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                     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, 2005 OR

[ ]    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.)

          15375 Barranca Parkway, Suite I-101, Irvine, California 92618
               (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___

     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 [ ].

     CalbaTech, Inc. had revenue of $1,292,167 and other income of $19,261 for
the fiscal year ended on December 31, 2005. The aggregate market value of the
voting stock held by non-affiliates of the Company as of March 8, 2005: Common
Stock, par value $0.001 per share -- $5,399,173. As of March 8, 2005, the
Company had 95,893,110 shares of common stock issued and outstanding, of which
71,893,110 were held by non-affiliates.





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                                TABLE OF CONTENTS

PART I
                                                                         PAGE

ITEM 1.  Description of Business............................................3

ITEM 2.  Description of Property............................................7

ITEM 3.  Legal Proceedings..................................................8

ITEM 4.  Submission of Matters to a Vote of Security Holders................8

PART II

ITEM 5.  Market for Common Equity and Other Shareholder Matters.............9

ITEM 6.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations...............................16

ITEM 7.  Financial Statements..............................................16

ITEM 8.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure...............................16

ITEM 8A. Controls and Procedures...........................................17

PART III

ITEM 9.  Directors, Executive Officers, Promoters
         and Control Persons; Compliance with Section
         16(a) of the Exchange Act.........................................17

ITEM 10. Executive Compensation............................................20

ITEM 11. Security Ownership of Certain Beneficial
         Owners and Management.............................................20

ITEM 12. Certain Relationships and Related Transactions....................21

ITEM 13. Exhibits and Reports on Form 8-K..................................21

ITEM 14. Principal Accountant Fees and Services............................22

Signatures.................................................................23



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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.) ("CalbaTech", "CTI" or
"Company") was organized on April 29, 2002 under the laws of the state of
Nevada. On January 3, 2003, the Company completed an Agreement and Plan of
Exchange ("Agreement") with Traffic Technology, Inc. ("Traffic"). As a result of
the acquisition, there was a change in control of the public entity, and Traffic
Technology, Inc. changed its name to CalbaTech, Inc.

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. In addition, CalbaTech has assembled an
experienced and innovative scientific staff, including several notable members
of its Scientific Advisory Board, that CalbaTech believes may contribute
innovation in areas of biological discovery. 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.

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.


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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. Products and intellectual property of the
dissolved LLC were transferred to Molecula, Inc.

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. KD believes that the addition of new product
lines could significantly increase its revenues within the NIH, to as much as $5
Million annually, within the next five years.

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 will greatly 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.

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Market Size

The general laboratory supplies industry is 12 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.

Additionally, it is anticipated that KD will move into its new state-of-the-art
ISO 9002 certified and FDA compliant facility featuring two class 100 clean
rooms by the end of 2005. It is believed that this new 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 2005 revenues of
approximately $1.225 Million in gross revenues. CalbaTech believes that combined
revenues within the division will be $1.5 Million in 2006. Within three years,
it is anticipated that revenues will grow to $5 Million.

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.

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 based on embryonic and
adult stem cells, as well as clinical applications to compete with, or
complement, existing drug based therapeutics. LifeStem's strategy is to leverage
the CalbaTech 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. In time, it is anticipated that elements of
LifeStem's services will become standard practice in mainstream clinical
applications, thus opening a much larger market to LifeStem as a cellular
logistics services company.

LifeStem is positioning itself to become a leading supplier 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.

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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.

The MicroBanking process, for which LifeStem has filed for US patent protection,
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. 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 applied for trademark protection for the
term "Stem Cell Microbank". LifeStem is the only company that is collecting and
storing adult stem cells from two different cell sources. LifeStem expects to
begin generating revenue from its Stem Cell Microbank(TM) in the second quarter
of 2006.

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.

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.

Clinical Applications

Stem cells have shown great promise in their ability to grow into new healthy
tissue. As a result, they have the potential to provide cures for diabetes,
heart disease, Alzheimer's disease, spinal cord injuries and many other medical
conditions. There are hundreds of researchers concentrating on the successful
cure for these and other diseases.

An area of specific interest to LifeStem however, is the non-disease application
of stem cells, notably applications specific to the cosmetic surgery market.
Stem cells have been proven to aid in the healing of injured tissue and are a
natural compliment to many existing cosmetic surgical procedures.


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.

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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 of these patent applications entitled "Device and methods for
processing sample and detecting analytes at low concentration" is a provisional
application 60/536,044 filed 01/13/04 by James Zoval, Ph.D. This was officially
published by the USPTO 20th October Publication number US-2005-0233352-A1. This
application describes a novel concept for the isolation and purification of DNA
and other biological molecules. This concept fits within the overall molecular
biology/media focus of CalbaTech's acquisition strategy and could become an
important new product line.

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.

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
15375 Barranca Parkway, Suite I-101, Irvine, California 92618. The facility
consists of approximately 3,000 square feet and is equipped as a general
molecular biology and biochemistry lab with is prime purpose being development
of an AABB, FDA and CLIA compliant facility to test, process and store adult
stem cells, as well as testing of DNA micro-array reagents, including a wet lab
and cleanroom. The current lease expires at the end of July 2007 and has a
current yearly rent of $52,146. 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.

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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.

A corporation has lodged a claim against K-K Medical, Inc., one of the Company's
subsidiaries, in such that it claims to have a judgment of $572,188 against K-D
Medical, Inc., inclusive of interest. The Company intends to take all steps
necessary to contest the validity of such claim on behalf of K-D Medical, Inc.
if and when such a formal claim is made.

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

During the last quarter of fiscal year-ended December 2005, the Company did not
submit any matters to a vote of security holders.

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, 2005

                                                  High     Low

Quarter Ended December 31, 2005                   .077     .018
Quarter Ended September 30, 2005                  .22      .018
Quarter Ended June 30, 2005                       .22      .15
Quarter Ended March 31, 2005                      .28      .16

Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2003

                                                  High     Low

Quarter Ended December 31, 2004                   .31      .10
Quarter Ended September 30, 2004                  .15      .06
Quarter Ended June 30, 2004                       .30      .13
Quarter Ended March 31, 2004                      .29      .15

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.

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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 March 6, 2006, the Company's transfer agent shows 232 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. In addition, CalbaTech is building an
experienced and innovative scientific staff, including several notable members
of its Scientific Advisory Board that it believes may contribute innovation in
areas of biological discovery. 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 2004, and LifeStem was incorporated
in 2004 to pursue opportunities in the rapidly expanding stem cell market.

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.

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Comparison of the Year Ended December 31, 2005 with the Year Ended December 31,
2004

During the year ending December 31, 2005 the Company experienced significant
growth in revenues with sales of $1,292,167 compared to $300,633 in the year
ending December 31, 2004. Additionally, the Company had other income of $19,261
compared to $12,744 in prior year 2004. The Company believes that with the
continued growth of KD Medical, Inc. and Molecula, along with the revenue to be
generated by LifeStem's Stem Cell Microbank(TM), The Company's revenue will
substantially increase in 2006. Additionally, the effort to streamline expenses
and combine marketing of KD Medical and Molecula will continue in 2006. For the
period for which KD Medical was a wholly-owned subsidiary of the Company,
November 19, 2004 through December 31, 2004, KD Medical had revenues of $133,684
with a net loss of $28,947. For the year ended December 31, 2005, KD Medical had
revenues of $1,075,283 with a net profit of $37,145. Similar to the improvement
in performance, Molecula increased its revenues from $104,005 in 2004 to
$149,596 in 2005 while reducing its net loss from $197,283 in 2004 to $171,883
in 2005. The Company believes that Molecula is now at a break even and
positioned to be profitable in 2006 while we expect KD Medical to continue its
growth and profitability. The Company believes the combined revenue of KD
Medical and Molecula will be approximately $1,500,000 in 2006.

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
44% in the year ended December 31, 2005, down from 47% for the year ended
December 31, 2004. 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. The overall
increase in the cost of goods sold during 2005 is directly attributable to the
increase in net revenues.

Operating expenses decreased during 2005 from $2,872,158 in 2004 to $2,312,276
in 2004, despite the expenses related to twelve months of operation of KD
Medical compared to six weeks in 2004 as management has worked to cut costs and
control expenses.

Net Income (Loss)

In 2005, the Company incurred an unrealized loss in recording the fair value of
the debenture and related warrant derivatives relating to the convertible notes
it obtained in 2005. The total non cash financial impact to the Company's income
statement amounted to $2,303,555. Additionally, we incurred non cash interest
costs of $916,232 relating to the convertible debt accretion as required under
FAS 133 along with debt conversions to common shares. As a result, the Company
realized a net loss of $5,011,116. However, the Company anticipates that it will
complete the repayment of the convertible notes during 2006, at which time the
related debenture and warrant derivative liabilities reflective in our balance
sheet will be adjusted to zero. The current balance as of December 31, 2005 is
$4,151,499 which will be adjusted to other income and will be reflected in our
income statement. 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 Microbank(TM)
sales from LifeStem will result in a net profit for 2006.

Liquidity and Capital Resources

Cash and cash equivalents at December 31, 2005 was $301,143 and $38,895 at
December 31, 2004. The assets of the Company increased from $393,883 at December
31, 2004 to $1,038,495 at December 31, 2005. As a result of our operating losses
for the year ended December 31, 2004, we generated a cash flow deficit of
$877,342 from operating activities. We met our cash requirements during this
period through the private placement of $97,273 of common stock, and $1,611,667
from the issuance of notes payable. The Company also paid down notes payable
$276,897. 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.

