31, 2007 with the Year Ended December
31, 2006
 
 During
the year ending December 31, 2007 the Company experienced a slight decrease in
revenues with sales $1,148,529 compared to $1,250,353 in the year ending
December 31, 2006.  Additionally, the Company had other income of
$3,598 compared to $13,443 in prior year 2006. The Company believes that with
expected growth of KD Medical, Inc., along with the revenue to be generated by
LifeStem’s Stem Cell MicrobankTM, the Company’s revenue will substantially
increase in 2008.
 
 Cost of
revenues consists of direct manufacturing costs and applied overhead expenses
for the research reagent business, as well as labor costs associated with its
service revenue.  Cost of revenues as a percentage of net revenues
were 42% in the year ended December 31, 2007, down 5% from 47% for the year
ended December 31, 2006.  The cost of goods sold percentage will
fluctuate from quarter to quarter because absorbed overhead increases when
volume is decreasing and because labor ratios are less than optimized in
manufacturing processes when revenues are lower.  As revenues
increases, cost of goods sold as a percentage of revenue should become more and
more favorable for the company.
  Operating
expenses decreased 20% in 2007 from $1,947,918 in 2006 to $1,557,523 in the
current period, as management has worked to cut costs and control
expenses.
  Net
Income (Loss)
 
 The
Company produced net income of $27,940 as compared to a net income of $13,801.
The net income at December 31, 2006 was due primarily to an unrealized gain on
adjustment of derivative and warrant liability to fair value of underlying
securities related to the convertible notes the Company obtained in 2005 of
$2,007,730. Net income at December 31, 2007 was due to two factors: 1) an
unrealized gain on adjustment of derivative and warrant liability to fair value
of underlying securities related to the convertible notes the Company obtained
in 2005 of $657,349; and 2) income derived from the settlement of debt of
$999,926 as management worked to reduced the Company’s outstanding debt.
Operationally, the Company believes that increased revenues and profitability
generated by KD Medical, continued growth and new profitability of Molecula,
along with the profitable Stem Cell MicrobankTM sales from LifeStem will result
in a net profit for 2008.
 
 Liquidity
and Capital Resources
 
 Cash and
cash equivalents at December 31, 2007 was $134,623 and $10,212 at December 31,
2006.  The assets of the Company increased from $520,443 at December
31, 2006 to $575,817 at December 31, 2007. As a result of our operating losses
for the year ended December 31, 2007, we generated a cash flow deficit of
$244,576 from operating activities.  The Company has used its working
capital to finance ongoing operations and the development and marketing of its
products.
 
 The
Company's success and ongoing financial viability is contingent upon its selling
of its products and the related generation of cash flows.  The Company
evaluates its liquidity and capital needs on a continuous basis, and based on
the Company's requirements and capital market conditions, the Company may, from
time to time, raise working capital through additional debt or equity
financing.  There is no assurance that such financing will be
available in the future to meet additional capital needs of the Company, or that
any such terms or conditions of any such financing would be favorable to the
Company. Both the management of the Company's current growth and the expansion
of the Company's current business involve significant financial risk and require
significant capital investment.  Management believes that it will meet
is capital needs through debt and equity financing.
 
 New
Accounting Pronouncements
 
 In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities." Interpretation 46 changes the criteria by which one company
includes another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest. Interpretation 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. A company that consolidates a variable interest entity is
called the primary beneficiary of that entity. The consolidation requirements of
Interpretation 46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
  9
 In April
2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS 149 amends SFAS No. 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 will not
have a material impact on the Company's results of operations or financial
position.
 
 In May
2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS 150 establishes
standards on the classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. The provisions of SFAS 150
are effective for financial instruments entered into or modified after May 31,
2003 and to all other instruments that exist as of the beginning of the first
interim financial reporting period beginning after June 15, 2003. The adoption
of SFAS 150 will not have a material impact on the Company's results of
operations or financial position.
 
 Acquisition
or Disposition of Plant and Equipment
 
 Other
than as provided herein, we do not anticipate the sale or acquisition of any
significant property, plant or equipment during the next twelve months. We do
not anticipate the acquisition of any significant property, plant or equipment
during the next 12 months.
 
 Number of
Employees
 
 As of
December 31, 2007, the Company has sixteen employees.  In order for us
to attract and retain quality personnel, we anticipate we will have to offer
competitive salaries to future employees. Other than through acquisition, we do
not anticipate our employment base will significantly change during the next 12
months. As we continue to expand, we expect to incur additional costs for
personnel. This projected increase in personnel is dependent upon our generating
revenues and obtaining sources of financing. There is no guarantee that we will
be successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees.
 
 Forward
Looking Statements.
 
 The
foregoing Managements Discussion and Analysis of Financial Condition and Results
of Operations "forward looking statements" within the meaning of Rule 175 under
the Securities Act of 1933, as amended, and Rule 3b-6 under the Securities Act
of 1934, as amended, including statements regarding, among other items, the
Company's business strategies, continued growth in the Company's markets,
projections, and anticipated trends in the Company's business and the industry
in which it operates. The words "believe," "expect," "anticipate," "intends,"
"forecast," "project," and similar expressions identify forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, including
but not limited to, those risks associated with economic conditions generally
and the economy in those areas where the Company has or expects to have assets
and operations; competitive and other factors affecting the Company's
operations, markets, products and services; those risks associated with the
Company's ability to successfully negotiate with certain customers, risks
relating to estimated contract costs, estimated losses on uncompleted contracts
and estimates regarding the percentage of completion of contracts, associated
costs arising out of the Company's activities and the matters discussed in this
report; risks relating to changes in interest rates and in the availability,
cost and terms of financing; risks related to the performance of financial
markets; risks related to changes in domestic laws, regulations and taxes; risks
related to changes in business strategy or development plans; risks associated
with future profitability; and other factors discussed elsewhere in this report
and in documents filed by the Company with the Securities and Exchange
Commission. Many of these factors are beyond the Company's control. Actual
results could differ materially from these forward-looking statements. In light
of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Form 10-KSB will, in fact, occur.
The Company does not undertake any obligation to revise these forward-looking
statements to reflect future events or circumstances and other factors discussed
elsewhere in this report and the documents filed or to be filed by the Company
with the Securities and Exchange Commission.
 
 Inflation
 
 In the
opinion of management, inflation has not had a material effect on the operations
of the Company.
  10
 Cautionary
Factors that may Affect Future Results
 
 We
provide the following cautionary discussion of risks, uncertainties and possible
inaccurate assumptions relevant to our business and our products. These are
factors that we think could cause our actual results to differ materially from
expected results. Other factors besides those listed here could adversely affect
us.
 
 Trends,
Risks and Uncertainties
 
 The
Company has sought to identify what it believes to be the most significant risks
to its business as discussed in "Risk Factors" above, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurances that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risk factors before making an
investment decision with respect to the Company's stock.
 
 Limited
operating history; anticipated losses; uncertainly of future
results
 
 The
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based.  The Company's prospects must
be evaluated with a view to the risks encountered by a company in an early stage
of development, particularly in light of the uncertainties relating to the
business model that the Company intends to market and the potential acceptance
of the Company's business model.  The Company will be incurring costs
to develop, introduce and enhance its products, to establish marketing
relationships, to acquire and develop products that will complement each other,
and to build an administrative organization.  To the extent that such
expenses are not subsequently followed by commensurate revenues, the Company's
business, results of operations and financial condition will be materially
adversely affected.  There can be no assurance that the Company will
be able to generate sufficient revenues from the sale of its products and
services.  The Company expects that negative cash flow from operations
may exist for the next 12 months as it continues to develop and market its
products and services.  If cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may be
required to sell additional equity or debt securities.  The sale of
additional equity or convertible debt securities would result in additional
dilution to the Company's shareholders.
 
 Potential
fluctuations in quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, most of which are outside the
Company's control, including:  the demand for the Company's products
and services; seasonal trends in demand and pricing of products and services;
the amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations; the introduction of new services and
products by the Company or its competitors; price competition or pricing changes
in the industry; political risks and uncertainties involving the world's
markets; technical difficulties and general economic conditions.  The
Company's quarterly results may also be significantly affected by the impact of
the accounting treatment of acquisitions, financing transactions or other
matters.  Due to the foregoing factors, among others, it is possible
that the Company's operating results may fall below the expectations of the
Company and/or investors in some future quarter.
 
 Management
of Growth
 
 The
Company expects to experience growth in the number of employees relative to its
current levels of employment and the scope of its operations.  In
particular, the Company may need to hire scientists, as well as sales, marketing
and administrative personnel. Additionally, acquisitions could result in an
increase in employee headcount and business activity.  Such activities
could result in increased responsibilities for management.  The
Company believes that its ability to attract, train, and retain qualified
technical, sales, marketing, and management personnel, will be a critical factor
to its future success.  During strong business cycles, the Company may
experience difficulty in filling its needs for qualified personnel.
 
 The
Company's future success will be highly dependent upon its ability to
successfully manage the expansion of its operations.  The Company's
ability to manage and support its growth effectively will be substantially
dependent on its ability to implement adequate financial and management
controls, reporting systems, and other procedures and hire sufficient numbers of
financial, accounting, administrative, and management personnel. The Company is
in the process of establishing and upgrading its financial accounting and
procedures.  There can be no assurance that the Company will be able
to identify, attract, and retain experienced accounting and financial personnel.
The Company's future operating results will depend on the ability of its
management and other key employees to implement and improve its systems for
operations, financial control, and information management, and to recruit,
train, and manage its employee base.  There can be no assurance that
the Company will be able to achieve or manage any such growth successfully or to
implement and maintain adequate financial and management controls and
procedures, and any inability to do so would have a material adverse effect on
the Company's business, results of operations, and financial
condition.
 
 The
Company's future success depends upon its ability to address potential market
opportunities while managing its expenses to match its ability to finance its
operations.  This need to manage its expenses will place a significant
strain on the Company's management and operational resources.  If the
Company is unable to manage its expenses effectively, the Company's business,
results of operations, and financial condition may be materially adversely
affected.
  11
 Risks
associated with acquisitions
 
 As a
major component of its business strategy, the Company expects to acquire assets
and businesses relating to or complementary to its operations.  Any
acquisitions by the Company would involve risks commonly encountered in
acquisitions of companies.  These risks would include, among other
things, the following:  the Company could be exposed to unknown
liabilities of the acquired companies; the Company could incur acquisition costs
and expenses higher than it anticipated; fluctuations in the Company's quarterly
and annual operating results could occur due to the costs and expenses of
acquiring and integrating new businesses or technologies; the Company could
experience difficulties and expenses in assimilating the operations and
personnel of the acquired businesses; the Company's ongoing business could be
disrupted and its management's time and attention diverted; the Company could be
unable to integrate successfully.
 
 Liquidity
and Working Capital Risks; Need for Additional Capital to Finance
Growth and Capital Requirements
 
 We have
had limited working capital and we may rely upon notes (borrowed funds) to
operate. We may seek to raise capital from public or private equity or debt
sources to provide working capital to meet our general and administrative costs
until net revenues make the business self-sustaining.  We cannot
guarantee that we will be able to raise any such capital on terms acceptable to
us or at all. Such financing may be upon terms that are dilutive or potentially
dilutive to our stockholders. If alternative sources of financing are required,
but are insufficient or unavailable, we will be required to modify our growth
and operating plans in accordance with the extent of available
funding.
 
 Potential
fluctuations in quarterly operating results
 
 Our
quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, most of which are outside our control,
including: the demand for our products; seasonal trends in purchasing, the
amount and timing of capital expenditures and other costs relating to the
development of our products; price competition or pricing changes in the
industry; technical difficulties or system downtime; general economic
conditions, and economic conditions specific to the healthcare industry. Our
quarterly results may also be significantly impacted by the impact of the
accounting treatment of acquisitions, financing transactions or other matters.
Particularly at our early stage of development, such accounting treatment can
have a material impact on the results for any quarter. Due to the foregoing
factors, among others, it is likely that our operating results will fall below
our expectations or those of investors in some future quarter.
 
 Dependence
Upon Management
 
 Our
future performance and success are dependant upon the efforts and abilities of
our Management. To a very significant degree, we are dependent upon the
continued services of James DeOlden and Edward Deese, our founders and
Directors. If we lost the services of Mr. DeOlden or Mr. Deese or other key
employees before we could get a qualified replacement, that loss could
materially adversely affect our business.
 
