UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER~~MARCH 3031, ~~2009~~ 2010

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

FOR THE TRANSITION PERIOD FROM __________________ TO _______________________

Commission file number 000-19031

NATIONAL QUALITY CARE, INC.

(Exact name of Registrant as Specified in its Charter)

Delaware	84-1215959
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

84-1215959

(I.R.S. Employer

Identification Number)

2431 Hill Drive

Los Angeles, California 90041

(Address of Principal Executive Offices including Zip Code)

(310) 254-2014

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former address and telephone number, if changed since last report)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 80,221,807 shares of common stock as of ~~September 30~~March 31, ~~2009~~2010.

Documents incorporated by reference: None

A. EXPLANATORY NOTE

Prior to the date of this filing, National Quality Care, Inc. has not filed any periodic reports since December 7, 2011 for the annual report on Form 10-K for the year ended December 31, 2008. This report is one of several reports being filed by National Quality Care, Inc. in order to bring its filing current as of the date hereof. Except as otherwise noted, the information in this report relates solely to the period covered thereby.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

TABLE OF CONTENTS

	~~Page Number~~	Page Number
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements	2	2
Condensed Consolidated Balance Sheets - September 30, 2009 (Unaudited) and December 31, 2008	2
Condensed Consolidated Balance Sheets -
Condensed Consolidated Statements of Operations (Unaudited) - Three Months and Nine Months Ended September 30, 2009 and 2008	3
March 31, 2010 (Unaudited) and December 31, 2009		2
Condensed Consolidated Statement of Stockholders’ Deficiency - Year ended December 31, 2008 and Nine Months Ended September 30, 2009 (Unaudited)	4
Condensed Consolidated Statements of Operations (Unaudited) -
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2009 and 2008	5
Three Months Ended March 31, 2010 and 2009		3
Notes to Condensed Consolidated Financial Statements (Unaudited) - Three Months and Nine Months ended September 30, 2009 and 2008	6
Condensed Consolidated Statement of Stockholders’ Equity (Deficiency) - Year ended December 31, 2009 and Three Months Ended March 31, 2010 (Unaudited)		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Three Months Ended March 31, 2010 and 2009		5
Item 4. Controls and Procedures	26
Notes to Condensed Consolidated Financial Statements (Unaudited) -
PART II - OTHER INFORMATION
Three Months Ended March 31, 2010 and 2009		6
Item 1. Legal Proceedings	27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 1A. Risk Factors	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 4. Controls and Procedures		23
Item 3. Defaults Upon Senior Securities	27
PART II - OTHER INFORMATION
Item 4. Reserved	27
Item 1. Legal Proceedings		24
Item 5. Other Information	27
Item 1A. Risk Factors		24
Item 6. Exhibits	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24
SIGNATURES	28
Item 3. Defaults Upon Senior Securities		24
Item 4. Reserved		24
Item 5. Other Information		24
Item 6. Exhibits		24
SIGNATURES		25

Forward-Looking Statements

Certain statements in this Quarterly Report constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These include statements about anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance and similar matters. The words “budgeted,” “anticipate,” “project,” “estimate,” “expect,” “may,” “believe,” “potential” and similar statements are intended to be among the statements that are forward-looking statements. Because such statements reflect the risk and uncertainty that is inherent in our business, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of these risks and uncertainties are related to our current business situation and include, but are not limited to, our lack of revenues, our history of operating losses, our need for additional financing, the uncertainty of our pending arbitration with our former legal counsel, and the uncertainty about our ability to continue as a going concern, as well as those set forth in this Quarterly Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of ~~September 30~~March 31, ~~2009~~ 2010. We undertake no obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments.

PART I – FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2009			December 31, 2008
	March 31,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Current assets:
Cash	$	2082,~~717~~088		$	~~116~~22,~~800~~281
Prepaid expenses and other current assets		6,749			13,291
Money market funds		175,838			—
Total current assets		27,466			130,091
Receivable from sale of technology rights		3,300,000			—
Technology rights, net of accumulated amortization of $38,947 at September 30, 2009 and $35,302 at December 31, 2008		61,053			64,698
Prepaid expenses and other current assets		48,794			—
Total assets	$	88,519		$	194,789
Technology rights held for sale, net of accumulated amortization of $40,162 – discontinued operations		—			59,838
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Deferred income taxes		—			1,500,000
Total current assets		3,606,720			1,582,119
Total assets	$	3,606,720		$	1,582,119
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses	$	32,~~005~~729,~~058~~123		$	23,~~662~~009,~~622~~379
Advances due to related party		87,500			—
Accounts payable and accrued expenses – discontinued operations		17,212			176,528
Notes payable to related party, including accrued interest of $21,199 at September 30, 2009 and $46,776 at December 31, 2008, net of discounts of $231,774 at September 30, 2009 and $-0- at December 31, 2008		704,036			896,776
Income taxes payable		258,000			—
Note payable to consultant		120,000			—
Deferred income taxes		288,000			—
Total current liabilities		3,916,594			3,559,398
Notes payable to related party, including accrued interest of $37,497, net of discount of $188,025		—			964,083
Note payable to consultant		—			120,000
Note payable to consultant – discontinued operations		—			120,000
Total liabilities		3,916,594			3,679,398
Total current liabilities		3,292,335			4,269,990
Total liabilities		3,292,335			4,269,990
Commitments and contingencies
Stockholders’ deficiency:
Stockholders’ equity (deficiency):
Preferred stock, $0.01 par value; authorized - 5,000,000 shares; issued – none		—			—
Common stock, $0.01 par value; authorized - 125,000,000 shares; issued and outstanding – 80,221,807 shares at September 30, 2009 and 73,916,252 shares at December 31, 2008		802,219			739,163
Common stock, $0.01 par value; authorized - 125,000,000 shares; issued and outstanding – 80,221,807 shares		802,219			802,219
Additional paid-in capital		12,~~674~~770,~~706~~189			12,~~186~~764,~~413~~246
Accumulated deficit		(1713,~~305~~258,~~000~~023	)		(16,~~410~~254,~~185~~336	)
Total stockholders’ deficiency		(3,828,075	)		(3,484,609	)
Total stockholders’ equity (deficiency)		314,385			(2,687,871	)
Total liabilities and stockholders’ deficiency	$	88,519		$	194,789
Total liabilities and stockholders’ equity (deficiency)	$	3,606,720		$	1,582,119

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	Three Months Ended March 31,
	2009			2008			2009			2008
	2010			2009
Revenues	$	—		$	—		$	—		$	—
Operating expenses:
General and administrative, including $5,943 and $6,702 of stock-based compensation costs for the three months ended March 31, 2010 and 2009, respectively		131,350			373,193
General and administrative, including $5,944 and $4,412 of stock-based compensation costs for the three months ended September 30, 2009 and 2008, respectively, and $31,870 and $14,118 of stock-based compensation costs for the nine months ended September 30, 2009 and 2008, respectively		143,028			371,041			769,064			2,831,813
Loss from operations		(131,350	)		(373,193	)
Research and development, including $5,000 and $-0- of stock-based compensation costs for the three months ended September 30, 2009 and 2008, respectively, and $18,500 and $84,279 of stock-based compensation costs for the nine months ended September 30, 2009 and 2008, respectively		60,941			36,284			77,472			386,679
Interest expense – related party		(197,030	)		(12,575	)
Total operating expenses		203,969			407,325			846,536			3,218,492
Gain from legal settlement		1,871,430			—
Loss from operations		(203,969	)		(407,325	)		(846,536	)		(3,218,492	)
Other income		156,145			32,084
Interest expense		(109,781	)		(72,422	)		(195,484	)		(181,231	)
Income (loss) before income taxes		1,699,195			(353,684	)
Other income		115,121			—			147,205			—
Income tax expense		(683,000	)		—
Loss from continuing operations		(198,629	)		(479,747	)		(894,815	)		(3,399,723	)
Income (loss) from continuing operations		1,016,195			(353,684	)
Income (loss) from discontinued operations		—			10			—			(9	)
Income (loss) from discontinued operations, including gain from sale of assets of $3,318,732, and net of income taxes of $1,363,000, in 2010		1,980,118			(2,556	)
Net loss	$	(198,629	)	$	(479,737	)	$	(894,815	)	$	(3,399,732	)
Net income (loss)	$	2,996,313		$	(356,240	)
Net loss per common share - basic and diluted:
Income (loss) per common share - basic and diluted
From continuing operations	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.06	)
Continuing operations	$	0.01		$	(0.00	)
From discontinued operations		—			0.00			—			(0.00	)
Discontinued operations		0.03			(0.00	)
Total net loss per common share	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.06	)
Total net income (loss) per common share	$	0.04		$	(0.00	)
Weighted average common shares outstanding – basic and diluted		80,~~081~~221,~~710~~807			6073,~~028~~916,~~752~~252			~~77,140,509~~			~~60,028,752~~

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

Year Ended December 31, ~~2008~~2009

And ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2009~~2010

	Common Stock				Additional Paid-in		~~Stock Subscriptions and Other Receivables from~~Accumulated			~~Accumulated~~Total Stockholders’ Equity			~~Total Stockholders’~~
	Shares		Amount		Capital		~~Stockholders~~Deficit			~~Deficit~~(Deficiency)			~~Deficiency~~
Balance at December 31, 2007		54,191,252	$	541,913	$	11,343,306	$	(49,815	)	$	(12,837,325	)	$	(1,001,921	)
Balance at December 31, 2008		73,916,252	$	739,163	$	12,186,413	$	(16,410,185	)	$	(3,484,609	)
Shares issued in private placement		13,650,000		136,500		297,500		(30,000	)		—			404,000
Stock-based compensation costs		750,000		7,500		48,813		—			56,313
Reclassification of derivative liability		—		—		43,750		—			—			43,750
Exercise of stock warrants		5,555,555		55,556		59,444		—			115,000
Payments received on stock subscription receivables		—		—		—		36,788			—			36,788
Fair value of warrants issued in connection with debt		—		—		469,576		—			469,576
Stock-based compensation costs		—		—		112,629		—			—			112,629
Net income		—		—		—		155,849			155,849
Exercise of stock options		250,000		2,500		15,000		—			—			17,500
Balance at December 31, 2009		80,221,807		802,219		12,764,246		(16,254,336	)		(2,687,871	)
Exercise of stock warrants		5,825,000		58,250		328,750		—			—			387,000
Stock-based compensation costs		—		—		5,943		—			5,943
Fair value of warrants issued in connection with convertible debt		—		—		45,478		—			—			45,478
Net income		—		—		—		2,996,313			2,996,313
Write-off of other receivable from stockholder		—		—		—		43,027			—			43,027
Balance at March 31, 2010 (Unaudited)		80,221,807	$	802,219	$	12,770,189	$	(13,258,023	)	$	314,385
Net loss		—		—		—		—			(3,572,860	)		(3,572,860	)
Balance at December 31, 2008		73,916,252		739,163		12,186,413		—			(16,410,185	)		(3,484,609	)
Stock-based compensation costs		750,000		7,500		42,870		—			—			50,370
Exercise of stock warrants		5,555,555		55,556		59,444		—			—			115,000
Fair value of warrants issued in connection with debt		—		—		385,979		—			—			385,979
Net loss		—		—		—		—			(894,815	)		(894,815	)
Balance at September 30, 2009 (Unaudited)		80,221,807	$	802,219	$	12,674,706	$	—		$	(17,305,000	)	$	(3,828,075	)

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009			2008
	2010			2009
Cash flows from operating activities:
Continuing operations:
Loss from continuing operations	$	(894,815	)	$	(3,399,723	)
Income (loss) from continuing operations	$	1,016,195		$	(353,684	)
Adjustments to reconcile loss from continuing operations to net cash used in continuing operating activities:
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) continuing operating activities:
Amortization of technology rights		3,645			3,645
Amortization of discount on notes payable		188,025			—
Amortization of discount on notes payable		154,205			147,978
Stock-based compensation costs		5,943			6,702
Stock-based compensation costs		50,370			98,397
Forgiveness of payables		(156,145	)		(32,859	)
Note payable issued for services rendered		—			120,000
Deferred income taxes		574,000			—
Forgiveness of payables		(147,980	)		—
Changes in operating assets and liabilities:
Decrease in -
Prepaid expenses and other current assets		6,542			30,909
Increase in -
Accounts payable and accrued expenses		490,416			1,529,290
Prepaid expenses and other current assets		(48,794	)		(20,553	)
Accrued interest due to related party		39,034			32,581
Increase (decrease) in -
Net cash used in continuing operating activities		(298,583	)		(1,436,923	)
Accounts payable and accrued expenses		(124,111	)		296,932
Income taxes payable		109,000			—
Accrued interest due to related party		9,004			12,575
Net cash provided by (used in) continuing operating activities		1,573,117			(90,887	)
Discontinued operations:
Loss from discontinued operations		—			(9	)
Income (loss) from discontinued operations		1,980,118			(2,556	)
Net cash used in discontinued operating activities		—			(9	)
Adjustments to reconcile income (loss) from discontinued operations to net cash used in discontinued operating activities:
Net cash used in operating activities		(298,583	)		(1,436,932	)
Amortization of technology rights		—			1,215
Forgiveness of payables		(25,101	)		—
Deferred income taxes		1,214,000			—
Gain from sale of assets		(3,318,732	)		—
Changes in discontinued operating assets and liabilities:
Increase (decrease) in -
Accounts payable and accrued expenses		(134,215	)		(24,260	)
Income taxes payable		149,000			—
Net cash used in discontinued operating activities		(134,930	)		(25,601	)
Net cash provided by (used in) operating activities		1,438,187			(116,488	)
Cash flows from investing activities:
Proceeds from sale of assets		78,570			—
Increase in money market funds		(175,838	)		—
Net cash used in investing activities		(97,268	)		—
Cash flows from financing activities:
Proceeds from the issuance of common stock		—			204,000
Proceeds from notes payable to related party		45,000			—
Advances from related party		87,500			—
Payment of note payable issued for services		(120,000	)		—
Payments received on stock subscription receivables		—			36,790
Repayment of note payable to related party		(1,206,112	)		—
Proceeds from exercise of stock options		—			17,500
Net cash used in financing activities		(1,281,112	)		—
Proceeds from exercise of stock warrants		115,000			387,000
Net increase (decrease) in cash		59,807			(116,488	)
Proceeds from notes payable to related party		20,000			100,000
Cash balance at beginning of period		22,281			116,800
Repayment of note payable to related party		(20,000	)		—
Cash balance at end of period	$	82,088		$	312
Net cash provided by financing activities		202,500			745,290
Net decrease in cash		(96,083	)		(691,642	)
Cash balance at beginning of period		116,800			709,579
Cash balance at end of period	$	20,717		$	17,937
Supplemental disclosures of cash flow information:
Cash paid for -
Interest	$	—116,043		$	—
Income taxes	$	~~1,600~~750		$	~~1,600~~—
Non-cash financing activities:
Non-cash investing activities:
Notes payable to related party, including related accrued interest, rolled-over into a new note payable	$	914,611		$	—
During the three months ended March 31, 2010, the Company sold technology rights summarized as follows:
Discount recorded for issuance of warrants in connection with convertible notes payable to related party	$	385,979		$	45,478
Total sales price	$	3,378,570
Derivative liability reclassified to additional paid-in capital	$	—		$	43,750
Less amount receivable as of March 31, 2010		(3,300,000	)
Common stock issued for stock subscription receivables	$	—		$	30,000
Cash received	$	78,570

See accompanying notes to condensed consolidated financial statements.

NATIONAL QUALITY CARE, INC.

AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months ~~and Nine Months~~ Ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~ 2009

1. Basis of Presentation

The condensed consolidated financial statements of National Quality Care, Inc. (“NQCI”) and its wholly-owned subsidiary, Los Angeles Community Dialysis, Inc. (“LACDI”) (collectively, the “Company”) at ~~September~~March 3031, ~~2009~~2010, and for the three months ~~and nine months~~ ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009, are unaudited. In the opinion of management, all adjustments (including normal recurring adjustments) have been made that are necessary to present fairly the financial position of the Company as of ~~September~~March 3031, ~~2009~~2010, the results of its operations for the three months ~~and nine months~~ ended ~~September 30~~March 31, ~~2009~~2010 and ~~2008~~2009, and its cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full fiscal year. The condensed balance sheet at December 31, ~~2008~~2009 has been derived from the Company’s audited financial statements.

The statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and other information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2008~~2009, as filed with the SEC.

2. Organization and Business Operations

Organization and Nature of Business

National Quality Care, Inc. ~~(“NQCI”)~~, a publicly-traded Delaware corporation, was incorporated on January 1, 1996. Prior to May 31, 2006, NQCI, through its wholly-owned subsidiary, Los Angeles Community Dialysis, Inc. (“LACDI”), operated a dialysis clinic located in Los Angeles, California. Additionally, prior to June 15, 2006, LACDI provided dialysis services for patients suffering from acute kidney failure through a visiting nursing program contracted to several Los Angeles County hospitals (see Note 10). Prior to March 19, 2010, NQCI was ~~also~~ a research and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications. On that date, NQCI consummated a sale of its technology rights with respect to its developing wearable artificial kidney (see Note 1211). Subsequent to March 19, 2010, NQCI has had no operations other than the maintenance of its corporate shell. Unless the context indicates otherwise, NQCI and LACDI are hereinafter referred to as the “Company”.

The Company’s common stock is presently traded on the OTC Market (also referred to as the “Pink Sheets”) under the symbol “NQCI.PK”.

Going Concern

The Company’s condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Prior to June 15, 2006, the Company provided dialysis services for patients suffering from acute kidney failure through a clinic located in Los Angeles, California, and through a visiting nursing program contracted to several Los Angeles County hospitals. The assets of both the clinic and the nursing program were sold to third parties (see Note 10), and as a result such activities were accounted for as discontinued operations in the Company’s condensed consolidated financial statements. Prior to March 19, 2010, the Company was ~~also~~ a research and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications. On that date, the Company consummated a sale of its technology rights with respect to its developing wearable artificial kidney (see Note 1211) and, consequently, those activities have been accounted for as discontinued operations in the Company’s condensed consolidated financial statements. Since June 15, 2006, the Company has not generated any revenues from operations, and does not expect to do so in the foreseeable future, except for the revenue generated from the sale of its technology rights during 2010.

For the past several years, except for the three months ended March 31, 2010, the Company has experienced net operating losses and negative operating cash flows. As of ~~September 30~~March 31, ~~2009~~2010, the Company had an accumulated deficit of $1713,~~305~~258,~~000~~023, ahad ~~working~~no ~~capital~~revenues ~~deficiency~~from ofoperating $3activities,~~889,128,~~ and ~~its~~did ~~total~~not ~~liabilities~~have ~~exceeded~~sufficient internal ~~its~~and ~~total~~external ~~assets~~working bycapital ~~$3,828,075~~resources to meet current and expected future obligations. Such deficiencies indicate the Company will ~~not~~ be ~~able~~unable to ~~meet~~continue to fund its ~~current~~operations and meet its obligations as they come due. In recent years, the Company has financed its working capital requirements through the sale of technology rights, loans and the recurring ~~sale~~sales of its securities to related parties; however, ~~which~~there ~~the~~can ~~Company~~be ~~cannot~~no beassurances ~~assured~~that ofsuch ~~obtaining~~related inparty funding will be available to the Company in future periods on commercially reasonable terms or at all. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s ~~2008~~2009 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional debt and/or equity capital and to acquire sufficient operating capital through the ~~sale of assets,~~ development of business activities, or otherwise. The Company’s condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

~~3. Summary of Significant Accounting Policies~~6

~~Principles~~3. Summary of ~~Consolidation~~Significant Accounting Policies

~~The~~Principles ~~accompanying condensed consolidated financial statements include the financial statements~~ of ~~NQCI and its wholly-owned subsidiary, LACDI. All intercompany balances and transactions have been eliminated in consolidation.~~Consolidation

~~Cash~~The ~~Concentrations~~accompanying condensed consolidated financial statements include the financial statements of NQCI and its wholly-owned subsidiary, LACDI. All intercompany balances and transactions have been eliminated in consolidation.

The Company’s cash balances may periodically exceed federally insured limits. The Company has not experienced a loss in such accounts to date. The Company maintains its accounts with financial institutions with high credit ratings.Concentrations

6The Company’s cash and money market fund balances may periodically exceed federally insured limits and the limits of the Securities Investor Protection Corporation. The Company has not experienced a loss in such accounts to date. The Company maintains its accounts with financial institutions with high credit ratings.

~~Derivative~~Convertible ~~Liabilities~~Instruments

The Company ~~has~~ issued ~~common~~convertible ~~stock~~debt with non-detachable ~~warrants~~conversion ~~under~~features aand ~~private~~detachable ~~placement offering~~warrants. InThe ~~2005~~non-detachable ~~and~~conversion ~~2006,~~feature ~~certain common stock~~ and detachable warrants ~~sold~~are byrecorded as ~~the~~a ~~Company~~discount ~~granted~~to the ~~holders~~related ~~mandatory~~debt ~~registration~~either ~~rights~~as ~~which~~additional ~~were~~paid-in ~~contained~~capital inor ~~the~~a ~~terms~~derivative ~~governing~~liability, depending on the ~~private~~guidance, ~~placement~~using the ~~offering.~~intrinsic ~~The~~value ~~mandatory~~method ~~rights~~or ~~provision~~relative ~~results~~fair invalue ~~share~~method, ~~settlement~~respectively. ~~which~~The isdebt ~~not~~discount ~~controlled~~associated bywith the ~~Company.~~warrants ~~Accordingly,~~and ~~they~~embedded beneficial ~~qualify~~conversion asfeature, ~~derivative~~if ~~instruments.~~any, Atis ~~each~~amortized ~~balance~~to ~~sheet~~interest ~~date,~~expense over the ~~Company~~life ~~adjusts~~of the ~~derivative~~debenture ~~financial~~or ~~instruments~~upon toearlier ~~their~~conversion of ~~estimated~~the ~~fair~~debenture ~~value~~using ~~and~~either ~~analyzes~~ the ~~instruments~~effective toyield ~~determine~~method ~~their~~or ~~classification~~the asstraight-line amethod, ~~liability~~as ~~or equity~~appropriate.

~~Convertible~~Research ~~Instruments~~and Development

~~The~~Research ~~Company~~and ~~issued~~development ~~convertible~~costs ~~debt~~were ~~with~~expensed as ~~non-detachable~~incurred. Research ~~conversion features~~ and ~~detachable~~development ~~warrants.~~expenses ~~The~~consist ~~non-detachable~~primarily ~~conversion~~of ~~feature~~costs ~~and~~incurred ~~detachable~~with ~~warrants~~respect ~~are recorded as a discount~~ to the ~~related~~development ~~debt~~of ~~either as additional paid-in capital or a derivative liability, depending on~~ the Company’s ~~guidance,~~wearable ~~using~~artificial ~~the~~kidney ~~intrinsic~~for ~~value~~dialysis ~~method~~and orother ~~relative~~medical ~~fair value method~~applications, ~~respectively. The debt discount associated with the warrants~~ and ~~embedded~~are ~~beneficial~~included ~~conversion~~in ~~feature,~~discontinued ifoperations in ~~any, is amortized to interest expense over~~ the ~~life~~condensed ofconsolidated ~~the~~statement ~~debenture or upon earlier conversion~~ of ~~the debenture using either the effective yield method or the straight-line method, as appropriate~~operations.