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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.

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

For the fiscal year ended December 31, 2004, we have relied on the services of
outside consultants for services and as of December 31, 2005, 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

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<PAGE>

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.

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.

                                       12

<PAGE>

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.

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.

                                       13

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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, Edward Deese and John Gordon, our founders
and Directors. If we lost the services of Mr. DeOlden, Mr. Deese or Dr. Gordon
or other key employees before we could get a qualified replacement, that loss
could materially adversely affect our business. We currently maintain key man
life insurance on the lives of Mr. DeOlden and Mr. Deese in the amounts of
$3,000,000 and $2,842,000 respectively.

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 8, 2006, the present officers and directors own approximately 25% 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".

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.

                                       14

<PAGE>

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.

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

                                       15

<PAGE>

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, 2005, and for the
ended December 31, 2004 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.

On January 23, 2003, upon recommendation of its Board of Directors, the Company
dismissed its certifying accountant, Eide Bailly LLP ("Edie"). Edie 's report on
the Company's financial statements for of the two fiscal years ended December
31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion,
and was not modified as to uncertainty, audit scope, or accounting principles.
There were no disagreements with Edie on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
during the two fiscal years ended December 31, 2001 and during the interim
period ended January 23, 2003, which, if not resolved to Edie's satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report, as required by Item 304(a)(3) of Regulation S-B.
The Company engaged Russell Bedford Stefanou Mirchandani LLP ("Russell Bedford
Stefanou Mirchandani") as its certifying accountant as of April 9, 2003 for the
Company's fiscal year ending December 31, 2002. The Company has not consulted
Russell Bedford Stefanou Mirchandani previously.

On May 10, 2004, upon recommendation of its Board of Directors, the Company
dismissed its certifying accountant, Russell Bedford Stefanou Mirchandani, LLP
("Russell Bedford"). Russell Bedford's report on the Company's financial
statements from its inception in April, 2002 and fiscal year ended December 31,
2003 did not contain any adverse opinion or disclaimer of opinion, and was not
modified as to uncertainty, audit scope, or accounting principles. There were no
disagreements with Russell Bedford on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, from
its inception in April, 2002 and during fiscal year ended December 31, 2003 and
during the interim period ended May 14, 2004, which, if not resolved to Russell
Bedford's satisfaction, would have caused it to make reference to the subject
matter of the disagreement in connection with its report, as required by Item
304(a)(3) of Regulation S-B.

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The Company engaged Dejoya and Company ("DeJoya") as its certifying accountant
as of May 10, 2005 for the Company's fiscal year ending December 31, 2004. The
Company has not consulted DeJoya previously.

The Company has been informed that its PCAOB auditor, De Joya and Company, has
merged with another accounting firm creating a new entity with a corresponding
new name, DeJoya Griffith and Company, LLC and has registered with the PCAOB. In
furtherance of auditing continuity, CalbaTech audits will now be provided by De
Joya Griffith and Company, LLC. CalbaTech expects that the change and subsequent
entity change of its PCAOB auditor will not have any material affect on its
audits or the auditing process.

ITEM 8A.  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.

Evaluation of disclosure and controls and procedures. As of the end of the
period covered by this Annual Report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer, of our disclosure controls and procedures (as defined in
Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.

Changes in internal controls over financial reporting. There was no change in
our internal controls, which are included within disclosure controls and
procedures, during our most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
controls.


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.

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.

                                       17

<PAGE>

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.

John Gordon, Ph.D. - Chief Technology Officer, Director

Dr. Gordon, B.Sc. Honors in Cell Biology (1982), Ph.D. Biochemistry (1989) from
the University of Glasgow is an experienced immunologist/biochemist. Dr. Gordon
is the pioneer of a biomedical technology based on exploiting Compact Disc
technology that is likely to become the main alternative to "laboratory on a
chip" technologies used in drug screening and diagnostics. The bio-compact disc
enables chemical and biological testing to be performed within modified optical
discs, using either a stand-alone instrument that acts as the optical disc
reader, or a slightly modified disc drive that plugs into a standard personal
computer (PC).

Dr. Gordon's primary role will be to identify promising technologies developed
by others. Dr. Gordon has spent the last 20 years in the life-sciences
developing and researching technologies.

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.

                                       18

<PAGE>

Gerald C. Huth, Ph.D.

Dr. Huth, Ph.D. in Physics has a long successful history of innovative product
development beginning with his invention of the Avalanche Photodetection
sensors, and revolutionary invention which replaced photomultiplier tubes with a
solid state silicon equivalent. Dr. Huth created and directed the Department of
Physics at the University of Southern California where many technologies were
created and developed for commercial applications through a long association
with the NIH and the DOE. In 1985 Dr. Huth founded Xsirius Scientific, Inc. to
commercialize ideas generated by university colleagues around the world. Xsirius
Scientific was completed an IPO in 1986 and was listed on NASDAQ. Two
subsidiaries of Xsirius were also developed by Dr. Huth and completed IPOs and
were listed on NASDAQ. Dr. Huth has provided new ideas and intellectual property
to CalbaTech.

Paul Heaney, Ph.D.

Dr. Heaney, Ph.D. Medicinal Chemistry, has a successful track record of leading
and managing technology innovation, development and product commercialization in
many fields of Life Sciences, including Biotechnology, Clinical Diagnostics and
Pharmaceutical Discovery. His two most recent companies, Sequenom and Orchid
Biosciences, achieved tremendous initial public offering success and are leaders
in their fields of genomics, biochemical analysis and lab-on-chip
instrumentation. As Executive Vice President of Research and Technology at
Sequenom, Dr. Heaney's team was responsible for the development of the highly
acclaimed and commercially successful chip-based MassARRAY Genotyping Platform.
This platform, which has becomethe industry standard for Genetic Variation
Analysis, was chosen byleaders of the Human Genome Project at the Whitehead
Institute andthe Sanger Centre.

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.

(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, 2005 and subsequently, the Company is unaware
that any required reports were not timely filed.

                                       19

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION.

<TABLE>
                                     Summary Compensation Table

                               Annual compensation
                              Long-term Compensation             Awards              Payouts
                         ------------------------------   -----------------------    -------
Name and                                       Other      Restricted   Securities
principal                                      annual       stock      underlying       LTIP      All other
position       Year      Salary     Bonus   compensation   award(s)    options/SARs    payouts   compensation
--------       ----      ------     -----   ------------   --------    ------------    -------   ------------
                           ($)       ($)        ($)          ($)           (#)           ($)         ($)
<S>            <C>      <C>           <C>        <C>      <C>               <C>           <C>         <C>
James DeOlden  2005     $104,153      0          0        $  63,000         0             0           0
CEO            2004     $      0(1)   0          0        $ 316,872(2)      0             0           0
               2003     $ 14,000      0          0                0         0             0           0

Edward Deese,  2005     $133,500      0          0        $  63,000         0             0           0
CFO            2004     $ 93,500(1)   0          0        $ 266,387(2)      0             0           0
               2003     $ 74,500      0          0                0         0             0           0

John Gordon,   2004     $ 72,912      0          0        $  63,000         0             0           0
CTO            2004     $ 14,542(1)   0          0        $ 322,278(2)      0             0           0
               2003            0      0          0                0         0             0           0
</TABLE>

(1) Contractual agreements with James DeOlden, Edward Deese and John Gordon 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 through 2004.

(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 8, 2005 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.

                                       20

<PAGE>

                                 OWNERSHIP

                                                                Approximate
                                                                  Percent
                                                                of Common
                                      Number of Shares            Shares
    Name                              of Common Stock              Owned
---------------                      -----------------          -----------
Edward H. Deese .........................8,000,000                 8.34

James DeOlden ...........................8,000,000                 8.34

John F. Gordon ..........................8,000,000                 8.34

Group: All Officers/
Directors (1) ..........................24,000,000                25.02

All Shares
Outstanding ............................95,893,110               100.00

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.

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 $17,295
outstanding as of December 31, 2005 and $266,713 outstanding as of December 31,
2004. 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.                       Page
--------------------------------------------                       ----

Audit Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Financial Statements
Reports on Form 8-K.


                                       21

<PAGE>

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, 2005 and 2004 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, 2005       December 31, 2004
                                -----------------       -----------------

(i) Audit Fees                       $88,751                   $44,000
(ii) Audit Related Fees              $     0                   $     0
(iii) Tax Fees                       $     0                   $     0
(iv) All Other Fees                  $ 5,750                   $     0
                                     -------                   -------
Total fees                           $94,501                   $44,000

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 2005 or
2004.

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 2005
or 2004.

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 2004.

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.


                                       22


<PAGE>



                                   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 31, 2006
------------------
James DeOlden

/s/Edward Deese            President/Treasurer/Director      March 31, 2006
------------------
Edward Deese

/s/John Gordon, PhD        Vice-President/CTO/Director       March 31, 2006
------------------
John Gordon, PhD



                                       23

<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                       FINANCIAL STATEMENTS AND SCHEDULES

                           DECEMBER 31, 2005 AND 2004

                         FORMING A PART OF ANNUAL REPORT
                 PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
                                 CALBATECH, INC.

                                       24

<PAGE>

                                 CALBATECH, INC.