 Lack of
Independent Directors
 
 We cannot
guarantee that our Board of Directors will have a majority of independent
directors in the future. In the absence of a majority of independent directors,
our executive officers, who are also principal stockholders and directors, could
establish policies and enter into transactions without independent review and
approval thereof. This could present the potential for a conflict of interest
between the Company and its stockholders generally and the controlling officers,
stockholders or directors.
 
 Limitation
of Liability and Indemnification of Officers and Directors
 
 Our
officers and directors are required to exercise good faith and high integrity in
our Management affairs. Our Articles of Incorporation provide, however, that our
officers and directors shall have no liability to our shareholders for losses
sustained or liabilities incurred which arise from any transaction in their
respective managerial capacities unless they violated their duty of loyalty, did
not act in good faith, engaged in intentional misconduct or knowingly violated
the law, approved an improper dividend or stock repurchase, or derived an
improper benefit from the transaction. Our Articles and By-Laws also provide for
the indemnification by us of the officers and directors against any losses or
liabilities they may incur as a result of the manner in which they operate our
business or conduct the internal affairs, provided that in connection with these
activities they act in good faith and in a manner that they reasonably believe
to be in, or not opposed to, the best interests of the Company, and their
conduct does not constitute gross negligence, misconduct or breach of fiduciary
obligations. To further implement the permitted indemnification, we have entered
into Indemnity Agreements with our officers and directors.
 
 Continued
Control by Current Officers and Directors
 
 As of
March 18, 2008, the present officers and directors own approximately 14% of the
outstanding shares of Common Stock, and therefore are in a position to elect all
of our Directors and otherwise control the Company, including, without
limitation, authorizing the sale of equity or debt securities of the Company,
the appointment of officers, and the determination of officers' salaries.
Shareholders have no cumulative voting rights. (See Security Ownership of
Certain Beneficial Owners and Management) Audit's Opinion Expresses Doubt About
The Company's Ability To Continue As a "Going Concern".
  12
 Delays in
the Introduction of Our Products or Services
 
 The
Company may be subject to regulation by numerous governmental
authorities.  Failure to obtain regulatory approvals or delays in
obtaining regulatory approvals by the Company, its collaborators or licensees
would adversely affect the marketing of products or services developed by the
Company, as well as hinder the Company's ability to generate product
revenues.  Further, there can be no assurance that the Company, its
collaborators or licensees will be able to obtain the necessary regulatory
approvals. Although the Company does not anticipate problems satisfying any of
the regulations involved, the Company cannot foresee the possibility of new
regulations that could adversely affect the business of the
Company.
 
 The
healthcare industry is a highly regulated industry and is subject to numerous
statutes, rules and regulations administered by healthcare commissions or
similar regulatory authorities of each jurisdiction.  The Company may
be required to submit applications relating to their activities or products
(including detailed background information concerning controlling persons within
their organization) that are then reviewed for approval.  The Company
may incur significant expense in seeking to obtain licenses for its products and
concepts.  No assurances can be given that its products will be
approved in any particular jurisdiction.  The failure to obtain such
approval or delay in obtaining such approval in any jurisdiction that the
Company seeks to introduce its products or concepts may have a materially
adverse effect upon the Company's business.
 
 Dependence
on Independent Parties to Produce our Products
 
 The
Company may be dependent upon current and future collaborations with and among
independent parties to research, develop, test, manufacture, sell or distribute
our products.   The Company intends to continue to rely on such
collaborative arrangements.  Some of the risks and uncertainties
related to the reliance on such collaborations include, but are not limited to
1) the ability to negotiate acceptable collaborative arrangements, 2) the fact
that future or existing collaborative arrangements may not be successful or may
not result in products that are marketed or sold, 3) such collaborative
relationships may actually act to limit or restrict the Company, 4)
collaborative partners are free to pursue alternative technologies or products
either on their own or with others, including the Company's competitors, for the
diseases targeted by the Company's programs and products and 5) the Company's
partners may terminate a collaborative relationship and such termination may
require the Company to seek other partners, or expend substantial additional
resources to pursue these activities independently.  These efforts may
not be successful and may interfere with the Company's ability to manage,
interact and coordinate its timelines and objectives with its strategic
partners.
 
 Government
Regulation and Legal Uncertainties
 
 The
Company is not currently subject to many direct government regulations, other
than the securities laws, the regulations thereunder applicable to all publicly
owned companies, the Food and Drug Administration, the American Association of
Blood Banks, and the laws and regulations applicable to businesses generally. It
is possible that certain laws and regulations may be adopted at the local,
state, national and international level that could effect the Company's
operations. Changes to such laws could create uncertainty in the marketplace
which could reduce demand for the Company's products or increase the cost of
doing business as a result of costs of litigation or a variety of other such
costs, or could in some other manner have a material adverse effect on the
Company's business, financial condition, results of operations and prospects. If
any such law or regulation is adopted it could limit the Company's ability to
operate and could force the business operations to cease, which would have a
significantly negative effect on the shareholder's investment. The integrated
disclosure system for small business issuers adopted by the Securities and
Exchange Commission in Release No. 34-30968 and effective as of August 13, 1992,
substantially modified the information and financial requirements of a "Small
Business Issuer," defined to be an issuer that has revenues of less than
$25,000,000; is a U.S. or Canadian issuer; is not an investment company; and if
a majority-owned subsidiary, the parent is also a small business issuer;
provided, however, an entity is not a small business issuer if it has a public
float (the aggregate market value of the issuer's outstanding securities held by
non-affiliates) of $25,000,000 or more. The Company is deemed to be a "small
business issuer." The Securities and Exchange Commission, state securities
commissions and the North American Securities Administrators Association, Inc.
("NASAA") have expressed an interest in adopting policies that will streamline
the registration process and make it easier for a small business issuer to have
access to the public capital markets. The Company can make no assurances that
any of these agencies will adopt any such policies. Also, an agency could adopt
such policy that may have a detrimental effect to the Company's operations and
it could have a significantly negative effect on the value of the Company's
equity.
  13
 Limited
Market Due To Penny Stock
 
 The
Company's stock differs from many stocks, in that it is a "penny stock." The
Securities and Exchange Commission has adopted a number of rules to regulate
"penny stocks." These rules include, but are not limited to, Rules 3a5l-l,
15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and
Exchange Act of 1934, as amended. Because our securities probably constitute
"penny stock" within the meaning of the rules, the rules would apply to us and
our securities. The rules may further affect the ability of owners of our stock
to sell their securities in any market that may develop for them. There may be a
limited market for penny stocks, due to the regulatory burdens on
broker-dealers. The market among dealers may not be active. Investors in penny
stock often are unable to sell stock back to the dealer that sold them the
stock. The mark-ups or commissions charged by the broker-dealers may be greater
than any profit a seller may make. Because of large dealer spreads, investors
may be unable to sell the stock immediately back to the dealer at the same price
the dealer sold the stock to the investor. In some cases, the stock may fall
quickly in value. Investors may be unable to reap any profit from any sale of
the stock, if they can sell it at all. Stockholders should be aware that,
according to the Securities and Exchange Commission Release No. 34- 29093, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. These patterns include:- - Control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer;
-Manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; - "Boiler room" practices involving high
pressure sales tactics and unrealistic price projections by inexperienced sales
persons; - Excessive and undisclosed bid-ask differentials and markups by
selling broker- dealers; and - The wholesale dumping of the same securities by
promoters and broker- dealers after prices have been manipulated to a desired
level, along with the inevitable collapse of those prices with consequent
investor losses. Furthermore, the "penny stock" designation may adversely affect
the development of any public market for the Company's shares of common stock
or, if such a market develops, its continuation. Broker-dealers are required to
personally determine whether an investment in "penny stock" is suitable for
customers. Penny stocks are securities (i) with a price of less than five
dollars per share; (ii) that are not traded on a "recognized" national exchange;
(iii) whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an
issuer with net tangible assets less than $2,000,000 (if the issuer has been in
continuous operation for at least three years) or $5,000,000 (if in continuous
operation for less than three years), or with average annual revenues of less
than $6,000,000 for the last three years. Section 15(g) of the Exchange Act, and
Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to
provide potential investors with a document disclosing the risks of penny stocks
and to obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor's account. Potential
investors in the Company's common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Rule 15g-9 of the Commission requires broker- dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for the Company's stockholders to
resell their shares to third parties or to otherwise dispose of
them.
 
 ITEM 7.
FINANCIAL STATEMENTS.
 
 Financial
statements as of and for the year ended December 31, 2007, and for the ended
December 31, 2006 are presented in a separate section of this report following
Part IV.
 
 ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
 
 The
Company engaged Turner, Jones, and Associates, PLLC ("Turner") as its certifying
accountant as of
January 3, 2007 for the Company's fiscal year ending December 31, 2006. The Company
has not consulted Turner previously.
 
 There
were no disagreements with auditors for the period ended December 31,
2007.
 
 ITEM
8A(T).  CONTROLS AND PROCEDURES.
 
 Disclosure
controls and procedures are controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
  14
 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) of the Exchange Act.  Internal control over financial
reporting is a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures
that:
 
 ·
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect transactions and dispositions of assets;·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures are being made
      only in accordance with authorizations of management and the board of
      directors; and·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of assets that could have a
      material effect on the financial
statements.
 
 Because
of their inherent limitations, any system of 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.
 
 Our
management, including the chief executive officer and chief financial officer,
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2007 based on the framework defined in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
 
 Management’s
assessment of the control environment included all significant locations and
subsidiaries.
 
 Material
Weaknesses
 
 Based on
our evaluation under COSO, management concluded that our internal control over
financial reporting was not effective as of December 31, 2007, due to
control deficiencies in three areas that we believe should be considered
material weaknesses. A material weakness is defined within the Public Company
Accounting Oversight Board's Auditing Standard No. 5 as a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company's annual or interim financial statements will not be prevented or
detected on a timely basis.
  1.
              The
      company did not sufficiently segregate duties over incompatible functions
      at the corporate headquarters.The
      company’s inability to sufficiently segregate duties is due to a staff
      vacancy at the corporate headquarters, which management expects to fill
      during the current year. Further, management has increased the frequency
      of independent reconciliations of significant accounts, which will
      mitigate the lack of segregation of duties until the accounting department
      at the corporate headquarters is fully staffed2.
              In
      conjunction with the lack of segregation of duties, the company did not
      institute specific anti-fraud controls.While
      management found no evidence of fraudulent activity, the chief accounting
      officer has access to both accounting records and corporate assets,
      principally the operating bank account. Management believes this exposure
      to fraudulent activity is not material either to the operations of the
      company or to the financial reporting; however, management has instituted
      Key Controls specifically designed to prevent and detect—on a timely
      basis—any potential loss due to fraudulent activity.In
      addition, management is in the process of instituting whistle-blower
      policies and procedures, see material weakness 3, following.  This
      policy and procedure will further strengthen the anti-fraud controls at
      the corporate headquarters.3.
              The
      company did not institute, as of December 31, 2007, a whistle-blower
      policy and procedure as required by Section 301 of the Sarbanes-Oxley
      Act.
 
 Management
has drafted a whistle-blower policy, and will communicate the policy as soon as
it is approved by the Board of Directors.  In addition, management is
compiling specific procedures for the Chairman of the Audit Committee to
independently investigate and resolve any issues or concerns raised. Management
expects that this material weakness will be fully remedied during the second
quarter of 2008.
 
 Limitations
on Effectiveness of Controls and Procedures
 
 Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include, but are not limited to, the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate.
 
 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 our 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.
 
 PART
III.
 
 ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS AND COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
 
 Officers
and Directors.
 
 The names
and respective positions of the directors, executive officers, and key employees
of the Company are set forth below; there are no other promoters or control
persons of the Company. The directors named below will serve until the next
annual meeting of the Company's stockholders or until their successors are duly
elected and have qualified. Directors are elected for a one-year term at the
annual stockholders' meeting. Officers will hold their positions at the will of the
board of directors, absent any employment agreement. There are no arrangements,
agreements or understandings between non-management shareholders and
management under which non-management shareholders may directly or indirectly
participate in or influence the management of the Company's affairs. The
directors and executive officers of the Company are not a party to any material
pending legal proceedings.
  15
 James
DeOlden, Esq. - Chief Executive Officer, Director
 
 Mr.
DeOlden, B.A. History (1996) from Virginia Commonwealth University, J.D. (1998)
from Whittier Law School, is an attorney admitted to the California Bar. Mr.
DeOlden, in conjunction with being a founder of CalbaTech, maintains a minimum
number of clients in his small law practice but is almost entirely focusing
on the growth and development of CalbaTech. Mr. DeOlden currently represents
or has represented both publicly traded and private companies, with the focus
being on emerging growth companies in various stages of corporate existence
or development.
 