~~Research~~Income ~~and Development~~Taxes

~~Research~~The ~~and~~Company ~~development~~accounts ~~costs~~for ~~are~~income ~~expensed~~taxes asunder an ~~incurred. Research~~asset and ~~development~~liability ~~expenses~~approach ~~consist~~for ~~primarily~~financial ofaccounting ~~costs~~and ~~incurred~~reporting ~~with~~purposes. ~~respect~~Accordingly, to the ~~development~~Company ofrecognizes deferred tax assets and liabilities for the ~~Company’s~~expected ~~wearable~~impact ~~artificial~~of ~~kidney~~differences ~~for~~between ~~dialysis~~the financial statements and ~~other~~the ~~medical~~tax ~~applications~~basis of assets and liabilities.

~~Income~~The ~~Taxes~~Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.

The Company ~~accounts~~recognizes ~~for~~the ~~income~~tax ~~taxes~~benefit ~~under~~ from an ~~asset~~uncertain ~~and~~tax ~~liability~~position ~~approach~~only ~~for~~if ~~financial~~it ~~accounting~~is ~~and~~more ~~reporting~~likely ~~for~~than ~~income~~not ~~taxes.~~that ~~Accordingly,~~ the ~~Company~~tax ~~recognizes~~position ~~deferred~~will ~~tax~~be ~~assets~~sustained ~~and~~on ~~liabilities~~examination ~~for~~by the ~~expected~~taxing authorities, ~~impact~~based on the technical merits of ~~differences~~the ~~between~~position. The tax benefits recognized in the financial statements ~~and~~from such a position are measured based on the ~~tax~~largest ~~basis~~benefit that has a greater than fifty percent likelihood of ~~assets~~being ~~and~~realized ~~liabilities~~upon ultimate settlement. As of March 31, 2010, no liability for unrecognized tax benefits was required to be recorded.

The Company ~~records~~files aincome ~~valuation allowance to reduce its deferred~~ tax ~~assets~~returns toin the ~~amount that is more likely than not to be realized~~ U.S. Infederal ~~the~~jurisdiction ~~event~~and ~~the~~is ~~Company~~subject ~~was~~ to ~~determine~~income ~~that~~tax itexaminations ~~would~~by befederal ~~able to realize its deferred~~ tax ~~assets~~authorities infor the ~~future~~year in2008 ~~excess~~and ofthereafter. The ~~its~~Company’s ~~recorded~~policy ~~amount,~~is ~~an adjustment~~ to ~~the~~record ~~deferred~~interest ~~tax~~and ~~assets~~penalties ~~would~~on beuncertain ~~credited~~tax topositions ~~operations~~as inincome ~~the~~tax ~~period~~expense. ~~such~~As ~~determination~~of ~~was~~March ~~made. Likewise~~31, 2010, ~~should~~ the Company ~~determine~~had ~~that~~no itaccrued ~~would~~interest ~~not be able to realize all~~ or ~~part~~penalties ofrelated ~~its deferred tax assets in the future, an adjustment~~ to ~~the~~uncertain ~~deferred~~ tax ~~assets would be charged to operations in the period such determination was made~~positions.

~~For federal income tax purposes, net operating losses can be carried forward for a period of 20 years until they are either utilized or until they expire.~~Contingencies

The Company’s ~~recognizes~~management ~~the~~assesses ~~tax~~contingent liabilities, ~~benefit~~and ~~from~~such anassessment ~~uncertain~~inherently ~~tax~~involves ~~position~~an ~~only~~exercise ifof itjudgment. isIf ~~more~~the ~~likely~~assessment ~~than~~of ~~not~~a contingency indicates that it ~~the~~is ~~tax~~probable ~~position~~that ~~will~~a bematerial ~~sustained~~loss onhas ~~examination~~been byincurred and the ~~taxing~~amount ~~authorities,~~of ~~based~~the onliability ~~the~~can ~~technical~~be ~~merits~~estimated, ofthen the ~~position.~~estimated ~~The~~liability would ~~tax~~be ~~benefits~~accrued ~~recognized~~ in the Company’s condensed consolidated financial statements. ~~from~~If ~~such~~the assessment indicates that a ~~position~~potentially material ~~are~~loss ~~measured~~contingency ~~based~~is onnot ~~the~~probable, ~~largest~~but ~~benefit~~is ~~that~~reasonably ~~has~~possible, aor ~~greater~~is ~~than~~probable ~~fifty~~but ~~percent~~cannot ~~likelihood~~be ofestimated, ~~being~~then ~~realized~~the ~~upon~~nature of ~~ultimate~~the ~~settlement.~~contingent ~~The~~liability, ~~accounting~~together ~~rules~~with ~~also~~an ~~provide~~estimate ~~guidance~~of onthe ~~de-recognition,~~range ~~classification,~~of ~~interest~~possible ~~and~~loss ~~penalties~~if ondeterminable ~~income~~and ~~taxes~~material, ~~accounting~~would inbe ~~interim~~disclosed. Loss ~~periods~~contingencies ~~and~~considered ~~requires~~remote ~~increased~~are ~~disclosures.~~generally Asnot ofdisclosed ~~September~~unless ~~30,~~they ~~2009~~involve guarantees, noin ~~liability~~which ~~for~~case ~~unrecognized~~the ~~tax~~nature ~~benefits~~of ~~was~~the guarantee ~~required~~would to be ~~recorded~~disclosed.

The Company files income tax returns in the U.S. federal jurisdiction and is subject to income tax examinations by federal tax authorities for the year 2008 and thereafter. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of September 30, 2009, the Company had no accrued interest or penalties related to uncertain tax positions.7

~~Contingencies~~Stock-Based Compensation

The Company’s ~~management~~periodically ~~assesses~~issues ~~contingent~~stock ~~liabilities,~~ options and ~~such~~warrants ~~assessment~~to ~~inherently~~officers, ~~involves~~directors anand ~~exercise~~consultants offor ~~judgment~~services rendered. Options Ifvest ~~the~~and ~~assessment~~expire ofaccording ato ~~contingency~~terms ~~indicates~~established at ~~that~~the itgrant isdate. ~~probable~~The ~~that~~Company aaccounts ~~material~~for ~~loss~~share-based ~~has~~payments ~~been~~to ~~incurred~~officers and ~~the~~directors ~~amount~~by ofmeasuring the ~~liability~~cost ~~can~~of beservices ~~estimated,~~received in ~~then~~exchange ~~the~~for ~~estimated~~equity ~~liability~~awards ~~would~~based beon ~~accrued in~~ the ~~Company’s~~grant ~~financial~~date ~~statements.~~fair Ifvalue of the ~~assessment~~awards, ~~indicates~~with ~~that~~the acost ~~potentially~~recognized ~~material~~as ~~loss~~compensation ~~contingency~~expense in isthe ~~not~~Company’s ~~probable,~~condensed ~~but~~consolidated isfinancial ~~reasonably~~statements ~~possible,~~over orthe isvesting ~~probable~~period ~~but~~of ~~cannot~~the beawards. ~~estimated,~~The ~~then~~Company ~~the~~accounts for ~~nature~~share-based ofpayments ~~the~~to ~~contingent~~consultants ~~liability,~~by ~~together~~determining ~~with~~the anvalue ~~estimate~~ of the ~~range~~stock ofcompensation ~~possible~~based ~~loss~~upon ifthe ~~determinable~~measurement ~~and~~date ~~material,~~at ~~would~~either (a) bethe ~~disclosed.~~date ~~Loss~~at ~~contingencies~~which ~~considered~~a ~~remote~~performance ~~are~~commitment ~~generally~~is ~~not~~reached ~~disclosed~~or ~~unless~~(b) ~~they~~at ~~involve~~the ~~guarantees,~~date inat which ~~case~~ the ~~nature~~necessary ofperformance ~~the~~to ~~guarantee~~earn ~~would~~the beequity instruments ~~disclosed~~is complete.

~~Stock-Based~~Earnings ~~Compensation~~Per Share

The Company’s ~~periodically~~computation ~~issues~~of ~~stock~~earnings per ~~options~~share ~~and~~(“EPS”) ~~warrants~~includes tobasic ~~officers, directors~~ and ~~consultants~~diluted ~~for services rendered~~EPS. ~~Options~~Basic ~~vest~~EPS ~~and~~is ~~expire~~measured ~~according~~as ~~to terms established at~~ the ~~grant~~income ~~date.~~(loss) ~~The~~available ~~Company accounts for share-based payments~~ to ~~officers~~common shareholders ~~and~~divided ~~directors~~ by ~~measuring~~ the ~~cost~~weighted ofaverage ~~services~~common ~~received~~shares inoutstanding ~~exchange~~ for ~~equity awards based on~~ the ~~grant~~period. Diluted ~~date~~EPS ~~fair~~is ~~value~~similar ofto ~~the~~basic ~~awards,~~EPS but ~~with~~presents the ~~cost~~dilutive ~~recognized~~effect ason ~~compensation~~a ~~expense~~per inshare ~~the~~basis ~~Company’s~~of ~~financial~~potential ~~statements~~common ~~over~~shares ~~the vesting period of the awards~~(e.g., ~~The~~warrants ~~Company~~and ~~accounts~~options) ~~for~~as ~~share-based~~if ~~payments~~they tohad ~~consultants~~been converted byat ~~determining~~ the ~~value~~beginning of the ~~stock~~periods ~~compensation~~presented, ~~based~~or ~~upon~~issuance ~~the measurement~~ date, atif ~~either~~later. Potential ~~(a)~~common ~~the~~shares ~~date~~that athave ~~which~~an aanti-dilutive effect ~~performance~~(i.e., ~~commitment~~those isthat ~~reached~~increase orincome ~~(b)~~per atshare ~~the~~or ~~date~~decrease atloss ~~which~~per ~~the~~share) ~~necessary~~are ~~performance~~excluded tofrom ~~earn~~ the ~~equity~~calculation ~~instruments~~of isdiluted ~~complete~~EPS.

~~Impairment~~Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of ~~Long-lived~~shares ~~Assets~~of common stock outstanding during the respective periods. Basic and diluted income (loss) per common share is the same for all periods presented because all warrants, stock options and convertible notes payable outstanding were anti-dilutive.

~~The~~At ~~Company~~March ~~periodically evaluates~~31, at2010 ~~least~~and ~~annually~~2009, ~~whether~~the ~~facts~~Company excluded ~~or circumstances indicate that~~ the ~~carrying~~outstanding ~~value~~securities ofsummarized ~~its long-lived assets to be held and used~~below, ~~including~~which ~~intangible~~entitle ~~assets,~~the ~~may~~holders ~~not~~thereof beto ~~recoverable.~~acquire ~~The~~shares ~~carrying value~~ of acommon ~~long-lived~~stock, ~~asset is considered impaired when the anticipated discounted cash flow~~ from ~~such asset is separately identifiable and is less than~~ its ~~carrying~~calculation ~~value.~~of Inearnings ~~that~~per ~~event~~share, aas ~~loss~~their iseffect ~~recognized~~would ~~based~~have onbeen ~~the amount by which the carrying value exceeds the fair market value of the long~~anti-~~lived asset~~dilutive. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

	2010		2009

Warrants		4,465,625		10,090,625
Stock options		8,070,000		7,570,000
Convertible notes payable		—		12,061,032
Total		12,535,625		29,721,657

~~Earnings~~Fair ~~Per~~Value ~~Share~~of Financial Instruments

The ~~Company’s~~carrying ~~computation~~amounts of ~~earnings~~cash, ~~per~~money ~~share~~market funds, ~~(“EPS”)~~receivable ~~includes~~from ~~basic~~sale ~~and~~of ~~diluted~~technology ~~EPS. Basic~~rights, ~~EPS~~prepaid isexpenses ~~measured~~and asother ~~the~~current ~~income~~assets, ~~(loss)~~accounts ~~available~~payable toand ~~common~~accrued ~~shareholders~~expenses, and ~~divided~~income bytaxes ~~the~~payable ~~weighted~~approximate ~~average~~their ~~common~~respective ~~shares~~fair ~~outstanding~~values ~~for~~due ~~the period. Diluted EPS is similar~~ to ~~basic EPS but presents~~ the ~~dilutive~~short-term ~~effect~~nature ~~on a per share basis~~ of ~~potential~~these ~~common~~items. ~~shares~~The ~~(e.g.,~~amounts ~~warrants~~shown for ~~and~~notes ~~options)~~payable asalso ifapproximate ~~they~~fair ~~had~~value ~~been~~because ~~converted~~current atinterest ~~the~~rates ~~beginning~~offered ofto the ~~periods~~Company ~~presented,~~for ordebt ~~issuance~~of ~~date,~~similar ~~if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share)~~ maturities are ~~excluded~~substantially ~~from~~ the ~~calculation of diluted EPS~~same.

~~Loss~~Use ~~per common share is computed by dividing net loss by the weighted average number~~ of shares of common stock outstanding during the respective periods. Basic and diluted loss per common share is the same for all periods presented because all warrants and stock options outstanding are anti-dilutive.Estimates

AtThe ~~September~~preparation ~~30,~~of ~~2009~~financial ~~and~~statements ~~2008,~~in conformity with accounting principles generally accepted in the ~~Company~~United ~~excluded~~States of America requires management to make estimates and assumptions that affect the ~~outstanding~~reported ~~securities~~amounts ~~summarized~~of ~~below,~~assets ~~which~~and ~~entitle~~liabilities at the ~~holders~~date ~~thereof~~of tothe ~~acquire~~financial ~~shares~~statements and the reported amounts of ~~common~~expenses ~~stock,~~during the reporting period. Actual results could differ from those estimates. The Company evaluates its ~~calculation~~estimates on an on-going basis, including those related to valuation of ~~earnings~~warrants ~~per~~and ~~share~~options, asanalysis ~~their~~of ~~effect~~deferred ~~would~~taxes ~~have~~and ~~been~~provision ~~anti-dilutive~~for income taxes, contingencies and litigation.

	2009		2008
Warrants		21,805,643		5,090,625
Stock options		8,120,000		7,770,000
Convertible notes payable		—		11,721,311
Total		29,925,643		24,581,936

Segment Information

~~Fair~~Prior ~~Value~~to the discontinued operations discussed in Note 11, the Company’s reportable operating segments included dialysis services and development of ~~Financial~~a ~~Instruments~~wearable artificial kidney.

~~The~~Technology carrying amounts of cash, prepaid expenses and other current assets, accounts payable and accrued expenses and advances due to related party approximate their respective fair values due to the short-term nature of these items. The amounts shown for notes payable also approximate fair value because current interest rates offered to the Company for debt of similar maturities are substantially the same.Rights

~~Use~~Technology rights for a wearable artificial kidney were being amortized over an estimated useful life of ~~Estimates~~approximately 20 years. On December 14, 2009, the Company entered into an Asset Purchase Agreement for the sale of these rights, which was consummated on March 19, 2010 (see Note 11). Amortization is included in discontinued operations and amounted to $-0- and $1,215 for the three months ended March 31, 2010 and 2009.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The Company evaluates its estimates on an on-going basis, including those related to valuation of derivative instruments, valuation of warrants and options, analysis of deferred taxes and provision for income taxes, contingencies and litigation.8

~~Segment Information~~Reclassifications

~~The~~Certain ~~Company~~items ~~operates~~ in ~~one segment,~~ the ~~development~~2009 ofcondensed aconsolidated financial ~~wearable~~statements ~~artificial~~have ~~kidney.~~been ~~Prior~~reclassified to ~~the~~conform ~~discontinued~~to ~~operations discussed in Note 10,~~ the ~~Company~~current year’s ~~reportable operating segments included dialysis services and development of a wearable artificial kidney~~presentation.

~~Technology~~Recent ~~Rights~~Accounting Pronouncements

~~Technology~~Management ~~rights~~does ~~for~~not abelieve ~~wearable~~that ~~artificial~~any ~~kidney are being amortized over an estimated useful life of approximately 20 years. Amortization is included in research and development expense and amounted to $1~~recently issued,~~215~~ ~~for~~but ~~the~~not ~~three~~yet ~~months ended September 30~~effective, ~~2009~~authoritative ~~and 2008~~guidance, ~~and~~if ~~$3,645~~currently ~~for the nine months ended September 30~~adopted, ~~2009~~would ~~and~~have ~~2008.~~a Onmaterial ~~December~~impact ~~14,~~on ~~2009,~~ the Company's ~~entered~~financial statement ~~into~~presentation anor ~~Asset Purchase Agreement for the sale of these rights, which was consummated on March 19, 2010 (see Note 12)~~disclosures.

~~Recent~~4. Notes ~~Accounting Pronouncements~~Payable

~~Management~~Note ~~does~~Payable ~~not~~to ~~believe that any recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company's financial statement presentation or disclosures.~~Consultant

~~Reclassifications~~The Company was party to a contract dispute with a consultant claiming additional compensation relating to an agreement dated January 6, 2002, as amended. In August 2008, the Company and consultant reached an agreement whereby the Company executed and delivered a promissory note in the amount of $120,000, bearing interest at 2.54% per annum, and payable on August 7, 2010. In connection therewith, the Company and the consultant entered into a mutual general release agreement. As a result, compensation in the amount of $120,000 was charged to discontinued operations in August 2008. Additionally, on June 21, 2008, the Company granted the consultant options to purchase 1,500,000 shares of the Company’s common stock. In August 2008, the consultant was elected as a Director of the Company and was also appointed to serve as the Company’s Chief Scientific Officer. In connection with such election and appointment, the consultant received an additional 1,000,000 options to purchase shares of common stock. In March 2010, the note principal and related accrued interest were paid.

~~Certain~~Notes ~~items~~Payable ~~in the 2008 condensed consolidated financial statements have been reclassified~~ to ~~conform~~Related ~~to the current year’s presentation.~~Party

4On December 26, 2007, the Company entered into a $700,000 uncollateralized convertible promissory note agreement with Robert M. ~~Notes~~ ~~Payable~~Snukal, a director and chief executive officer, bearing interest at 6% per annum, and payable on December 31, 2008. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.07 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. In connection with this note, the Company issued warrants to purchase 5,000,000 shares of the Company’s common stock at an exercise price of $0.07 per share. The warrants were exercised in March 2008. The relative fair value of the warrants at the time of issuance was determined to be $179,163, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. The discount was fully amortized as of December 31, 2008.

~~Note~~On ~~Payable~~August 12, 2008, the Company entered into a $150,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and chief executive officer, bearing interest at 6% per annum, payable on December 31, 2008. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.12 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. In connection with this note, the Company issued warrants to ~~Consultant~~purchase 625,000 shares of the Company’s common stock at an exercise price of $0.12 per share. The warrants expire on the earlier of (i) August 12, 2015 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $45,478, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. The discount was fully amortized as of December 31, 2008. On March 19, 2010, the above described warrants to acquire 625,000 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note 11).

~~The~~On ~~Company~~May ~~was~~13, 2009, the $700,000 promissory note payable to related party and the $150,000 promissory note payable to arelated ~~contract~~party, ~~dispute~~plus ~~with~~accrued interest of $64,611, were rolled-over into a ~~consultant~~new ~~claiming~~uncollateralized ~~additional~~non-convertible ~~compensation~~promissory ~~relating~~note toin anthe ~~agreement~~amount ~~dated~~of ~~January~~$914,611, 6due on May 13, ~~2002~~2010, aswith ~~amended~~interest at 6% per annum. In ~~August~~connection ~~2008~~with this note, the Company ~~and~~issued ~~consultant~~warrants ~~reached~~to anpurchase ~~agreement~~16,937,240 ~~whereby~~shares of the Company’s common ~~executed~~stock ~~and~~at ~~delivered~~an aexercise ~~promissory~~price ~~note~~of in$0.027 per share, which was the ~~amount~~approximate closing price of ~~$120,000,~~the ~~bearing~~Company’s ~~interest~~common atstock on ~~2.54%~~or ~~per~~about ~~annum,~~the ~~and~~date ~~payable~~of the note. The warrants expire on ~~August~~the 7,earlier ~~2010.~~of In(i) ~~connection~~May ~~therewith~~13, 2016 or (ii) the ~~Company~~closing ~~and~~of the ~~consultant~~Company’s sale ~~entered~~of ~~into~~all aor ~~mutual~~substantially ~~general~~all ~~release~~of ~~agreement.~~its Asassets aor ~~result~~the acquisition of the Company, ~~compensation~~as defined in the ~~amount~~warrant. The relative fair value of ~~$120,000~~the warrants at the time of issuance was ~~charged~~determined to ~~operations~~be as$377,667, ~~research~~using the Black-Scholes option-pricing model, and was ~~development~~recorded ~~expense~~as indiscount ~~August~~to ~~2008.~~the ~~Additionally,~~note onpayable ~~June~~upon ~~21,~~issuance. ~~2008,~~The ~~the~~relative ~~Company~~fair ~~granted~~value of the ~~consultant~~warrants ~~options~~was amortized to ~~purchase~~interest ~~1,500,000~~expense over ~~shares~~the term of the ~~Company’s~~note ~~common~~using ~~stock~~the ~~(see~~straight-line ~~Note 9)~~method. InFor ~~August~~the ~~2008~~three months ended March 31, 2010, the ~~consultant~~Company ~~was~~recorded ~~elected~~interest expense asof a$136,581 ~~Director~~relative ofto the ~~Company~~amortized ~~and~~discount. ~~was~~The ~~also~~discount ~~appointed~~was tofully ~~serve~~amortized as ~~the~~of ~~Company’s~~March ~~Chief~~31, ~~Scientific Officer~~2010. In ~~connection~~March 2010, the $914,611 note, with ~~such~~accrued ~~election~~interest ~~and~~of ~~appointment~~$42,398, ~~the~~was ~~consultant~~paid ~~received~~in anfull. ~~additional~~On 1July 7,~~000~~ 2009,~~000~~ ~~options~~warrants to ~~purchase~~acquire 555,555 shares ofwere ~~common stock~~exercised. On In March 19, 2010, warrants to acquire the ~~note~~remaining ~~principal~~16,381,685 ~~and~~shares ~~related~~expired ~~accrued~~unexercised ~~interest~~as ~~were~~a ~~paid~~result of the Company’s sale of substantially all of its assets (see Note 11).

~~Notes~~On ~~Payable~~April 21, 2009, the Company entered into a $20,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and chief executive officer, bearing interest at 6% per annum, and payable on August 31, 2009. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date of the note, at any time. In connection with this note, the Company issued warrants to ~~Related~~purchase ~~Party~~333,333 shares of the Company’s common stock at an exercise price of $0.03 per share. The warrants expire on the earlier of (i) April 21, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was charged to interest expense over the period that the note was outstanding. The discount was fully amortized as of December 31, 2009. On April 28, 2009, the $20,000 note was paid in full. On March 19, 2010, the above described warrants to acquire 333,333 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note 11).

On ~~December~~October 2618, ~~2007~~2009, the Company entered into a $~~700~~200,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, a director and chief executive officer, bearing interest at 6% per annum, and payable on ~~December~~April 3130, ~~2008~~2010. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.07022 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 54,~~000~~545,~~000~~455 shares of the Company’s common stock at an exercise price of $0.07022 per share. The warrants ~~were~~expire ~~exercised~~on the earlier of (i) October 18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in ~~March~~the ~~2008~~warrant. The relative fair value of the warrants at the time of issuance was determined to be $~~179~~83,~~163~~597, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. For the three months ~~and nine months~~ ended March ~~September 30~~31, ~~2008~~2010, the Company recorded interest expense of $4451,~~310~~444 ~~and $131,965, respectively,~~ relative to the amortized discount. The discount was fully amortized as of ~~December~~March 31, ~~2008~~2010. In March 2010, the $200,000 note, with accrued interest of $4,077, was paid in full. On March 19, 2010, the above described warrants to acquire 4,545,455 shares expired unexercised as a result of the Company’s sale of substantially all of its assets (see Note 11).