Index to Financial Statements                                     PAGE
-----------------------------                                     ----

Reports of Independent Registered
Certified Public Accountants.......................................26

Balance Sheets at December 31, 2005
and 2004...........................................................28

Statements of Losses for the year ended
December 31, 2005 and December 31, 2004............................29

Statements of Deficiency in Stockholders'
Equity for the years ended December 31, 2005
and December 31, 2004..............................................30

Statements of Cash Flows for the year ended
December 31, 2005 and December 31, 2004............................33

Notes to Financial Statements......................................35



                                       25

<PAGE>

De Joya Griffith & Company, LLC
-------------------------------
Certified Public Accountants
                                                      6330 McLeod Drive, Suite 1
                                                             Las Vegas, NV 89120
                                                              702.735.1852 (tel)
                                                              702.736.1608 (fax)

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the accompanying consolidated balance sheet of Calbatech, Inc.
and subsidiaries as of December 31, 2005, and the related consolidated statement
of operations, stockholders' deficit, and cash flows for the year 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 did not audit the financial
statements of Calbatech, Inc. and subsidiaries as of and for the year ended
December 31, 2004. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included in the period ended December 31, 2004, is based solely on the report of
the other auditors.

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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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, 2005, and the results of its operations and cash
flows for the year then ended in conformity with U.S. generally accepted
accounting principles.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note P 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 plans in regard to these matters are also described in
Note P. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

De Joya Griffith & Company, LLC

/s/ De Joya Griffith & Company, LLC
Las Vegas, NV
March 31, 2006




                                       25

<PAGE>
De Joya & Company
-----------------
Certified Public Accountants
                                                   2425 W. Horizon Ridge Parkway
                                                             Henderson, NV 89014
                                                              702.735.1852 (tel)
                                                              702.736.1608 (fax)

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the accompanying consolidated balance sheet of Calbatech, Inc.
as of December 31, 2004, and the related consolidated statements of loss,
deficiency in stockholders' equity and cash flows for the year 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 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. as
of December 31, 2004, and the consolidated results of their operations and cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the Note P to the accompanying
financial statements, the Company has incurred a net loss of $2,700,598 for the
year ended December 31, 2004. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to this
matter are described in Note P. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

De Joya & Company
Certified Public Accountants

/s/ De Joya & Company
Henderson, NV
March 18, 2005


                                       26
<PAGE>
<TABLE>


FINANCIAL STATEMENTS AND NOTES.

                                         CALBATECH, INC.
                                   CONSOLIDATED BALANCE SHEETS
                                             Audited

                                                                            December 31,
                                                                        2005            2004
                                                                    ------------    ------------
                                              ASSETS
CURRENT ASSETS:
<S>                                                                 <C>             <C>
  Cash                                                              $    301,143    $     38,895
  Accounts receivable, net of allowance of $27,982 and
    $42,764, respectively                                                158,487         134,373
  Inventory                                                              216,130          77,045
  Prepaid expenses                                                        32,244          37,923
                                                                    ------------    ------------
    Total current assets                                                 708,004         288,236
                                                                    ------------    ------------

Fixed assets, net                                                        160,876         105,647
                                                                    ------------    ------------

Other assets:
  Prepaid interest                                                        49,911              --
  Unamortized financing costs, net of accumulated
    amortization and write off of $135,296 and $-0-, respectively        119,704              --
                                                                    ------------    ------------

    Total other assets                                                   169,615              --
                                                                    ------------    ------------
                                                                    $  1,038,495    $    393,883
                                                                    ============    ============

                       LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable and accrued  expenses                            $    860,690    $    798,838
  Capital leases payable                                                  16,511           5,923
  Notes payable to banks                                                  18,280          21,829
  Notes payable, including $17,295  and $266,713 to
    related parties, respectively                                        573,506         901,986
  Settlement liability                                                   572,188         528,613
  Convertible notes payable                                               76,028         295,138
                                                                    ------------    ------------
    Total current liabilities                                          2,117,203       2,552,327
                                                                    ------------    ------------

Long term liabilities, less current maturities:
  Capital leases payable                                                  59,605          23,740
  Derivative liability related to convertible debentures               3,939,256              --
  Warrant liability related to convertible debentures                    364,299              --
  Notes payable to banks                                                  31,361          38,606
  Convertible notes payable                                              178,632              --
                                                                    ------------    ------------
    Total long term liabilities                                        4,573,153          62,346
                                                                    ------------    ------------

Total liabilities                                                      6,690,356       2,614,673
                                                                    ------------    ------------

DEFICIENCY IN STOCKHOLDERS' EQUITY
  Preferred stock, par value $0.001 per share; 25,000,000 shares
    authorized; 1,250,000 shares issued and outstanding as of
    December 31, 2005 and 2004, respectively                               1,250           1,250
  Common stock, par value $0.001 per share; 200,000,000 shares
    authorized, 76,712,132 and 33,939,945 shares issued and
    outstanding as of December 31, 2005 and 2004 respectively             76,712          33,940
  Common stock subscription payable                                      169,000         247,000
  Additional paid in capital                                           5,783,228       4,111,103
  Treasury stock, at cost                                                (87,647)        (30,795)
  Accumulated deficit                                                (11,594,404)     (6,583,288)
                                                                    ------------    ------------
    Total deficiency in stockholders' equity                          (5,651,861)     (2,220,790)
                                                                    ------------    ------------
                                                                    $  1,038,495    $    393,883
                                                                    ============    ============


                                                    27

<PAGE>


                                       CALBATECH, INC.
                               CONSOLIDATED STATEMENTS OF LOSS
                                           Audited

                                                                  Year ended December 31,
                                                                  2005              2004
                                                               ------------    ------------
REVENUES:
  Net sales                                                    $  1,292,167    $    300,633
  Cost of sales                                                    (568,491)       (142,177)
                                                               ------------    ------------
      Gross profit                                                  723,676         158,456
                                                               ------------    ------------

OPERATING EXPENSES:
  Selling and administrative                                      2,286,479       1,235,224
  Goodwill impairment                                                    --       1,624,213
  Depreciation and amortization                                      25,797          12,721
                                                               ------------    ------------

    Total operating expenses                                      2,312,276       2,872,158
                                                               ------------    ------------

LOSS FROM OPERATIONS                                             (1,588,600)     (2,713,702)

  Other income                                                       19,261          12,744
  Reduction in liability from settlement
    of debt with acquisition                                             --          91,662
  Unrealized loss related to adjustment of derivative and
    warrant liability to fair value of underlying securities     (2,303,555)             --
  Interest (expense), net                                        (1,138,222)        (91,302)
                                                               ------------    ------------

Net income (loss) before income taxes                            (5,011,116)     (2,700,598)

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

NET (LOSS)                                                     $ (5,011,116)   $ (2,700,598)
                                                               ============    ============

Net loss per common share (basic and fully diluted             $      (0.12)   $      (0.11)
                                                               ============    ============

Weighted average common shares outstanding                       44,957,820      24,170,907
                                                               ============    ============



                                                      28

<PAGE>


                                                    CALBATECH, INC.
                                    STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                                     FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                                        Audited

                                                                              Additional                 Treasury
                          Preferred     Stock         Common        Stock      Paid in      Treasury       Stock
                           Shares       Amount        Shares        Amount     Capital       Shares        Amount
                         -----------  -----------   -----------  -----------  -----------  -----------   -----------
Balance as of
 December 31, 2003                --           --    15,856,393       15,857    1,705,740      213,611       (10,935)
Common stock issued
 on January 27, 2004
 for services
 rendered at $0.15
 per share                        --           --       300,000          300       44,700           --            --
Sale of common stock
 on February 23, 2004
 for $0.25 per share              --           --       140,000          140       34,860           --            --
Common stock issued
 on February 23, 2004
 for acquisition at
 $0.459 per share                 --           --       131,109          131       60,048           --            --
Common stock issued
 on February 23, 2004
 for license rights
 at $0.19 per share               --           --       100,000          100       18,900           --            --
Common stock issued
 on February 23, 2004
 for services
 rendered at $0.19
 per share                        --           --       915,000          915      172,935           --            --
Common stock issued
 on February 23, 2004
 for officers
 compensation at
 $0.17 per share                  --           --     4,766,498        4,767      797,797           --            --
Common stock
 subscription
 cancelled in April,
 2004 settlement of
 debt from
 acquisition of
 Molecularware                    --           --            --           --           --           --            --
Sale of common stock
 on April 15, 2004 at
 $0.17 per share                  --           --     1,000,000        1,000      169,000           --            --
Sale of preferred stock
 on April 15, 2004 at
 approximately $0.20
 per share convertible
 to common shares at a
 ratio of 1.5:1            1,250,000        1,250            --           --      328,750           --            --
Common stock issued
 on June 7, 2004 for
 services rendered at
 $0.14 per share                  --           --        75,000           75       10,425           --            --
Common stock issued
 on June 25, 2004 as
 settlement of debt
 at $0.13 per share               --           --       100,000          100       12,900           --            --
Common stock issued
 on August 6, 2004
 for services
 rendered at $0.10
 per share                        --           --       300,000          300       29,700           --            --
Common stock issued
 on September 1, 2004
 as settlement of
 debt at $0.06 per
 share                            --           --       900,000          900       62,042           --            --
Common stock issued
 on September 1, 2004
 for services
 rendered at $0.06
 per share                        --           --       323,000          323       19,057           --            --

                                                                 29a
continued below

<PAGE>
continued from above
                                                    CALBATECH, INC.
                                    STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                                     FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                                        Audited

                                                                              Additional                 Treasury
                          Preferred     Stock         Common        Stock      Paid in      Treasury       Stock
                           Shares       Amount        Shares        Amount     Capital       Shares        Amount
                         -----------  -----------   -----------  -----------  -----------  -----------   -----------