 Edward H.
Deese - President, Chief Operating Officer, Director
 
 Mr.
Deese, B.S. Economics (1985) from the University of California, Irvine has been
involved in entrepreneurial business development for the past 17 years. Most
recently, Mr. Deese has served in various interim capacities for publicly traded
companies or subsidiaries thereof. Prior to this, Mr. Deese was a founder,
Director, and Chief Operating Officer of Burstein Technologies, Inc., an
Irvine, California bio-technology company. Prior to Burstein Technologies, Mr. Deese
served in a variety of entrepreneurial ventures, including three companies
that went public through IPOs.
 
 Scientific
Advisory Board
 
 The
Company has engaged the services of the following individuals as members of its
Scientific Advisory Board. Members are encouraged to submit new ideas to the Company
and to advise the Company on its business activities, technology and product
development when requested and where applicable.
 
 Kary B.
Mullis, Ph.D.
 
 Dr. Kary
Mullis received the 1993 Nobel Prize in chemistry for his invention of the
polymerase chain reaction (PCR). The process, which Dr. Mullis conceptualized
in 1983, is hailed as one of the monumental scientific techniques of the
twentieth century. A method of amplifying DNA, PCR multiplies a single microscopic
strand of genetic material billions of times within minutes. The process
has multiple applications in medicine, genetics, biotechnology, and forensics.
Dr. Mullis has authored several major patents. His patented inventions
include the PCR technology and an UV-sensitive plastic that changes color in
response to light.
 
 From 1973
to 1977, Dr. Mullis was a postdoctoral fellow in pediatric cardiology at the
University of Kansas Medical School, with an emphasis in the areas of angiostensin
and pulmonary vascular physiology. From 1977 to 1979, Dr. Mullis did
postdoctoral work in pharmaceutical chemistry at the University of California
in San Francisco. Dr. Mullis joined the Cetus Corporation in California
as a DNA chemist in 1979 where he conducted research on oligonucleotide
synthesis and invented the polymerase chain reaction. In 1986, Dr.
Mullis was named director of molecular biology at Xytronyx, Inc. in San Diego,
where his work concentrated on DNA technology and photochemistry. In 1987, Dr.
Mullis began consulting on nucleic acid chemistry for more than a dozen
corporations, including: Angenics, Cytometrics, Eastman Kodak, Abbott Labs,
Milligen/Biosearch and Specialty Laboratories.
 
 Dr.
Mullis holds a Ph.D. from the University of California at Berkeley and a B.S. from
the Georgia Institute of Technology.
 
 David
O'Bryan, Ph.D.
 
 Dr.
O'Bryan, B.S. (1969) from Boston College, Ph.D., Medical Sciences - - Biochemistry
from Boston University Medical School, served as a senior vice president
at SmithKline Beecham Clinical Labs. Dr. O'Bryan has spent 28+ years working
in the clinical testing industry. Dr. O'Bryan is extremely well connected
in the diagnostic industry and has significant experience in gaining access to
new technology. On behalf of SmithKline Beecham Clinical Labs, he negotiated
the first license to PCR from Roche Diagnostics. In the last two years, he
secured the first license to HCV nucleic acid testing from Chiron Diagnostics
and a license for the exclusive use of patented gene sequences used to
diagnose Hereditary Hemachromatosis from Progenitor with an ability to sub license
other service providers.
 
 Jason Van
Tassel, M.D.
 
 Dr. Jason
Van Tassel, the inventor of LifeStem's stem cell delivery Device and its Chief
Medical Officer, is currently in medical practice specializing in Otolaryngology,
Facial Plastic and Reconstructive Surgery in Beverly Hills, CA. Dr. Van
Tassel attended Georgetown University School of Medicine in Washington D.C.,
graduating with Honors in 1997. Dr. Van Tassel was accepted into the well-known
Department of Otolaryngology, Head and Neck Surgery Residency program at the
University of Arkansas for Medical Sciences, headed by world famous Dr. James
Suen. Upon completion of his residency, Dr. Van Tassel joined the faculty at the
University of California Irvine in the Department of Facial Plastic and Reconstructive
Surgery, completing a fellowship in 2003. He is currently board certified
in Otolaryngology and board eligible in Facial Plastic and Reconstructive
Surgery.
 
 Prior to
beginning his practice of medicine in Los Angeles, Dr. Van Tassel worked at
Hybritech Inc., where he performed research investigating manufacturing
processes related to monoclonal antibody test assays, an area of specific
interest to CalbaTech. In addition, Dr. Van Tassel also investigated retinal
signal transduction pathways for the Department of Neurosciences at San Diego
State under Dr. Gregory Harris, Ph.D., also an area of significant potential
interest for CalbaTech. Dr. Van Tassel is also the Chief Medical Officer
for CalbaTech's subsidiary, LifeStem.
  16
 (b)
Compliance with Section 16(a) of the Exchange Act. Section 16(a) of the Securities
Exchange Act of 1934 requires the Company's directors, certain officers
and persons holding 10% or more of the Company's common stock to file reports
regarding their ownership and regarding their acquisitions and dispositions
of the Company's common stock with the Securities and Exchange Commission.
Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on a review of the
fiscal year ended December 31, 2006, the Company is unaware that any
required reports were not filed.
 
 ITEM 10.
EXECUTIVE COMPENSATION.
 
 Summary
Compensation Table
 
 Annual
      compensationLong-term
      Compensation
              
              
              Awards
              
              
              PayoutsName
      and
              
              
              
              
              
              
              
              
              
              Other
              
              
              Restricted
              
              
              SecuritiesPrincipal
              
              
              
              
              
              
              
              
              
              annual
              
              
              stock
              
              
              underlying
              
              
              LTIP
              
              
              All
      otherposition
              
              Year
              
              Salary
              
              
              Bonus
              
              
              compensation
              
              
              award(s)
              
              
              options/SARs
              
              
              payouts
              
              
              compensation($)
              
              
              ($)
              
              
              ($)
              
              
              ($)
              
              
              (#)
              
              
              ($)
              
              
              ($)James
      DeOlden,
              
              2007
              
              $
              97,439
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              114,000
              
              
              
              0
              
              
              
              0
              
              
              
              0CEO
              
              2006
              
              $
              96,000
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              159,000
              
              
              
              0
              
              
              
              0
              
              
              
              0CEO
              
              2005
              
              $
              104,153
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              63,000
              
              
              
              0
              
              
              
              0
              
              
              
              02004
              
              $
              0
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              316,872
              (2)
              
              
              0
              
              
              
              0
              
              
              
              02003
              
              $
              14,000
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Edward
      Deese,
              
              2007
              
              $
              69,588
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              114,000
              
              
              
              0
              
              
              
              0
              
              
              
              0President,
      COO
              
              2006
              
              $
              92,000
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              159,000
              
              
              
              0
              
              
              
              0
              
              
              
              02005
              
              $
              133,500
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              63,000
              
              
              
              0
              
              
              
              0
              
              
              
              02004
              
              $
              93,500
              (1)
              
              
              0
              
              
              
              0
              
              
              $
              266,387
              (2)
              
              
              0
              
              
              
              0
              
              
              
              02003
              
              $
              74,500
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
 
 (1)
Contractual agreements with James DeOlden and Edward Deese as officers
have been attached to previous filings. As these salaries have not been paid in
full, either in payments in restricted stock nor cash, such outstanding amounts
have carried over.
 
 (2) These
awards of restricted stock were in lieu of unpaid salaries and other compensation
due from inception of the Company through December 31, 2003
 
 Insurance
Plans
 
 The
Company currently does not provide medical and/or dental plan benefits to any of
its employees, but at such time as the Company has the resources necessary
to provide such benefits, intends to provide these benefits to its full-time
employees.
 
 Other
Benefit Plans
 
 Stock
Option Plan.
 
 The
Company adopted a Stock Option Plan in 2003 and allocated 10,000,000 shares to this
plan. The purpose of this plan will be as follows:
 
 A.
Encourage selected employees, directors and consultants to improve operations and
increase profits of the Company;
 
 B.
Encourage selected employees, directors and consultants to accept or continue employment
or association with the Company; and
 
 C.
Increase the interest of selected employees, directors and consultants in the Company's
welfare through participation in the growth in value of the common stock of
the Company. The Company had not issued any Stock Options pursuant to the Plan
included therein to any employees as of December 31, 2003.
 
 ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
 The
following table sets forth certain information regarding the beneficial ownership
of the Company's Common Stock as of March 18, 2008. This chart reflects the
number of shares held by those shareholders controlling more than five percent,
those shareholders that are officers and/or directors, as well as a collective
group of all of the above.
 
 OWNERSHIP
 
 ApproximatePercentof
      CommonNumber
      of Shares
              
              
              SharesName
              
              of
      Common Stock
              
              
              OwnedEdward
      H. Deese(3)
              
              
              9,262,388
              
              
              
              4.69James
      DeOlden(3)
              
              
              9,077,803
              
              
              
              4.60John
      F. Gordon
              
              
              10,077,803
              
              
              
              5.11Group:
      All Officers/Beneficial OwnersDirectors
      (1)
              
              
              28,417,994
              
              
              
              14.40All
      SharesOutstanding
              
              
              197,361,586
              
              
              
              100.00
  17
 1. This
total number encompasses three persons.
 
 (1) Each
person has sole voting power and sole dispositive power as to all of the
shares shown as beneficially owned by them.
 
 (2) Other
than as provided for in Employment Agreements, previously filed, none of these
security holders has the right to acquire any amount of the shares within
sixty days from options, warrants, rights, conversion privilege, or similar
obligations. The amount owned is based on issued common stock, as well as stock
options that are currently exercisable.
 
 3.  These
individuals each own five million preferred shares of the Company.
 
 ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
 During
the past two years, and not as otherwise disclosed of in any other filing,
there have not been any transactions that have occurred between the Company
and its officers, directors, and five percent or greater shareholders, unless
listed below.
 
 From time
to time, the Company's officers and shareholders have advanced funds to the
Company. The note payable balance to related parties was $78,070 outstanding
as of December 31, 2007 and $84,878 outstanding as of December 31, 2006. No
formal arrangements or repayment terms exist.Certain
of the officers and
directors of the Company are engaged in other businesses, either individually
or through partnerships and corporations in which they have an interest,
hold an office, or serve on a board of directors. As a result, certain conflicts
of interest may arise between the Company and its officers and directors.
The Company will attempt to resolve such conflicts of interest in favor of
the Company. The officers and directors of the Company are accountable to it and
its shareholders as fiduciaries, which requires that such officers and directors
exercise good faith and integrity in handling the Company's affairs. A shareholder
may be able to institute legal action on behalf of the Company or on behalf of
itself and other similarly situated shareholders to recover damages or for other
relief in cases of the resolution of conflicts is in any manner prejudicial
to the Company.
 
 PART
IV.
 
 ITEM 13.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 Exhibits.
 
 Exhibits
included or incorporated by reference in this document are set forth in the
Exhibit Index.
 
 Index
      to Financial Statements and Schedules.
              PageAudit
      Report of Independent Certified Public Accountants
              F-1Consolidated
      Balance Sheets
              F-2Consolidated
      Statements of Income
              F-3Consolidated
      Statements of Stockholders' Equity
              F-4Consolidated
      Statements of Cash Flows
              F-7Notes
      to Financial Statements
              F-8Reports
      on Form 8-K.
 
 ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The
following table sets forth fees billed to us by our auditors during the years
ended December 31, 2007 and 2006 for: (i) services rendered for the audit of our
annual financial statements and the review of our quarterly financial statements,
(ii) services by our auditor that are reasonably related to the performance
of the audit or review of our financial statements and that are not reported
as Audit Fees, (iii) services rendered in connection with tax compliance,
tax advice and tax planning, and (iv) all other fees for services rendered.
 
 December
      31, 2007
              
              
              December
      31, 2006(i)  
       Audit Fees
              
              $
              46,887
              
              
              $
              44,501(ii)  
      Audit Related Fees
              
              $
              0
              
              
              $
              0(iii)
       Tax Fees
              
              $
              0
              
              
              $
              0(iv)
      All Other Fees
              
              $
              0
              
              
              $
              0Total
      fees
              
              $
              46,887
              
              
              $
              44,501
 
 AUDIT
FEES. Consists of fees billed for professional services rendered for the audit of
CalbaTech's consolidated financial statements and review of the interim consolidated
financial statements included in quarterly reports and services that are
normally provided by our auditors in connection with statutory and regulatory
filings or engagements.
 