On ~~August~~February 1223, ~~2008~~2010, the Company entered into a $~~150~~45,000 uncollateralized ~~convertible~~ promissory note agreement with ~~Robert~~an M.officer ~~Snukal, a director~~ and ~~chief executive officer~~director, bearing interest at 65% per annum, ~~payable~~and payable on ~~December~~February 3123, ~~2008~~2011. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.12 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. In ~~connection~~March ~~with this note~~2010, the ~~Company issued warrants to purchase 625,000 shares of the Company’s common stock at an exercise price of~~ $~~0.12 per share. The relative fair value of the warrants at the time of issuance was determined to be $~~45,~~478,~~000 ~~using the Black-Scholes option-pricing model, and was recorded as a discount to the~~ note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. For the three months and nine months ended September 30, ~~2008,~~with ~~the~~accrued ~~Company recorded~~ interest ~~expense~~ of $1626,~~013~~ ~~relative to the amortized discount. The discount~~ was ~~fully~~paid ~~amortized~~in ~~as of December 31, 2008~~full.

OnDuring ~~May 13, 2009,~~ the $700,000 promissory note payable to related party and the $150,000 promissory note payable to related party, plus accrued interest of $64,611, were rolled-over into a new uncollateralized non-convertible promissory note in the amount of $914,611, due on May 13, 2010, with interest at 6% per annum. In connection with this note, the Company issued warrants to purchase 16,937,240 shares of the Company’s common stock at an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note. The warrants expire on the earlier of (i) May 13, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $377,667, using the Black-Scholes option-pricing model, and was recorded as discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. For the three months ~~and nine months~~ ended ~~September~~March 3031, 2010 and 2009, the Company recorded total interest expense of $95188,~~193~~025 and $~~145~~-0-,~~893,~~ respectively, relative to the ~~amortized~~amortization ~~discount. In March 2010, the $914,611 note, with accrued interest~~ of ~~$42,424, was paid in full~~discounts.

~~On April 21, 2009, the Company entered into a $20,000 uncollateralized convertible promissory note agreement Robert M~~5. Common ~~Snukal,~~Stock ~~a director~~ and ~~chief~~Preferred executive officer, bearing interest at 6% per annum, and payable on August 31, 2009. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 333,333 shares of the Company’s common stock at an exercise price of $0.03 per share. The warrants expire on the earlier of (i) April 21, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was charged to interest expense over the period that the note was outstanding. Accordingly, during the three months and nine months ended September 30, 2009, the Company recorded interest expense of $-0- and $8,312, respectively, relative to the amortized discount. On April 28, 2009, the $20,000 note was paid in full.Stock

OnThe ~~October~~Company’s ~~18,~~Certificate ~~2009,~~of ~~the~~Incorporation provides ~~Company~~for ~~entered~~authorized ~~into~~capital aof ~~$200~~130,000 ~~uncollateralized convertible promissory note agreement with Robert M. Snukal~~,000 ~~a director and chief executive officer~~shares, ~~bearing interest at 6% per annum, and payable on April 30, 2010. Under the terms~~ of ~~the~~which ~~note~~125, ~~at the option of the holder through maturity~~000,000 ~~the principal amount plus any accrued interest thereon could be converted into~~ shares consist of ~~the Company’s~~ common stock atwith a ~~conversion~~par ~~price~~value of $0.~~022~~01 per share, ~~which~~and ~~was the approximate closing price of the Company’s common stock on or about the date of the note~~5, ~~at any time. In connection with this note~~000,000 ~~the Company issued warrants to purchase 4,545,455~~ shares consist of ~~the~~preferred ~~Company’s common~~ stock atwith ana ~~exercise~~par ~~price~~value of $0.~~022~~01 per share. The warrants expire on the earlier of (i) October 18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $83,597, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $200,000 note, with accrued interest of $4,077, was paid in full.

~~During~~The ~~the three months ended September 30, 2009 and 2008, the~~ Company ~~recorded~~is ~~total~~authorized ~~interest~~to ~~expense~~issue ~~of $95~~5,~~193 and $60~~000,~~323,~~000 shares ~~respectively, relative to the amortization~~ of ~~discounts.~~preferred ~~During~~stock ~~the~~with ~~nine~~such ~~months ended September 30~~designations, ~~2009~~voting and ~~2008,~~other ~~the~~rights ~~Company~~and ~~recorded~~preferences ~~total~~as ~~interest~~may ~~expense~~be ofdetermined ~~$154,205~~from ~~and~~time ~~$147,978, respectively, relative~~ to time by the ~~amortization~~Board of ~~discounts~~Directors.

~~5. Common~~Exercise ~~Stock~~of Options and ~~Preferred Stock~~Warrants

~~The~~On ~~Company’s~~April ~~Certificate of Incorporation provides for authorized capital of 130~~29,~~000,000~~ ~~shares~~2009, ofthe ~~which~~Company ~~125~~issued 3,000,000 shares ~~consist~~ of its common stock ~~with~~to aRobert ~~par~~M. ~~value~~Snukal, ofa ~~$0.01~~director ~~per~~and ~~share~~chief ~~and~~executive 5officer,~~000,000~~ ~~shares~~upon ~~consist~~the exercise of ~~preferred~~warrants ~~stock~~at ~~with~~$0.02 per ashare. ~~par~~The ~~value~~Company ofreceived $~~0.01~~60,000 ~~per~~of ~~share~~proceeds.

~~The~~On ~~Company~~May is11, ~~authorized~~2009, tothe ~~issue~~Company 5issued 2,000,000 shares of ~~preferred~~its common stock ~~with~~to ~~such~~Robert ~~designations~~M. Snukal, ~~voting~~a director and ~~other~~chief ~~rights~~executive ~~and~~officer, ~~preferences~~upon asthe ~~may~~exercise beof ~~determined~~warrants ~~from~~at ~~time~~$0.02 per toshare. ~~time~~The byCompany ~~the~~received ~~Board~~$40,000 of ~~Directors~~proceeds.

9On July 7, 2009, the Company issued 555,555 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of warrants at $0.027 per share. The Company received $15,000 of proceeds.

~~Private~~6. Related ~~Placements~~Party Transactions

OnDuring ~~June~~August 22, 2007, the Company completed a private placement of an aggregate of 5,756,250 units at a purchase price of $0.16 per unit, for a total purchase price of $921,000. Each unit consisted of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.16 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. The purchase price for the units was paid $307,000 in cash at closing with the balance of $614,000 satisfied through delivery of promissory notes. One-half of the principal amounts of each such promissory note, together with accrued and unpaid interest there-under, was due and payable September 22, 2007, and the remaining principal balance, together with accrued and unpaid interest, was due and payable on December 22, 2007. The unpaid principal amount under each promissory note bore interest at the rate of ~~4.84% per annum. As of December 31~~2009, 2007, these notes receivable from stockholders amounted to $6,500 and were presented as stock subscription receivables, an offset to stockholders’ equity, on the condensed consolidated balance sheet. These notes receivable were paid during the first quarter of 2008. The purchasers of the units were: Robert M. Snukal, a director and chief executive officer, ~~5,625,000~~advanced ~~units; Jose Spiwak~~$87, ~~director, 37,~~500 ~~units;~~to ~~The~~the ~~Leonardo~~Company ~~Berezovsky~~on ~~Charitable~~a ~~Trust,~~non-interest ~~46,875~~bearing ~~units;~~basis ~~and~~for ~~The~~working capital ~~Karen~~purposes. ~~and~~On ~~Sonia~~October ~~Berezovsky Charitable Trust~~17, 462009,~~875~~ ~~units. Leonardo Berezovsky is~~ the ~~chief~~advances ~~financial~~were ~~officer~~repaid ~~and~~in ~~a director of the Company and trustee of The Leonardo Berezovsky Charitable Trust and The Karen and Sonia Berezovsky Charitable Trust~~full.

During March 2008, the Company completed a private placement of an aggregate of 1,375,000 units at a purchase price of $0.08 per unit, for a total purchase price of $110,000. Each unit consisted of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.08 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. The purchase price for the units was paid $80,000 in cash at closing, with the balance of $30,000 satisfied through delivery of a promissory note. The principal amount of the promissory note, together with accrued and unpaid interest, was due and payable in three equal installments of $10,000 due April 30, 2008, May 30, 2008, and June 30, 2008. The unpaid principal amount under the promissory note bore interest at the rate of 1.85% per annum and was paid in full on July 1, 2008. The purchasers of the units were: Robert M. Snukal, a director and chief executive officer, 750,000 Units; and Jose Spiwak, director, 625,000 Units.

~~During May 2008, the Company completed a private placement of an aggregate of 400,000 units at a purchase price of $0~~7.06 ~~per~~Money ~~unit,~~Market ~~for~~Funds a— ~~total~~Fair cash purchase price of $24,000. Each unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.06 per share. The warrants were exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets. The purchaser of the units was Robert M. Snukal, a director and chief executive officer.Value

~~During~~Money ~~June~~market ~~2008,~~funds ~~the~~at ~~Company~~March ~~completed~~31, a2010 ~~private placement~~ consisted of an ~~aggregate~~investment in shares of ~~1,250,000~~the ~~units~~UBS atRMA aMoney ~~purchase~~Fund ~~price~~Inc of– ~~$0.04~~Money ~~per~~Market ~~unit,~~Portfolio ~~for~~with a ~~total~~market ~~cash~~value ~~purchase price~~ of $50175,~~000~~838. ~~Each~~The ~~unit~~Money Market ~~consists~~Portfolio ofis ~~one~~an ~~share~~open-end offund ~~common~~incorporated ~~stock~~in of the ~~Company~~USA ~~and~~whose ~~one~~stated ~~warrant~~objective is to ~~purchase~~provide ~~one-half~~maximum ofcurrent aincome ~~share~~consistent with ofliquidity ~~common~~and ~~stock~~conservation of ~~the Company at an exercise price of $0~~capital.04 ~~per share.~~ The ~~warrants~~Fund ~~were~~invests ~~exercisable~~in ~~immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon~~ a ~~sale~~diversified ofportfolio ~~the Company or substantially all~~ of ~~its~~high ~~assets.~~quality ~~The~~money ~~purchaser~~market instruments of ~~the~~governmental ~~units was Robert M. Snukal, a director~~ and ~~chief~~private ~~executive officer~~issuers.

~~During~~The ~~July~~authoritative ~~2008,~~guidance ~~the~~with ~~Company~~respect to ~~completed~~fair value established a ~~private~~fair ~~placement~~value hierarchy that prioritizes the inputs to anvaluation ~~existing~~techniques ~~shareholder~~used ofto anmeasure ~~aggregate~~fair ofvalue into ~~625~~three levels,~~000~~ ~~shares~~and ofrequires ~~common~~that ~~stock~~assets and liabilities carried at afair ~~purchase~~value ~~price~~be classified and disclosed in one of $0three categories, as presented below.08 ~~per~~Disclosure ~~share~~as to transfers in and out of Levels 1 and 2, ~~for~~and aactivity ~~total~~in ~~cash~~Level ~~purchase~~3 ~~price~~fair ofvalue ~~$50~~measurements,~~000~~ is also required.

OnLevel ~~October~~1: ~~16,~~quoted ~~2008,~~prices ~~the~~(unadjusted) ~~Company~~in ~~completed~~active markets afor ~~private placement of~~ an ~~aggregate~~identical ofasset ~~10,000,000~~or ~~units~~liability atthat ~~a purchase price of $0.02 per unit, for a total purchase price of $200,000. Each unit consists of one share of common stock of~~ the Company ~~and~~has ~~one~~the ~~warrant~~ability to ~~purchase~~access ~~one-half~~as of ~~a share of common stock of~~ the ~~Company~~measurement ~~at an exercise price of $0~~date.02 ~~per~~Financial ~~share. The warrants were exercisable immediately upon issuance~~ assets and ~~expire~~liabilities ~~upon~~utilizing ~~the~~Level ~~first~~1 toinputs ~~occur~~include ofactive-exchange ~~(i)~~traded ~~seven~~securities years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. The purchase price for the units was paid in cash at the closing. The purchaser of the units was Robert M. Snukal, a director and ~~chief~~exchange-based ~~executive officer~~derivatives.

~~Exercise~~Level of2: ~~Options~~inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and ~~Warrants~~liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.

~~During~~Level ~~March~~3: ~~2008,~~unobservable inputs for the ~~Company~~asset or ~~issued~~liability 5are only used when there is little,~~000~~ if any,~~000~~ ~~shares~~market ofactivity ~~its~~for ~~common~~the ~~stock~~asset toor ~~Robert~~liability M.at ~~Snukal,~~the ameasurement ~~director~~date. Financial assets and ~~chief~~liabilities ~~executive~~utilizing ~~officer,~~Level ~~upon~~3 ~~the~~inputs ~~exercise~~include ofinfrequently-traded ~~warrants~~non-exchange-based atderivatives ~~$0.07~~and ~~per~~commingled ~~share.~~investment funds, ~~The~~and ~~Company~~are ~~received~~measured ~~$350,000~~using ofpresent ~~proceeds~~value pricing models.

OnThe ~~June~~Company ~~30,~~determines ~~2008,~~ the ~~Company~~level ~~issued~~in ~~875,000~~the fair ~~shares~~value ofhierarchy ~~its~~within ~~common~~which ~~stock~~each tofair ~~Robert~~value M.measurement ~~Snukal,~~falls ain ~~director~~its ~~and chief executive officer~~entirety, ~~upon~~based on the ~~exercise~~lowest oflevel ~~250,000~~input ~~options~~that atis ~~$0.07~~significant to ~~per~~the ~~share~~fair ~~and~~value ~~625,000~~measurement ~~warrants~~in atits $0entirety.04 ~~per~~In ~~share.~~determining ~~Proceeds~~the ~~received~~appropriate bylevels, the Company ~~were~~performs ~~$17,500~~an ~~and~~analysis ~~$25,000,~~of ~~respectively,~~the ~~for~~assets and aliabilities ~~total~~at ofeach ~~$42,500~~reporting period end.

InMoney ~~August~~market ~~2008,~~funds are the ~~Company~~only ~~issued~~financial instrument ~~200,000~~that ~~shares~~is ofmeasured ~~its~~and ~~common~~recorded ~~stock~~at tofair ~~Jeff~~value ~~Croucier~~on ~~upon~~ the ~~exercise~~Company’s ofbalance ~~warrants~~sheet aton ~~$0.06~~a ~~per~~recurring ~~share~~basis. The ~~Company~~following table ~~received~~presents ~~$12,000~~money ofmarket ~~proceeds~~funds at their level within the fair value hierarchy at March 31, 2010.

On April 29, 2009, the Company issued 3,000,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $60,000 of proceeds.

	Total		Level 1		Level 2		Level 3

March 31, 2010:
Money market funds	$	175,838	$	175,838	$	—	$	—

~~On May 11, 2009, the Company issued 2,000,000 shares of its common stock to Robert M~~8. ~~Snukal,~~Stock aOptions ~~director~~ and ~~chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $40,000 of proceeds.~~Warrants

OnA ~~July~~summary 7,of ~~2009,~~ the Company’s ~~issued 555,555 shares of its common~~ stock tooption activity ~~Robert M. Snukal, a director~~ and ~~chief~~related ~~executive~~information ~~officer,~~for ~~upon~~ the ~~exercise~~three ofmonths ~~warrants~~ended atMarch ~~$0.027~~31, ~~per~~2010 ~~share.~~and ~~The~~2009 ~~Company~~is ~~received~~as ~~$15,000 of proceeds.~~follows:

6. Related Party Transactions

	2010				2009
			Weighted Average				Weighted Average
			Exercise				Exercise
	Options		Price		Options		Price
Outstanding — beginning of period		8,070,000	$	0.37		7,570,000	$	0.39
Granted		—	$	—		—	$	—
Exercised		—	$	—		—	$	—
Expired		—	$	—		—	$	—

Outstanding — end of period		8,070,000	$	0.37		7,570,000	$	0.39

~~Stock Subscriptions and Other Receivables from Stockholders~~11

AsThe offollowing ~~December 31,~~table ~~2007,~~summarizes the ~~Company~~number of ~~was~~option ~~owed $43~~shares,~~027~~ ~~from~~the anweighted ~~entity~~average ~~controlled~~exercise byprice, aand ~~shareholder~~weighted ofaverage ~~the~~life ~~Company.~~(by ~~This~~years) ~~note~~by ~~receivable~~price isrange ~~presented~~for inboth ~~the~~total ~~Company’s~~outstanding options ~~condensed~~and ~~consolidated~~total ~~balance~~exercisable ~~sheet~~options as anof ~~offset to shareholders’ equity. Interest accrued on this note receivable was $832 for the year ended December~~March 31, ~~2007. During the quarter ended December 31, 2008, this note, including accrued interest of $832, was written-off.~~2010:

As of December 31, 2007, the Company was owed $6,788, including accrued interest of $288, from three stockholders and directors who subscribed to units of the Company’s securities in connection with its June 22, 2007 private placement. These stock subscription receivables, including accrued interest, were paid in 2008.

	Total Outstanding						Total Exercisable
	Number		Weighted Average				Number		Weighted Average
Price Range	Of Shares		Exercise Price		Life (Years)		Of Shares		Exercise Price		Life (Years)
$0.03 - $0.35		4,090,000	$	0.12		8.13		3,440,000	$	0.12		8.09
$0.36 - $0.99		3,980,000	$	0.63		6.05		3,980,000	$	0.63		6.05

		8,070,000	$	0.37		7.11		7,420,000	$	0.39		6.99

10See Note 9 for a description of the Company’s share-based compensation including the stock option activity during the three months ended March 31, 2010 and 2009.

~~Advances~~Stock ~~due to Related Party~~Warrants

~~During~~A ~~August~~summary ~~and September~~ of ~~2009, Robert M. Snukal, a director and chief executive officer, advanced $87,500 to~~ the Company’s onstock awarrant activity ~~non-interest~~and ~~bearing~~related ~~basis~~information for ~~working~~the ~~capital~~three ~~purposes.~~months Onended ~~October~~March 1731, ~~2009,~~2010 ~~the~~and ~~advances~~2009 ~~were~~is ~~repaid~~as ~~in full.~~follows:

Discontinued Operations

	2010					2009
				Weighted Average				Weighted Average
	Warrant			Exercise Price		Warrant		Exercise Price
Outstanding — beginning of period		26,351,098		$	0.05		10,090,625	$	0.10
Granted		—		$	—		—	$	—
Exercised		—		$	—		—	$	—
Expired		(21,885,473	)	$	0.03		—	$	—

Outstanding — end of period		4,465,625		$	0.18		10,090,625	$	0.10

AsThe offollowing ~~December~~table ~~31,~~summarizes ~~2007,~~ the ~~Company owed $4,854 to one~~ number of ~~its stockholders~~warrants, ~~which was due on demand. During~~ the ~~quarter~~weighted ~~ended~~average ~~December~~exercise 31price, ~~2008,~~and ~~this~~weighted ~~amount~~average ~~was~~life ~~written-off.~~(by ~~Additionally,~~years) ~~during~~by ~~the~~price ~~quarter~~range ~~ended~~for ~~December~~both ~~31,~~total ~~2008,~~outstanding warrants ~~the~~and ~~Company’s~~total ~~CEO~~exercisable ~~forgave~~warrants ~~accrued~~as ~~interest payable to him in the amount~~ of ~~$28~~March 31,~~450,~~ ~~and the Company also wrote-off a receivable due from an entity in which one of the Company’s shareholders was also a majority shareholder.~~2010:

7. Derivative Liability

	Total Outstanding						Total Exercisable
	Number		Weighted Average				Number		Weighted Average
Price Range	Of Shares		Exercise Price		Life (Years)		Of Shares		Exercise Price		Life (Years)
$0.02 - $0.35		4,315,625	$	0.15		3.90		4,315,625	$	0.15		3.90
$0.36 - $0.99		100,000	$	0.60		0.79		100,000	$	0.60		0.79
$1.00 - $1.25		50,000	$	1.25		0.79		50,000	$	1.25		0.79

		4,465,625	$	0.18		3.80		4,465,625	$	0.18		3.80

~~The Company has issued common stock with detachable warrants under private placement offerings~~9. Share-Based In 2005 and 2006, certain common stock and warrants sold by the Company granted the holders mandatory registration rights which were contained in the terms governing the private placement offerings. The mandatory rights provision results in share settlement not being controlled by the Company. Accordingly, the shares of common stock and warrants qualify as derivative instruments. At each balance sheet date, the Company adjusts the derivative financial instruments to their estimated fair value and analyzes the instruments to determine their classification as a liability or equity.Compensation

As of ~~December~~March 31, ~~2007~~2010, the ~~derivative~~Company ~~liability~~had ~~was~~adopted three ~~$43,750~~stock ~~representing~~option anplans ~~aggregate~~for ~~amount of proceeds received from~~ the ~~issuance~~benefit of ~~common~~officers, ~~stock under private placement offerings. Of that amount~~directors, ~~$18~~employees,~~750~~ ~~related~~independent tocontractors ~~the~~and ~~issuance~~consultants of ~~common~~the ~~stock~~Company. These ~~under~~plans ainclude: ~~private~~(i) ~~placement during~~ the ~~three~~1998 ~~months~~Stock ~~ending~~Option ~~March 31~~Plan, ~~2006~~(ii) atthe ~~date~~1996 ofStock ~~issuance~~Option Plan, and ~~$25,000~~(iii) ~~related~~the to1996 ~~the~~Employee ~~issuance~~Compensatory Stock ofOption ~~common~~Plan. ~~stock~~The ~~under~~1998 ~~similar~~Stock ~~terms~~Option asPlan ~~the~~was ~~private~~terminated ~~placement~~with ~~during~~respect ~~the~~to ~~three~~future ~~months~~grants ~~ending~~on ~~June~~April 308, ~~2006 at date of issuance. During 2007~~2008, the ~~Company~~1996 ~~began~~Stock ~~reclassification~~Option Plan ofwas ~~the~~terminated ~~derivative~~with ~~liability~~respect to ~~equity~~future asgrants ~~the~~on ~~underlying~~May ~~mandatory~~11, ~~registration~~2006 ~~rights~~and ~~for each purchase expired on~~ the ~~date~~1996 onEmployee ~~which~~Compensatory ~~the~~Stock ~~shares~~Option ~~may~~Plan bewas ~~resold~~terminated with ~~pursuant~~respect to anfuture ~~exemption~~grants ~~under~~on ~~Rule~~February ~~144(k)~~7, ~~promulgated under the Securities Act~~2000. In ~~accordance~~addition ~~with~~to ~~Rule~~these ~~144(k)~~plans, ~~holders~~from ~~may~~time ~~resell~~to ~~their~~time, ~~shares~~the ~~beginning~~Company ~~two~~grants ~~years~~various ~~after~~other stock ~~purchase~~options ~~regardless~~and ofwarrants ~~whether~~directly ato ~~registration~~certain ~~statement has been filed~~parties. ~~During~~The ~~the~~Company ~~nine~~grants ~~months~~all ~~ended~~such ~~September~~awards ~~30,~~as ~~2008~~incentive ~~the~~compensation ~~Company~~to ~~reclassified $43~~officers,~~750~~ directors, ~~from~~and ~~derivative~~employees, ~~liability~~and toas ~~additional~~compensation ~~paid-in~~for ~~capital.~~the ~~There~~services ~~was~~of noindependent ~~derivative~~contractors ~~liability~~and atconsultants ~~December~~of ~~31,~~the ~~2008, or thereafter~~Company.

The authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.12

~~Level~~The ~~1: quoted~~fair ~~prices~~value ~~(unadjusted)~~of ineach ~~active~~option ~~markets~~and ~~for~~warrant awarded anis ~~identical~~estimated ~~asset~~on orthe ~~liability~~date ~~that~~of grant using the ~~Company~~Black-Scholes ~~has~~option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the ~~ability~~fair tovalue ~~access~~of astraded options. In addition, option valuation models require the input of highly subjective assumptions including the ~~measurement~~expected ~~date~~stock price volatility. ~~Financial~~ ~~assets~~Because the Company’s stock options and ~~liabilities~~warrants have ~~utilizing~~characteristics ~~Level~~significantly 1different ~~inputs~~from ~~include~~those ~~active-exchange~~of traded ~~securities~~options, and ~~exchange~~because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options and warrants. The expected dividend yield assumption is based on the Company’s expectation of dividend payouts. Expected volatilities are based on historical volatility of the Company’s stock. The average risk-free interest rate is based ~~derivatives~~on the U.S. treasury yield curve in effect as of the grant date. Expected life of the options and warrants is the average of the vesting term and the full contractual term of the options and warrants.

~~Level~~There ~~2: inputs~~were ~~other~~no ~~than~~transactions ~~quoted~~during ~~prices included within Level 1 that are directly observable for~~ the ~~asset~~three months orended ~~liability~~March or31, ~~indirectly~~2010 ~~observable through corroboration with observable market data. Financial assets~~ and ~~liabilities~~2009, ~~utilizing~~requiring ~~Level~~an 2assessment ~~inputs~~of ~~include~~value ~~fixed~~pursuant ~~income~~to ~~securities,~~the ~~non~~Black-~~exchange~~Scholes ~~based derivatives, mutual funds, and fair~~option-~~value~~pricing ~~hedges~~model.

~~Level~~On ~~3: unobservable~~August ~~inputs~~5, ~~for~~2009, the ~~asset~~Board orapproved ~~liability~~the issuance ~~are~~of ~~only~~250,000 ~~used~~shares ~~when~~of ~~there~~the isCompany’s ~~little,~~common ifstock ~~any,~~to ~~market~~Dr. ~~activity~~Rambod as payment for additional services in connection with the ~~asset~~patent orapplication. ~~liability~~The common stock issued was valued at $0.02 per share, which was the ~~measurement~~approximate ~~date. Financial~~closing ~~assets~~price ~~and~~of ~~liabilities~~the ~~utilizing~~Company’s common ~~Level~~stock 3on ~~inputs~~the ~~include~~date ~~infrequently-traded~~of ~~non-exchange-based~~the ~~derivatives~~issuance, ~~and~~for ~~commingled~~a ~~investment~~total ~~funds~~of $5,000, and ~~are~~was ~~measured~~charged ~~using~~to ~~present~~discontinued ~~value~~operations ~~pricing~~on ~~models~~August 5, 2009.

~~The~~On ~~Company~~May ~~determines~~13, 2009, the ~~level~~Board inapproved the ~~fair~~issuance of ~~value~~500,000 ~~hierarchy~~shares ~~within~~of ~~which~~the ~~each~~Company’s ~~fair~~common ~~value~~stock ~~measurement~~to ~~falls~~Dr. inRambod, ~~its~~a ~~entirety~~consultant and former officer of the Company, ~~based~~as onpayment for services in connection with the ~~lowest~~completion ~~level~~and ~~input~~filing ~~that~~of isa ~~significant~~patent application regarding the Company’s rights in and to the polymer technology developed by the ~~fair~~Company. ~~value~~The ~~measurement~~common instock ~~its~~issued ~~entirety~~was valued at $0.027 Inper ~~determining~~share, which was the ~~appropriate~~approximate closing ~~levels,~~price of the Company’s ~~performs~~common anstock ~~analysis~~on or about the date of the ~~assets~~issuance, ~~and~~for ~~liabilities~~a attotal ~~each~~of ~~reporting~~$13,500. ~~period~~On ~~end~~May 13, 2009, the Company charged discontinued operations for consultant compensation expense of $13,500 relating to these shares.

~~The~~On ~~derivative~~May ~~liability~~13, as2009, ~~described~~the ~~above,~~Company isissued ~~the~~options to ~~only~~purchase ~~financial~~250,000 ~~instrument~~shares ~~that~~of iscommon ~~measured~~stock ~~and~~to ~~recorded~~a atconsultant ~~fair~~for ~~value~~past onservices. ~~the~~The ~~Company’s~~options ~~balance~~became ~~sheets~~fully vested on aMay ~~recurring~~13, ~~basis. The~~2009, the ~~following~~date ~~table~~of ~~presents~~grant. ~~the~~The ~~derivative~~options ~~liability~~have atan ~~their~~exercise ~~level~~price ~~within~~of ~~the~~$0.027 ~~fair~~per ~~value~~share, ~~hierarchy~~which ~~during~~was the ~~nine~~approximate ~~months~~closing ~~ended~~price ~~September~~of ~~30,~~the ~~2008,~~Company’s common asstock ~~well~~on asor aabout ~~reconciliation~~the date of the ~~changes~~issuance, toand ~~the~~expire ~~beginning~~in ~~and~~ten ~~ending~~years. ~~balances~~The offair ~~such~~value ~~financial~~of ~~instruments~~these ~~during~~options ~~such~~on ~~period.~~the ~~There~~date of grant was no$6,037, ~~derivative~~and ~~liability~~was atcharged ~~December~~to ~~31,~~operations ~~2008,~~on orMay ~~thereafter~~13, 2009.

	Fair Value
	Level 1		Level 2			Level 3		Total
Balance, December 31, 2007	$	—	$	43,750		$	—	$	43,750
Reclassified to additional paid-in capital		—		(43,750	)		—		(43,750	)
Balance, September 30, 2008	$	—	$	—		$	—	$	—

On May 13, 2009, the Company issued options to purchase a total of 300,000 shares of common stock to two outside directors for past services. The options became fully vested on May 13, 2009, the date of grant. The options have an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $7,244, and was charged to operations on May 13, 2009.

On August 8., 2008, the Company issued options to purchase 1,000,000 shares of common stock to a director pursuant to the 1998 Stock ~~Options~~Option Plan. The options vest in eight equal semi-annual installments commencing on February 8, 2009 and ~~Warrants~~continuing on each August 8 and February 8 thereafter until the becoming fully vested on the fourth anniversary of the date of grant, and expire in ten years. The fair value of these options on the date of grant was $83,621 and will be charged to operations on a straight-line basis over the requisite service period. During the three months ended March 31, 2010 and 2009, the Company charged continuing operations for share-based compensation expense of $5,205 and $5,203, respectively, relating to these options.

~~Stock~~On ~~Options~~June 21, 2008, the Company issued options to purchase 100,000 shares of common stock to a consultant. The options vest over two years, have an exercise price of $0.08 per share, and expire in ten years. The fair value of these options on the date of grant was to $5,901 and is being charged to operations on a straight-line basis over the requisite service period. During the three months ended March 31, 2010 and 2009, the Company recorded consultant compensation expense of $738 relating to these options.

AOn ~~summary~~February of12, 2007, the Company’s issued options to purchase 50,000 shares of common stock ~~option~~to ~~activity~~a consultant pursuant to the 1998 Stock Option Plan. The options vest over two years, have an exercise price of $0.36 per share, and ~~related~~expire ~~information~~in ~~for~~ten years. The fair value of these options on the ~~nine~~date ~~months~~of grant was $12,163 and is being charged to operations on a straight-line basis over the requisite service period. During the three months ended ~~September~~March 3031, 2009, ~~and~~the ~~2008,~~Company isrecorded asconsultant ~~follows:~~compensation expense of $761 relating to these options.

11During the three months ended March 31, 2010 and 2009, a total of $5,943 and $6,702, respectively, was charged to continuing and discontinued operations for share-based compensation costs relating to common stock, stock options and warrants.

	2009				2008
			Weighted Average					Weighted Average
			Exercise					Exercise
	Options		Price		Options			Price
Outstanding — beginning of period		7,570,000	$	0.39		5,420,000		$	0.51
Granted		550,000	$	0.03		2,600,000		$	0.10
Exercised		—	$	—		(250,000	)	$	0.07
Forfeited		—	$	—		—		$	—
Outstanding — end of period		8,120,000	$	0.37		7,770,000		$	0.39

As of March 31, 2010, there was approximately $47,800 of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over the ensuing 28 months.

The following table summarizes the number of option shares, the weighted average exercise price, and weighted average life (by years) by price range for both total outstanding options and total exercisable options as of September 30, 2009:13

	Total Outstanding						Total Exercisable
	Number		Weighted Average				Number		Weighted Average
Price Range	of Shares		Exercise Price		Life (Years)		of Shares		Exercise Price		Life (Years)
$0.03 - $0.35		4,140,000	$	0.12		8.53		3,340,000	$	0.12		8.45
$0.36 - $0.99		3,980,000	$	0.63		6.55		3,980,000	$	0.63		6.55
		8,120,000	$	0.37		7.56		7,320,000	$	0.40		7.42

There were no exercisable but unexercised in-the-money stock options and warrants at March 31, 2010, Accordingly, they had no intrinsic value on that date, based on a fair market value of $0.026 per share on March 31, 2010. The intrinsic value of exercisable but unexercised in-the-money stock options and warrants at March 31, 2009 was approximately $250,000, based on a fair market value of $0.07 per share on March 31, 2009.

~~See~~10. Commitments ~~Note 9 for a description of the Company’s share-based compensation including the stock option activity during the nine months ended September 30, 2009~~ and ~~2008.~~Contingencies

~~Stock~~Arbitration ~~Warrants~~ Proceeding with Xcorporeal

AOn ~~summary~~September 1, 2006, the Company entered into a merger agreement (the “Merger Agreement”) with Xcorporeal, Inc. (“Xcorporeal”) which contemplated that either (i) the Company would enter into a triangular merger in which the Company would become a wholly-owned subsidiary of Xcorporeal, or (ii) Xcorporeal would issue to the Company shares of its common stock in consideration of the assignment of the technology relating to the Company’s ~~stock~~wearable ~~warrant~~artificial ~~activity~~kidney and ~~related~~other ~~information~~medical ~~for~~devices (collectively sometimes referred to as the ~~nine~~“Technology ~~months~~Transactions”). ~~ended~~In connection with the Merger Agreement, also on September 301, ~~2009~~2006, ~~and~~the ~~2008~~Company entered into a license agreement (the “License Agreement”) with Xcorporeal granting an exclusive license for ninety-nine years (or until the expiration of the Company’s proprietary rights in the technology, isif asearlier), ~~follows:~~to all technology relating to the Company’s wearable artificial kidney and other medical devices for a minimum royalty of $250,000.

	2009					2008
				Weighted Average					Weighted Average
	Warrant			Exercise Price		Warrant			Exercise Price
Outstanding — beginning of period		10,090,625		$	0.10		8,778,125		$	0.12
Granted		17,270,573		$	0.03		2,137,500		$	0.08
Exercised		(5,555,555	)	$	0.02		(5,825,000	)	$	0.07
Outstanding — end of period		21,805,643		$	0.06		5,090,625		$	0.16

Following execution of the Merger Agreement and the License Agreement, the parties attempted to close the transactions contemplated by the Merger Agreement, but disputes arose regarding satisfaction of the conditions to closing and with respect to certain provisions of the Merger Agreement. In addition, a dispute arose as to whether the License Agreement would survive a failure to consummate either of the two transactions contemplated by the Merger Agreement.

~~The~~Effective ~~following~~as ~~table~~of ~~summarizes~~December 29, 2006, the ~~number~~Company terminated ofthe ~~warrants~~Merger Agreement and License Agreement and all transactions contemplated thereby due to Xcorporeal’s continuing, uncured ~~the~~and ~~weighted~~incurable ~~average~~breaches ~~exercise~~of ~~price~~the Merger Agreement, the License Agreement and ~~weighted~~certain ~~average~~related ~~life~~matters. ~~(by~~Xcorporeal ~~years)~~did bynot ~~price~~dispute the ~~range~~termination ~~for~~of ~~both~~the ~~total~~Merger ~~outstanding~~Agreement, ~~warrants~~but ~~and~~had ~~total~~disputed ~~exercisable~~the ~~warrants~~Company’s astermination of ~~September 30~~the License Agreement, ~~2009:~~which Xcorporeal alleged to be in full force and effect.

	Total Outstanding						Total Exercisable
	Number		Weighted Average				Number		Weighted Average
Price Range	of Shares		Exercise Price		Life (Years)		of Shares		Exercise Price		Life (Years)
$0.02 - $0.35		21,655,643	$	0.06		6.16		21,655,643	$	0.06		6.16
$0.36 - $0.99		100,000	$	0.60		1.29		100,000	$	0.60		1.29
$1.00 - $1.25		50,000	$	1.25		1.29		50,000	$	1.25		1.29
		21,805,643	$	0.06		6.12		21,805,643	$	0.06		6.12

On December 1, 2006, Xcorporeal filed a demand for arbitration against the Company, alleging an unspecified anticipatory breach of the License Agreement. On December 29, 2006, at the same time that the Company terminated the Merger Agreement and the License Agreement, the Company filed a lawsuit against Xcorporeal and against Victor Gura, former Chief Financial Officer and Chief Scientific Officer and a director of the Company.

~~During~~The ~~March~~arbitration was held in February 2008. On June 9, 2008, the ~~Company~~arbitrator ~~completed~~issued aan ~~private~~interim ~~placement~~award. ofThe anarbitrator ~~aggregate~~concluded ofthat ~~1,375,000~~the ~~units~~License atAgreement awas ~~purchase~~not ~~price~~to ofsurvive the ~~$0.08~~failure ~~per~~of ~~unit,~~the ~~for~~transactions acontemplated ~~total~~by ~~purchase~~the ~~price~~Merger ~~of $110~~Agreement,~~000.~~ ~~Each~~that ~~unit~~Xcorporeal ~~consisted~~had ofwaived ~~one~~and ~~share~~excused ofthe ~~common~~Company’s obligations ~~stock~~to ofperform under the ~~Company~~Merger Agreement and ~~one~~that ~~warrant~~the appropriate remedy under the circumstances was to ~~purchase~~award ~~one-half~~the Company specific performance of athe ~~share~~Technology ofTransaction. ~~common~~The ~~stock~~arbitrator ofrejected the Company’s fraud, amisappropriation ~~total~~and ~~of 687~~other claims,~~500~~ ~~warrants,~~and atrejected anGura’s ~~exercise~~claims ~~price~~against ofthe ~~$0.08~~Company ~~per~~and ~~share.~~the ~~The~~Company’s ~~warrants~~claims ~~were~~against ~~exercisable~~Gura. ~~immediately~~In ~~upon~~addition, ~~issuance~~the ~~and~~arbitrator stated ~~expire~~that ~~upon~~the Company was the ~~first~~prevailing toparty ~~occur~~in ofthe ~~(i)~~arbitration ~~seven~~and ~~years~~therefore ~~following~~entitled ~~the~~to ~~date~~recover ofits ~~issuance,~~fees ~~(ii)~~and costs. Because the ~~closing~~Company ofhad aprevailed ~~firmly~~on ~~underwritten~~some, ~~public~~but ~~offering~~not orall, ~~(iii)~~of ~~upon~~its aclaims, ~~sale~~the ofarbitrator awarded the Company approximately $1,870,000 in fees and costs.

~~During~~On ~~May~~April ~~2008~~13, 2009, the ~~Company~~arbitrator ~~completed~~in athe arbitration ~~private~~proceeding ~~placement~~issued ofa anpartial ~~aggregate~~final ofaward ~~400~~(“Partial Final Award”),~~000~~ ~~units~~which atresolved athe ~~purchase~~remaining ~~price~~issues ofthat were $0pending for decision in the arbitration proceeding.06 ~~per~~The ~~unit,~~Partial ~~for~~Final aAward ~~total~~reflected ~~cash~~the ~~purchase~~arbitrator’s ~~price~~conclusions ofbased on ~~$24~~arguments by Xcorporeal that the 9,230,000. ~~Each~~shares ~~unit~~could ~~consisted~~not ofbe ~~one~~issued ~~share~~to the Company in compliance with the federal securities laws because of ~~common~~the ~~stock~~financial condition of the Company. ~~and~~The ~~one~~Partial ~~warrant~~Final Award provided that Xcorporeal would have a perpetual exclusive license (the “Perpetual License”) to ~~purchase~~the ~~one-half~~technology. Under the terms of athe ~~share~~Partial Final Award, in consideration of ~~common~~the ~~stock~~award of the ~~Company~~Perpetual License to Xcorporeal, the Company was awarded a ~~total~~royalty of ~~200~~39% of all net income,~~000~~ ~~warrants~~ordinary or extraordinary, to atbe anreceived ~~exercise~~by ~~price~~Xcorporeal and the Company was to receive 39% of ~~$0.06~~any ~~per~~shares ~~share~~received in any merger transaction to which Xcorporeal may become a party. ~~The~~In ~~warrants~~addition, ~~were~~the ~~exercisable~~Partial ~~immediately~~Final ~~upon~~Award ~~issuance~~provided that Xcorporeal was obligated to pay the Company $1,871,430 for its attorneys’ fees and ~~expire~~costs ~~upon~~previously awarded by the ~~first~~arbitrator toin ~~occur~~an oforder ~~(i)~~issued ~~seven~~on ~~years~~August ~~following~~13, 2008, that the ~~date~~Company’s application offor ~~issuance~~interim orroyalties ~~(ii)~~and ~~upon~~expenses awas ~~sale~~denied ofand that the Company orwas ~~substantially~~not ~~all~~entitled ofto ~~its~~recover ~~assets~~any additional attorneys’ fees.

~~During~~On ~~June~~August ~~2008~~7, ~~the Company completed a private placement of an aggregate of 1~~2009,~~250,000~~ ~~units~~to ~~at a purchase price of $0.04 per unit~~clarify, ~~for~~resolve aand settle ~~total~~disputes ~~cash~~that ~~purchase~~had ~~price~~arisen ofbetween ~~$50,000. Each unit consisted of one share of common stock of~~ the Company and ~~one~~Xcorporeal ~~warrant~~with respect to ~~purchase one-half of a share of common stock of~~ the ~~Company,~~Partial aFinal ~~total of 625~~Award,~~000~~ ~~warrants,~~including atwith anrespect to ~~exercise~~the ~~price~~rights of ~~$0.04~~the ~~per~~parties ~~share.~~regarding ~~The~~certain ~~warrants~~technology ~~were exercisable immediately upon issuance~~ and ~~expire upon~~ the ~~first~~application ~~to occur~~ of ~~(i)~~the ~~seven~~Partial ~~years~~Final ~~following~~Award in the ~~date~~case of ~~issuance or (ii) upon~~ a sale of the Technology, the Company orand ~~substantially~~Xcorporeal ~~all~~entered into a Memorandum of ~~its~~Understanding ~~assets~~(“Memorandum”).

1214

OnIn connection with the issuance of the Partial Final Award and the Memorandum, on August 127, ~~2008~~2009, the Company entered into a ~~$150,000~~stipulation ~~uncollateralized~~(the ~~convertible~~“Stipulation”) ~~promissory~~with Xcorporeal. ~~note~~Pursuant ~~agreement~~to ~~with~~the ~~Robert~~terms M.of ~~Snukal~~the Stipulation, athe ~~director~~Company and ~~chief~~Xcorporeal ~~executive~~agreed ~~officer,~~(i) ~~bearing~~not ~~interest~~to atchallenge 6%the ~~per~~terms ~~annum,~~of ~~payable~~the onPartial Final ~~December~~Award 31or any portion of such award, ~~2008.~~(ii) Inthat ~~connection~~any ~~with~~of ~~this~~the ~~note~~parties may, ~~the~~at ~~Company~~any ~~issued~~time, ~~warrants~~seek to ~~purchase~~confirm ~~625,000~~all ~~shares~~but not part of the Partial ~~Company’s~~Final ~~common~~Award ~~stock~~through atthe filing of an ~~exercise~~appropriate ~~price~~petition ofor ~~$0.12~~motion ~~per~~with ~~share.~~the ~~The~~appropriate ~~relative~~court ~~fair~~and ~~value~~in ofresponse ~~the~~to ~~warrants~~such action atto confirm the ~~time~~Partial ofFinal ~~issuance~~Award, ~~was~~no ~~determined~~party would oppose, object to beor ~~$45,478,~~in ~~using~~any way seek to hinder or delay the ~~Black-Scholes~~court’s confirmation ~~option-pricing~~of ~~model~~the Partial Final Award, but would in fact support and ~~was~~stipulate ~~recorded~~to assuch aconfirmation, ~~discount~~and (iii) to ~~the~~waive ~~note~~any ~~payable~~and all ~~upon~~right ~~issuance.~~to ~~The~~appeal ~~relative~~from, ~~fair~~seek ~~value~~appellate review of, ~~the~~file ~~warrants~~or ~~was~~prosecute ~~amortized~~any lawsuit, action, motion or proceeding, in law, equity, or otherwise, challenging, opposing, seeking to ~~interest~~modify ~~expense~~or ~~over~~otherwise attacking the ~~term~~confirmed ofPartial ~~the~~Final ~~note~~Award ~~using~~or the ~~straight-line method~~judgment thereon.

OnIn ~~October~~late ~~16,~~March ~~2008~~2009, ~~the~~Xcorporeal ~~Company~~began ~~completed~~ a ~~private~~preliminary dialogue ~~placement~~with ofFresenius anMedical ~~aggregate~~Care ~~of 10~~Holdings,~~000,000~~ ~~units at a purchase price of $0~~Inc.02 ~~per unit~~(“Fresenius”), ~~for a total purchase price of $200,000. Each unit consisted of one share of common stock of the Company and one warrant~~ to ~~purchase~~determine ~~one-half of a share of common stock of~~ the ~~Company,~~interest ~~a total~~ of ~~5,000,000~~Fresenius ~~warrants,~~to atacquire certain anor ~~exercise~~all ~~price~~ of ~~$0.02~~Xcorporeal ~~per share~~assets. ~~The~~These ~~warrants~~discussions ~~were~~continued ~~exercisable~~through ~~immediately~~June ~~upon~~2009. ~~issuance~~In ~~and~~June ~~expire upon the first to occur of (i) seven years following the date of issuance~~2009, ~~(ii)~~Fresenius ~~the~~commenced ~~closing~~its ofdue adiligence review ~~firmly underwritten public offering or (iii) upon a sale~~ of ~~the Company~~Xcorporeal.

9In September 2009, the Company and Xcorporeal reviewed the terms of a transaction proposed by Fresenius USA, Inc. ~~Share~~ (“FUSA”), a wholly-~~Based~~owned ~~Compensation~~subsidiary of Fresenius, in a draft non-binding term sheet for the acquisition of all of the Xcorporeal assets and the Company’s assets.

AsThe ~~of December 31~~Company, ~~2008,~~Xcorporeal ~~the~~and ~~Company~~FUSA ~~had~~executed an ~~adopted~~Asset ~~three~~Purchase ~~stock~~Agreement ~~option~~on ~~plans~~December ~~for the benefit of officers~~14, ~~directors,~~2009 ~~employees,~~(“Asset ~~independent~~Purchase ~~contractors~~Agreement”) and ~~consultants of~~ the Company. ~~These~~publicly ~~plans~~announced ~~include:~~this transaction ~~(i)~~on ~~the~~December ~~1998 Stock Option Plan~~18, ~~(ii) the 1996 Stock Option Plan, and (iii) the 1996 Employee Compensatory Stock Option Plan~~2009. The ~~1998~~arbitration ~~Stock Option Plan~~ was terminated with ~~respect to future grants on April 8, 2008,~~ the ~~1996~~closing ~~Stock~~of ~~Option Plan was terminated with respect to future grants on May 11, 2006 and~~ the ~~1996~~Asset ~~Employee~~Sale in ~~Compensatory~~March ~~Stock~~2010 ~~Option~~(see ~~Plan~~Note ~~was terminated with respect to future grants on February 7, 2000~~11). In addition to these plans, from time to time, the Company grants various other stock options and warrants directly to certain parties. The Company grants all such awards as incentive compensation to officers, directors, and employees, and as compensation for the services of independent contractors and consultants of the Company.