Purchase of Common
 stock as treasury on
 September 2, 2004 at
 approximately $0.10
 per share                    40,000       (4,140)           --           --           --       (4,140)
Common stock issued
 on September 13,
 2004 for services
 rendered at $0.10
 per share                        --           --        50,000           50        4,950           --            --
Sale of common stock
 on September 29,
 2004 at $0.06 per
 share                            --           --     2,100,002        2,100      123,900           --            --
Sale of common stock
 on September 30,
 2004 at $0.06 per
 share                            --           --       833,334          833       49,167           --            --
Sale of common stock
 on October 19, 2004
 at $0.06 per share               --           --       166,667          167        9,833           --            --
Common stock issued
 on October 26, 2004
 for services
 rendered at $0.22
 per share                        --           --       120,000          120       26,280           --            --
Purchase of Common
 stock as treasury in
 October, 2004 at
 approximately $0.13
 per share                        --           --            --           --           --      122,500       (15,720)
Sale of common stock
 on November 2, 2004
 at $0.06 per share               --           --     1,333,334        1,333       78,667           --            --
Issuance of common
 stock subscription
 in connection with
 the acquisition of
 K-D Medical at $0.26
 per share                        --           --            --           --           --           --            --
Sale of common stock
 on November 16, 2004
 at $0.06 per share               --           --     2,195,334        2,195      129,525           --            --
Sale of common stock
 on November 17, 2004
 at $0.06 per share               --           --     1,700,334        1,700      100,320           --            --
Common stock issued
 on November 17, 2004
 for services
 rendered at $0.26
 per share                        --           --       140,000          140       36,260           --            --
Sale of common stock
 on November 23, 2004
 at $0.06 per share               --           --       166,667          167        9,833           --            --
Sale of common stock
 on December 21, 2004
 at $0.11 per share               --           --       227,273          227       24,773           --            --
Debt forgiveness by
 shareholder                      --           --            --           --       50,741           --            --

Net Loss                          --           --            --           --           --           --            --
                         -----------  -----------   -----------  -----------  -----------  -----------   -----------
Balance at
 December 31, 2004         1,250,000  $     1,250    33,939,945  $    33,940  $ 4,111,103      376,111   $   (30,795)
                         -----------  -----------   -----------  -----------  -----------  -----------   -----------

continued on next page
                                                                   29b

<PAGE>
continued from previous page



                                 CALBATECH, INC.
                 STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                     Audited

                         Common Stock  Common Stock
                         Subscription  Subscription   Accumulated
                            Shares         Share        Deficit        Total
                          -----------   -----------   -----------   -----------
Balance as of
 December 31, 2003            300,000       137,700    (3,882,690)   (2,034,328)
Common stock issued
 on January 27, 2004
 for services
 rendered at $0.15
 per share                         --            --            --        45,000
Sale of common stock
 on February 23, 2004
 for $0.25 per share               --            --            --        35,000
Common stock issued
 on February 23, 2004
 for acquisition at
 $0.459 per share            (131,109)      (60,179)           --            --
Common stock issued
 on February 23, 2004
 for license rights
 at $0.19 per share                --            --            --        19,000
Common stock issued
 on February 23, 2004
 for services
 rendered at $0.19
 per share                         --            --            --       173,850
Common stock issued
 on February 23, 2004
 for officers
 compensation at
 $0.17 per share                   --            --            --       802,564
Common stock
 subscription
 cancelled in April,
 2004 settlement of
 debt from
 acquisition of
 Molecularware               (168,891)      (77,521)           --       (77,521)
Sale of common stock
 on April 15, 2004 at
 $0.17 per share                   --            --            --       170,000
Sale of preferred stock
 on April 15, 2004 at
 approximately $0.20
 per share convertible
 to common shares at a
 ratio of 1.5:1                    --            --            --       330,000
Common stock issued
 on June 7, 2004 for
 services rendered at
 $0.14 per share                   --            --            --        10,500
Common stock issued
 on June 25, 2004 as
 settlement of debt
 at $0.13 per share                --            --            --        13,000
Common stock issued
 on August 6, 2004
 for services
 rendered at $0.10
 per share                         --            --            --        30,000
Common stock issued
 on September 1, 2004
 as settlement of
 debt at $0.06 per
 share                             --            --            --        62,942

continued on next page
                                            29c

<PAGE>
continued from previous page


                                 CALBATECH, INC.
                 STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                     Audited

                         Common Stock  Common Stock
                         Subscription  Subscription   Accumulated
                            Shares         Share        Deficit        Total
                          -----------   -----------   -----------   -----------

Common stock issued
 on September 1, 2004
 for services
 rendered at $0.06
 per share                         --            --            --        19,380
Purchase of Common
 stock as treasury on
 September 2, 2004 at
 approximately $0.10
 per share
Common stock issued
 on September 13,
 2004 for services
 rendered at $0.10
 per share                         --            --            --         5,000
Sale of common stock
 on September 29,
 2004 at $0.06 per
 share                             --            --            --       126,000
Sale of common stock
 on September 30,
 2004 at $0.06 per
 share                             --            --            --        50,000
Sale of common stock
 on October 19, 2004
 at $0.06 per share                --            --            --        10,000
Common stock issued
 on October 26, 2004
 for services
 rendered at $0.22
 per share                         --            --            --        26,400
Purchase of Common
 stock as treasury in
 October, 2004 at
 approximately $0.13
 per share                         --            --            --       (15,720)
Sale of common stock
 on November 2, 2004
 at $0.06 per share                --            --            --        80,000
Issuance of common
 stock subscription
 in connection with
 the acquisition of
 K-D Medical at $0.26
 per share                    950,000       247,000            --       247,000
Sale of common stock
 on November 16, 2004
 at $0.06 per share                --            --            --       131,720
Sale of common stock
 on November 17, 2004
 at $0.06 per share                --            --            --       102,020
Common stock issued
 on November 17, 2004
 for services
 rendered at $0.26
 per share                         --            --            --        36,400
Sale of common stock
 on November 23, 2004
 at $0.06 per share                --            --            --        10,000
Sale of common stock
 on December 21, 2004
 at $0.11 per share                --            --            --        25,000
Debt forgiveness by
 shareholder                       --            --            --        50,741

Net Loss                           --            --    (2,700,598)   (2,700,598)
                          -----------   -----------   -----------   -----------
Balance at
 December 31, 2004            950,000   $   247,000   $(6,583,288)  $(2,220,790)
                          -----------   -----------   -----------   -----------

                                               29d


<PAGE>


                                                   CALBATECH, INC.
                                   STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                                   FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                                       Audited

                                                                           Additional                   Treasury
                        Preferred      Stock        Common       Stock       Paid in      Treasury       Stock
                          Shares       Amount       Shares       Amount      Capital       Shares        Amount
                       -----------  -----------  -----------  -----------  -----------   -----------  -----------

Common stock issued
 on January 17, 2005
 for settlement of
 debt at $0.17 per
 share                          --           --       47,059           47        7,953            --           --
Common stock issued
 on January 21, 2005
 for services
 rendered at $0.17
 per share                      --           --      399,423          399       67,503            --           --
Treasury stock
 purchased with
 Common stock on
 January 21, 2005 at
 $0.17 per share           334,423          335       56,517      334,423      (56,852)           --           --
Common stock issued
 on February 8, 2005
 for services
 rendered at $0.20
 per share                      --           --      400,000          400       79,600            --           --
Common stock issued
 on March 15, 2005
 for settlement of
 debt at $0.064 per
 share                          --           --    1,000,000        1,000       63,000            --           --
Common stock issued
 on March 15, 2005
 for acquisition at
 $0.26 per share                --           --      200,000          200       51,800            --           --
Common  stock issued
 on March 21, 2005
 for services
 rendered at $0.20
 per share                      --           --      177,000          177       35,223            --           --
Sale of common stock
 on March 24, 2005 at
 $0.10 per share                --           --      272,727          273       27,000            --           --
Common stock issued
 on April 22, 2005
 for services
 rendered at $0.14
 per share                      --           --       75,000           75       10,425            --           --
Sale of common stock
 on May 14, 2005
 rendered at $0.10
 per share                      --           --      700,000          700       69,300            --           --
Common stock issued
 on June 14, 2005 for
 services rendered at
 $0.20 per share                --           --       57,141           57       11,371            --           --
Common stock issued
 on June 23, 2005 for
 prior years'
 services rendered at
 $0.06 per share                --           --    1,086,667        1,087       64,113            --           --
Common stock issued
 on June 23, 2005 to
 officers for prior
 years' compensation
 at $0.16 per share             --           --    1,240,355        1,240      197,217            --           --
Common stock issued
 on July 26, 2005 for
 services rendered at
 $0.20 per share                --           --      642,856          643      127,928            --           --
Common stock issued
on July 26, 2005 for
subscription shares             --           --      100,000          100       25,900            --           --
                       -----------  -----------  -----------  -----------  -----------   -----------  -----------

Sub-total                1,250,000  $     1,250   40,672,596  $    40,673  $ 5,005,953       710,534  $   (87,647)
                       -----------  -----------  -----------  -----------  -----------   -----------  -----------


continued on next page
                                                                       30a

<PAGE>
continued from above

                                 CALBATECH, INC.
                 STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                     Audited