 AUDIT-RELATED
FEES. Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of CalbaTech,
Inc.'s consolidated financial statements and are not reported under "Audit
Fees." There were no Audit-Related services provided in fiscal 2007 or 2006.
  18
 TAX FEES.
Consists of fees billed for professional services for tax compliance, tax
advice and tax planning. There were no tax services provided in fiscal 2007 or
2006.
 
 ALL OTHER
FEES. Consists of fees for products and services other than the services
reported above. There were no management consulting services provided in fiscal
2007 or 2006.
 
 POLICY ON
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES
OF INDEPENDENT AUDITORS
 
 The
Company currently does not have a designated Audit Committee, and accordingly,
the Company's Board of Directors' policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The Board of Directors may also
pre-approve particular services on a case-by-case basis.
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the date indicated:
 
 
 
 Signature
              Title
              Date/s/ James
      DeOlden
              CEO/Secretary/Director
              March
      26, 2008James
      DeOlden/s/Edward
      Deese
              President/Treasurer/Director
              March
      26, 2008Edward
      Deese
 
 
 19
 
  
 UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 
 WASHINGTON,
D.C. 20549
 
 FINANCIAL
STATEMENTS AND SCHEDULES
 
 DECEMBER
31, 2007 AND 2006
 
 FORMING A
PART OF ANNUAL REPORT
 PURSUANT
TO THE SECURITIES EXCHANGE ACT OF 1934
 CALBATECH,
INC.
 
 
 
 
 
 CALBATECH,
INC.
 
 Index to Financial
      Statements
              PAGEReports
      of Independent Registered Certified Public Accountants
              F-1Balance
      Sheets at December 31, 2007 and 2006
              F-2Statements
      of Losses for the year ended December 31, 2007 and December 31,
      2006
              F-3Statements
      of Deficiency in Stockholders' Equity for the years ended December 31,
      2007 and December 31, 2006
              F-4Statements
      of Cash Flows for the year ended December 31, 2007 and December 31,
      2006
              F-7Notes
      to Financial Statements
              F-8
 
 
 
 
 Turner,
Jones & Associates, PLLC
 Certified
Public Accountants
 108
Center Street, North, 2nd Floor
 Vienna,
Virginia 22180-5712
 (703)
242-6500
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Stockholders of
 Calbatech,
Inc. and Subsidiaries
 23341 Del
Lago
 Laguna
Hills, CA 92653
 
 
 We have
audited the accompanying consolidated balance sheet of Calbatech, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended.  These consolidated financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial 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 audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Calbatech, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
 
 The
accompanying consolidated financial statements must have been prepared assuming
the Company will continue as a going concern.  As discussed in Note O
to the consolidated financial statements, the Company has suffered recurring
losses from operations, negative working capital, and negative cash flows from
operations that raise substantial doubt about its ability to continue as a going
concern.  Management's plan in regard to these matters is also
described in Note O.  The consolidated financial statements do not
include adjustments that might result from the outcome of this
uncertainty.
 
 
 
 Vienna,
Virginia
 March 27,
2008
 
 
 /s/ Turner, Jones &
Associates, PLLC
 Turner,
Jones & Associates, PLLC
  F-1
  CALBATECH,
      INC.CONSOLIDATED
      BALANCE SHEETSDECEMBER
      31, 2007 AND 20062007
              
              
              2006ASSETSCURRENT
      ASSETS:Cash
              
              $
              134,623
              
              
              $
              10,212Accounts
      receivable, net of allowance of $10,715 and $17,642,
      respectively
              
              
              75,262
              
              
              
              94,181Inventory
              
              
              214,855
              
              
              
              212,405Prepaid
      expenses
              
              
              23,274
              
              
              
              31,973Total
      current assets
              
              
              448,014
              
              
              
              348,771Fixed
      assets, net
              
              
              89,556
              
              
              
              123,665Other
      assets:Unamortized
      financing costs, net of accumulated amortization and write off of $234,439
      and $206,994, respectively
              
              
              38,247
              
              
              
              48,007$
              575,817
              
              
              $
              520,443LIABILITIES
      AND DEFICIENCY IN STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Cash
      overdraft
              
              $
              -
              
              
              $
              12,401Accounts
      payable and accrued  expenses
              
              
              1,260,421
              
              
              
              1,044,884Capital
      leases payable
              
              
              36,562
              
              
              
              35,642Notes
      payable - banks
              
              
              -
              
              
              
              67,250Notes
      payable, including $78,070 and $84,878 to related parties,
      respectively
              
              
              241,070
              
              
              
              554,689Settlement
      liability
              
              
              -
              
              
              
              619,354Convertible
      notes payable
              
              
              743,927
              
              
              
              53,577Total
      current liabilities
              
              
              2,281,980
              
              
              
              2,387,797Long
      term debt, less current maturities:Capital
      leases payable
              
              
              17,745
              
              
              
              29,889Derivative
      liability related to convertible debentures
              
              
              2,118,173
              
              
              
              1,732,097Warrant
      liability related to convertible debentures
              
              
              55,336
              
              
              
              563,728Note
      payable to banks
              
              
              -
              
              
              
              21,190Convertible
      notes payable
              
              
              83,549
              
              
              
              540,083Total
      long term liabilities
              
              
              2,274,803
              
              
              
              2,886,987Total
      liabilities
              
              
              4,556,783
              
              
              
              5,274,784DEFICIENCY
      IN STOCKHOLDERS' EQUITYPreferred
      stock, par value $0.001 per share; 25,000,000 shares authorized; 1,250,000
      shares issued and outstanding as of December 31, 2007
      and  2006
              
              
              1,250
              
              
              
              1,250Common
      stock, par value $0.001 per share;  200,000,000 shares
      authorized, 196,798,501 and 108,791,489 shares issued and outstanding as
      of December 31, 2007 and 2006, respectively
              
              
              196,799
              
              
              
              108,792Additional
      paid in capital
              
              
              7,373,648
              
              
              
              6,803,867Treasury
      stock, at cost
              
              
              -
              
              
              
              (87,647
              )Accumulated
      deficit
              
              
              (11,552,663
              )
              
              
              (11,580,603
              )Total
      deficiency in stockholders' equity
              
              
              (3,980,966
              )
              
              
              (4,754,341
              )$
              575,817
              
              
              $
              520,443See
      the accompanying notes to the consolidated financial
      statements
 
 F-2
  CALBATECH,
      INC.CONSOLIDATED
      STATEMENTS OF OPERATIONSYEARS
      ENDED DECEMBER 31, 2007 AND 20062007
              
              
              2006REVENUES:Net
      sales
              
              $
              1,148,529
              
              
              $
              1,250,353Cost
      of sales
              
              
              (485,680
              )
              
              
              (587,640
              )Gross
      profit
              
              
              662,849
              
              
              
              662,713OPERATING
      EXPENSES:Selling
      and administrative
              
              
              1,545,033
              
              
              
              1,925,845Depreciation
      and amortization
              
              
              12,490
              
              
              
              22,073Total
      operating expenses
              
              
              1,557,523
              
              
              
              1,947,918LOSS
      FROM OPERATIONS
              
              
              (894,674
              )
              
              
              (1,285,205
              )Other
      income
              
              
              3,598
              
              
              
              13,443Income
      derived from settlement of debt
              
              
              999,926
              
              
              
              -Unrealized
      gain (loss) on adjustment of derivative and warrant liability to fair
      value of underlying securities
              
              
              657,349
              
              
              
              2,007,730Interest
      expense, net
              
              
              (738,258
              )
              
              
              (722,167
              )Net
      Income before income taxes
              
              
              27,940
              
              
              
              13,801Income
      taxes
              
              
              -
              
              
              
              -NET
      INCOME
              
              $
              27,940
              
              
              $
              13,801Net
      Income per common share-basic  (Note A)
              
              $
              0.00
              
              
              $
              0.00Net
      Loss per common stock-assuming fully diluted (Note A)
              
              $
              (0.00
              )
              
              $
              (0.02
              )Weighted
      average number of common shares outstanding-basic
              
              
              135,320,968
              
              
              
              73,004,530Weighted
      average number of common shares outstanding-fully diluted
              
              
              1,514,472,903
              
              
              
              131,098,261See
      the accompanying notes to the consolidated financial
      statements
 
 F-3
  CALBATECH,
      INC.STATEMENT
      OF DEFICIENCY IN STOCKHOLDERS' EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006Additional
              
              
              
              
              
              Treasury
              
              
              
              
              
              CommonPreferred
              
              
              Stock
              
              
              Common
              
              
              Stock
              
              
              Paid
      in
              
              
              Treasury
              
              
              Stock
              
              
              Subscription
              
              
              Stock
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Subscription
              
              
              Deficit
              
              
              TotalBalance
      as of January 1, 2006
              
              
              1,250,000
              
              
              $
              1,250
              
              
              
              76,712,132
              
              
              $
              76,712
              
              
              $
              5,783,228
              
              
              
              563,155
              
              
              $
              (87,647
              )
              
              
              650,000
              
              
              $
              169,000
              
              
              $
              (11,594,404
              )
              
              $
              (5,651,861
              )Common
      stock issued on January 10, 2006 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              2,980,000
              
              
              
              2,980
              
              
              
              30,992
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,972Common
      stock issued on January 20, 2006 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              2,980,000
              
              
              
              2,980
              
              
              
              30,742
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,722Common
      stock issued on February 13, 2006 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              2,980,000
              
              
              
              2,980
              
              
              
              31,767
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              34,747Common
      stock issued on February 21, 2006 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              777,000
              
              
              
              777
              
              
              
              8,391
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9,168Common
      stock issued on February 28, 2006 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              777,446
              
              
              
              777
              
              
              
              11,338
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12,115Common
      stock issued on March 1, 2006 to officers for prior year's compensation at
      $0.025 per share
              
              
              -
              
              
              
              -
              
              
              
              8,286,532
              
              
              
              8,287
              
              
              
              198,877
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              207,164Common
      stock issued on March 1, 2006 for services rendered at $0.09 per
      share
              
              
              -
              
              
              
              -
              
              
              
              400,000
              
              
              
              400
              
              
              
              35,600
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              36,000Common
      stock issued on March 9, 2006 for services rendered at $.07 per
      share
              
              
              -
              
              
              
              -
              
              
              
              25,000
              
              
              
              25
              
              
              
              1,725
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,750Common
      stock issued on July 21, 2006 for services rendered at $0.07 per
      share
              
              
              -
              
              
              
              -
              
              
              
              600,000
              
              
              
              600
              
              
              
              41,400
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,000Common
      stock issued on July 21, 2006 for subscription shares
              
              
              -
              
              
              
              -
              
              
              
              650,000
              
              
              
              650
              
              
              
              168,350
              
              
              
              -
              
              
              
              -
              
              
              
              (650,000
              )
              
              
              (169,000
              )
              
              
              -
              
              
              
              -Common
      stock issued on August 21, 2006 for services rendered at $0.05 per
      share
              
              
              -
              
              
              
              -
              
              
              
              690,909
              
              
              
              691
              
              
              
              33,854
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              34,545Common
      stock issued on October 12, 2006 for services rendered at $0.044 per
      share
              
              
              -
              
              
              
              -
              
              
              
              355,606
              
              
              
              356
              
              
              
              15,291
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15,647Commons
      stock issued on October 13, 2006 as payment towards convertible
      securities
              
              
              -
              
              
              
              -
              
              
              
              959,181
              
              
              
              959
              
              
              
              18,705
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              19,664Common
      stock issued on October 16, 2006 for services rendered at $0.047 per
      share
              
              
              -
              
              
              
              -
              
              
              
              400,000
              
              
              
              400
              
              
              
              18,400
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              18,800Common
      stock issued on October 26, 2006 to officers for compensation at $0.042
      per share
              
              
              -
              
              
              
              -
              
              
              
              6,000,000
              
              
              
              6,000
              
              
              
              246,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              252,000Common
      stock issued on November 3, 2006 for services rendered at $0.045 per
      share
              
              
              -
              
              
              
              -
              
              
              
              125,000
              
              
              
              125
              
              
              
              5,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,625Common
      stock issued on December 13, 2006 for services rendered at $0.041 per
      share
              