~~The~~Arbitration ~~fair~~Proceeding ~~value~~with ofFormer ~~each~~Legal option and warrant awarded is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options and warrants. The expected dividend yield assumption is based on the Company’s expectation of dividend payouts. Expected volatilities are based on historical volatility of the Company’s stock. The average risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date. Expected life of the options and warrants is the average of the vesting term and the full contractual term of the options and warrants.Counsel

~~For~~On February 17, 2011, the ~~nine~~Company commenced ~~months~~a ~~ended~~binding ~~September~~arbitration 30proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, ~~2009~~and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the ~~Black-Scholes~~testimony ~~option-pricing~~presented ~~model~~by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of April 2, 2012, the arbitrators had not rendered their decision on this matter. Management reviews available information and determines the need for recording an estimate of the potential expense when the amount is probable, reasonable and estimable. The Company believes that it has ~~utilized~~adequately and appropriately provided for the ~~following~~fees ~~assumptions~~incurred through March 31, 2010 in the accompanying condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, it is uncertain whether the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered.

	2009			2008
Expected dividend yield		0.00	%		0.00	%
Expected volatility		142.57	%		87.82	%
Average risk-free interest rate		1.9	%	3.6% to 3.7		%
Expected life (in years)		5		5 to 5.75

11. Discontinued Operations

OnAsset ~~August~~Purchase 5, 2009, the Board approved the issuance of 250,000 shares of the Company’s common stock to Dr. Rambod as payment for additional services in connection with the patent application. The common stock issued was valued at $0.02 per share, which was the approximate closing price of the Company’s common stock on the date of the issuance, for a total of $5,000, and was charged to operations on August 5, 2009.Agreement

On ~~May~~December 1314, 2009, the ~~Board~~Company, ~~approved~~Xcorporeal and FUSA executed an Asset Purchase Agreement that provided for the ~~issuance~~sale of ~~500,000~~substantially ~~shares~~all of each of the Company’s ~~common~~and Xcorporeal’s ~~stock~~assets (the “Asset Sale”) to ~~Dr.~~FUSA ~~Rambod,~~for aan ~~consultant~~aggregate ~~and~~cash ~~former~~purchase ~~officer~~price of $8,000,000 (the ~~Company,~~“Cash Purchase asPrice”) ~~payment~~and ~~for~~certain ~~services~~other inroyalty ~~connection~~payment ~~with~~rights. Subject to the ~~completion~~terms and ~~filing~~conditions of athe ~~patent~~Asset ~~application~~Purchase ~~regarding~~ Agreement, the ~~Company’s~~Cash ~~rights~~Purchase inPrice ~~and~~was to be paid to the ~~polymer~~Company ~~technology~~and ~~developed~~Xcorporeal byas ~~the~~follows: ~~Company.~~(a) ~~The~~an ~~common~~exclusivity ~~stock~~fee ~~issued~~in ~~was~~the ~~valued~~amount atof $~~0.027~~200,000 previously ~~per~~paid ~~share~~by FUSA to Xcorporeal, ~~which~~(b) ~~was~~$3,800,000 on the ~~approximate~~date of closing ~~price~~(the “Closing Date”) of the ~~Company’s~~transactions contemplated ~~common~~under ~~stock~~the onAsset orPurchase ~~about~~Agreement (the ~~date~~“Closing”), of which the ~~issuance,~~Company ~~for~~and aXcorporeal ~~total~~received of$2,150,000 and $131,~~500.~~650,000, Onrespectively, ~~May~~(c) 13$2,000,000 ~~2009~~on April 1, 2010, of which the Company ~~recorded~~and ~~consultant~~Xcorporeal ~~compensation~~received ~~expense~~$1,625,000 ofand $13375,~~500~~000, respectively, ~~relating~~and to(d) ~~these~~$2,000,000 ~~shares~~on April 1, 2011, of which the Company and Xcorporeal received $1,925,000 and $75,000, respectively.

OnIn ~~May 13~~addition, ~~2009,~~during the ~~Company~~life ~~issued options to purchase 250,000 shares~~ of ~~common~~the ~~stock~~patents referred to aas ~~consultant~~the ~~for~~HD ~~past~~WAK ~~services.~~Technology, ~~The~~which ~~options~~expire ~~became~~between ~~fully~~November ~~vested~~11, on2021 ~~May~~and 13September 9, ~~2009~~2024, the ~~date~~Company ofis ~~grant.~~entitled ~~The~~to certain ~~options~~royalty ~~have~~payments anfrom ~~exercise~~the ~~price~~sale of ~~$0.027~~wearable ~~per~~hemodialysis ~~share,~~devices ~~which~~and ~~was~~ the ~~approximate~~attendant ~~closing~~disposables ~~price~~that ofincorporate the ~~Company’s~~HD ~~common stock on or about the date of the issuance, and expire in ten years~~WAK Technology. The ~~fair~~Company ~~value~~is ofentitled ~~these~~to ~~options~~40% onof the ~~date~~HD ofWAK ~~grant~~royalty ~~was $6,037,~~ and ~~was~~Xcorporeal ~~charged~~is entitled to ~~operations~~the onremaining ~~May 13, 2009~~60%.

~~On May 13~~Additionally, ~~2009,~~during the ~~Company~~life ~~issued~~of ~~options~~any patents referred to ~~purchase~~as athe ~~total~~Supersorbent ~~of 300~~Technology,~~000~~ ~~shares~~the ofCompany ~~common~~is ~~stock~~entitled to ~~two~~certain ~~outside~~royalty ~~directors~~payments ~~for~~on ~~past~~each ~~services.~~supersorbent ~~The~~cartridge sold ~~options~~less ~~became~~any ~~fully~~and ~~vested~~all onroyalties ~~May~~payable ~~13,~~to ~~2009,~~The ~~the~~Technion ~~date~~Research ofand ~~grant~~Development Foundation Ltd. ~~The~~(“TRDF”) ~~options~~pursuant to ~~have~~a anResearch ~~exercise~~Agreement ~~price~~and ofOption ~~$0.027~~for ~~per~~License, ~~share~~dated June 16, ~~which~~2005, ~~was~~or ~~the~~any ~~approximate~~subsequently ~~closing~~executed ~~price~~license ofagreement ~~the~~between ~~Company’s~~TRDF and ~~common~~FUSA. ~~stock~~The onCompany oris ~~about~~entitled ~~the~~to ~~date~~60% of the ~~issuance,~~Supersorbent ~~and~~royalty ~~expire~~payments inand ~~ten~~Xcorporeal ~~years.~~is ~~The~~entitled ~~fair~~to ~~value~~the ofremaining ~~these~~40%. While ~~options~~several onapplications ~~the~~for ~~date~~patents ofare ~~grant was $7~~pending,~~244,~~ ~~and~~no ~~was~~patent ~~charged~~incorporating tothe ~~operations~~Supersorbent onTechnology ~~May~~has ~~13,~~yet ~~2009~~been issued.

On August 8, 2008, the Company issued options to purchase 1,000,000 shares of common stock to a director pursuant to the 1998 Stock Option Plan. The options vest in eight equal semi-annual installments commencing on February 8, 2009 and continuing on each August 8 and February 8 thereafter until the becoming fully vested on the fourth anniversary of the date of grant, and expire in ten years. The fair value of these options on the date of grant was $83,621 and will be charged to operations on a straight-line basis over the requisite service period. During the three months ended September 30, 2009 and 2008, the Company recorded consultant compensation expense of $5,206 and $-0-, respectively, relating to these options. During the nine months ended September 30, 2009 and 2008, the Company recorded consultant compensation expense of $15~~,614 and $-0-, respectively, relating to these options.~~

OnFUSA ~~June~~also ~~21,~~granted ~~2008,~~to the Company ~~issued~~and ~~options~~Xcorporeal an option to ~~purchase~~obtain ~~100~~a perpetual,~~000~~ ~~shares~~worldwide oflicense ~~common~~to ~~stock~~the toSupersorbent aTechnology ~~consultant~~for use in healthcare fields other than renal (the “Option”). The ~~options~~Option ~~vest~~is ~~over~~exercisable ~~two~~during ~~years,~~the ~~have~~twelve-month anperiod ~~exercise~~following ~~price~~FUSA’s receipt of ~~$0.08~~regulatory approval ~~per~~for ~~share,~~the ~~and~~sale ~~expire~~of ina ~~ten~~supersorbent ~~years.~~product ~~The~~in ~~fair~~the ~~value~~United ofStates ~~these~~or ~~options~~European onUnion, which the ~~date~~Company expects will require further development of ~~grant~~the ~~was~~supersorbent totechnology ~~$5,901~~with TRDF and issuccessful ~~being~~completion ~~charged~~of toclinical ~~operations~~trials onby aFUSA. ~~straight-line~~The ~~basis~~consideration payable ~~over~~to FUSA by the ~~requisite~~Company ~~service~~or ~~period.~~Xcorporeal ~~During~~for the ~~three~~exercise ~~months~~of ~~ended~~the ~~September~~Option ~~30,~~consists ~~2009~~of ~~and~~a ~~2008,~~payment in the ~~Company~~amount ~~recorded~~of ~~consultant~~$7,500,000, payable ~~compensation~~in ~~expense~~immediately ofavailable ~~$738~~funds, and ~~$738,~~a ~~respectively,~~payment ~~relating~~of toan ~~these~~ongoing ~~options. During~~royalty ~~the~~in ~~nine~~an ~~months~~amount ~~ended~~equal ~~September~~to ~~30,~~the ~~2009~~lesser of $0.75 per supersorbent cartridge and ~~2008,~~$1.50 ~~the~~per ~~Company~~patient ~~recorded~~per ~~consultant~~week ~~compensation~~in ~~expense~~each ofcountry ~~$2,214~~where such sales infringe valid and ~~$738,~~issued ~~respectively,~~claims ~~relating~~of tothe ~~these~~Supersorbent Patents ~~options~~issued in such country.

13The Asset Purchase Agreement closed on March 19, 2010, with payments made to the Company by FUSA of $1,950,000, $1,625,000 and $1,675,000 on March 19, 2010, April 1, 2010 and April 1, 2011, respectively, for a total of $5,250,000. FUSA held back $200,000 and $250,000 from the March 19, 2010 and April 1, 2011 payments, respectively, for purposes of resolving a dispute between the Company and TRDF. The closing of the Asset Sale in March 2010 also terminated the arbitration proceeding with Xcorporeal (see Note 10).

OnAs ~~June~~a ~~21,~~result ~~2008~~of the Asset Sale, the Company has ~~issued~~accounted ~~options~~for toits ~~purchase~~previous ~~1,500,000~~research ~~shares~~and ofdevelopment ~~common~~activities ~~stock~~as to a ~~consultant,~~discontinued inoperation ~~connection~~for ~~with~~all ~~the~~periods ~~settlement of a dispute~~presented. ~~The~~During the ~~options~~three ~~became~~months ~~fully~~ended ~~vested~~March on31, ~~August~~2010 7,and ~~2008~~2009, the ~~date on which the~~ Company ~~and~~had ~~the~~income ~~consultant~~(loss) ~~entered~~from ~~into~~its adiscontinued ~~settlement~~research and ~~release~~development ~~with respect to the dispute. The options have an exercise price~~ operation of $~~0.08 per share~~24,386 and ~~expire in ten years. The fair value of these options on the date of grant was~~ $84(2,~~279 and was charged to operations on June 21~~556), ~~2008~~respectively. ~~In August 2008, the consultant was also elected as a Director of the Company and appointed to serve as the Company’s Chief Scientific Officer.~~

~~On August 9~~Additionally, ~~2007,~~upon the ~~Company~~closing ~~issued options to purchase 30,000 shares~~ of ~~common~~the ~~stock~~Asset Sale toon aMarch ~~consultant~~19, ~~pursuant~~2010, to the ~~1998~~Company ~~Stock~~recorded ~~Option~~a ~~Plan.~~gain ~~The~~from ~~options~~debt ~~vested~~settlement ~~over one year, have an exercise price~~ of $~~0.12 per share~~1,871,430 ~~and~~(see ~~expire~~Note in10), ~~ten~~which ~~years.~~is ~~The~~included ~~fair~~in ~~value of these options on the date of grant was $2~~continuing operations,~~359~~ and ~~has been charged to operations on~~ a ~~straight-line~~gain ~~basis~~from ~~over~~ the ~~requisite~~Asset ~~service~~Sale ~~period. The Company recorded consultant compensation expense~~ of $~~-0-~~3,318,732, ~~and~~before ~~$197~~income ~~relating~~taxes toof ~~these~~approximately ~~options during the three months ended September 30~~$1, ~~2009 and 2008~~363,000, ~~respectively.~~which ~~During~~is ~~the~~included ~~nine~~in discontinued ~~months ended September 30~~operations, ~~2009~~in ~~and 2008,~~ the ~~Company~~accompanying ~~recorded~~condensed ~~consultant~~consolidated ~~compensation~~statement ~~expense~~ of ~~$-0- and $1,377, respectively, relating to these options~~operations.

On August 9, 2007, the Company issued options to purchase 60,000 shares of common stock to a consultant pursuant to the 1998 Stock Option Plan. The options vested over one year, have an exercise price of $0.12 per share, and expire in ten years. The fair value of these options on the date of grant was $4,719 and has been charged to operations on a straight-line basis over the requisite service period. The Company recorded consultant compensation expense of $-0- and $394 relating to these options during the three months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009 and 2008, the Company recorded consultant compensation expense of $-0- and $2,754, respectively, relating to these options.16

OnItem ~~February 12, 2007, the Company issued options to purchase 50,000 shares of common stock to a consultant pursuant to the 1998 Stock Option Plan~~2. ~~The~~Management’s ~~options~~Discussion ~~vest over two years, have an exercise price of $0.36 per share,~~ and ~~expire~~Analysis ~~in ten years. The fair value~~ of ~~these~~Financial ~~options~~Condition ~~on the date of grant was $12,163~~ and isResults ~~being charged to operations on a straight-line basis over the requisite service period. The Company recorded consultant compensation expense~~ of $-0- and $1,520 relating to these options during the three months ended September 31, 2009 and 2008, respectively. During the nine months ended September 30, 2009 and 2008, the Company recorded consultant compensation expense of $761 and $4,560, respectively, relating to these options.Operations

On February 12, 2003, the Company issued options to purchase 250,000 shares of common stock to a director and chief executive officer. The options vest over four years, have an exercise price of $0.07 per share, and expire in five years. The fair value of these options on the date of grant was $31,250 and is being charged to operations on a straight-line basis over the requisite service period. The Company recorded director and executive compensation expense of $-0- and $1,563 relating to these options during the three months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009 and 2008, the Company recorded consultant compensation expense of $-0- and $4,689, respectively, relating to these options.Overview

~~During~~Prior ~~the~~to ~~three months ended September 30~~March 19, ~~2009 and 2008~~2010, athe ~~total~~Company’s platform oftechnology ~~$10,944 and $4,412, respectively,~~ was ~~charged~~a towearable ~~operations~~artificial kidney for ~~share-based~~dialysis ~~compensation~~and ~~costs~~other ~~relating~~medical toapplications. ~~common~~This ~~stock,~~device ~~stock~~was ~~options~~being ~~and~~developed to ~~warrants.~~treat ~~During~~ the ~~nine~~blood ~~months~~of ~~ended~~patients ~~September~~through ~~30, 2009 and 2008,~~ a ~~total of $50~~pulsating,~~370~~ ~~and $98,397, respectively, was charged to operations for share~~dual-~~based~~chambered ~~compensation costs relating to common stock, stock options and warrants~~pump.

AsUntil ofthat ~~September 30~~date, ~~2009,~~the ~~there~~Company’s plan of operation was ~~approximately~~to ~~$59,700~~complete ofthe ~~total~~clinical ~~unrecognized~~studies ~~compensation~~in ~~cost~~humans ~~related~~with the Wearable Artificial Kidney in order to ~~share-based~~apply ~~compensation~~to ~~arrangements~~the FDA for permission to market the device. Pending resolution of the arbitration with Xcorporeal, ~~which~~Peizer isand ~~expected~~Gura, tothe beCompany ~~recognized~~suspended its ~~over~~research and development efforts with respect to the ~~ensuing~~wearable 34artificial ~~months~~kidney and had no active business operations.

~~There~~Sale ~~were no unexercised in-the-money stock options and warrants at September 30, 2009 and December 31, 2008. Accordingly, they had no intrinsic value on those dates, based on fair market values~~ of ~~$0.02 per share on September 30, 2009 and December 31, 2008.~~Assets

10On December 14, 2009, the Company, Xcorporeal and FUSA executed an Asset Purchase Agreement that provided for the sale of substantially all of the Company’s and Xcorporeal’s assets (the “Asset Sale”) to FUSA for an aggregate cash purchase price of $8,000,000 (the “Cash Purchase Price”) and certain other royalty payment rights. ~~Discontinued~~ ~~Operations~~Subject –to ~~Dialysis~~the ~~Clinic~~terms and conditions of the Asset Purchase Agreement, the Cash Purchase Price was to be paid to the Company and Xcorporeal as follows: (a) an exclusivity fee in the amount of $200,000 previously paid by FUSA to Xcorporeal, (b) $3,800,000 on the date of closing (the “Closing Date”) of the transactions contemplated under the Asset Purchase Agreement (the “Closing”), of which the Company and Xcorporeal received $2,150,000 and $1,650,000, respectively, (c) $2,000,000 on April 1, 2010, of which the Company and Xcorporeal received $1,625,000 and $375,000, respectively, and (d) $2,000,000 on April 1, 2011, of which the Company and Xcorporeal received $1,925,000 and $75,000, respectively.

OnIn ~~May 31~~addition, ~~2006,~~during ~~LACDI completed~~ the ~~sale~~life of ~~substantially all of its assets used in~~ the ~~chronic~~patents referred ~~care dialysis clinic~~ to ~~Kidney~~as ~~Dialysis~~the ~~Center~~HD ofWAK ~~West Los Angeles~~Technology, ~~LLC.~~which Onexpire ~~June~~between ~~15,~~November ~~2006~~11, ~~LACDI~~2021 ~~completed the sale of its acute care dialysis unit to stockholders Dr. Victor Gura~~ and ~~Dr. Ronald~~September ~~Lang.~~9, ~~The~~2024, ~~decision to sell~~ the ~~dialysis~~Company ~~units~~is ~~was~~entitled ~~based on the determination that it would be in the best interest of the Company~~ to certain ~~focus~~royalty ~~principally~~payments onfrom ~~completion of~~ the ~~development~~sale ~~and eventual commercial marketing~~ of ~~the~~ wearable ~~artificial~~hemodialysis ~~kidney~~devices ~~for dialysis~~ and ~~other~~the ~~medical~~attendant ~~applications.~~disposables Asthat aincorporate ~~result of~~ the ~~sale~~HD ofWAK Technology. ~~LACDI’s~~The ~~assets, the~~ Company ~~has~~is ~~accounted~~entitled ~~for~~to ~~the~~40% ~~business~~ of ~~LACDI as a discontinued operation for all periods presented. At December 31, 2008,~~ the ~~Company~~HD noWAK ~~longer~~royalty ~~had~~and ~~any~~Xcorporeal ~~balances~~is ~~related~~entitled to ~~its~~the ~~discontinued~~remaining ~~operations~~60%.

11Additionally, during the life of any patents referred to as the Supersorbent Technology, the Company is entitled to certain royalty payments on each supersorbent cartridge sold less any and all royalties payable to The Technion Research and Development Foundation Ltd. ~~Commitments~~ (“TRDF”) pursuant to a Research Agreement and ~~Contingencies~~Option for License, dated June 16, 2005, or any subsequently executed license agreement between TRDF and FUSA. The Company is entitled to 60% of the Supersorbent royalty payments and Xcorporeal is entitled to the remaining 40%. While several applications for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued.

~~Arbitration~~FUSA ~~Proceeding~~also granted to the Company and Xcorporeal an option to obtain a perpetual, worldwide license to the Supersorbent Technology for use in healthcare fields other than renal (the “Option”). The Option is exercisable during the twelve-month period following FUSA’s receipt of regulatory approval for the sale of a supersorbent product in the United States or European Union, which the Company expects will require further development of the supersorbent technology with TRDF and successful completion of clinical trials by FUSA. The consideration payable to FUSA by the Company or Xcorporeal for the exercise of the Option consists of a payment in the amount of $7,500,000, payable in immediately available funds, and a payment of an ongoing royalty in an amount equal to the lesser of $0.75 per supersorbent cartridge and $1.50 per patient per week in each country where such sales infringe valid and issued claims of the Supersorbent Patents issued in such country.

OnThe ~~September~~Asset 1,Purchase ~~2006,~~Agreement ~~the~~closed ~~Company~~on ~~entered~~March 19, ~~into~~2010, ~~a merger agreement (the “Merger Agreement”)~~ with ~~Xcorporeal,~~payments ~~Inc.~~made ~~(“Xcorporeal”)~~to ~~which contemplated that either (i)~~ the Company ~~would~~by ~~enter~~FUSA ~~into a triangular merger in which the Company would become a wholly-owned subsidiary~~ of ~~Xcorporeal~~$1,950,000, or$1,625,000 ~~(ii)~~and ~~Xcorporeal~~$1,675,000 ~~would~~on ~~issue~~March to19, ~~the~~2010, ~~Company~~April ~~shares~~1, of2010 ~~its~~and April ~~common~~1, ~~stock~~2011, inrespectively, ~~consideration~~for ofa ~~the~~total ~~assignment~~ of ~~the~~$5,250,000. ~~technology~~FUSA ~~relating~~held toback ~~the~~$200,000 ~~Company’s wearable artificial kidney~~ and ~~other~~$250,000 ~~medical~~from ~~devices (collectively sometimes referred to as~~ the ~~“Technology~~March ~~Transactions”).~~19, In2010 ~~connection~~and ~~with the Merger Agreement~~April 1, ~~also~~2011 ~~on September 1~~payments, ~~2006~~respectively, ~~the~~for ~~Company~~purposes ~~entered~~of ~~into~~resolving a ~~license~~dispute ~~agreement~~between (the ~~“License~~Company ~~Agreement”)~~and ~~with~~TRDF. ~~Xcorporeal~~The closing ~~granting an exclusive license for ninety-nine years (or until the expiration~~ of the ~~Company’s~~Asset ~~proprietary~~Sale ~~rights~~ in ~~the~~March ~~technology,~~2010 ifalso ~~earlier),~~terminated ~~to all technology relating to~~ the ~~Company’s~~arbitration ~~wearable~~proceeding ~~artificial~~with ~~kidney and other medical devices for a minimum royalty of $250,000~~Xcorporeal.