                       Common Stock  Common Stock
                       Subscription  Subscription  Accumulated
                         Shares         Amount       Deficit        Total
                       -----------   -----------   -----------   -----------

Common stock issued
 on January 17, 2005
 for settlement of
 debt at $0.17 per
 share                          --            --            --         8,000
Common stock issued
 on January 21, 2005
 for services
 rendered at $0.17
 per share                      --            --            --        67,902
Treasury stock
 purchased with
 Common stock on
 January 21, 2005 at
 $0.17 per share                --            --
Common stock issued
 on February 8, 2005
 for services
 rendered at $0.20
 per share                      --            --            --        80,000
Common stock issued
 on March 15, 2005
 for settlement of
 debt at $0.064 per
 share                          --            --            --        64,000
Common stock issued
 on March 15, 2005
 for acquisition at
 $0.26 per share          (200,000)      (52,000)           --            --
Common  stock issued
 on March 21, 2005
 for services
 rendered at $0.20
 per share                      --            --            --        35,400
Sale of common stock
 on March 24, 2005 at
 $0.10 per share                --            --            --        27,273
Common stock issued
 on April 22, 2005
 for services
 rendered at $0.14
 per share                      --            --            --        10,500
Sale of common stock
 on May 14, 2005
 rendered at $0.10
 per share                      --            --            --        70,000
Common stock issued
 on June 14, 2005 for
 services rendered at
 $0.20 per share                --            --            --        11,428
Common stock issued
 on June 23, 2005 for
 prior years'
 services rendered at
 $0.06 per share                --            --            --        65,200
Common stock issued
 on June 23, 2005 to
 officers for prior
 years' compensation
 at $0.16 per share             --            --            --       198,457
Common stock issued
 on July 26, 2005 for
 services rendered at
 $0.20 per share                --            --            --       128,571
Common stock issued
on July 26, 2005 for
subscription shares       (100,000)      (26,000)           --            --
                       -----------   -----------   -----------   -----------

Sub-total                  650,000   $   169,000   $(6,583,288)  $(1,454,059)
                       -----------   -----------   -----------   -----------


                                           30b

<PAGE>


                                                 CALBATECH, INC.
                                 STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                                     Audited

                                                                          Additional                 Treasury
                       Preferred      Stock       Common       Stock        Paid in     Treasury       Stock
                         Shares       Amount      Shares       Amount       Capital      Shares        Amount
                      -----------  -----------  -----------  -----------  -----------  -----------  -----------

Common stock issued
 on July 29, 2005 as
 payment towards
 convertible
 debentures                    --           --      950,000          950       86,925           --           --
Common stock issued
 on August 15, 2005
 as payment towards
 convertible
 debentures                    --           --    1,000,000        1,000       43,000           --           --
Common stock issued
 on August 17, 2005
 for services
 rendered at $0.07
 per share                     --           --      800,000          800       55,200           --           --
Common stock issued
 on August 24, 2005
 as payment towards
 convertible
 debentures                    --           --    2,080,000        2,080      185,120           --           --
Common stock issued
 on September 13,
 2005 as payment
 towards convertible
 debentures                    --           --    2,220,000        2,220       51,282           --           --
Common stock issued
 on September 26,
 2005 as payment
 towards convertible
 debentures                    --           --    2,220,000        2,220       27,706           --           --
Common stock issued
 on October 3, 2005
 as payment towards
 convertible
 debentures                    --           --    2,440,000        2,440       20,740           --           --
                      -----------  -----------  -----------  -----------  -----------  -----------  -----------

Subtotal                1,250,000  $     1,250   52,382,596  $    52,383  $ 5,475,926      710,534  $   (87,647)
                      -----------  -----------  -----------  -----------  -----------  -----------  -----------


continued on next page
                                                                    31a

<PAGE>
continued from above page

                                 CALBATECH, INC.
                 STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                     Audited

                        Common Stock  Common Stock
                        Subscription  Subscription  Accumulated
                           Shares       Amount       Deficit       Total
                        -----------  -----------  -----------   -----------

Common stock issued
 on July 29, 2005 as
 payment towards
 convertible
 debentures                      --           --           --        87,875
Common stock issued
 on August 15, 2005
 as payment towards
 convertible
 debentures                      --           --           --        44,000
Common stock issued
 on August 17, 2005
 for services
 rendered at $0.07
 per share                       --           --           --        56,000
Common stock issued
 on August 24, 2005
 as payment towards
 convertible
 debentures                      --           --           --       187,200
Common stock issued
 on September 13,
 2005 as payment
 towards convertible
 debentures                      --           --           --        53,502
Common stock issued
 on September 26,
 2005 as payment
 towards convertible
 debentures                      --           --           --        29,926
Common stock issued
 on October 3, 2005
 as payment towards
 convertible
 debentures                      --           --           --        23,180
                        -----------  -----------  -----------   -----------

Subtotal                    650,000  $   169,000  $(6,583,288)  $  (972,376)
                        -----------  -----------  -----------   -----------


                                                 31b

<PAGE>


                                                     CALBATECH, INC.
                                     STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                                     FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                                         Audited

                                                                               Additional                     Treasury
                        Preferred       Stock        Common         Stock        Paid in      Treasury         Stock
                          Shares        Amount       Shares         Amount       Capital       Shares          Amount
                       ------------  ------------  ------------  ------------  ------------  ------------   ------------

Common stock issued
 on October 10, 2005
 as payment towards
 convertible
 debentures                      --            --     2,440,000         2,440        18,300            --             --
Common stock issued
 on October 14, 2005
 as payment towards
 convertible
 debentures                      --            --     2,440,000         2,440        18,300            --             --
Common stock issued
 on October 27, 2005
 as payment towards
 convertible
 debentures                      --            --     2,440,000         2,440        18,300            --             --
Common stock issued
 on November 2, 2005
 for services
 rendered at $0.05
 per share                       --            --       200,000           200         9,800            --             --
Common stock issued
 on November 4, 2005
 as payment towards
 convertible
 debentures                      --            --     2,440,000         2,440        36,990            --             --
Common stock issued
 on November 8, 2005
 for services
 rendered at $0.04
 per share                       --            --        42,856            42         1,672            --             --
Common stock issued
 on November 11, 2005
 as payment towards
 convertible
 debentures                      --            --     2,440,000         2,440        36,990            --             --
Common stock issued
 on November 18, 2005
 as payment towards
 convertible
 debentures                      --            --     2,440,000         2,440        36,112            --             --
Common stock issued
 on November 25, 2005
 for services
 rendered at $0.04
 per share                       --            --       200,000           200         7,800            --             --
Common stock issued
 on December 5, 2005
 as payment towards
 convertible
 debentures                      --            --       846,680           847        12,488            --             --
Common stock issued
 on December 6, 2005
 as payment towards
 convertible
 debentures                      --            --     2,440,000         2,440        35,990            --             --
Common stock issued
 on December 14, 2005
 as payment towards
 convertible
 debentures                      --            --     2,980,000         2,980        40,558            --             --
Common stock issued
 on December 28, 2005
 as payment towards
 convertible
 debentures                      --            --     2,980,000         2,980        34,002            --             --

Net Loss                         --            --            --            --            --            --             --
                       ------------  ------------  ------------  ------------  ------------  ------------   ------------

                          1,250,000  $      1,250    76,712,132  $     76,712  $  5,783,228       710,534   $    (87,647)
                       ============  ============  ============  ============  ============  ============   ============



continued on next page
                                                             32a

<PAGE>
continued from above

                                 CALBATECH, INC.
                 STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                                     Audited

                       Common Stock  Common Stock
                       Subscription  Subscription   Accumulated
                          Shares       Amount         Deficit         Total
                       ------------  ------------   ------------   ------------

Common stock issued
 on October 10, 2005
 as payment towards
 convertible
 debentures                      --            --             --         20,740
Common stock issued
 on October 14, 2005
 as payment towards
 convertible
 debentures                      --            --             --         20,740
Common stock issued
 on October 27, 2005
 as payment towards
 convertible
 debentures                      --            --             --         20,740
Common stock issued
 on November 2, 2005
 for services
 rendered at $0.05
 per share                       --            --             --         10,000
Common stock issued
 on November 4, 2005
 as payment towards
 convertible
 debentures                      --            --             --         39,430
Common stock issued
 on November 8, 2005
 for services
 rendered at $0.04
 per share                       --            --             --          1,714
Common stock issued
 on November 11, 2005
 as payment towards
 convertible
 debentures                      --            --             --         39,430
Common stock issued
 on November 18, 2005
 as payment towards
 convertible
 debentures                      --            --             --         38,552
Common stock issued
 on November 25, 2005
 for services
 rendered at $0.04
 per share                       --            --             --          8,000
Common stock issued
 on December 5, 2005
 as payment towards
 convertible
 debentures                      --            --             --         13,335
Common stock issued
 on December 6, 2005
 as payment towards
 convertible
 debentures                      --            --             --         38,430
Common stock issued
 on December 14, 2005
 as payment towards
 convertible
 debentures                      --            --             --         43,538
Common stock issued
 on December 28, 2005
 as payment towards
 convertible
 debentures                      --            --             --         36,982

Net Loss                         --            --     (5,011,116)    (5,011,116)
                       ------------  ------------   ------------   ------------

                            650,000  $    169,000   $(11,594,404)  $ (5,651,861)
                       ============  ============   ============   ============


                                              32b

<PAGE>

                                            CALBATECH, INC.
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                Audited