              
              -
              
              
              
              -
              
              
              
              3,092,683
              
              
              
              3,093
              
              
              
              123,707
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              126,800Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13,801
              
              
              
              13,801Balance
      as of December 31, 2006
              
              
              1,250,000
              
              
              $
              1,250
              
              
              
              108,791,489
              
              
              $
              108,792
              
              
              $
              6,803,867
              
              
              
              563,155
              
              
              $
              (87,647
              )
              
              
              -
              
              
              $
              -
              
              
              $
              (11,580,603
              )
              
              $
              (4,754,341
              )
  See the
accompanying notes to the consolidated financial statements
 F-4
  CALBATECH,
      INC.STATEMENT
      OF DEFICIENCY IN STOCKHOLDERS' EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006Additional
              
              
              
              
              
              Treasury
              
              
              
              
              
              CommonPreferred
              
              
              Stock
              
              
              Common
              
              
              Stock
              
              
              Paid
      in
              
              
              Treasury
              
              
              Stock
              
              
              Subscription
              
              
              Stock
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Subscription
              
              
              Deficit
              
              
              TotalBalance
      as of December 31, 2006
              
              
              1,250,000
              
              
              $
              1,250
              
              
              
              108,791,489
              
              
              $
              108,792
              
              
              $
              6,803,867
              
              
              
              710,534
              
              
              $
              (87,647
              )
              
              
              -
              
              
              $
              -
              
              
              $
              (11,580,603
              )
              
              $
              (4,754,341
              )Common
      stock issued on February 9, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              978,590
              
              
              
              979
              
              
              
              17,027
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              18,006Common
      stock issued on February 13, 2007 to officers for prior year's
      compensation at $0.0345 per share
              
              
              -
              
              
              
              -
              
              
              
              9,000,000
              
              
              
              9,000
              
              
              
              302,040
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              311,040Common
      stock issued on March 1, 2007 for services rendered at $0.036 per
      share
              
              
              -
              
              
              
              -
              
              
              
              2,500,000
              
              
              
              2,500
              
              
              
              87,501
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              90,001Common
      stock issued on April 16, 2007 for services rendered at $0.03 per
      share
              
              
              -
              
              
              
              -
              
              
              
              656,653
              
              
              
              657
              
              
              
              19,043
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              19,700Common
      stock issued on May 1, 2007 for services rendered at $0.028 per
      share
              
              
              -
              
              
              
              -
              
              
              
              1,500,000
              
              
              
              1,500
              
              
              
              40,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,000Common
      stock issued on May 3, 2007 for services rendered at $0.024 per
      share
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              11,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12,000Common
      stock issued on May 24, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              5,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,500Common
      stock issued on June 6, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              5,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,500Common
      stock issued on July 20, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              250,000
              
              
              
              250
              
              
              
              1,125
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              1,375Common
      stock issued on July 25, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              250,000
              
              
              
              250
              
              
              
              1,150
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,400Common
      stock issued on August 3, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              2,050
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,550Common
      stock issued on August 9, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              1,750
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,250Common
      stock issued on August 16, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              1,400
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,900Common
      stock issued on August 21, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              1,400
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,900Common
      stock issued on August 27,, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              
              500
              
              
              
              1,650
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,150Common
      stock issued on September 5, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              1,000,000
              
              
              
              1,000
              
              
              
              2,900
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,900
  See the
accompanying notes to the consolidated financial statements
 F-5
  CALBATECH,
      INC.STATEMENT
      OF DEFICIENCY IN STOCKHOLDERS' EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006Additional
              
              
              
              
              
              Treasury
              
              
              
              
              
              CommonPreferred
              
              
              Stock
              
              
              Common
              
              
              Stock
              
              
              Paid
      in
              
              
              Treasury
              
              
              Stock
              
              
              Subscription
              
              
              Stock
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Subscription
              
              
              Deficit
              
              
              TotalCommon
      stock issued on September 19, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,351
              
              
              
              6,222
              
              
              
              26,750
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              32,972Common
      stock issued on September 26, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,351
              
              
              
              6,222
              
              
              
              32,974
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              39,196Common
      stock issued on October 1, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,431
              
              
              
              6,222
              
              
              
              24,263
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              30,485Common
      stock issued on October 11, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,341
              
              
              
              6,221
              
              
              
              14,309
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              20,530Common
      stock issued on October 19, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              3,600,000
              
              
              
              3,600
              
              
              
              7,560
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,160Common
      stock issued on October 22, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              2,621,350
              
              
              
              2,621
              
              
              
              5,505
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,126Common
      stock issued on October 26, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              3,600,000
              
              
              
              3,600
              
              
              
              8,280
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,880Common
      stock issued on October 30, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              2,621,350
              
              
              
              2,621
              
              
              
              5,505
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,126Common
      stock issued on November 6, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              3,600,000
              
              
              
              3,600
              
              
              
              8,280
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,880Common
      stock issued on November 7, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              2,621,350
              
              
              
              2,621
              
              
              
              5,767
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,388Common
      stock issued on November 19, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,350
              
              
              
              6,221
              
              
              
              10,576
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              16,797Common
      stock issued on November 26, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,350
              
              
              
              6,221
              
              
              
              4,978
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,199Common
      stock issued on December 3, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,350
              
              
              
              6,221
              
              
              
              1,244
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,465Common
      stock issued on December 17, 2007 as payment towards convertible
      debentures
              
              
              -
              
              
              
              -
              
              
              
              6,221,350
              
              
              
              6,221
              
              
              
              (162
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,059Cancellation
      of treasury shares
              
              
              -
              
              
              
              -
              
              
              
              (563,155
              )
              
              
              (563
              )
              
              
              (87,084
              )
              
              
              (563,155
              )
              
              
              87,647
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              27,940
              
              
              
              26,190Balance,
      December 31, 2007
              
              
              1,250,000
              
              
              $
              1,250
              
              
              
              196,798,501
              
              
              $
              196,799
              
              
              $
              7,373,648
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              (11,552,663
              )
              
              $
              (3,982,716
              )
 
 See the
accompanying notes to the consolidated financial statements
 F-6
 
 CALBATECH,
      INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED DECEMBER 31, 2007 AND 20062007
              
              
              2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              27,940
              
              
              $
              13,801Adjustments
      to reconcile net loss to net cash used in operating
      activities:Adjustments
      for depreciation and amortization
              
              
              34,109
              
              
              
              43,706Common
      stock issued or subscribed in connection with services
      rendered
              
              
              163,701
              
              
              
              281,167Common
      stock issued for officer compensation
              
              
              311,040
              
              
              
              459,163Common
      stock issued in settlement of debt
              
              
              270,694
              
              
              
              143,388Income
      derived in settlement of debt
              
              
              (999,926
              )
              
              
              -Accretion
      of convertible notes payable
              
              
              233,816
              
              
              
              361,451Unrealized
      losses (gains) on adjustment of derivative and warrant liability to fair
      value of underlying securities
              
              
              (657,349
              )
              
              
              (2,007,730
              )Amortization
      and write off of financing costs
              
              
              44,759
              
              
              
              71,698Amortization
      of prepaid interest
              
              
              -
              
              
              
              49,911(Increase)
      decrease in:Accounts
      receivable
              
              
              18,919
              
              
              
              64,306Inventory
              
              
              (2,450
              )
              
              
              3,725Prepaid
      expenses
              
              
              8,699
              
              
              
              271Increase
      (decrease) in:Cash
      overdraft
              
              
              (12,401
              )
              
              
              12,401Accounts
      payable and accrued expenses
              
              
              324,641
              
              
              
              184,194Net
      cash used in operating activities
              
              
              (244,576
              )
              
              
              (318,548
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of fixed assets
              
              
              -
              
              
              
              (6,495
              )Net
      cash used in investing activities
              
              
              -
              
              
              
              (6,495
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      from (to) shareholders
              
              
              (6,808
              )
              
              
              67,582Proceeds
      (payments) on convertible debentures
              
              
              500,000
              
              
              
              -Proceeds
      (payments) on notes payable and capital leases, net
              
              
              (134,973
              )
              
              
              (33,470
              )Net
      cash provided by financing activities
              
              
              366,119
              
              
              
              34,112Net
      decrease in cash and cash equivalents
              
              
              124,411
              
              
              
              (290,931
              )Cash
      and cash equivalents at beginning of period
              
              
              10,212
              
              
              
              301,143Cash
      and cash equivalents at end of period
              
              $
              134,623
              
              
              $
              10,212SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
              
              $
              3,595
              
              
              $
              13,281Cash
      paid during the period for taxes
              
              
              -
              
              
              
              -Unrealized
      (gain) loss on adjustment of derivative and warrant liability to fair
      value of underlying securities
              
              $
              (657,349
              )
              
              $
              (2,007,730
              )NON
      - CASH FINANCING ACTIVITIES:Common
      stock issued in exchange for services
              
              $
              474,741
              
              
              $
              740,330See
      the accompanying notes to the consolidated financial
      statements
 
 F-7
 
 
 CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
A - SUMMARY OF ACCOUNTING POLICIES
 
 A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.
 
 Business and Basis of
Presentation
 
 Calbatech
Inc, (formerly Traffic Technology Inc.) ("Company") was organized on April 29,
2002 under the laws of the state of Nevada. The Company is focused on incubating
life science based companies that are developing next generation products and
technologies.
 
 CalbaTech
acquired Molecula in October 2003. During 2005, Molecula Research Laboratories,
LLC was dissolved in the state of Virginia. CalbaTech incorporated Molecula,
Inc. in the state of Nevada.
 
 Molecula
develops and sells numerous research reagents for cell transfection, DNA and RNA
purification, protein expression, gene expression analysis and other innovative
and fundamental products. Molecula also sells transfection reagents, a novel
IPTG replacement for increased protein expression, neuropeptides and biochemicals.
Please see www.molecula.com.
 
 The
Company also through its subsidiary – KD Medical, manufactures and distributes
microbiological culture medias and other research agents. KD Medical’s products
are used in genetic engineering, drug discovery, molecular biology labs and
biopharmaceutical production.
 
 The
Company also through its subsidiary – LifeStem, Inc is positioning itself to
become a leading supplier of “Cellular Logistics” by providing services and
technologies to facilitate the efficient acquisition and delivery of purified
adult stem cells, development of stem cell delivery devices for clinical
applications and clinical applications of specific stem cell based
therapies.
 
 From its
inception through the date of these financial statements the Company has
incurred significant operating expenses. Consequently, its operations are
subject to all risks inherent in the establishment of a new business enterprise.
As of December 31, 2007, the Company has accumulated losses of
$11,554,413.
 
 The
consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, Molecularware, Inc., KD Medical Inc., LifeStem, Inc.,
Molecula, Inc., and that of Traffic Technology, Inc. with whom the Registrant
merged. All significant inter-company transactions and balances have been
eliminated in consolidation.
 
 Revenue
Recognition
 
 For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which
superseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. SAB
104   incorporates   Emerging Issues Task Force
00-21 ("EITF 00-21"), MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS.  EITF
00-21 addresses accounting for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use
assets.  The effect of implementing EITF 00-21 on the Company's
consolidated financial position and results of operations was not
significant.
 
 Use of
Estimates
 
 The
preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures.  Accordingly, actual
results could differ from those estimates.
 
 Foreign Currency
Translation
 
 The
Company translates the foreign currency financial statements in accordance with
the requirements of Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." Assets and liabilities are translated at current exchange
rates, and related revenue and expenses are translated at average exchange rates
in effect during the period.  Resulting translation adjustments are
recorded as a separate component in stockholders' equity.  Foreign
currency translation gains and losses are included in the statement of
operations.
 
 Cash
Equivalents
 
 For the
purpose of the accompanying financial statements, all highly liquid investments
with a maturity of three months or less are considered to be cash
equivalents.
 
 F-8
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
 
 Inventories
 
 Inventories
are stated at the lower of cost or market determined by the average cost
method.  Inventories consist of products available for sale to
distributors and customers.
 