~~Following~~Arbitration execution of the Merger Agreement and the License Agreement, the parties attempted to close the transactions contemplated by the Merger Agreement, but disputes arose regarding satisfaction of the conditions to closing and with respect to certain provisions of the Merger Agreement. In addition, a dispute arose as to whether the License Agreement would survive a failure to consummate either of the two transactions contemplated by the Merger Agreement.Proceedings

14On February 17, 2011, the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys’ fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of April 2, 2012 the arbitrators had not rendered their decision on this matter. The Company believes that it has adequately and appropriately provided for the fees incurred through March 31, 2010 in its condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, the Company may be unable to satisfy such obligation should a decision adverse to the Company be rendered.

Effective as of December 29, 2006, the Company terminated the Merger Agreement and License Agreement and all transactions contemplated thereby due to Xcorporeal’s continuing, uncured and incurable breaches of the Merger Agreement, the License Agreement and certain related matters. Xcorporeal did not dispute the termination of the Merger Agreement, but had disputed the Company’s termination of the License Agreement, which Xcorporeal alleged to be in full force and effect.17

OnGoing December 1, 2006, Xcorporeal filed a demand for arbitration against the Company, alleging an unspecified anticipatory breach of the License Agreement. On December 29, 2006, at the same time that the Company terminated the Merger Agreement and the License Agreement, the Company filed a lawsuit against Xcorporeal and against Victor Gura, former Chief Financial Officer and Chief Scientific Officer and a director of the Company.Concern

The ~~arbitration~~Company’s ~~was~~condensed ~~held~~consolidated financial instatements ~~February~~have ~~2008.~~been Onpresented ~~June~~on ~~9, 2008,~~ the ~~arbitrator~~basis ~~issued~~that anit ~~interim~~is ~~award.~~a ~~The~~going ~~arbitrator~~concern, ~~concluded~~which ~~that~~contemplates the ~~License~~realization ~~Agreement~~of ~~was~~assets and ~~not~~satisfaction toof ~~survive~~liabilities in the ~~failure~~normal course of ~~the~~business. ~~transactions~~Prior ~~contemplated~~to byMarch ~~the~~19, ~~Merger Agreement~~2010, ~~that~~the ~~Xcorporeal~~Company ~~had~~was ~~waived~~a research and ~~excused~~development company in the ~~Company’s~~business ~~obligations~~of todeveloping ~~perform~~a ~~under~~wearable ~~the~~artificial ~~Merger~~kidney ~~Agreement~~for dialysis and ~~that~~other ~~the~~medical ~~appropriate~~applications. ~~remedy~~On ~~under~~that ~~the~~date, ~~circumstances was to award~~ the Company ~~specific~~consummated ~~performance~~a sale of ~~the~~its ~~Technology~~technology ~~Transaction.~~rights ~~The~~with ~~arbitrator~~respect ~~rejected~~to ~~the~~its ~~Company’s~~developing ~~fraud,~~wearable ~~misappropriation~~artificial kidney and, ~~other claims~~consequently, those ~~and~~activities ~~rejected~~have ~~Gura’s~~been ~~claims~~accounted ~~against~~for ~~the~~as ~~Company~~discontinued ~~and~~operations in the Company’s ~~claims~~condensed ~~against~~consolidated ~~Gura~~financial statements. Since InJune ~~addition~~15, ~~the~~2006, ~~arbitrator stated that~~ the Company ~~was~~has ~~the~~not ~~prevailing~~generated ~~party~~any inrevenues ~~the~~from ~~arbitration~~operations, and ~~therefore~~does ~~entitled~~not expect to ~~recover~~do ~~its~~so ~~fees~~in ~~and~~the ~~costs.~~foreseeable future; ~~Because~~however, the Company ~~had~~generated ~~prevailed~~revenue onfrom ~~some,~~the ~~but~~sale ~~not all,~~ of ~~its claims,~~ the ~~arbitrator awarded the~~ Company’s ~~approximately~~technology ~~$1,870,000~~rights induring ~~fees and costs~~2010.

OnFor ~~April~~the ~~13,~~past ~~2009~~several years, ~~the~~except ~~arbitrator~~for in the three ~~arbitration~~months ~~proceeding~~ended ~~issued~~March a31, ~~partial final award (“Partial Final Award”)~~2010, ~~which resolved~~ the ~~remaining~~Company ~~issues~~has ~~that~~experienced ~~were~~net ~~pending~~operating ~~for~~losses ~~decision~~and innegative ~~the~~operating ~~arbitration~~cash ~~proceeding~~flows. ~~The~~As ~~Partial~~of ~~Final~~March 31, ~~Award~~2010, ~~reflected~~ the ~~arbitrator’s~~Company ~~conclusions~~had ~~based~~an onaccumulated ~~arguments~~deficit byof ~~Xcorporeal that the 9~~$13,~~230~~258,~~000~~023, ~~shares~~had ~~could~~no ~~not~~revenues befrom ~~issued~~operating toactivities, ~~the~~and ~~Company~~did innot ~~compliance~~have ~~with~~sufficient internal ~~the~~and ~~federal~~external ~~securities~~working ~~laws~~capital ~~because~~resources ofto ~~the~~meet ~~financial~~current ~~condition~~and ofexpected ~~the~~future ~~Company~~obligations. ~~The~~ ~~Partial~~Such ~~Final~~deficiencies ~~Award~~indicate ~~provided~~the Company ~~that~~will ~~Xcorporeal~~be ~~would~~unable ~~have~~to acontinue ~~perpetual~~to ~~exclusive~~fund ~~license~~its ~~(the~~operations ~~“Perpetual~~and ~~License”)~~meet toits ~~the~~obligations ~~technology. Under~~as ~~the~~they ~~terms~~come ofdue. ~~the~~In ~~Partial~~recent ~~Final Award~~years, ~~in consideration of~~ the ~~award~~Company has offinanced ~~the~~its ~~Perpetual~~working ~~License~~capital torequirements ~~Xcorporeal,~~through the ~~Company~~sale ~~was awarded a royalty~~ of ~~39%~~technology ~~of all net income~~rights, ~~ordinary~~loans ~~or extraordinary, to be received by Xcorporeal~~ and the ~~Company~~recurring ~~was~~sales ~~to receive 39%~~ of ~~any~~its ~~shares~~securities to ~~received~~related inparties; ~~any~~however, ~~merger~~there ~~transaction~~can tobe ~~which~~no ~~Xcorporeal~~assurances ~~may~~that ~~become~~such arelated party. Infunding ~~addition,~~will ~~the~~be ~~Partial~~available ~~Final Award provided that Xcorporeal was obligated~~ to ~~pay~~ the Company ~~$1,871,430~~in ~~for~~future periods ~~its~~on ~~attorneys’~~commercially ~~fees~~reasonable ~~and~~terms ~~costs~~or ~~previously~~at ~~awarded~~all. byAs ~~the~~a ~~arbitrator~~result, inthe anCompany’s ~~order~~independent ~~issued~~registered onpublic ~~August~~accounting 13firm, in ~~2008,~~its ~~that~~report on the Company’s ~~application~~2009 ~~for~~consolidated ~~interim~~financial ~~royalties~~statements, ~~and~~has ~~expenses~~raised ~~was~~substantial ~~denied~~doubt ~~and~~about ~~that~~ the Company’s ability ~~was not entitled~~ to ~~recover~~continue ~~any~~as ~~additional~~a ~~attorneys’~~going ~~fees~~concern.

OnThe ~~August~~Company’s 7,ability ~~2009,~~ to ~~clarify,~~continue ~~resolve~~as a ~~and~~going ~~settle~~concern ~~disputes~~is ~~that~~dependent ~~had~~upon ~~arisen~~its ~~between~~ability ~~the~~to ~~Company~~raise ~~and~~additional ~~Xcorporeal~~debt ~~with~~and/or ~~respect~~equity ~~to the Partial Final Award~~capital, ~~including~~and ~~with respect~~ to ~~the~~acquire ~~rights~~sufficient ofoperating capital ~~the~~through ~~parties regarding certain technology and~~ the ~~application~~development of ~~the~~business ~~Partial~~activities, ~~Final~~or ~~Award~~otherwise. inThe ~~the~~Company’s ~~case~~condensed ofconsolidated afinancial ~~sale~~statements do ofnot ~~the~~include ~~Technology,~~any ~~the~~adjustments ~~Company~~that ~~and~~might ~~Xcorporeal~~result ~~entered~~from ~~into~~the aoutcome ~~Memorandum~~ of ~~Understanding~~these ~~(“Memorandum”)~~uncertainties.

In Recent ~~connection~~Accounting with the issuance of the Partial Final Award and the Memorandum, on August 7, 2009, the Company entered into a stipulation (the “Stipulation”) with Xcorporeal. Pursuant to the terms of the Stipulation, the Company and Xcorporeal agreed (i) not to challenge the terms of the Partial Final Award or any portion of such award, (ii) that any of the parties may, at any time, seek to confirm all but not part of the Partial Final Award through the filing of an appropriate petition or motion with the appropriate court and in response to such action to confirm the Partial Final Award, no party would oppose, object to or in any way seek to hinder or delay the court’s confirmation of the Partial Final Award, but would in fact support and stipulate to such confirmation, and (iii) to waive any and all right to appeal from, seek appellate review of, file or prosecute any lawsuit, action, motion or proceeding, in law, equity, or otherwise, challenging, opposing, seeking to modify or otherwise attacking the confirmed Partial Final Award or the judgment thereon.Pronouncements

InManagement ~~late~~does ~~March~~not ~~2009,~~believe ~~Xcorporeal~~that ~~began~~any arecently issued, ~~preliminary~~but ~~dialogue~~not ~~with~~yet ~~Fresenius Medical Care Holdings~~effective, ~~Inc.~~authoritative ~~(“Fresenius”)~~guidance, toif ~~determine~~currently ~~the~~adopted, ~~interest~~would ofhave ~~Fresenius~~a tomaterial ~~acquire~~impact ~~certain~~on orthe ~~all~~Company's offinancial statement ~~Xcorporeal~~presentation ~~assets.~~or ~~These discussions continued through June 2009~~disclosures. ~~In June 2009, Fresenius commenced its due diligence review of Xcorporeal.~~

InSignificant ~~September~~Accounting 2009, the Company and Xcorporeal reviewed the terms of a transaction proposed by Fresenius USA, Inc. (“FUSA”), a wholly-owned subsidiary of Fresenius, in a draft non-binding term sheet for the acquisition of all of the Xcorporeal assets and the Company’s assets.Policies

The Company, ~~Xcorporeal~~prepared ~~and~~its ~~FUSA~~condensed ~~executed~~consolidated financial anstatements ~~Asset~~in ~~Purchase~~accordance ~~Agreement~~with onaccounting ~~December~~principles ~~14,~~generally ~~2009~~accepted ~~(“Asset~~in ~~Purchase~~the ~~Agreement”)~~United ~~and~~States ~~the~~of ~~Company~~America. ~~publicly~~The ~~announced~~preparation of ~~this~~these ~~transaction~~financial onstatements ~~December~~requires ~~18,~~the ~~2009.~~use Onof ~~February~~estimates 8,and ~~2010,~~assumptions that affect the ~~Company,~~reported ~~Xcorporeal~~amounts of assets and ~~FUSA~~liabilities and ~~entered~~the ~~into~~disclosure anof ~~amendment,~~contingent ~~which~~assets ~~extended~~and ~~from~~liabilities ~~February~~at ~~28,~~the ~~2010~~date ~~until~~of ~~March~~the ~~31,~~financial ~~2010~~statements and the ~~date~~reported ~~upon~~amount ~~which~~of ~~any~~revenues and ~~party~~expenses toduring the ~~Asset~~reporting ~~Purchase~~period. ~~Agreement~~Management ~~could~~periodically ~~terminate~~evaluates the ~~Asset~~estimates ~~Purchase~~and ~~Agreement~~judgments ifmade. ~~the~~Management ~~closing~~bases its ofestimates ~~the~~and ~~transactions~~judgments ~~contemplated~~on ~~therein~~historical ~~has~~experience ~~not~~and ~~occurred. The~~on ~~arbitration~~various ~~was~~factors ~~terminated~~that ~~with~~are ~~the~~believed ~~closing~~to ofbe reasonable under the ~~Asset~~circumstances. Actual ~~Sale~~results inmay ~~March~~differ ~~2010~~from ~~(see~~these ~~Note~~estimates ~~12)~~as a result of different assumptions or conditions.

~~Arbitration~~The ~~Proceeding~~following ~~with~~critical ~~Former~~accounting ~~Legal~~policies affect ~~Counsel~~the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.

OnResearch February 17, 2011, the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of January 13, 2012, the arbitrators had not rendered their decision on this matter. The Company believes that it has adequately and appropriately provided for the fees incurred through September 30, 2009 in the accompanying condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, it is uncertain whether the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered.Development

~~Deferred~~Research ~~Compensation~~and ~~Plan~~development costs are expensed as incurred. Research and development expenses consist primarily of costs incurred with respect to the development of the Company’s wearable artificial kidney for dialysis and other medical applications, and are included in discontinued operations in the condensed consolidated statement of operations.

~~Effective~~Technology August 9, 2007, the Company established the National Quality Care, Inc. Deferred Compensation Plan (the “Plan”) in recognition of services currently being performed without cash compensation by Robert M. Snukal in his capacity as Chief Executive Officer, and Leonardo Berezovsky in his capacity as Chief Financial Officer (each, a “Participant”), and to encourage their continued performance of services. In accordance with the Plan, each Participant shall become entitled to payment of a benefit upon the occurrence of a change in control or a qualified financing. A change in control is defined in the Plan as any of the following:Rights

15Technology rights relate to the Company’s wearable artificial kidney and were being amortized over an estimated useful life of approximately 20 years. Amortization is included in discontinued operations in the condensed consolidated statement of operations.

(1) The direct or indirect transfer of the legal or equitable ownership of more than 50% of the Company’s outstanding common stock or any other class of stock representing more than 50% of the aggregate voting power of all classes of stock to an individual or entity;18

~~(2)~~Stock-Based A merger or consolidation of the Company with any other company (other than a subsidiary of the Company) pursuant to which the resulting aggregate ownership of the Company (or of the parent or surviving company resulting from such merger or consolidation) held by or attributable to those persons who were stockholders of the Company immediately prior to such merger or consolidation is less than 50% of the common stock or any other class of stock representing less than 50% of the aggregate voting power of all classes of stock of the Company (or of the parent or surviving corporation resulting from such merger or consolidation) outstanding as a result of such merger or consolidation;Compensation

~~(3)~~ The ~~sale,~~Company ~~transfer~~periodically orissues ~~other~~stock options ~~disposition~~and warrants to officers, directors and consultants for services rendered. Options vest and expire according to terms established at the grant date. The Company accounts for share-based payments to officers and directors by measuring the cost of services received in ~~one~~exchange orfor aequity ~~series~~awards based on the grant date fair value of ~~related~~the ~~transactions~~awards, ofwith ~~all~~the orcost ~~substantially~~recognized ~~all~~as ofcompensation expense in the Company’s ~~assets;~~condensed consolidated financial statements over the vesting period of the awards. The Company accounts for share-based payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

~~(4)~~Income ~~The grant of an exclusive long-term license of the intellectual property of the Company.~~Taxes

AThe ~~qualified financing is defined in the Plan as a debt or equity financing that yields at least $5,000,000 in net proceeds to the~~ Company, oraccounts the receipt of at least $2,500,000 as the result of a settlement or favorable judgment in a litigation or arbitration proceeding. A benefit is defined in the Plan as the dollar amount payable to a Participant equal to the sum of his base amount plus his monthly amount multiplied by the number of full calendar months ending after the effective date of the Plan, August 9, 2007, that the Participant continues to perform services for ~~the~~income ~~Company~~taxes as under an ~~executive~~asset ~~officer. The base amount~~ and ~~monthly~~liability ~~amount~~approach for ~~Robert~~financial M.accounting ~~Snukal is $240,000~~ and ~~$12,000,~~reporting ~~respectively~~purposes. ~~The~~Accordingly, ~~base~~the ~~amount~~Company ~~and~~recognizes ~~monthly~~deferred ~~amount~~tax assets ~~for Leonardo Berezovsky is $76,000~~ and ~~$8,000,~~liabilities ~~respectively.~~for ~~Prior to~~ the ~~occurrence~~expected impact of adifferences ~~change~~between ~~in control or a qualified financing, a Participant may irrevocably waive his right to a benefit. In~~ the ~~event~~financial ~~neither~~statements ~~a change in control nor a qualified financing occurs on or before December 31, 2009, each Participant’s benefit will be forfeited~~ and nothe ~~such~~tax ~~change~~basis inof ~~control~~assets ~~or qualified financing occurred before December 31, 2009~~and liabilities.

The Company’s ~~management~~records ~~performed~~a anvaluation ~~assessment~~allowance to ofreduce ~~this~~its ~~contingent~~deferred ~~liability~~tax ~~for~~assets to the ~~September~~amount ~~30,~~that ~~2009~~is ~~reporting~~more ~~period~~likely ~~and~~than ~~determined~~not to be realized. In the event the Company was to determine that ait ~~change~~would inbe ~~control~~able ~~and/or~~to arealize ~~qualified~~its ~~financing~~deferred ~~had~~tax ~~not~~assets ~~occurred.~~in ~~Based~~the onfuture ~~that~~in ~~determination~~excess of its recorded amount, noan ~~accrual~~adjustment ofto ~~benefits~~the deferred tax assets would be credited to operations in the period such determination was made. asLikewise, should the Company determine that it would not be able to realize all or part of ~~September~~its 30deferred tax assets in the future, ~~2009~~an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.

~~12. Subsequent Events~~Contingencies

~~Asset~~The ~~Purchase~~Company’s ~~Agreement~~management assesses contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

OnResults ~~December 14, 2009, the Company, Xcorporeal and FUSA executed an Asset Purchase Agreement that provided for the sale~~ of ~~substantially~~Operations ~~all of each of the Company’s and Xcorporeal’s assets (the “Asset Sale”) to FUSA~~ for ~~an aggregate cash purchase price of $8,000,000 (~~the ~~“Cash~~Three ~~Purchase~~Months ~~Price”)~~Ended ~~and~~March ~~certain other royalty payment rights. Subject to the terms and conditions of the Asset Purchase Agreement~~31, the Cash Purchase Price was to be paid to the Company and Xcorporeal as follows: (a) an exclusivity fee in the amount of $200,000 previously paid by FUSA to Xcorporeal, (b) $3,800,000 on the date of closing (the “Closing Date”) of the transactions contemplated under the Asset Purchase Agreement (the “Closing”), of which the Company and Xcorporeal received $2,150,000 and $1,650,000, respectively, (c) $2,000,000 on April 1, 2010, ~~of which the Company~~ and ~~Xcorporeal received $1,625,000 and $375,000, respectively, and (d) $2,000,000 on April 1, 2011, of which the Company and Xcorporeal received $1,925,000 and $75,000, respectively.~~2009

InThe ~~addition,~~Company ~~during~~had ~~the~~no ~~life~~revenues offrom ~~the~~operations for ~~patents referred to as~~ the HDthree ~~WAK~~months ~~Technology~~ended ~~(the~~March ~~“HD WAK Patents”)~~31, ~~which~~2010 ~~expire between November 11, 2021~~ and ~~September~~2009; 9however, ~~2024,~~ the Company isgenerated ~~entitled~~revenue ~~to certain royalty payments~~ from the sale of ~~wearable hemodialysis (“HD WAK”) devices in each country where such sales infringe valid and issued claims of~~ the Company’s and Xcorporeal’s HD WAK Patents issued in such country (“HD WAK Devices Royalty”) and the attendant disposables that incorporate the HD WAK Technology (as defined below) (“Attendant Disposables”), not to exceed a certain maximum amount per patient per week in a country where such sales infringe valid and issued claims of the HD WAK Patents issued in such country (the “Attendant Disposables Royalty”, and together with the HD WAK Devices Royalty, the “HD WAK Royalty”). Such payment for Attendant Disposables are not to be payable with regard to Attendant Disposables that incorporate any technology ~~for~~rights ~~which~~during ~~a Supersorbent Royalty (as defined below) is paid by FUSA to the Company or Xcorporeal~~2010. ~~The Company is entitled to 40% of the HD WAK Royalty and Xcorporeal is entitled to the remaining 60%.~~

~~Additionally,~~General ~~during~~and ~~the~~administrative ~~life~~expenses offor ~~any patents referred to as~~ the three ~~Supersorbent~~months ~~Technology~~ended ~~(the~~March ~~“Supersorbent Patents”)~~31, ~~the~~2010 ~~Company~~were is$131,350, ~~entitled~~as compared to ~~certain~~$373,193 ~~royalty~~for ~~payments~~the onthree ~~each~~months ~~supersorbent~~ended ~~cartridge~~March ~~sold~~31, ~~per~~2009, ~~patient~~a ~~in each country where such sales infringe valid and issued claims~~ decrease of ~~the~~$241,843 ~~Supersorbent~~or ~~Patents~~65%. ~~issued~~Included in such ~~country~~costs ~~less~~was ~~any~~stock-based ~~and~~compensation ~~all~~of ~~royalties~~$5,943 ~~payable to The Technion Research~~ and ~~Development~~$6,702 ~~Foundation~~in ~~Ltd.~~2010 ~~(“TRDF”) pursuant to a Research Agreement~~ and ~~Option for License~~2009, ~~dated~~respectively. ~~June~~The decrease ~~16,~~in ~~2005~~general ~~(the “Research Agreement”), or any subsequently executed license agreement between TRDF~~ and ~~FUSA.~~administrative ~~Such~~expenses ~~payments~~in ~~for~~2010 ~~supersorbent~~as ~~cartridges~~compared ~~are not payable with regard~~ to ~~supersorbent~~2009 ~~cartridges~~was ~~that~~primarily ~~incorporate~~a ~~any~~result HDof ~~WAK Technology for which~~ a HDdecrease ~~WAK~~in ~~Royalty~~legal isfees of ~~paid by FUSA to the Company or Xcorporeal~~$262,221. ~~During~~Significant ~~the~~legal ~~life~~fees ofwere ~~any~~incurred ~~Supersorbent~~in ~~Patents,~~2009 ~~the~~as ~~Company~~compared ~~is entitled~~ to ~~60%~~2010 ofdue ~~the~~primarily ~~Supersorbent Royalty payments and Xcorporeal is entitled~~ to the ~~remaining~~arbitration ~~40%.~~with ~~While several applications for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued~~Xcorporeal.

~~FUSA~~Interest ~~also~~expense ~~granted~~(all to ~~the~~a ~~Company~~related ~~and~~party) was ~~Xcorporeal an option to obtain a perpetual~~$197,030 ~~worldwide license to the Supersorbent Technology~~ for ~~use in healthcare fields other than renal (~~the ~~“Option”).~~three ~~The~~months ~~Option~~ended ~~will~~March be31, ~~exercisable~~2010, ~~during~~as ~~the~~compared ~~twelve-month~~to ~~period~~$12,575 ~~following FUSA’s receipt of regulatory approval~~ for the ~~sale~~three ofmonths aended ~~supersorbent~~March ~~product in the United States or European Union~~31, ~~which the Company expects will require further development of the supersorbent technology with TRDF and successful completion of clinical trials by FUSA~~2009. InThe ~~the~~increase in ~~event that the Option becomes exercisable and the Company and/or Xcorporeal exercises the Option~~2010, ~~the~~as ~~consideration~~compared ~~payable~~ to ~~FUSA~~2009, bywas the ~~Company~~result ~~or Xcorporeal for the exercise~~ of ~~the~~amortization ~~Option~~in ~~will~~2010 ~~consist~~ of adiscounts ~~payment~~on innotes ~~the amount of $7,500,000,~~ payable inthat ~~immediately~~were ~~available~~borrowed ~~funds, and a payment of an ongoing royalty~~ in anprior years ~~amount equal~~ to fund the ~~lesser~~company’s ofworking ~~$0.75~~capital ~~per supersorbent cartridge and $1~~needs.50 ~~per~~Such ~~patient~~notes ~~per~~payable ~~week~~were repaid in ~~each~~2010 ~~country~~from ~~where~~the ~~such~~proceeds ~~sales~~received ~~infringe~~in ~~valid~~2010 relating ~~and~~to ~~issued~~the ~~claims~~sale of the ~~Supersorbent~~Company’s ~~Patents~~technology ~~issued in such country~~rights.