                                                                              Year ended December 31,
                                                                                2005          2004
                                                                             -----------   -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                     $(5,011,116)  $(2,700,598)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments for depreciation and amortization                                     45,028        15,032
Disposal of fixed asset                                                              738            --
Goodwill impairment                                                                   --     1,624,213
Debt reduction from settlement of debt issued with acquisition                        --      (145,136)
Common stock issued or subscribed in connection with services rendered           474,715       346,530
Common stock issued for officer compensation                                     198,456       802,564
Common stock issued in settlement of debt                                        809,600        75,942
Accretion of convertible notes payable                                           178,632            --
Debt forgiveness by shareholder                                                       --        50,741
Unrealized loss related to  adjustment of derivative and warrant
  liability to fair value of underlying securities                             2,303,555            --
Amortization and write off of financing costs                                    135,296            --
Amortization of prepaid interest                                                  83,423            --
  (Increase) decrease in:
     Accounts receivable                                                         (24,114)     (123,609)
     Inventory                                                                  (139,085)      (77,045)
     Prepaid expenses                                                              5,678       (37,923)
  Increase (decrease) in:
     Accounts payable and accrued expenses                                        61,852      (232,064)
                                                                             -----------   -----------

    Net cash used in operating activities                                       (877,342)     (501,353)
                                                                             -----------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of KD Medical, Inc                                                        --      (267,000)
Acquisition of treasury stock                                                         --       (19,860)
Acquisition for fixed assets                                                     (43,034)      (93,300)
                                                                             -----------   -----------

   Net cash used in investing activities                                         (43,034)     (380,160)
                                                                             -----------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net                                       97,273       739,740
Proceeds from issuance of preferred stock, net                                        --       330,000
Advances from (to) shareholders                                                 (249,419)       30,078
Payment on notes payable, net                                                   (276,897)     (224,100)
Proceeds from issuance of convertible notes payable                            1,611,667        26,796
                                                                             -----------   -----------

   Net cash provided by financing activities                                   1,182,624       902,514
                                                                             -----------   -----------

Net increase in cash and cash equivalents                                        262,248        21,001
  Cash and cash equivalents at beginning of period                                38,895        17,894
                                                                             -----------   -----------
  Cash and cash equivalents at end of period                                 $   301,143   $    38,895
                                                                             ===========   ===========



                                                   33

<PAGE>



                                 CALBATECH, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     Audited


                                                           Year ended December 31,
                                                             2005          2004
                                                          -----------  -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

  Cash paid during the period for interest                     68,051       15,564
  Cash paid during the period for taxes                            --           --

 Unrealized loss on adjustment of derivative and warrant
   liability to fair value of underlying securities         2,303,555           --

NON - CASH FINANCING ACTIVITIES:
  Liability reduction in settlement of debt               $        --  $  (145,136)
                                                          ===========  ===========
  Goodwill impaired                                       $        --  $ 1,624,213
                                                          ===========  ===========
</TABLE>



                                       34

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

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.

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 and intellectual property of the dissolved LLC were
transferred to Molecula, Inc. 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 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, 2005, the Company has accumulated losses of $11,594,404 which
include an unrealized loss on derivative and warrant liability related to
convertible debentures of $2,303,555 for the year ended December 31, 2005 and a
goodwill impairment of $1,624,213 for the year ended December 31, 2004.

The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries, Molecularware, Inc., KD Medical Inc., LifeStem, Inc.,
Molecula Research Laboratories, LLC and that of Traffic Technology, Inc. with
whom the Registrant merged. All significant inter-company transactions and
balances have been eliminated in consolidation.

Acquisitions and Capital Restructure

On January 3, 2003, the Company completed an Agreement and Plan of Exchange
("Agreement") with Traffic Technology, Inc. ("Traffic"). As a result of the
acquisition, there was a change in control of the public entity, and Traffic
Technology, Inc. changed its name to CalbaTech, Inc. For accounting purposes,
Calbatech became the surviving entity. The transaction was accounted for using
the purchase method of accounting. The total purchase price and carrying value
of net assets acquired of Traffic was $200,000 of which $100,000 was paid in
cash and $100,000 was paid in notes payable. The results of operations of
Traffic subsequent to the Agreement are included in the Company's consolidated
statement of losses.



                                       35

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

Effective with the Agreement, all previously outstanding common stock, preferred
stock, options and warrants owned by the Company's stockholders were exchanged
for an aggregate of 5,766,591 shares of Traffic's common stock and a common
stock subscription of 3,939,882 shares. The value of the stock that was issued
was the historical cost of Traffic's net tangible assets, which did not differ
materially from their fair value. The value of the 1,199,491 shares of common
stock that were retained by Traffic's stockholders was based on the par value of
$.001 per share of Traffic's common stock. In accordance with SFAS No. 141,
CalbaTech is the acquiring entity.

The total consideration paid was $257,666 and the significant components of the
transaction are as follows:

Common stock retained by
Traffic shareholders                                     $ 11,997
Excess of assets acquired over
  liabilities assumed                                    (211,997)
Treasury stock assumed                                    (57,666)
                                                         --------

Goodwill impaired                                        $257,666
                                                         ========

On July 1, 2003, the Company acquired Molecularware, Inc., as a wholly owned
subsidiary. Molecularware, Inc. was acquired by issuance of common stock
subscriptions totaling 300,000 shares valued at the time acquisition at
$137,700. In addition, the Company issued 12% convertible debt totaling $600,000
as settlement of the outstanding liabilities of Molecularware, Inc. (Note E).
The convertible debt can be converted in to shares of the Company's common stock
within thirty days after the effective date a registration statement is filed
with the Securities and Exchange Commission ("SEC") at a conversion price equal
to twenty percent of the closing price of the Company's common stock on the date
of the conversion.

The total consideration paid was $713,828 and the significant components of the
transaction are as follows:

Common stock issued                                      $137,700
Convertible debt issued                                   600,000
Excess of assets acquired over
    liabilities assumed                                   (23,872)
                                                         --------

Goodwill impaired                                        $713,828
                                                         ========


In October 2003, the Company acquired Molecula Research Laboratories, LLC
(Molecula), Herndon, Virginia, a leading company in gene silencing technologies
for gene and protein function studies by acquiring the shares of the company
which was held by the CEO of the company. The Company issued 500,000 shares of
common stock valued at $200,000 for acquisition.

The total consideration paid was $255,158 and the significant components of the
transaction are as follows:

Common stock issued                                      $200,000
Excess of liabilities assumed over assets acquired         55,158
                                                         --------

Goodwill impaired                                        $255,158
                                                         ========



                                       36

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

In November 2004, the Company acquired KD Medical, Columbia Maryland, one of the
nation's leading manufacturers of microbiological culture media and other
research agents. The Company paid $350,000 in cash, 200,000 shares of common
stock valued at $52,000 and incurred an obligation to pay an additional $150,000
by November, 2005. Additionally, the Company is obligated to issue up to 750,000
shares of common stock valued at $195,000 based on certain contractual
milestones, such as, KD Medical's revenue in excess of $1,000,000 and earnings
of $10,000 before interest and taxes for the year ended December 31, 2004
(500,000 and 250,000 shares of common stock, respectively). In 2005, KD Medical
met its goals of both revenue and profitability. The Company issued 100,000 of
the 750,000 shares in 2005. The remaining 650,000 shares are still outstanding
as of December 31, 2005.

The total consideration paid was $1,605,213 and the significant components of
the transaction are as follows:


Cash paid                                              $  350,000
Excess of liabilities assumed over
  assets acquired                                         858,213
Debt issued                                               150,000
Common stock issued at acquisition                         52,000
Original obligation to additional shares
  of common stock based on operating
  performance milestones                                  195,000
                                                       ----------
Goodwill impaired                                      $1,605,213
                                                       ==========


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.



                                       37

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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.

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, 2005 and 2004 are as follows:

                                                2005        2004
                                              --------    -------
Raw materials                                 $180,429    $     0
Finished goods                                  35,701     77,045
                                              --------    -------

Total                                         $216,130    $77,045
                                              ========    =======

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 years
Office equipment               3 to 5 years
Manufacturing equipment        3 to 8 years



                                       38

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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.

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 expenditures
were $-0- and $59,248 on research and product development for the year ended
December 31, 2005 and 2004, respectively.

Advertising

The Company follows the policy of charging the costs of advertising to expenses
as incurred. The Company charged to operations $2,136 and $-0-, as advertising
costs for the year ended December 31, 2005 and 2004, respectively.

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.



                                       39

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended December 31, 2002 and
subsequent years. During fiscal year 2005 and 2004, there were no stock options
granted to employees.



                                       40

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

Liquidity

As shown in the accompanying financial statements, the Company incurred a net
loss of $4,859,060 and $2,700,598 during the years ended December 31, 2005 and
2004, respectively. The Company's total liabilities exceeded its total assets by
$5,499,805 as of December 31, 2005.



                                       41

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

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, 2005 and 2004, allowance for doubtful account balance was $27,982
and $42,764, respectively.

New Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and re-handling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.

On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company has implemented the revised standard in the third
quarter of fiscal year 2005. The Company had accounted for its share-based
payment transactions under the provisions of APB 25, which did not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessed the implications of this revised standard, and did not
materially impact the Company's results of operations in the third quarter of
fiscal year 2005 or thereafter.

On December 16, 2004, FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions (" SFAS 153"). This statement amends APB
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Under SFAS 153, if a
nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.