 Components
of inventories as of December 31, 2007 and 2006 are as follows:
 
 2007
              
              
              2006Raw
      materials
              
              $
              182,179
              
              
              $
              133,936Finished
      goods
              
              
              32,676
              
              
              
              78,469Total
              
              $
              214,855
              
              
              $
              212,405
 
 Property and
Equipment
 
 Property
and equipment are stated at cost.  When retired or otherwise disposed,
the related  carrying value
and  accumulated  depreciation  are removed from
the respective  accounts  and the
net  difference  less  any  amount  realized  from
disposition,  is  reflected  in  earnings.  For
financial statement purposes,
property  and  equipment  are  recorded  at  cost  and  depreciated   using  the
straight-line method over their estimated useful lives as follows:
 
 Furniture
      and fixtures
              5
      yearsOffice
      equipment
              3
      to 5 yearsManufacturing
      equipment
              3
      to 8 years
 
 Impairment of Long-Lived
Assets
 
 The
Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
144). The Statement requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted discounted cash flows. Should impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset.  SFAS No. 144 also requires assets to be disposed of be
reported at the lower of the carrying amount or the fair value less disposal
costs. The Company did not incurred an impairment loss for the years ended
December 31, 2007 and 2006
 
 Income
Taxes
 
 The
Company has adopted Financial Accounting Standards No. 109 ("SFAS 109") which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns.  Under this method, deferred tax liabilities
and assets are determined based on the difference between financial statements
and the tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to
reverse.  Temporary differences between taxable income reported for
financial reporting purposes and income tax purposes are
insignificant.
 
 Research and
Development
 
 The
Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 2 ("SFAS 2"), "Accounting for Research and Development
Costs".  Under SFAS 2, all research and development costs must be
charged to expense as incurred. Accordingly, internal research and development
costs are expensed as incurred.  Third-party research and developments
costs are expensed when the contracted work has been performed or as milestone
results have been achieved.  Company-sponsored research and
development costs related to both present and future products are expensed in
the period incurred.  The Company did not incur expenditures on
research and product development for the years ended December 31, 2007 and
2006.
 
 Advertising
 
 The
Company follows the policy of charging the costs of advertising to expenses as
incurred.  The Company charged to operations $4,574 and $4,437, as
advertising costs for the year ended December 31, 2007 and 2006,
respectively.
 
 F-9
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
 
 Comprehensive
Income
 
 Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," establishes standards for reporting and displaying of comprehensive
income, its components and accumulated balances.  Comprehensive income
is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners.  Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.  The Company does not have any items of
comprehensive income in any of the periods presented.
 
 Segment
Information
 
 The
Company has adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS 131")
in the years ended December 31, 2001 and subsequent years. SFAS 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders.  SFAS
131 also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as components
of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or decision
making group, in making decisions on how to allocate resources and assess
performance.
 
 Stock Based
Compensation
 
 Prior to
the January 1, 2006 adoption of the Financial Accounting Standards Board
(“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations.
Accordingly, because the stock option grant price equaled the market price on
the date of grant, and any purchase discounts under the Company’s stock purchase
plans were within statutory limits, no compensation expense was recognized by
the Company for stock-based compensation. As permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”), stock-based compensation
was included as a pro forma disclosure in the notes to the consolidated
financial statements. The Company did not issue any stock options during the
years ended December 31, 2007 and 2006.
 
 Effective
January 1, 2006, the beginning of the Company’s first fiscal quarter of 2006,
the Company adopted the fair value recognition provisions of SFAS 123R, using
the modified-prospective transition method. Under this transition method,
stock-based compensation expense was recognized in the consolidated financial
statements for granted, modified, or settled stock options. Compensation expense
recognized included the estimated expense for stock options granted on and
subsequent to January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R, and the estimated expense for the
portion vesting in the period for options granted prior to, but not vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS 123. Results for prior periods have not been
restated, as provided for under the modified-prospective method.
 
 Total
stock-based compensation expense recognized in the consolidated statement of
earnings for the year ending December 31, 2007 and 2006 was $0, net of tax
effect.
  SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the Company’s pro forma information required under SFAS 123 for
the periods prior to fiscal 2006, the Company accounted for forfeitures as they
occurred.
  Liquidity
 
 As shown
in the accompanying financial statements, the Company recorded a net income of
$27,940 and $13,801 during the years ended December 31, 2007 and 2006,
respectively. The Company's total liabilities exceeded its total assets by
$3,980,966 as of December 31, 2007.
 
 Concentration of Credit
Risk
 
 Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
trade receivables.  The Company places its cash and temporary cash
investments with high credit quality institutions.  At times, such
investments may be in excess of the FDIC insurance limit. The Company
periodically reviews its trade receivables in determining its allowance for
doubtful accounts. At December 31, 2007 and 2006, allowance for doubtful account
balance was $10,715 and $17,642, respectively.
 
 F-10
  
 CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
 
 Net income (loss) per
share
 
 The
following reconciliation of net income and share amounts used in the computation
of income (loss) per share for the year ended December 31, 2007 and
2006:
 
 Year
      Ended
                December
      31,
                2007
              
              
              Year
      Ended
                December
      31,
                2006Net
      income used in computing basic net income per share
              
              $
              27,940
              
              
              $
              13,801Impact
      of assumed assumptions:Amortization
      of debt discount (interest expense) on convertible
    debentures
              
              
              233,815
              
              
              
              361,451Impact
      of equity classified as liability:Gain
      on warrant liability and derivative to fair value
              
              
              (657,349
              )
              
              
              (2,007,730
              )Net
      Income (loss) in computing diluted net income (loss) per
      share:
              
              $
              (395,594
              )
              
              $
              (1,632,478
              )
 
 The
weighted average shares outstanding used in the basic net income per share
computations for the years ended December 31, 2007 and 2006 was 135,320,968 and
73,004,530, respectively. In determining the number of shares used in computing
diluted loss per share, the Company added approximately 1,379,151,935 and
58,093,731 potentially dilutive securities for the years ended December 31, 2007
and 2006, respectively. The potentially dilutive securities added were
attributable to the warrants and convertible debentures outstanding. As a
result, the diluted loss per share for the year ended December 31, 2007 was
$0.00 and  $0.02, respectively.
 
 Derivative Financial
Instruments
 
 The
Company's derivative financial instruments consist of embedded derivatives
related to the Secured Convertible Debentures (see Note F). These embedded
derivatives include certain conversion features, variable interest features,
call options and default provisions. The accounting treatment of derivative
financial instruments requires that the Company record the derivatives and
related warrants at their fair values as of the inception date of the Note
Agreement and at fair value as of each subsequent balance sheet date. In
addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. Any
change in fair value inclusive of modifications of terms will be recorded as
non-operating, non-cash income or expense at each reporting date. If the fair
value of the derivatives is higher at the subsequent balance sheet date, the
Company will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, the Company will
record non-operating, non-cash income. Conversion-related derivatives were
valued using the intrinsic method and the warrants using the Black Scholes
Option Pricing Model with the following assumptions: dividend yield of 0%;
annual volatility of 401%; and risk free interest rate from 3.05% to
3.70%.  The derivatives are classified as long-term
liabilities.
 
 Registration
rights
 
 In with
raising capital through the issuance of Convertible Notes, the Company has
issued convertible debentures and warrants in that have registration rights with
liquidated damages for the underlying shares.  As the contract must be
settled by the delivery of registered shares and the delivery of the registered
shares is not controlled by the Company, pursuant to EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”, the net value of the of the underlying embedded derivative
and warrants at the date of issuance was recorded as liabilities on the balance
sheet. Liquidated damages are estimated and accrued as a liability at each
reporting date.
 
 New Accounting
Pronouncements
 
 In
February 2006, the FASB issued SFAS No. 155, “Accountingfor certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140”(“SFAS No.
155”).  SFAS
No. 155 permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
The SFAS No. 155 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
 
 In March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140” (“SFAS No.
156”). SFAS No. 156 requires that an entity recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a financial
asset by entering into a service contract under certain situations. The new
standard is effective for fiscal years beginning after September 15, 2006. SFAS
No.156 did not have a material impact on the Company's financial position,
results of operations or cash flows.
 
 F-11
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
A - SUMMARY OF ACCOUNTING POLICIES (continued)
 
 Recent accounting
pronouncements (continued)
 
 In July
2006, the FASB issued Interpretation No. 48, “Accountingfor uncertainty in Income Taxes”(“FIN No. 48”). FIN No. 48 clarifies the accounting for Income Taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. It also provides guidance
on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition and clearly scopes
income taxes out of SFAS No. 5, “ Accounting for
Contingencies”. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. The Company has not yet evaluated the impact of adopting FIN
No. 48 on the Company’s financial position, results of operations or cash
flows.
 
 In
September 2006, FASB issued its SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. SFAS No.157 applies under
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does
not require any new fair value measurements. However, for some entities, the
application of SFAS No. 157 will change current practice. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company does
not expect adoption of this standard will have a material impact on its
financial position, results of operations or cash flows.
 
 In
September 2006 the FASB issued its SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 improves
financial reporting by requiring an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization. SFAS No. 158 also
improves financial reporting by requiring an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The effective date for an employer with publicly traded
equity securities is as of the end of the fiscal year ending after December 15,
2006. The Company does not expect adoption of this standard will have a material
impact on its financial position, results of operations or cash
flows.
 
 In
December 2006, the FASB issued FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements” (“FSP 00-19-2”) which addresses accounting for registration
payment arrangements. FSP 00-19-2 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 SFAS No. 5, “Accounting for
Contingencies”. FSP 00-19-2 further clarifies that a financial instrument
subject to a registration payment arrangement should be accounted for in
accordance with other applicable generally accepted accounting principles
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement. For registration payment arrangements
and financial instruments subject to those arrangements that were entered into
prior to  the issuance of EITF 00-19-2, this guidance shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2006 and interim periods within those fiscal years. The Company
does not expect adoption of this standard will have a material impact on its
financial position, results of operations or cash flows
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure many financial instruments, and certain other
items, at fair value. SFAS No. 159 applies to reporting periods beginning after
November 15, 2007. The adoption of SFAS No. 159 is not expected to have a
material impact on the Company’s financial position, results of operations or
cash flows.
 
 In
December 2007, the FASB issued SFAS No. 141(R),"Business Combinations"
("SFAS No. 141(R)"), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. SFAS No. 141R is effective as of the beginning of the
first fiscal year beginning on or after December 15,
2008.  Earlier adoption is prohibited and the Company is currently
evaluating the effect, if any, that the adoption will have on its financial
position, results of operations or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51"
("SFAS No. 160"), which will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity within the consolidated balance
sheets.  SFAS No. 160 is effective as of the beginning of the first
fiscal year beginning on or after December 15, 2008.  Earlier
adoption is prohibited and the Company is currently evaluating the effect, if
any, that the adoption will have on its financial position, results of
operations or cash flows.
 
 Reclassifications
 
 Certain
reclassifications have been made in prior year's financial statements to conform
to classifications used in the current year.
 
 F-12
  
 CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
B - PROPERTY, PLANT, AND EQUIPMENT
 
 Property,
plant and equipment at December 31, 2007 and 2006 are as follows:
 
 2007
              
              
              2006Furniture
      and fixtures
              
              $
              41,260
              
              
              $
              41,260Equipment
              
              
              351,183
              
              
              
              351,138Computer
      equipment
              
              
              56,654
              
              
              
              56,654449,097
              
              
              
              449,052Less:
      Accumulated depreciation
              
              
              359,541
              
              
              
              325,387Net
      property and equipment
              
              $
              89,556
              
              
              $
              123,665
 
 The total
depreciation expense for the year ended December 31, 2007 and 2006 amounted to
$34,155 and $43,706, respectively of which $21,665 and $21,633 is included in
cost of goods sold for each respective year.
 
 NOTE
C - NOTES PAYABLE
 
 Notes
payable at December 31, 2007 and 2006 consists of the following:
 
 2007
              
              
              2006Note
      payable-State of Maryland, accrues interest at 0% per annum,
      unsecured.  In accordance with a forbearance agreement, if KD
      Medical defaults on any payments, cumulative interest at 10% per annum
      will be added. as of December 31, 2007, cumulative amount of interest was
      $352,499
              
              
              163,000
              
              
              
              249,400Notes
      payable-unsettled claims from acquisition of Molecularware; accrues
      interest at 12% per annum, unsecured
              
              
              -
              
              
              
              175,273Notes
      payable-settlement of outstanding claims of Molecularware; accrues
      interest at 12% per annum, unsecured
              
              
              -
              
              
              
              45,138Notes
      payables-shareholders, accrues interest at 0% per annum,
      unsecured
              
              
              78,070
              
              
              
              84,878241,070
              
              
              
              554,689Less:
      current maturities:
              
              
              (241,070
              )
              
              
              (554,689
              )$
              -
              
              
              $
              -
 
 The
Company agreed to issue up to $600,000 of convertible debentures to
Molecularware to settle debts.  The time frame for settling those debts and
issuing convertible debentures was ninety days.  As of December 31, 2006,
$45,138 was settled in the form of debentures. The Company determined that the
remaining $175,273 and $45,138 could not be identified or could verify its
existence.  Therefore the Company reported as gain on disposition of
debt of a total of $315,624 inclusive of accrued interest; which represented the
remaining non extinguished debt in the year ended December 31,
2007.
 