16Other income was $156,145 for the three months ended March 31, 2010, as compared to $32,084 for the three months ended March 31, 2009. The increase was due primarily to forgiveness of payables by vendors in 2010.

~~The~~Income ~~Asset~~tax ~~Purchase~~expense ~~Agreement~~related ~~closed on March 19, 2010, with payments made~~ to ~~the~~continuing operations ~~Company by FUSA~~ of $1683,~~950,~~000, ~~$1,625,000~~was ~~and~~recorded ~~$1,675,000~~for onthe ~~March~~three ~~19,~~months ~~2010,~~ended ~~April~~March 131, 2010, and ~~April~~related 1,primarily ~~2011,~~to ~~respectively,~~the ~~for~~gain afrom ~~total~~legal settlement of $51,~~250~~871,~~000.~~430 ~~FUSA~~recognized ~~held~~in ~~back $200,000 and $250,000 from the March 19,~~ 2010. ~~and~~No ~~April~~tax 1,provision ~~2011~~had ~~payments,~~been ~~respectively,~~made for ~~purposes of resolving a dispute between~~ the ~~Company~~three ~~and~~months ~~TRDF.~~ended ~~The closing of the Asset Sale in~~ March ~~2010 also terminated the arbitration proceeding with Xcorporeal (see Note 11). The Company recognized a gain of approximately $5~~31,~~200,000,~~ ~~including~~2009 ~~the~~due ~~Xcorporeal~~to ~~legal~~losses ~~fee~~incurred during ~~reimbursement, upon the consummation of the close of the asset purchase transaction on March 19, 2010~~2009.

~~Advances~~Income ~~and~~from ~~Notes~~continuing ~~Payable~~operations was $1,016,195 for the three months ended March 31, 2010, as compared to ~~Related~~a ~~Party~~loss from continuing operations of $353,684 for the three months ended March 31, 2009, due primarily to the gain from legal settlement, net of income taxes, in 2010.

OnIncome ~~October~~from ~~18,~~discontinued ~~2009,~~operations ~~the~~was ~~Company entered into a~~ $~~200~~1,~~000 uncollateralized convertible promissory note agreement with Robert M. Snukal~~980,118 for athe ~~director~~three ~~and~~months ~~chief~~ended ~~executive~~March ~~officer~~31, ~~bearing interest at 6% per annum, and payable on April 30,~~ 2010~~. Under the terms of the note~~, atas ~~the~~compared ~~option~~to ofa ~~the~~loss ~~holder~~from ~~through~~discontinued ~~maturity,~~operations ~~the principal amount plus any accrued interest thereon could be converted into shares~~ of ~~the Company’s common stock at a conversion price of~~ $~~0.022 per share~~2,556 ~~which~~for ~~was~~ the ~~approximate~~three ~~closing~~months ~~price~~ended March of31, ~~the Company’s common stock on or about the date of the note. In connection with this note~~2009, ~~the~~due ~~Company~~primarily ~~issued warrants~~ to ~~purchase 4,545,455 shares of~~ the ~~Company’s~~gain ~~common~~from ~~stock at an exercise price of $0.022 per share. The warrants expire on~~ the ~~earlier of (i) October 18, 2016 or (ii) the closing of the Company’s~~ sale of ~~all or substantially all of its~~ assets ~~or the acquisition of the Company~~, asnet ~~defined in the warrant. The relative fair value~~ of ~~the~~income ~~warrants at the time of issuance was determined to be $83~~taxes,~~597,~~ using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants will be amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $200,000 note, with accrued interest of $4,077, was paid in ~~full~~2010.

OnNet ~~February~~income ~~23,~~was ~~2010~~$2,996,313 for the ~~Company~~three ~~entered~~months ended ~~into~~March a31, ~~$45~~2010,~~000~~ ~~uncollateralized~~as ~~promissory~~compared ~~note~~to ~~agreement~~a ~~with~~net anloss ~~officer~~of ~~and director~~$356,240 ~~bearing~~for ~~interest~~the atthree 5%months ~~per~~ended ~~annum,~~March ~~and payable on February 23~~31, ~~2011~~2009. ~~This note was paid in full in March 2010.~~

1719

~~Item~~The ~~2. Management’s~~Company ~~Discussion~~expects to report continuing losses from operations and ~~Analysis~~negative ofoperating ~~Financial~~cash ~~Condition~~flows for the remainder of 2010 and ~~Results~~subsequently, as the Company has no on-going revenue-generating activities, except for any ancillary revenues that may be derived in future periods from the sale of ~~Operation~~the Company’s technology rights.

~~Overview~~Liquidity and Capital Resources

~~Prior~~The toCompany had cash and money market funds of $257,926 at March 19 31, 2010, as compared to $22,281 at December 31, 2009, an increase of $235,645. However, the Company’s ~~platform~~does not ~~technology~~have ~~was~~sufficient aworking ~~wearable~~capital ~~artificial~~assets ~~kidney~~and ~~for~~resources ~~dialysis~~to ~~and~~meet ~~other~~its ~~medical~~continuing ~~applications~~obligations. ~~This~~In ~~device~~recent ~~was~~years, ~~being~~the ~~developed~~Company tohas ~~treat~~financed its working capital requirements through the ~~blood~~sale of ~~patients~~technology ~~through~~rights, loans and the recurring sales of its securities to related parties; however, there can be no assurances that such related party funding will be available to the Company in future periods on commercially reasonable terms or at all. As a ~~pulsating~~result, ~~dual-chambered~~the ~~pump~~Company’s independent registered public accounting firm, in its report on the Company’s 2009 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

~~Until~~The ~~that~~Company ~~date,~~had ~~the~~a ~~Company’s~~working ~~plan~~capital surplus of ~~operation~~$314,385 ~~was~~at toMarch ~~complete~~31, ~~the~~2010 ~~clinical~~as ~~studies~~compared ~~in humans with the Wearable Artificial Kidney in order~~ to ~~apply~~a toworking ~~the~~capital ~~FDA~~deficit ~~for permission to market the device. Pending resolution~~ of ~~the arbitration with Xcorporeal~~$2,687,871 ~~Peizer~~at ~~and~~December ~~Gura~~31, ~~the Company suspended its research and development efforts with respect to the wearable artificial kidney and had no active business operations~~2009.

~~The~~As ~~Company~~of ~~did~~March ~~not~~31, ~~have sufficient working capital to meet its obligations. Therefore~~2010, the Company ~~needed~~had tono note ~~obtain~~payable ~~funding~~obligations. onAs anof ~~ongoing~~December ~~basis~~31, ~~from outside sources~~2009, ~~both related and unrelated. There can be no assurances that~~ the Company ~~will~~had benotes ~~successful~~payable ~~now~~to orrelated inparties ~~the~~of ~~future~~$964,083, innet ~~obtaining~~of ~~any~~discount and ~~additional~~including ~~capital~~accrued oninterest, ~~terms~~and ~~favorable~~a tonote itpayable ~~or at all. The failure~~ to ~~obtain such capital will have~~ a ~~material~~consultant ~~adverse~~of ~~effect on the Company’s financial condition and operations~~$120,000.

~~Sale~~Operating ~~of Assets~~Activities

OnDuring ~~December 14, 2009,~~ the ~~Company~~three ~~entered~~months ~~into~~ended anMarch ~~Asset Purchase Agreement (the “Agreement”) by and among Xcorporeal~~31, ~~Inc. (“Xcorporeal”) and Fresenius USA~~2010, the ~~Inc.,~~Company agenerated ~~Massachusetts~~cash ~~corporation and a wholly owned subsidiary~~ of ~~Fresenius Medical Care Holdings~~$1, ~~Inc. (“Fresenius”)~~573,117 ~~pursuant~~from tocontinuing ~~which~~operating ~~the Company and Xcorporeal sold~~activities, ~~assigned~~as ~~and~~compared ~~delivered~~ to ~~Fresenius~~using ~~all~~cash of ~~their~~$90,887 ~~respective interests~~ in ~~and~~continuing operating ~~relating~~activities ~~to:~~during ~~(i)~~ the ~~designs~~three ~~for~~months ~~portable~~ended ~~hemodialysis~~March ~~devices;~~31, ~~(ii)~~2009, ~~the~~a ~~designs~~net ~~for~~increase ~~continuous~~of ~~renal~~$1,664,004. ~~replacement~~Cash ~~therapy~~provided ~~devices;~~from ~~(iii)~~continuing operations ~~the~~increased ~~designs~~in ~~for~~2010, ~~wearable~~as ~~hemodialysis~~compared ~~devices~~to ~~(the~~2009, ~~“HD~~due ~~WAK~~primarily ~~technology”);~~to ~~(iv)~~ the ~~designs~~proceeds ~~for~~received ~~wearable~~from ~~ultrafiltration devices; (v)~~ the ~~designs~~legal ~~for~~settlement, ~~wearable~~net ~~continuous renal replacement therapy devices; and (vi) the development~~ of ~~the~~income taxes, ~~supersorbent~~during ~~technology (subject to~~ the ~~option~~three ~~described~~months ~~below). The~~ended ~~foregoing~~March ~~technology~~31, ~~acquired by Fresenius constituted substantially all of the assets of the Company~~2010.

InDuring ~~exchange for~~ the ~~assets~~three ~~purchased,~~months ~~Fresenius~~ended ~~agreed~~March to31, ~~pay~~ 2010, the Company anused ~~aggregate $5,700,000 in~~ cash ~~as the Company’s portion~~ of ~~the purchase price. Fresenius assumed no previously existing liabilities of the Company. Fresenius also agreed to pay Xcorporeal an aggregate of~~ $2134,~~300,000~~930 in ~~cash. In~~discontinued ~~addition~~operating activities, ~~Fresenius~~as ~~agreed~~compared to ~~pay~~using ~~royalties~~cash ~~under the Agreement during the life~~ of the patents included in the HD WAK Technology equal to 2% of net revenues received by Fresenius on sales of HD WAK devices in each country where such sales infringe valid and issued claims under such patents, plus $~~0.75 per treatment of attendant disposables~~25,601 ~~not to exceed a maximum of $1.50 per patient per week~~ in ~~such~~discontinued ~~countries. Those~~operating activities ~~royalties are to be shared 40% to the Company and 60% to Xcorporeal. Fresenius also agreed to pay royalties under the Agreement~~ during the ~~life~~three ofmonths ~~the~~ended ~~patents~~March ~~included in the supersorbent technology (the “Supersorbent Patents”)~~31, ~~in each country where sales infringe valid and issued claims under such patents~~2009, ~~equal~~a tonet ~~the~~increase ~~lesser~~ of $~~0.75 per supersorbent cartridge or $1.50 per patient per week in such countries~~109, ~~less royalties payable to Technion Research and Development Foundation Ltd~~329. (“TRDF”) under the existing license agreement pursuant to which the Company is a party and which is expected to be assigned to Fresenius. Those royalties will be shared 60% to the Company and 40% to Xcorporeal. While several applications for patents are pending, no patent incorporating the Supersorbent Technology has yet been issued.

~~Fresenius~~Investing also granted to the Company and Xcorporeal an option to obtain a perpetual worldwide license to the supersorbent technology in the healthcare fields other than renal. The option is exercisable during the twelve-month period following Fresenius’s receipt of regulatory approval for the sale of a supersorbent product in the United States or European Union, which the Company expects will require further development of the supersorbent technology with TRDF and successful completion of clinical trials by Fresenius. The consideration for the exercise of the option was $7,500,000, payable in immediately available funds and an on-going royalty in an amount equal to the lesser of $0.75 per supersorbent cartridge or $1.50 per patient per week in each country where such sales infringe valid and issued claims of the Supersorbent Patents issued in such country.Activities

~~The~~During ~~Asset~~the ~~Purchase~~three ~~Agreement~~months ~~closed~~ended on March 19 31, 2010, ~~with payments made to~~ the Company byutilized ~~FUSA of~~ $197,~~950,000,~~268 ~~$1,625,000~~of ~~and~~cash ~~$1,675,000~~in oninvesting ~~March 19~~activities, ~~2010,~~consisting ~~April 1, 2010 and April 1, 2011, respectively, for a total~~ of ~~$5,250,000. FUSA~~the ~~held~~proceeds ~~back~~received ~~$200,000 and $250,000~~ from ~~the~~sale ~~March 19, 2010 and April 1, 2011 payments, respectively, for purposes~~ of ~~resolving~~assets ~~a dispute between the Company and TRDF. The Company recognized a gain~~ of ~~approximately~~ $578,~~200~~570,~~000,~~ less ~~including the Xcorporeal legal fee reimbursement~~$175,838 ~~upon~~transferred ~~the~~to ~~consummation of~~ the ~~close~~Company’s ofmoney ~~the~~market ~~asset purchase transaction on March 19, 2010~~funds.

18During the three months ended March 31, 2009, there were no investing activities.

~~Arbitration~~Financing ~~Proceeding with Former Legal Counsel~~Activities

OnDuring ~~February 17, 2011,~~ the ~~Company~~three ~~commenced~~months aended ~~binding~~March arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal31, ~~and certain transactional matters handled by~~ 2010, the ~~law firm for the~~ Company. ~~The~~used ~~former~~cash ~~law~~of ~~firm has asserted that approximately~~ $21,~~729~~281,~~000~~112 in ~~fees~~financing ~~and costs are owed to it by the Company for services rendered during 2008~~activities, ~~2009~~consisting ~~and~~primarily ~~2010, plus interest. The arbitrators have heard all~~ of ~~the~~principal ~~testimony presented by the parties,~~ and ~~the~~interest ~~parties~~payments ~~submitted~~made ~~their final closing briefs~~ on ~~November 10, 2011. As of January 13, 2012, the arbitrators had not rendered their decision on this matter. The Company believes that it has adequately and appropriately provided for the fees~~ debt incurred ~~through September 30, 2012~~ in ~~the~~prior ~~accompanying~~periods ~~condensed~~to ~~consolidated~~finance ~~financial statements. Given~~ the Company’s ~~limited liquidity and working capital resources, it is uncertain whether the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered~~activities.

~~Going~~During ~~Concern~~the three months ended December 31, 2009, the Company had no financing activities.

The ~~Company’s~~following ~~condensed~~significant ~~consolidated~~financing ~~financial statements have been presented on the basis that it is a going concern~~transactions, primarily ~~which~~equity ~~contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Prior to June 15~~related, 2006, the Company provided dialysis services for patients suffering from acute kidney failure through a clinic located in Los Angeles, California, and through a visiting nursing program contracted to several Los Angeles County hospitals. The assets of both the clinic and the nursing program were ~~sold~~completed ~~to third parties, and as a result such activities were accounted for as discontinued operations~~ in ~~the~~2009 ~~Company’s consolidated financial statements. Prior to March 19, 2010, the Company was also a research~~ and development company in the business of developing a wearable artificial kidney for dialysis and other medical applications. On that date, the Company consummated a sale of its assets, including its technology rights with respect to its developing wearable artificial kidney. Since June 15, 2006, the Company has not generated any revenues from operations, and does not expect to do so in the foreseeable future.2010:

~~For~~On ~~the~~May ~~past~~13, ~~several~~2009, ~~years~~a $700,000 ~~the~~promissory ~~Company~~note dated ~~has~~December ~~experienced~~26, ~~net~~2007 ~~operating~~payable ~~losses~~to ~~and~~Robert ~~negative~~M. ~~operating~~Snukal, ~~cash~~director ~~flows.~~and Aschief ofexecutive ~~September~~officer, 30and a $150,000 ~~2009~~promissory note dated August 12, ~~the~~2008 ~~Company~~payable ~~had~~to anRobert ~~accumulated~~M. ~~deficit~~Snukal, plus accrued interest of $1764,~~305~~611,~~000,~~ were rolled-over into a ~~working~~new ~~capital~~uncollateralized ~~deficiency~~non-convertible promissory note in the amount of $3914,~~889~~611,~~128~~ due on May 13, ~~and~~2010, ~~its~~with ~~total~~interest ~~liabilities~~at ~~exceeded~~6% ~~its~~per ~~total~~annum. ~~assets~~In byconnection $3with this note,~~828~~ the Company issued warrants to purchase 16,~~075~~937,240 shares of the Company’s common stock at an exercise price of $0.027 ~~Such~~per ~~deficiencies~~share, which ~~indicate~~was the ~~Company~~approximate ~~will~~closing ~~not~~price beof ~~able~~the toCompany’s ~~meet~~common ~~its~~stock ~~current~~on ~~obligations~~or asabout ~~they~~the ~~come~~date ~~due~~of the note. InThe ~~recent~~warrants ~~years,~~expire on the ~~Company~~earlier ~~has~~of ~~financed~~(i) ~~its~~May ~~working~~13, ~~capital~~2016 ~~requirements~~or ~~through~~(ii) ~~loans~~the ~~and~~closing of the ~~recurring~~Company’s sale of all or substantially all of its ~~securities~~assets toor the ~~related~~acquisition ~~parties~~of the Company, ~~which~~as defined in the ~~Company~~warrant. ~~cannot~~The berelative ~~assured~~fair value of ~~obtaining~~the inwarrants at the ~~future.~~time Asof aissuance ~~result~~was determined to be $377,667, using the ~~Company’s~~Black-Scholes ~~independent~~option-pricing ~~registered~~model, ~~public~~and ~~accounting~~was ~~firm,~~recorded inas ~~its~~a ~~report~~discount onto the ~~Company’s~~note ~~2008~~payable ~~consolidated~~upon issuance. ~~financial~~The ~~statements,~~relative ~~has~~fair ~~raised~~value ~~substantial~~of ~~doubt~~the ~~about~~warrants was amortized to interest expense over the ~~Company’s~~term ~~ability~~of tothe ~~continue~~note asusing athe ~~going~~straight-line method. ~~concern~~In March 2010, the $914,611 note, with accrued interest of $42,398, was paid in full.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional debt or equity capital and to acquire sufficient operating capital through the sale of assets, development of business activities, or otherwise. The Company’s consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.20

~~Recent~~On ~~Accounting~~April ~~Pronouncements~~21, 2009, the Company entered into a $20,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and chief executive officer, with interest at 6% per annum, payable on August 31, 2009. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted at any time into shares of the Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date the note was issued. In connection with this note, the Company issued warrants to purchase 333,333 shares of the Company’s common stock at an exercise price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date the warrants were issued. The warrants expire on the earlier of (i) April 21, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets, or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. On April 28, 2009, the $20,000 note was paid in full.

~~Management~~On ~~does~~April ~~not~~29, ~~believe~~2009, ~~that~~the ~~any~~Company ~~recently~~ issued 3,000,000 shares ~~but~~of ~~not~~its ~~yet~~common ~~effective,~~stock ~~authoritative~~to ~~guidance~~Robert M. Snukal, ifdirector ~~currently~~and ~~adopted~~chief executive officer, ~~would~~upon ~~have~~the aexercise ~~material~~of ~~impact~~warrants onat ~~the~~$0.02 ~~Company's~~per share. ~~financial~~The ~~statement~~Company ~~presentation~~received or$60,000 ~~disclosures~~of proceeds.

~~Significant~~On ~~Accounting~~May ~~Policies~~11, 2009, the Company issued 2,000,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $40,000 of proceeds.

~~The~~On ~~Company~~May ~~prepared~~13, ~~its~~2009, ~~condensed~~the ~~consolidated~~Board ~~financial~~approved ~~statements~~the inissuance of ~~accordance~~500,000 ~~with~~shares ~~accounting~~of ~~principles~~the ~~generally~~Company’s ~~accepted~~common instock ~~the~~to ~~United~~Dr. ~~States~~Rambod, ofa ~~America.~~consultant ~~The~~and ~~preparation~~former officer of ~~these~~the ~~financial~~Company, ~~statements~~as ~~requires~~payment for services in connection with the ~~use~~completion and filing of ~~estimates~~a patent application regarding the Company’s rights in and ~~assumptions~~to the ~~that~~polymer ~~affect~~technology developed by the ~~reported~~Company. ~~amounts~~The 500,000 shares of ~~assets~~common ~~and~~stock ~~liabilities~~were ~~and~~valued at $0.027 per share, which was the ~~disclosure~~approximate closing price of ~~contingent~~the ~~assets~~Company’s ~~and~~common ~~liabilities~~stock aton or about the date of the ~~financial~~issuance, ~~statements~~for ~~and~~a ~~the~~total ~~reported~~of ~~amount~~$13,500, which ofwas ~~revenues~~charged ~~and~~to ~~expenses~~discontinued ~~during~~operations ~~the~~on ~~reporting~~May ~~period~~13, 2009. ~~Management~~On ~~periodically~~August ~~evaluates~~5, 2009, the ~~estimates~~Board ~~and~~approved ~~judgments~~an ~~made~~additional issuance of 250,000 shares of the Company’s common stock to Dr. ~~Management~~Rambod ~~bases~~as ~~its~~payment ~~estimates~~for ~~and~~additional ~~judgments~~services onin ~~historical~~connection ~~experience~~with ~~and~~the onpatent ~~various~~application. The ~~factors~~250,000 ~~that~~shares ~~are~~of ~~believed~~common tostock bewere ~~reasonable~~valued ~~under~~at $0.02 per share, which was the ~~circumstances.~~approximate ~~Actual~~closing ~~results~~price ~~may~~of ~~differ~~the ~~from~~Company’s common ~~these~~stock ~~estimates~~on asthe date of the issuance, for a ~~result~~total of ~~different~~$5,000, ~~assumptions~~which orwas ~~conditions~~charged to discontinued operations on August 5, 2009.

19On May 13, 2009, the Company issued options to purchase 250,000 shares of common stock to a consultant for past services, which were fully vested on the date of grant. The options are exercisable at $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $6,037, which was charged to operations on May 13, 2009.

~~The~~On ~~following~~May ~~critical~~13, ~~accounting~~2009, ~~policies~~the ~~affect~~Company issued options to purchase a total of 300,000 shares of common stock to two outside directors for past services, which were fully vested on the date ~~more~~of ~~significant~~grant. ~~judgments~~The ~~and~~options ~~estimates~~are ~~used~~exercisable inat $0.027 per share, which was the ~~preparation~~approximate closing price of the Company’s common ~~consolidated~~stock ~~financial~~on ~~statements~~or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $7,244, which was charged to operations on May 13, 2009.

~~Research~~On July 7, 2009, the Company issued 555,555 shares of its common stock to Robert M. Snukal, director and ~~Development~~chief executive officer, upon the exercise of warrants at $0.027 per share. The Company received $15,000 of proceeds.

~~Research~~During August and ~~development~~September ~~costs~~2009, ~~are~~Robert M. ~~expensed~~Snukal, asdirector ~~incurred.~~and ~~Research~~chief ~~and~~executive ~~development~~officer, ~~expenses~~advanced ~~consist~~$87,500 ~~primarily~~to ofthe ~~costs~~Company ~~incurred~~on ~~with~~a ~~respect~~non-interest tobearing ~~the~~basis ~~development~~for ofworking ~~the~~capital purposes. ~~Company’s~~On ~~wearable~~October ~~artificial~~17, ~~kidney~~2009, ~~for~~the ~~dialysis~~advances ~~and~~were ~~other~~repaid ~~medical~~in ~~applications~~full.