                                       42

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and a correction of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by the Company in the
first quarter of fiscal 2007. The Company is currently evaluating the effect
that the adoption of SFAS 154 will have on its consolidated results of
operations and financial condition. Management does not expect the adoption of
these pronouncements to have a material impact on the Company's financial
position or results of operations

Reclassifications

Certain reclassifications have been made in prior year's financial statements to
conform to classifications used in the current year.

NOTE B - IMPAIRMENT OF GOODWILL

The Company has adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" (SFAS No. 142) effective April 29, 2002
(date of inception). SFAS No.142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for in
financial statements upon their acquisition. This statement requires goodwill
amortization to cease and for goodwill to be periodically reviewed for
impairment.

Under SFAS No. 142, goodwill impairment occurs if the net book value of a
reporting unit exceeds its estimated fair value. The Company has performed
impairment tests periodically and has written off $ -0- and $1,624,213 for
goodwill impairment for the year ended December 31, 2005 and 2004, respectively
mainly due to the following:

     - Significant operating losses

     - Lack of revenues and profitability

As a result of these events and circumstances, Management believes that more
likely than not the fair value of the reporting unit's goodwill has been reduced
below its carrying value. As a result, management performed an evaluation of the
reporting unit's tangible and intangible assets for purposes of determining the
implied fair value of goodwill at various dates. Upon completion of the
assessment, management recorded a non-cash impairment charge of $-0- and
$1,624,213, net of tax, or $(0.0) and $(0.07) per share for the years ended
December 31, 2005 and 2004, respectively, to reduce the carrying value of
goodwill in this reporting unit to its estimated value of $ -0-.

Considerable management judgment is necessary to estimate fair value.
Accordingly, actual results could vary significantly from managements'
estimates.



                                       43

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE C - PROPERTY, PLANT, AND EQUIPMENT

Property, plant and equipment at December 31, 2005 and 2004 are as follows:


                                                     2005          2004
                                                   --------      -------
           Furniture and fixtures                   $41,260      $37,258
           Equipment                                344,643      253,114
           Computer equipment                        56,654       52,961
                                                   --------      -------
                                                    442,557      343,333
           Less: Accumulated depreciation           281,681      237,686
                                                   --------      -------

           Net property and equipment              $160,876     $105,647
                                                   ========     ========


The total depreciation expense for the year ended December 31, 2005 and 2004
amounted to $45,028 and $15,032, respectively of which $19,231 and $2,311 is
included in cost of goods sold for each respective year.

NOTE D - NOTES PAYABLE

Notes payable at December 31, 2005 and 2004 consists of the following:

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

Note  payable in connection with
acquisition of Molecularware, Inc accrues
interest at 0% per annum, unsecured with
monthly payments of approximately $14,000
                                                  $      --            $  50,000

Note payable in connection with
acquisition of KD Medical; accrues
interest at 0%, unsecured                                --              150,000

Note 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, 2005,
cumulative amount of interest was
$238,781                                            335,800              415,000

Notes payable-unsettled claims
from acquisition of Molecularware; accrues
interest at 12% per annum, unsecured                175,273              220,273

Notes payable-settlement of outstanding
claims of Molecularware; accrues interest
at 12% per annum, unsecured                          45,138                   --

Notes payables-shareholder, accrues
interest at 0% per annum, unsecured                  17,295               66,713
                                                  ---------            ---------

                                                    573,506              901,986
Less: current maturities:                          (573,506)           (901,986)
                                                  ---------            ---------
                                                  $      --            $      --
                                                  =========            =========



                                       44

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004


NOTE D - NOTES PAYABLE (continued)

CalbaTech 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, 2005, $45,138
was settled in the form of debentures. $175,273 remains on Molecularware's books
as non-settled, non-converted debt, and to date, there has not been a claim made
to Molecularware for payment. Further, the company has not been able to verify
that such debt ever existed. The remaining $379,589 left from the balance of the
$600,000 that CalbaTech offered to use for settlement of debts has been
extinguished through other means of payment.

NOTE E - NOTES PAYABLE - BANKS

Notes payable - bank at December 31, 2005 and 2004 consists of the following:

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

Bank line of credit, guaranteed by its
officers, in the amount of $50,000 and
bears interest at a rate of 10.75% per
annum. The credit calls for the minimum
payment of interest only                          $      --            $  49,340

Bank 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                  38,757                   --

Line of credit, guaranteed by its officers,
in the amount of $12,500 and bears
interest rate of 8.5% per annum. The credit
line calls for minimum payments of
interest only.                                       10,884               11,095
                                                  ---------            ---------
                                                     49,641               60,435
Less current maturities:                             18,280               60,435
                                                  ---------            ---------
                                                  $  31,361            $      --
                                                  =========            =========



                                       45

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE F - CONVERTIBLE NOTES PAYABLE

A summary of convertible promissory notes payable at December 31, 2005 and 2004
is as follows:

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

12% convertible debentures, issued in
settlement of outstanding obligations of
subsidiary, Molecularware, Inc., unpaid
principal together with accrued and
unpaid interest is convertible into shares
of the Company's common stock within
thirty days after the effective date of a
registration statement is filed with
the Securities and Exchange Commission
("SEC") at a conversion price equal to
twenty percent of the closing price of the
Company's common stock on the date of
conversion                                        $       -            $  95,138

10% convertible debentures, payable and due
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 on
the date of the conversion. The
Company has recorded $100,000 as a beneficial
conversion discount-interest
expense during the year ended December 31, 2003.          -              100,000

10% 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.                 76,028              100,000

10% 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)                178,632                    -
                                                  ---------            ---------
                                                    254,660              295,138
Less current maturities                              76,028              295,138
                                                  ---------            ---------

Convertible notes payable-long term
portion                                             178,632                    -
                                                  =========            =========



                                       46

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE F - CONVERTIBLE NOTES PAYABLE (continued)

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 12,274,436 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.

As of December 31, 2005, 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 transaction, to the extent that it is to be satisfied with common stock of
the Company would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible host debt conversion feature, the Company is
required to record a liability relating to both the detachable warrants and the
embedded convertible feature of the note payable (included in the liabilities as
a "derivative liability".

The accompanying financial statements comply with current requirements relating
to warrants and embedded warrants as described in FAS 133, EITF 98-5 and 00-27,
and APB 14 as follows:

     o    The Company allocated the proceeds received between convertible debt
          and the detachable warrants based upon the relative fair market values
          on the dates the proceeds were received.
     o    Subsequent to the initial recording, the increase in the fair value of
          the detachable warrants, determined under the Black-Scholes option
          pricing formula and the increase in the intrinsic value of the
          embedded derivative in the conversion feature of the convertible
          debentures are accrued as adjustments to the liabilities at December
          31, 2005.
     o    The expense relating to the increase in the fair value of the
          Company's stock reflected in the change in the fair value of the
          warrants and derivatives (noted above) is included as an other
          comprehensive income item in the form of an unrealized interest
          expense arising from convertible financing on the Company's balance
          sheet.
     o    Accreted principal of $178,632 as of December 31, 2005.



                                       47

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE F - CONVERTIBLE NOTES PAYABLE (continued)

The following table summarizes the various components of the convertible
debentures as of December 31, 2005:


        Convertible debentures: ......................     $   178,632
        Warrant liability ............................         364,299
        Derivative liability .........................       3,939,256
                                                           -----------
                                                             4,482,187

        Adjustment of derivative and warrant liability
          to fair value ..............................     (2,303,555)
        Unrealized  loss  related to  conversion
          of  convertible  note to common shares
          charged to interest expense ................       (737,600)

        Accretion of principal related to
          convertible debenture ......................       (178,632)
                                                           -----------
        Total convertible debentures: ................     $ 1,262,400
                                                           ===========


NOTE G - 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, 2005.

NOTE H - COMMON STOCK

In 2004, the Company issued 6,989,498 shares of common stock for services
rendered at an approximate average of $0.16 per share, which represents the fair
value of the services received and which did not differ materially from the
value of the stock issued.

In February 2004, the Company issued 100,000 shares of common stock in
connection with an acquisition of a license, which did not differ materially
from the value of the stock issued.

In February 2004, the Company sold 140,000 shares of common stock at $0.25 per
share

In February 2004, the Company issued 131,109 shares of common stock in
connection with the acquisition of MolecularWare, Inc.

In April 2004, The Company sold 1,000,000 shares of common stock at $0.25 per
share.

In June 2004, the Company issued 100,000 shares of common stock as settlement of
debt at $0.13 per share, which did not differ materially from the underlining
debt incurred.

In September 2004, the Company issued 900,000 shares of common stock as
settlement of debt at $0.06 per share, which did not differ materially from the
underlining debt incurred.

In September 2004, the Company sold 2,933,334 shares of its common stock for
$0.06 per share specifically to raise funds to pay for its acquisition of KD
Medical, Inc., described elsewhere within this Form.

In October 2004, the Company sold 166,667 shares of its common stock for $0.06
per share specifically to raise funds to pay for its acquisition of KD Medical,
Inc., described elsewhere within this Form.

In October 2004, the Company repurchased 122,500 shares of its common stock in
the open market as treasury at approximately $0.13 per share



                                       48

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE H - COMMON STOCK (continued)

In November 2004, the Company sold 5,395,669 shares of its common stock for
$0.06 per share specifically to raise funds to pay for its acquisition of KD
Medical, Inc., described elsewhere within this Form.