 NOTE
D - NOTES PAYABLE - BANKS
 
 Notes
payable - bank at December 31, 2007 and 2006 consists of the
following:
 
 
 2007
              
              
              2006Bank
      term debt, guaranteed by its officers, and bears interest at a rate of 9%
      per annum, with monthly payments of $1,048 over five years, maturing Oct,
      2009
              
              $
              -0-
              
              
              $
              30,548Lines
      of credit, guaranteed by its officers, in the total amount of $74,150 and
      bears interest rates from 9.4% to 14.24% per annum. The credit line calls
      for minimum payment of interest only
              
              
              -
              
              
              
              57,892-
              
              
              
              88,440Less:
      current portion
              
              
              (-
              )
              
              
              (67,250
              )$
              -
              
              
              $
              21,190
 
 F-13
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 
 NOTE
E - CONVERTIBLE NOTES PAYABLE
 
 A summary
of convertible promissory notes payable at December 31, 2007 and 2006 is as
follows:
 
 December 31,
                2007
              
              
              December 31,
                200610%
      convertible debenture, with related party, is payable on demand, unpaid
      principal together with accrued and unpaid interest is, at the option of
      the holder, convertible into shares of the Company’s common stock at a
      time or conversion price equal to fifty percent of the closing price of
      the Company’s common stock on the date of conversion. The Company has
      recorded $100,000 as a beneficial conversion discount-interest expense
      during the year ended December 31, 2003. In 2005, the note was converted
      to a non-interest bearing debenture.
              
              $
              53,577
              
              
              $
              53,57710%
      convertible debenture with interest due quarterly subject to certain
      conditions, due three years from the date of the note.  The
      holder has the option to convert unpaid principal to the Company’s common
      stock at the lower of (i) $0.14 or (ii) 50% of the average of the three
      lowest intraday trading prices for the common stock on a principal market
      for the twenty days before, but not including, conversion
      date.  The Company granted the note holder a security interest
      in substantially all of the Company’s assets and intellectual property and
      registration rights. (see below)
              
              
              690,350
              
              
              
              540,0838%
      convertible debenture with interest due quarterly subject to certain
      conditions, due three years from the date of the note.  The
      holder has the option to convert unpaid principal to the Company’s common
      stock at the lower of (i) $0.14 or (ii) 40% of the average of the three
      lowest intraday trading prices for the common stock on a principal market
      for the twenty days before, but not including, conversion
      date.  The Company granted the note holder a security interest
      in substantially all of the Company’s assets and intellectual property and
      registration rights. (see below)
              
              
              83,549
              
              
              
              -0-827,476
              
              
              
              593,660Less:
      current maturities
              
              
              (743,927
              )
              
              
              (53,577
              )$
              83,549
              
              
              $
              540,083
 
 
 The
Company  entered into a
Securities  Purchase  Agreement with four accredited
investors on May 23, 2005 for the issuance of
an  aggregate  of  $2,000,000  of
convertible notes ("Convertible  Notes"),  and attached to
the Convertible Notes were warrants to purchase  12,143,290 shares of
the Company's  common stock. The Convertible Notes accrue interest at
10% per annum, payable quarterly, and are due three years from the date of the
note.  The  note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of (i) $0.14
or (ii) 50% 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
conversion date. The effective interest rate at the date of inception was 23.47%
per annum.
 
 As of
December 31, 2007, the Company issued to the investors Convertible Notes in a
total amount of $2,000,000 in exchange for net proceeds of
$1,635,667.  The proceeds that the Company received were net of
prepaid interest of $133,333 representing the first eight month’s interest
calculated at 10% per annum for the aggregate of $2,000,000 of convertible
notes, and related fees and costs of $255,000.  Prepaid interest is
amortized over the first eight months of the note and capitalized financing
costs were amortized over the maturity period (three years) of the convertible
notes.
 
 The
Company's identified embedded derivatives related to the Securities Purchase
Agreement entered into on May 23, 2005. These embedded derivatives included
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company allocate the relative fair values of the derivatives
and related warrants as of the inception date of the Securities Purchase
Agreement up to the proceeds amount and to fair value as of each subsequent
balance sheet date. At the inception of the Securities Purchase Agreement, the
Company allocated $1,147,698 and $852,302 to the embedded derivatives and
related warrants, respectively.
 
 For the
years ended December 31, 2007 and 2006, the Company amortized the debt discount
and charged to interest expense $150,266 and $361,451,
respectively.
 
 The
Company  entered into a
Securities  Purchase  Agreement with four accredited
investors on July 13, 2007 for the issuance of
an  aggregate  of  $535,000  of
convertible notes ("Convertible  Notes"),  and attached to
the Convertible Notes were warrants to purchase  10,000,000 shares of
the Company's  common stock. The Convertible Notes accrue interest at
8% per annum, payable quarterly, and are due three years from the date of the
note.  The  note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of (i) $0.14
or (ii) 40% 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
conversion date. The effective interest rate at the date of inception was 63.23%
per annum.
 
 F-14
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
E - CONVERTIBLE NOTES PAYABLE (continued)
 
 As of
December 31, 2007, the Company issued to the investors Convertible Notes in a
total amount of $535,000 in exchange for net proceeds of
$500,000.  The proceeds that the Company received were net of related
fees and costs of $35,000.  Capitalized financing costs are amortized
over the maturity period (three years) of the convertible notes.
 
 The
Company's identified embedded derivatives related to the Securities Purchase
Agreement entered into on July 13, 2007. These embedded derivatives included
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company allocate the relative fair values of the derivatives
and related warrants as of the inception date of the Securities Purchase
Agreement up to the proceeds amount and to fair value as of each subsequent
balance sheet date. At the inception of the Securities Purchase Agreement, the
Company allocated $467,310 and $67,690 to the embedded derivatives and related
warrants, respectively.
 
 For the
year ended December 31, 2007, the Company amortized the debt discount and
charged $83,549 to interest expense.
 
 The
accompanying financial statements comply with current requirements relating to
warrants and embedded derivatives as described in FAS 133, EITF 98-5 and 00-27,
and APB 14 as follows:
 
 ·
              The
      Company allocated the proceeds received between convertible debt and
      detachable warrants based upon the relative fair market values on the
      dates the proceeds were received. The fair values of the detachable
      warrants and the embedded derivatives  were determined under the
      Black-Scholes option pricing formula and the intrinsic method,
      respectively·
              Subsequent
      to the initial recording, the increase (or decease) in the fair value of
      the detachable warrants, determined under the Black-Scholes option pricing
      formula and the increase (or decrease) in the intrinsic value of the
      embedded derivatives of the convertible debentures are recorded as
      adjustments to the liabilities at December 31, 2007 and 2006,
      respectively.·
              The
      expense relating to the increase (or decrease) in the fair value of the
      Company’s stock reflected in the change in the fair value of the warrants
      and derivatives is included as other income item as a gain or loss arising
      from convertible financing on the Company’s balance
  sheet.·
              Accreted
      principal of $773,899 and $540,083 as of December 31, 2007 and 2006,
      respectively.
 
 NOTE
F – CONVERTIBLE PREFERRED STOCK
 
 On April
15, 2004, the Company issued 1,250,000 shares of Preferred Stock at a price of
$0.20 per share to one entity.  The preferred shares issued are
convertible on a 1 to 1.5 basis of preferred stock to common
shares.  These shares have not been converted as of December 31,
2007.
 
 NOTE
G - COMMON STOCK
 
 In
January 2006, the Company issued 5,960,000 shares of common stock in exchange
for convertible notes payable of $67,694.
 
 In
February 2006, the Company issued 4,534,446 shares of common stock in exchange
for convertible notes payable of $56,030.
 
 In March
2006, the Company issued 8,286,532 shares of common stock for officer’s prior
year’s compensation, at $0.025 per share, which represented the value of the
services received and which did not differ materially from the value of the
stock when services were rendered.
 
 In March
2006, the Company issued 400,000 shares of common stock for services rendered at
$0.09 per share, which represents the value of the services received and which
did not differ materially from the value of the stock issued.
 
 In March
2006, the Company issued 25,000 shares of common stock for services rendered at
$0.07 per share, which represents the value of the services received and which
did not differ materially from the value of the stock issued.
 
 In July
2006, the Company issued 600,000 shares of common stock for services rendered at
$0.07 per share, which represents the value of the services received and which
did not differ materially from the value of the stock issued.
 
 In July
2006, the Company issued 650,000 shares of common stock in settlement of a stock
subscription issued in conjunction with the acquisition of KD
Medical.
 
 In August
2006, the Company issued 690,909 shares of common stock for services rendered at
$0.05 per share, which represents the value of the services received and which
did not differ materially from the value of the stock issued.
 
 In
October 2006, the Company issued 355,606 shares of common stock for services
rendered at $0.044 per share, which represents the value of the services
received and which did not differ materially from the value of the stock
issued.
 
 In
October 2006, the Company issued 959,181 shares of common stock in exchange for
convertible notes payable of $19,663.
 
 In
October 2006, the Company issued 400,000 shares of common stock for services
rendered at $0.047 per share, which represents the value of the services
received and which did not differ materially from the value of the stock
issued.
 
 In
October 2006, the Company issued 6,000,000 shares of common stock for officer’s
compensation, at $0.042 per share, which represented the value of the services
received and which did not differ materially from the value of the stock when
services were rendered.
 
 F-15
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 
 NOTE
G - COMMON STOCK (continued)
 
 In
November 2006, the Company issued 125,000 shares of common stock for services
rendered at $0.045 per share, which represents the value of the services
received and which did not differ materially from the value of the stock
issued.
 
 In
December 2006, the Company issued 3,092,683 shares of common stock for services
rendered at $0.041 per share, which represents the value of the services
received and which did not differ materially from the value of the stock
issued.
 
 In
February 2007, the Company issued 9,000,000 shares of common stock for officer’s
prior year’s compensation, at $0.035 per share, which represented the value of
the services received and which did not differ materially from the value of the
stock when services were rendered.
 
 In
February 2007, the Company issued 978,590 shares of common stock in exchange for
convertible notes payable of $18,006.
 
 In March
2007, the Company issued 2,500,000 shares of common stock for services rendered
at $0.036 per share, which represents the value of the services received and
which did not differ materially from the value of the stock issued.
 
 In April
2007, the Company issued 656,653 shares of common stock for services rendered at
$0.03 per share, which represents the value of the services received and which
did not differ materially from the value of the stock issued.
 
 In May
2007, the Company issued 2,000,000 shares of common stock for services rendered
at an average of  $0.027 per share, which represents the value of the
services received and which did not differ materially from the value of the
stock issued.
 
 In May
2007, the Company issued 500,000 shares of common stock in exchange for
convertible notes payable of $5,500.
 
 In June
2007, the Company issued 500,000 shares of common stock in exchange for
convertible notes payable of $5,500.
 
 In July
2007, the Company issued 500,000 shares of common stock in exchange for
convertible notes payable of $2,775.
 
 In August
2007, the Company issued 2,500,000 shares of common stock in exchange for
convertible notes payable of $10,750.
 
 In
September 2007, the Company issued 12,542,702 shares of common stock in exchange
for convertible notes payable of $76,065
 
 In
October 2007, the Company issued 24,885,472 shares of common stock in exchange
for convertible notes payable of $90,307.
 
 In
November 2007, the Company issued 18,664,050 shares of common stock in exchange
for convertible notes payable of $48.264.
 
 In
December 2007, the Company issued 12,442,700 shares of common stock in exchange
for convertible notes payable of $13,524.
 
 NOTE
H – OPTIONS AND WARRANTS
 
 Non-Employee Stock
Options
 
 On
December 1, 2002, the Company issued 80,000 options to a consultant as incentive
to enter into a consulting agreement with the Company for a period of one
year.  The 80,000 options vest quarterly over a period of three years
with an exercise price of $.01 per share and a life of ten years from the date
of grant.
 
 The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company's common stock issued to consultants at
December 31, 2007.
 
   Options Outstanding
              
              
              Options ExercisableWeighted
      AverageExercise
              
              
              Number
              
              
              Remaining
      Contractual
              
              
              Weighed
      Average
              
              
              Number
              
              
              Weighted
      AveragePrice
              
              
              Outstanding
              
              
              Life
      (Years)
              
              
              Exercise
      Price
              
              
              Exercisable
              
              
              Exercise
      Price$
              0.001
              
              
              
              80,000
              
              
              
              4.92
              
              
              $
              0.001
              
              
              
              80,000
              
              
              $
              0.001
 
 F-16
 
 CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
H – OPTIONS AND WARRANTS (continued)
 
 Non-Employee Stock Options
(continued)
 
 
 Transactions
involving stock options issued to consultants are summarized as
follows:
 
 Weighted
      AverageNumber of Shares
              
              
              Price Per ShareOutstanding
      at December 31, 2005
              
              
              80,000
              
              
              $
              0.01Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2006
              
              
              80,000
              
              
              
              0.01Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2007
              
              
              80,000
              
              
              $
              0.01
 
 Warrants
 
 The
Company granted 10,000,000 warrants during the year ended December 31, 2007 in
connection with the issuance of convertible notes payable (see note E). The
Company did not grant any compensatory warrants during the year ended December
31, 2007 and 2006.  The following table summarizes the changes in
warrants outstanding and the related prices for the shares of the Company’s
common stock.
 
 Warrants Outstanding
              
              
              
              
              
              Warrants ExercisableWeighted
      Average
              
              
              Weighted
              
              
              
              
              
              WeightedNumber
              
              
              Remaining
      Contractual Life
              
              
              Average
              
              
              Number
              
              
              AverageExercise Price
              
              
              Outstanding
              
              
              (Years)
              
              
              Exercise Price
              
              
              Exercisable
              
              
              Exercise Price$
              0.02
              
              
              
              10,000,000
              
              
              
              6.53
              
              
              $
              0.02
              
              
              
              10,000,000
              
              
              $
              0.02$
              0.20
              
              
              
              6,071,645
              
              
              
              2.50
              
              
              $
              0.20
              
              
              
              6,071,645
              
              
              $
              0.20$
              0.35
              
              
              
              6,071,645
              
              
              
              2.50
              
              
              $
              0.35
              
              
              
              6,071,645
              
              
              $
              0.3522,143,290
              
              
              
              4.32
              
              
              $
              0.16
              
              
              
              22,143,290
              
              
              $
              0.16
 
 Transactions
involving warrants issued to non-employees are summarized as
follows:
 
 Weighted
      Average PriceNumber of Shares
              
              
              Per ShareOutstanding
      as of January 1, 2006
              
              
              12,173,290
              
              
              $
              0.275Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      as of December 31, 2006
              
              
              12,143,290
              
              
              
              0.275Granted
              
              
              10,000,000
              
              
              
              0.02Exercised
              
              
              -
              
              
              
              -Canceled
      or expired
              
              
              -
              
              
              
              -Outstanding
      as of December 31, 2007
              
              
              22,143,290
              
              
              $
              0.16
 
 NOTE
I - RELATED PARTY TRANSACTIONS
 
 From time
to time the Company's officers and shareholders advance funds to the Company.
The notes payable-related parties balance outstanding was $78,070 and $84,878 as
of December 31, 2007 and 2006, respectively.  No formal arrangements
or repayment terms exist (see Note C).
 
 NOTE
J - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
 Accounts
payable and accrued liabilities at December 31, 2007 and 2006 are as
follows:
 
 2007
              
              
              2006Accounts
      payable
              
              $
              172,677
              
              
              $
              242,195Accrued
      salaries
              
              
              456,539
              
              
              
              244,571Payroll
      liabilities
              
              
              364,068
              
              
              
              366,361Accrued
      Interest
              
              
              267,137
              
              
              
              191,758$
              1,260,421
              
              
              $
              1,044,885
 
 
 F-17
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
K - INCOME TAXES
 
 The
Company has adopted Financial Accounting Standards No. 109, which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns.
 
 Under
this method, deferred tax liabilities and assets are determined based on the
difference between 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.  Temporary differences between taxable income
reported for financial reporting purposes and income tax purposes are
insignificant.  A management estimates that at December 31, 2007, the
Company has available for federal income tax purposes a net operating loss carry
forward of approximately $10,000,000, expiring in the year 2023, that may be
used to offset future taxable income.  Due to significant changes in
the Company's ownership, the future use of its existing net operating losses may
be limited.
 
 The
Company has provided a valuation reserve against the full amount of the net
operating loss benefit, since in the opinion of management based upon the
earnings history of the Company; it is more likely than not that the benefits
will not be realized.
 
 Components
of deferred tax assets as of December 31, 2007 and 2006 are as
follows:
 Non
current:
 
 2007
              
              
              2006Net
      operating loss carry forward
              
              $
              3,500,000
              
              
              $
              3,150,000Valuation
      allowance
              
              
              (3,500,000
              )
              
              
              (3,150,000
              )Net
      deferred tax asset
              
              
              -
              
              
              
              -
 
 NOTE
L - LOSSES PER SHARE
 
 The
following table presents the computation of basic and diluted losses per share
as of December 31 2007 and 2006, respectively:
 
 2007
              
              
              2006Income
      available for common shareholders
              
              $
              27,940
              )
              
              $
              13,801Basic
      income (loss) per share
              
              $
              0.00
              
              
              $
              0.00Fully
      diluted loss per share
              
              $
              (0.00
              )
              
              $
              (0.02
              )Weighted
      average common shares outstanding-basic
              
              
              135,320,968
              
              
              
              73,004,530Weighted
      average common shares-fully diluted
              
              
              1,514,472,903
              
              
              
              131,098,261
 
 Net loss
per share is based upon the weighted average shares of common stock
outstanding.
 
 NOTE
M - COMMITMENTS AND CONTINGENCIES
 
 Operating Lease
Commitments
 
 The
Company leases production and administration facilities in Columbia, Maryland at
a rate of approximately $12,393 per month.
 
 Schedule
of future minimum lease payments under operating equipment and premises leases
at December 31, 2007 are as follows:
 
 2008
              
              
              125,1592009
              
              
              128,6312010
              
              
              132,1882011
              
              
              135,849Total
              
              $
              521,827
 
 Rental
expenses charged to operations for the years ended December 31, 2007 and 2006
were $142,907 and $192,113, respectively.
 
 Capital Lease
Obligations
 
 The
Company leases equipment financed by capital leases. Equipment included the
following amounts for capitalized leases at December 31, 2007 and
2006:
 
 2007
              
              
              2006Equipment
              
              $
              84,756
              
              
              $
              84,756Computers
              
              
              3,010
              
              
              
              3,01087,766
              
              
              
              87,766Less
      accumulated depreciation
              
              
              38,407
              
              
              
              25,803Net
              
              $
              49,359
              
              
              $
              61,963
 
 F-18
  CALBATECH,
INC.
 NOTES
TO FINANCIAL STATEMENTS
 DECEMBER
31, 2007 AND 2006
 
 NOTE
M - COMMITMENTS AND CONTINGENCIES (continued)
 
 The
Company has capital leases for equipment used in its operation. The future
minimum lease payments at December 31, 2007 are as follows:
 
 2007
              
              $
              48,1992008
              
              
              38,4902009
              
              
              14,0702010
              
              
              4,690201157,250Less:
      amount representing interest
              
              
              (3,943
              )54,307Less:
      current Portion
              
              
              (36,562
              )Long-term
      Portion
              
              $
              17,745
 
 Depreciation
expenses of $12,234 and $13,545 have been charged to operations for the years
ended December 31, 2007 and 2006, respectively for leased
equipment.
 
 Employment
Agreements
 
 The
Company has employment agreements with key employees. In addition to salary and
benefit provisions, the agreements include defined commitments should the
employees terminate the employment with or without cause.
  NOTE
N – DEFAULT LIABILITY
 
 As of
December 31, 2006, a default liability totaling $670,409, including accrued
interest at statutory rates, existed against the Corporation’s subsidiary, KD
Medical, Inc. The Company had never been able to confirm that a default
liability against KD Medical, Inc. was ever a valid default liability, though
the Company listed this potential default liability in the interest of full
disclosure.  The company that potentially had a claim against KD
Medical, Inc. was acquired in 2007 by another company and the default judgment
was expunged through the allowance of uncollectible debt.  The Company
has confirmed this through the confirmation process inherent in its year-end
audit for the fiscal year ending 2007, and has received confirmation that KD
Medical, Inc. no longer owes Qiagen any amounts related to such default
judgment.
 
 NOTE
O - GOING CONCERN MATTERS
 
 The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  As shown in the accompanying
financial statements for the years ended December 31, 2007 and 2006, the Company
has incurred operating losses of $894,674 and $1,285,205,
respectively.  In addition, the Company has a deficiency in
stockholder's equity of $3,980,966 and $4,754,341 at December 31, 2007 and 2006,
respectively.  These factors among others may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
 
 The
Company's existence is dependent upon management's ability to develop profitable
operations.  Management is devoting substantially all of its efforts
to establishing its business and there can be no assurance that the Company's
efforts will be successful.  However, the planned principal operations
have not fully commenced and no assurance can be given that management's actions
will result in profitable operations or the resolution of its liquidity
problems. The accompanying statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
 
 In order
to improve the Company's liquidity, the Company is actively pursuing additional
equity financing through discussions with investment bankers and private
investors.  There can be no assurance that the Company will be
successful in its efforts to secure additional equity financing.
 
 F-19
  EXHIBIT
INDEX
 
 Exhibit No.
              
              Description2.1
              
              Articles
      of Incorporation*2.1.1
              
              Articles
      of Amendment to Articles of Incorporation, dated September 16,
      1998*2.1.2
              
              Articles
      of Amendment dated March 20, 2003*2.1.3
              
              Articles
      of Merger dated March 20, 2003 for redomicile *2.1.3.1
              
              Merger
      Agreement underlying Articles of Merger for redomicile
*2.1.4
              
              Articles
      of Merger dated March 20, 2003 for merger of subsidiary, CalbaTech, Inc.,
      into Parent, Traffic Technology, Inc. with name change to CalbaTech, Inc.
      post merger *2.1.4.1
              
              Merger
      Agreement underlying Articles of Merger for merger of Subsidiary and
      Parent and concurrent name change *2.2
              
              Bylaws
      of Traffic Technology, Inc., a Nevada Corporation *6.1
              
              Consulting
      Agreement with Pinnacle West Capital Corporation, dated May 30,
      2000*6.2
              
              Distributor
      Agreement with Layton Solar, dated April 3, 2000*6.2.1
              
              Amendment
      to Distributor Agreement with Layton Solar, dated August 24,
      2000*6.3
              
              Distributor
      Agreement with IMS Industries, dated March 17, 2000*6.4
              
              Distributor
      Agreement with Taiwan Signal Technologies Co., dated June 30,
      2000*6.5
              
              Distributor
      Agreements with Artflex, Sinalizacao and Viaria Ltd., dated August 7,
      2000*6.6
              
              Distributor
      Agreement with Supremetech Engineering Co. dated August 15,
      2000*6.7
              
              Consulting
      Service Agreement for LED Traffic Signal Technology Transfer and Licensing
      with JCI Group, Inc. (China), dated January 8, 2001*6.8
              
              LED
      Single Lens Traffic Signal Technology Transfer and Consulting Service
      Agreement with JCI Group, Inc. Japan), dated April 25,
    2001*6.9
              
              Form
      of Distributor Agreement (United States)*10.1
              
              Employment
      Agreement for James DeOlden *10.2
              
              Employment
      Agreement for Edward Deese *10.3
              
              Employment
      Agreement for John Gordon *10.4
              
              Employment
      Agreement for David Killen *10.5
              
              Asset
      Purchase Agreement (Zoval Enterprises) *10.6
              
              Agreement
      and Plan of Reorganization for the acquisition of Molecularware
      *10.7
              
              Agreement
      and Plan of Reorganization for the acquisition of Molecula
    *10.8
              
              Lease
      Agreement for KD Medical with Snowden First, LLC *24.1
              
              Power
      of Attorney (filed herein)31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of James DeOlden (filed
      herewith).31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Edward Deese (filed
      herewith).32.
              
              Section
      1350 Certification of James DeOlden and Edward Deese (filed
      herewith).
 
 *Documents
previously filed with the SEC