In November 2004, the Company acquired KD Medical Inc. and issued stock
subscriptions for 950,000 shares of its common stock valued at the time of the
acquisition at $247,000. (Note A)

In December 2004, the Company sold 227,273 shares of its common stock at $0.11
per share

In January 2005, the Company issued 47,059 shares of common stock as settlement
of debt at $0.17 per share, which did not differ materially from the underlining
debt incurred.

In 2005, the Company issued 2,994,276 shares of common stock for services
rendered at an approximate average of $0.14 per share, which represents the
value of the services received and which did not differ materially from the
value of the stock issued. Related parties received 89,770 of those shares with
a total value of $15,261 for services rendered.

In January 2005, the Company issued 334,423 shares of common stock in exchange
for treasury stock at $0.17 per share, which represents the value of the shares
received and which did not differ materially from the value of the stock issued.

In March 2005, the Company issued 1,000,000 shares of common stock as settlement
of debt at $0.064 per share, which did not differ materially from the
underlining debt incurred.

In March 2005, the Company issued 200,000 shares of common stock as part payment
for acquisition at $0.26 per share

In March 2005, the Company sold 272,727 shares of its common stock for $0.10 per
share.

In May 2005, the Company sold 700,000 shares of its common stock for $0.10 per
share

In June 2005, the Company issued 1,086,667 shares of common stock for prior
years' services rendered at $0.06 per share which represents the value of the
services received and which did not differ materially from the value of the
stock issued.

In June 2005, the Company issued 1,240,355 shares of common stock to its
officers as prior years' compensation at $0.16 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 2005, the Company issued 100,000 shares of common stock as payment for
subscription shares in connection with the KD Medical, Inc acquisition.

In July 2005, the Company issued 950,000 shares of common stock in exchange for
convertible note payable of $87,875.

In August 2005, the Company issued 3,080,000 shares of common stock in exchange
for convertible note payable of $231,200.



                                       49

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE H - COMMON STOCK (continued)

In September 2005, the Company issued 4,440,000 shares of common stock in
exchange for convertible note payable of $83,428.

In October 2005, the Company issued 9,760,000 shares of common stock in exchange
for convertible note payable of $85,400.

In November 2005, the Company issued 7,320,000 shares of common stock in
exchange for convertible note payable of $117,413.

In December 2005, the Company issued 9,246,680 shares of common stock in
exchange for convertible note payable of $132,285.

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, 2005.


                                Options Outstanding       Options Exercisable
                                -------------------       -------------------
                             Weighted
                              Average
                             Remaining      Weighted                    Weighted
                            Contractual     Average                     Average
 Exercise       Number         Life         Exercise      Number        Exercise
  Price       Outstanding     (Years)        Price      Exercisable      Price
----------    -----------    ----------    ----------   -----------    ---------
  $0.001        80,000          6.92         $0.001       26,667         $0.001


Transactions involving stock options issued to consultants are summarized as
follows:


                                                  Weighted Average
                                       Number of Shares       Price Per Share
                                       ----------------       ---------------
Outstanding at December 31, 2003             80,000               $0.01
     Granted                                      -                   -
     Exercised                                    -                   -
     Canceled or expired                          -                   -
                                             ------              ------
Outstanding at December 31, 2004             80,000                0.01
     Granted                                      -                   -
     Exercised                                    -                   -
     Canceled or expired                          -                   -
                                             ------              ------
Outstanding at December 31, 2005             80,000               $0.01
                                             ======               =====



                                       50

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

Warrants

The Company granted an aggregate of 2,428,659 and -0- warrants during the year
ended December 31, 2005 and 2004, respectively, in connection with the issuance
of convertible notes payable (see note F). The Company did not grant any
compensatory warrants during the years ended December 31, 2005 and 2004. 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 Exercisable
                  --------------------                    --------------------
                             Weighted
                              Average
                             Remaining      Weighted                    Weighted
                            Contractual     Average                     Average
 Exercise       Number         Life         Exercise      Number        Exercise
  Price       Outstanding     (Years)        Price      Exercisable      Price
----------    -----------    ----------    ----------   -----------    ---------
   $0.20        6,071,645        4.50           $0.20    6,071,645       $0.20
   $0.35        6,071,645        4.50           $0.35    6,071,645       $0.35
               ----------                               ----------
               12,143,290        4.50          $0.275   12,143,290      $0.275
               ==========                               ==========


Transactions involving warrants issued to non-employees are summarized as
follows:


                                                                     Weighted
                                                                      Average
                                                       Number of       Price
                                                         Shares      Per Share
                                                      -----------   ------------
Outstanding as of January 1, 2004 .................       --              $-
  Granted .........................................       --              --
  Exercised .......................................       --              --
  Canceled or expired .............................       --              --
                                                      -----------   ------------
Outstanding as of December 31, 2004 ...............       --              --
  Granted .........................................   12,274,436       0.275
  Exercised .......................................       --              --
  Canceled or expired .............................       --              --
                                                      -----------   ------------
Outstanding as of December 31, 2005 ...............   12,274,436      $0.275
                                                      ===========   ============

NOTE J - 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 $17,295 and
$266,713 as of December 31, 2005 and 2004, respectively. No formal arrangements
or repayment terms exist (see Note F).



                                       51

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE K - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at December 31, 2005 and 2004 are as
follows:

                                  2005            2004
                                --------        --------
Accounts payable ..             $210,117        $229,379
Accrued salaries ..              218,579         262,457
Payroll liabilities              338,101         217,984
Accrued Interest ..               93,893          89,017
                                --------        --------
                                $860,690        $798,837
                                ========        ========

NOTE L - 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 estimate that at December 31, 2005, the Company has
available for federal income tax purposes a net operating loss carry forward of
approximately $9,000,000, 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, 2005 and 2004 are as
follows: Non current:

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

Net operating loss carry forward   $ 3,150,000    $ 2,200,000
Valuation allowance ............    (3,150,000)    (2,200,000)
                                   -----------    -----------
Net deferred tax asset .........            --             --
                                   ===========    ===========

NOTE M - LOSSES PER SHARE

The following table presents the computation of basic and diluted losses per
share as of December 31 2005 and 2004, respectively:

                                                 2005                2004
                                             -----------         -----------
Loss available for common shareholders ...   $(5,011,116)       $ (2,700,598)
Basic and fully diluted loss per share ...   $     (0.12)       $      (0.11)
Weighted average common shares outstanding    44,957,820          24,170,907

Net loss per share is based upon the weighted average shares of common stock
outstanding.



                                       52

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE N - COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company leases office space in Irvine, California at a rate of approximately
$4,345 per month and production and administration facilities in Columbia,
Maryland at a rate of approximately $8,700 per month.

Schedule of future minimum lease payments under operating equipment and premises
leases at December 31, 2005 are as follows:

                 2006       $159,102
                 2007        148,714
                 2008        125,159
                 2009        128,631
                 2010        132,188
                            --------
                 Total      $693,794
                            ========

Rental expenses charged to operations for the years ended December 31, 2005 and
2004 were $192,113 and $70,203, respectively.

Capital Lease Obligations

The Company leases equipment financed by capital leases. Equipment included the
following amounts for capitalized leases at December 31, 2005 and 2004:

                                                  2005            2004
                                                -------         -------
        Equipment ...................           $84,756         $36,292
        Computers ...................             3,010           3,010
                                                -------         -------
                                                 87,766          39,302
        Less accumulated depreciation            12,258           7,656
                                                -------         -------
        Net .........................           $75,508         $31,646
                                                =======         =======

The Company has capital leases for equipment used in its operation. The future
minimum lease payments at December 31, 2005 are as follows:


                2006                                    $ 25,044
                2007                                      23,451
                2008                                      22,451
                2009                                      20,108
                2010                                       4,690
                                                        --------
                                                          95,744
                Less: amount representing interest       (19,628)
                                                        --------
                                                          76,116
                Less: current Portion                   (16,511)
                                                        --------
                Long-term Portion                       $ 59,605
                                                        ========


The Company has recorded equipment purchased under non-cancelable leases with an
original cost of $57,960 and $6,800 as of December 31, 2005 and 2004,
respectively. Depreciation expenses of $11,193 and $5,000 have been charged to
operations for the years ended December 31, 2005 and 2004, 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.



                                       53

<PAGE>



                                 CALBATECH, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

NOTE O - DEFAULT LIABILITY

As of December 31, 2005, a default liability totaling $572,188, including
accrued interest at statutory rates, existed against the Corporation's
subsidiary, KD Medical, Inc. The Company will contest any attempt to enforce
said default.

NOTE P - 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, 2005 and 2004, the Company
has incurred losses of $5,011,116 and $2,700,598, respectively. In addition, the
Company has a deficiency in stockholder's equity of $5,651,861 and $2,220,790 at
December 31, 2005 and 2004, 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.



                                       54

<PAGE>



                                  EXHIBIT INDEX

Exhibit No.     Description
-----------     ----------------------------------------------------------------

2.1             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
23.1            Consent of De Joya & Company, Inc. (filed herein)
24.1            Power of Attorney (filed herein)
31.1            Certification pursuant of Chief Executive Officer to 18 U.S.C.
                Section 1350, as adopted to Section 906 of the Sarbanes Oxley
                Act of 2002.
31.2            Certification pursuant of Chief Financial Officer to 18 U.S.C.
                Section 1350, as adopted to Section 906 of the Sarbanes Oxley
                Act of 2002.
32.1            Certification Pursuant to 18 U.S.C. Section 1350, as adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2            Certification Pursuant to 18 U.S.C. Section 1350, as adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*Documents previously filed with the SEC


                                       55