~~Technology~~On ~~Rights~~October 18, 2009, the Company entered into a $200,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and chief executive officer, with interest at 6% per annum, and payable on April 30, 2010. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted at any time into shares of the Company’s common stock at a conversion price of $0.022 per share, which was the approximate closing price of the Company’s common stock on or about the date the note was issued. In connection with this note, the Company issued warrants to purchase 4,545,455 shares of the Company’s common stock at an exercise price of $0.022 per share, which was the approximate closing price of the Company’s common stock on or about the date the warrants were issued. The warrants expire on the earlier of (i) October 18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets, or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $83,597, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $200,000 note, including accrued interest of $4,077, was paid in full.

Technology rights relate to the Company’s wearable artificial kidney and are being amortized over an estimated useful life of approximately 20 years. Amortization is included in research and development expense in the statement of operations. On December 14, 2009, the Company entered into an Asset Purchase Agreement for the sale of these rights, which was consummated on March 19, 2010.21

~~Stock-Based~~On ~~Compensation~~February 23, 2010, the Company entered into a $45,000 uncollateralized promissory note agreement with Robert M. Snukal, director and chief executive officer, with interest at 5% per annum, and payable on February 23, 2011. In March 2010, the $45,000 note, with accrued interest of $26, was paid in full.

The Company periodically issues stock options and warrants to officers, directors and consultants for services rendered. Options vest and expire according to terms established at the grant date. The Company accounts for share-based payments to officers and directors by measuring the cost of services received in exchange for equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense in the Company’s financial statements over the vesting period of the awards. The Company accounts for share-based payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.22

~~The~~Item ~~fair~~3. ~~value~~Quantitative of stock-based compensation is affected by several variables, the most significant of which are the life of the equity award, the exercise price of the security as compared to the fair market value of the common stock on the grant date, and ~~the~~Qualitative ~~estimated~~Disclosures ~~volatility~~About ofMarket ~~the common stock over the term of the equity award.~~Risk

~~The~~Not Company recognizes the fair value of stock-based compensation awards in general and administrative expense and in research and development expense, as appropriate, in the condensed consolidated statement of operationsapplicable.

~~Income~~Item ~~Taxes~~4. Controls and Procedures

~~The~~Disclosure ~~Company~~Controls ~~accounts for income taxes under an asset~~ and liability approach for financial accounting and reporting for income taxes. Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities.Procedures

~~The~~Regulations ~~Company~~under ~~records~~the aSecurities ~~valuation~~Exchange Act ~~allowance~~of to1934 ~~reduce~~require ~~its~~public ~~deferred~~companies ~~tax assets~~ to ~~the~~maintain ~~amount~~“disclosure ~~that~~controls isand ~~more~~procedures,” ~~likely~~which ~~than~~are ~~not~~defined to bemean ~~realized.~~a company’s Incontrols ~~the~~and ~~event~~other ~~the~~procedures ~~Company was to determine~~ that itare ~~would~~designed ~~be able~~ to ~~realize~~ensure ~~its~~that ~~deferred~~information ~~tax~~required ~~assets in the future in excess of its recorded amount, an adjustment~~ to ~~the deferred tax assets would~~ be ~~credited~~disclosed ~~to operations~~ in the ~~period such determination was made. Likewise, should the Company determine~~ reports that it ~~would~~files ~~not~~or besubmits ~~able~~under tothe ~~realize~~Securities ~~all~~Exchange orAct ~~part~~ of ~~its~~1934 ~~deferred~~is ~~tax~~recorded, ~~assets in the future~~processed, ansummarized ~~adjustment~~and toreported within the ~~deferred~~time periods ~~tax~~specified ~~assets would be charged to operations~~ in the ~~period~~SEC’s ~~such~~rules ~~determination~~and ~~was made~~forms.

~~Contingencies~~We conducted an evaluation, with the participation of our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the period covered by this Report. Based on that evaluation, our Chief Executive Officer has concluded that as of March 31, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses.

~~The~~A ~~Company~~material ~~assesses~~weakness ~~contingent~~is ~~liabilities,~~a ~~and~~control ~~such~~deficiency (within ~~assessment~~the ~~inherently~~meaning ~~involves an exercise~~ of ~~judgment. If~~ the ~~assessment~~Public ofCompany aAccounting ~~contingency~~Oversight ~~indicates~~Board ~~that~~(PCAOB) itAuditing isStandard ~~probable~~No. ~~that~~5) aor ~~material~~combination ~~loss has been incurred and the amount~~ of ~~the~~control deficiencies ~~liability~~that ~~can~~result ~~be estimated, then the estimated liability is accrued~~ in ~~the~~more ~~Company’s~~than ~~financial~~a ~~statements.~~remote Iflikelihood ~~the assessment indicates~~ that a ~~potentially~~ material ~~loss~~misstatement ~~contingency~~of isthe ~~not~~annual ~~probable, but is reasonably possible,~~ or isinterim ~~probable~~financial ~~but~~statements will ~~cannot~~not be ~~estimated,~~prevented ~~then~~or ~~the~~detected. ~~nature~~Management ofhas ~~the~~identified ~~contingent liability, together with an estimate of~~ the ~~range~~following ofthree ~~possible loss, if determinable and~~ material, isweaknesses ~~disclosed. Loss contingencies considered remote are generally not disclosed, unless they involve guarantees,~~ in ~~which~~our ~~case~~disclosure ~~the~~controls and ~~nature of the guarantee is disclosed.~~procedures:

201. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

~~Results~~2. We do not have sufficient segregation of ~~Operations~~duties ~~for~~within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent ~~Three~~possible, ~~Months~~the ~~Ended~~initiation ~~September~~of 30transactions, ~~2009~~the custody of assets and ~~2008~~the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

~~There~~3. We do ~~were~~not nohave ~~revenues~~review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the ~~three~~accuracy ~~months~~of ~~ended~~financial ~~September~~information 30reported. The failure to review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, ~~2009~~review and ~~2008~~supervision may not always be possible or economically possible. Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

~~Research~~To ~~and~~address ~~development~~these ~~expenses~~material ~~for~~weaknesses, ~~the~~management performed ~~three~~additional ~~months~~analyses ~~ended~~and ~~September~~other ~~30,~~procedures ~~2009~~to ~~were~~ensure ~~$60,941~~that asthe ~~compared~~financial tostatements ~~$36,284~~included ~~for~~herein ~~the~~fairly ~~three~~present, ~~months~~in ~~ended~~all material ~~September 30~~respects, ~~2008,~~our anfinancial ~~increase~~position, results of ~~$24,657~~operations orand ~~68%.~~cash ~~Such~~flows ~~increase~~for ~~reflects~~the ~~expenditures~~periods ~~made~~presented. Management also ~~during~~retained ~~the~~outside ~~period~~consultants into ~~order~~assist toit ~~protect~~in the ~~Company’s~~preparation ~~interests~~of inconsolidated ~~its~~financial ~~wearable~~statements ~~artificial~~and ~~kidney~~footnotes.

~~Interest~~Changes ~~expense~~in ~~was~~Internal ~~$109,781~~Control ~~for~~over ~~the~~Financial ~~three months ended September 30, 2009, as compared to $72,422 for the three months ended September 30, 2008, as a result of the additional borrowings being made in 2009.~~Reporting

~~Other~~There ~~income~~were ofno ~~$115,121~~changes ~~for~~in the ~~three~~Company’s internal ~~months~~control ~~ended~~over ~~September~~financial ~~30,~~reporting ~~2009~~identified ~~resulted~~in ~~primarily~~connection ~~from~~with the ~~forgiveness~~evaluation of ~~payables.~~such ~~There~~internal ~~was~~control nothat ~~other~~occurred ~~income~~ during the ~~three~~period ~~months~~covered ~~ended~~by ~~September~~this 30report that have materially affected, ~~2008~~or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~The Company incurred a net loss from continuing operations for the three months ended September 30, 2009 and 2008 of $198,629 and $479,747, respectively.~~23

~~The~~PART ~~Company~~II ~~incurred~~– aOTHER ~~net loss for the three months ended September 30, 2009 and 2008 of $198,629 and $479,737, respectively.~~INFORMATION

~~Losses~~Item ~~are~~1 ~~expected~~– toLegal continue until such time of resolution of the arbitration with Xcorporeal, Peizer and Gura, resolution of the arbitration with the Company’s former counsel, and the commercial marketing or alternative economic exploitation of the wearable artificial kidney.Proceedings

~~Results~~On ofDecember 1, ~~Operations~~2006, Xcorporeal filed a demand for arbitration at JAMS in Santa Monica, California against the ~~Nine~~Company, ~~Months~~alleging ~~Ended~~an unspecified anticipatory breach of the License Agreement that the Company entered into with Xcorporeal on September 301, ~~2009~~2006. At the same time that the Company entered into the License Agreement, the Company entered into an interrelated and ~~2008~~inter-dependent Merger Agreement with Xcorporeal. Effective as of December 29, 2006, the Company terminated the Merger Agreement and the License Agreement due to Xcorporeal’s continuing, uncured and incurable breaches of the Merger Agreement and its other wrongful conduct related to the merger and license agreements and certain related matters. At the same time that the Company terminated the Merger Agreement and the License Agreement, the Company filed a lawsuit against Xcorporeal and against Victor Gura, a former officer and director of the Company. Xcorporeal and Gura stipulated to the filing of the Company’s claims against them as part of the arbitration proceedings related to the License Agreement, and the Company dismissed its lawsuit without prejudice. The arbitration was terminated with the closing of the Asset Sale in March 2010. A description of the Asset Sale is set forth at “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Sale of Assets”.

~~There~~On ~~were~~February no17, ~~revenues~~2011, the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, and certain transactional matters handled by the law firm for the ~~nine~~Company. ~~months~~The ~~ended~~former ~~September~~law 30firm has asserted that approximately $2,729,000 ~~2009~~in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of April 2, 2012 the arbitrators had not rendered their decision on this matter. The Company believes that it has adequately and appropriately provided for the fees incurred through March 31, 2010 in the accompanying condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, it is uncertain whether the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered.

~~Research~~Item ~~and~~1A ~~development~~– ~~expenses~~Risk for the nine months ended September 30, 2009 were $77,472 as compared to $386,679 for the nine months ended September 30, 2008, a decrease of $309,207 or 80%. Such decrease reflects the suspension of research and development activities related to the development of the Company’s wearable artificial kidney pending resolution of the Company’s arbitration proceeding with Xcorporeal.Factors

~~Interest~~Not ~~expense was $195,484 for the nine months ended September 30, 2009, as compared to $181,231 for the nine months ended September 30, 2008, as a result of the additional borrowings being made in 2009~~applicable.

~~Other~~Item ~~income~~2 of– ~~$147,205~~Unregistered ~~for~~Sales ~~the~~of ~~nine~~Equity ~~months~~Securities ~~ended~~and Use ~~September 30, 2009 resulted primarily from the forgiveness~~ of ~~payables. There was no other income during the nine months ended September 30, 2008.~~Proceeds

~~The~~Information ~~Company~~with ~~incurred~~respect ato ~~net~~the ~~loss~~sales ~~from~~of ~~continuing~~unregistered ~~operations~~equity securities ~~for~~can ~~the~~be ~~nine~~found ~~months~~at ~~ended~~Note ~~September~~5 30to the March 31, ~~2009~~2010 ~~and~~condensed ~~2008~~consolidated offinancial ~~$894,815~~statements. ~~and~~The ~~$3,399,723,~~proceeds ~~respectively~~from such sales were used to fund the Company’s operating activities.

~~The~~Item ~~Company~~3 ~~incurred~~– aDefaults ~~net~~Upon ~~loss~~Senior ~~for the nine months ended September 30, 2009 and 2008 of $894,815 and $3,399,732, respectively.~~Securities

Losses are expected to continue until such time of resolution of the arbitration with Xcorporeal, Peizer and Gura, resolution of the arbitration with the Company’s former counsel, and the commercial marketing or alternative economic exploitation of the wearable artificial kidneyNone.

21Item 4 – Reserved

~~Liquidity~~Item ~~and~~5 ~~Capital~~– ~~Resources~~Other Information

~~Cash was $20,717 as of September 30, 2009, as compared to $116,800 as of December 31, 2008, a decrease of $96,083~~None. The Company does not have sufficient working capital to meet its obligations. Therefore, the Company must obtain outside funding on an on-going basis. The Company cannot provide assurances that it will be successful now or in the future in obtaining any additional capital on terms favorable to it or at all. The failure to obtain such capital will have a material adverse effect on the Company’s financial condition and ability to conduct operations.

InItem ~~recent~~6 ~~years,~~– the Company’s cash flow needs have been met primarily through the sales of common stock, the exercise of stock options and stock warrants, and the proceeds from advances and notes payable to a related party. The Company had a working capital deficit of $3,889,128 and $3,429,307 at September 30, 2009 and December 31, 2008, respectively.Exhibits

AsA oflist ~~September 30, 2009, the Company had an advance due to a related party~~ of ~~$87,500~~exhibits ~~and~~required ~~notes payable~~ to ~~related~~be ~~parties~~filed ofas ~~$704,036,~~part ~~including accrued interest and net~~ of ~~discount,~~this ~~all~~report is ofset ~~which~~forth ~~was~~in ~~current at that date. As of December 31, 2008,~~ the ~~Company~~Index ~~had notes payable~~ to ~~related parties of $896~~Exhibits,~~776,~~ ~~including accrued interest and net of discounts, all of~~ which ~~was~~is ~~current~~presented atelsewhere ~~that~~in ~~date. Notes~~this ~~payable to related parties decreased by $192~~document,~~740~~ atand ~~September~~is ~~30,~~incorporated ~~2009,~~herein ~~as compared to December 31, 2008, due primarily to the roll-over of notes payable into a new note payable with warrants attached thereto that were valued at $377,667, offset~~ by ~~the accrual of interest and the amortization of discounts~~reference.

~~Operating Activities~~24

During the nine months ended September 30, 2009, the Company used cash of $298,583 in continuing operating activities, as compared to using cash of $1,436,923 in continuing operating activities during the nine months ended September 30, 2008, a decrease of $1,138,340, reflecting the decrease in professional fees that were incurred in 2008, primarily in connection with the arbitration proceedings with Xcorporeal and increased needs in connection with financing and reporting activities.SIGNATURES

~~During~~Pursuant to the ~~nine~~requirements ~~months~~of ~~ended~~Securities Exchange ~~September~~Act ~~30,~~of ~~2009~~1934, the ~~Company~~registrant ~~did~~has ~~not~~duly ~~use~~caused orthis ~~generate~~report ~~any~~to ~~cash~~be ~~from~~signed ~~discontinued~~on ~~operations. During~~its ~~the~~behalf ~~nine~~by ~~months~~the ~~ended~~undersigned ~~September~~thereunto ~~30,~~duly ~~2008, discontinued operations used $9 in cash~~authorized.

During the nine months ended September 30, 2009, the Company used cash of $298,583 in operations, as compared to using cash of $1,436,932 in operating activities during the nine months ended September 30, 2008.

	NATIONAL QUALITY CARE, INC.

Date: April 2, 2012	By:	/s/Robert M. Snukal
		Robert M. Snukal
		Chief Operating Officer and President
		(Principal Executive Officer)

Date: April 2, 2012	By:	/s/Leonardo Berezovsky
		Leonardo Berezovsky
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

~~Financing Activities~~25

~~During~~INDEX ~~the~~TO nine months ended September 30, 2009, the Company generated $202,500 of cash from financing activities consisting of $87,500 in advances from a related party, $115,000 from the exercise of stock warrants, and $20,000 in proceeds from a note payable to a related party that was repaid before the end of the period. During the nine months ended September 30, 2008, the Company generated $745,290 of cash from financing activities, consisting of the proceeds from the issuance of common stock of $204,000, payments received on stock subscription receivables of $36,790, proceeds from the exercise of stock options of $17,500, proceeds from a note payable to a related party of $100,000 and $387,000 from the exercise of stock warrants.EXHIBITS

The following significant financing transactions, primarily equity related, were completed during 2008, 2009 and 2010:

Exhibit No.		Description
2.1		Agreement for Exchange of Stock dated May 11, 1996, by and among the Company, Los Angeles Community Dialysis, Inc., Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald P. Lang, M.D. (1)
3.1		Restated Certificate of Incorporation (2)
3.2		Bylaws (2)
31.1		Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.1		Certification of CEO and CFO pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

1.		Incorporated by reference herein to its Current Report on Form 8-K dated May 24, 1996.
2.		Incorporated by reference herein to its Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1996.

During March 2008, the Company completed a private placement of an aggregate of 1,375,000 Units (the “Units”) at a purchase price of $0.08 per Unit, for a total purchase price of $110,000. Each Unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.08 per share. The warrants are exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance, (ii) the closing of a firmly underwritten public offering or (iii) upon a sale of the Company. Robert M. Snukal, director and chief executive officer, purchased 750,000 Units for $60,000 paid in cash at closing. Jose Spiwak, a director, purchased 625,000 Units for $20,000 in cash at closing, with the balance thereof satisfied through delivery of a promissory note. The principal amount of the promissory note, together with accrued and unpaid interest thereunder, was due and payable in three equal installments of $10,000 due April 30, 2008, May 30, 2008, and June 30, 2008. The unpaid principal amount under the promissory note bears interest at the rate of 1.85% per annum and was paid in full on July 1, 2008.26

During March 2008, the Company issued 5,000,000 shares of its common stock to Robert M. Snukal, a director and chief executive officer, upon the exercise of warrants at $0.07 per share. The Company received $350,000 of proceeds.

During May 2008, the Company completed a private placement of an aggregate of 400,000 Units (the “Units”) issued to Robert M. Snukal, director and chief executive officer, at a purchase price of $0.06 per Unit, for a total purchase price of $24,000. Each Unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.06 per share. The warrants are exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets.

On June 30, 2008, the Company issued 875,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of 250,000 options at $0.07 per share and 625,000 warrants at $0.04 per share. The Company received $42,500 of proceeds.

During June 2008, the Company completed a private placement of an aggregate of 1,250,000 Units (the “Units”) to Robert M. Snukal, director and chief executive officer, at a purchase price of $0.04 per Unit, for a total purchase price of $50,000. Each Unit consists of one share of common stock of the Company and one warrant to purchase one-half of a share of common stock of the Company at an exercise price of $0.04 per share. The warrants are exercisable immediately upon issuance and expire upon the first to occur of (i) seven years following the date of issuance or (ii) upon a sale of the Company or substantially all of its assets.

During July 2008, the Company completed a private placement to an accredited investor (an existing shareholder) of an aggregate of 625,000 shares of common stock at a purchase price of $0.08 per share, for a total purchase price of $50,000.

In August 2008, the Company issued 200,000 shares of its common stock upon the exercise of warrants at $0.06 per share. The Company received $12,000 of proceeds.

During August 2008, the Company entered into a $150,000 uncollateralized convertible promissory note with Robert M. Snukal, director and chief executive officer, bearing interest at 6% per annum, and payable on December 31, 2008. The note becomes immediately payable upon the consummation of a change of control transaction, which is defined as (i) a reorganization, consolidation or merger (or similar transaction or series of related transactions) of the Company with or into any other entity, or a sale or exchange of outstanding shares, any of which results in the shareholders of the Company immediately prior to the transaction owning less than 50% of the surviving entity of such transaction or transactions, or (ii) a sale of all or substantially all of the assets of the Company. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon may be converted into shares of the Company’s common stock at a conversion price of $0.12 per share at any time. In connection with this note, the Company issued warrants to purchase 625,000 shares of the Company’s common stock at an exercise price of $0.12 per share.

On October 16, 2008, Robert M. Snukal, director and chief executive officer, purchased 10,000,000 units (the “Units”) of the Company, at a purchase price equal to $0.02 per Unit, for a total purchase price of $200,000. Each Unit consisted of one share of the Company’s common stock and a warrant to purchase one-half of one share of the Company’s common stock at an exercise price of $0.02 per share. The warrants are exercisable immediately and expire on the earlier of (i) October 16, 2015 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or other transaction as a result of which stockholders of the Company immediately prior to such acquisition possess a minority of the voting power of the acquiring entity immediately following such acquisition.

On May 13, 2009, the $700,000 promissory note payable to Robert M. Snukal, director and chief executive officer, and the $150,000 promissory note payable to Robert M. Snukal, plus accrued interest of $64,611, were rolled-over into a new uncollateralized non-convertible promissory note in the amount of $914,611, due on May 13, 2010, with interest at 6% per annum. In connection with this note, the Company issued warrants to purchase 16,937,240 shares of the Company’s common stock at an exercise price of $0.027 per share. The warrants expire on the earlier of (i) May 13, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $377,667, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants is being amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $914,611 note, with accrued interest of $42,424, was paid in full.

On April 21, 2009, the Company entered into a $20,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and chief executive officer, bearing interest at 6% per annum, payable on August 31, 2009. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.03 per share, which was the approximate closing price of the Company’s common stock on the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 333,333 shares of the Company’s common stock at an exercise price of $0.03 per share. The warrants expire on the earlier of (i) April 21, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $8,312, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the warrants was amortized to interest expense over the term of the note using the straight-line method. On April 28, 2009, the $20,000 note was paid in full.

On April 29, 2009, the Company issued 3,000,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $60,000 of proceeds.

On May 11, 2009, the Company issued 2,000,000 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of warrants at $0.02 per share. The Company received $40,000 of proceeds.

On May 13, 2009, the Board approved the issuance of 500,000 shares of the Company’s common stock to Dr. Rambod, a consultant and former officer of the Company, as payment for services in connection with the completion and filing of a patent application regarding the Company’s rights in and to the polymer technology developed by the Company. The common stock issued was valued at $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, for a total of $13,500, which was charged to operations on May 13, 2009. On August 5, 2009, the Board approved an additional issuance of 250,000 shares of the Company’s common stock to Dr. Rambod as payment for additional services in connection with the patent application. The common stock issued was valued at $0.02 per share, which was the approximate closing price of the Company’s common stock on the date of the issuance, for a total of $5,000, which was charged to operations on August 5, 2009.

On May 13, 2009, the Company issued options to purchase 250,000 shares of common stock to an employee for past services. The options became fully vested on May 13, 2009, the date of grant. The options have an exercise price of $0.027 per share, which was the approximate closing price of the Company’s common stock on or about the date of the issuance, and expire in ten years. The fair value of these options on the date of grant was $6,037, which was charged to operations on May 13, 2009.

On July 7, 2009, the Company issued 555,555 shares of its common stock to Robert M. Snukal, director and chief executive officer, upon the exercise of warrants at $0.027 per share. The Company received $15,000 of proceeds.

During August and September of 2009, Robert M. Snukal, director and chief executive officer, advanced $87,500 to the Company on a non-interest bearing basis for working capital purposes. On October 17, 2009, the advances were repaid in full.

On October 18, 2009, the Company entered into a $200,000 uncollateralized convertible promissory note agreement with Robert M. Snukal, director and chief executive officer, bearing interest at 6% per annum, and payable on April 30, 2010. Under the terms of the note, at the option of the holder through maturity, the principal amount plus any accrued interest thereon could be converted into shares of the Company’s common stock at a conversion price of $0.022 per share, which was the approximate closing price of the Company’s common stock on or about the date of the note, at any time. In connection with this note, the Company issued warrants to purchase 4,545,455 shares of the Company’s common stock at an exercise price of $0.022 per share. The warrants expire on the earlier of (i) October 18, 2016 or (ii) the closing of the Company’s sale of all or substantially all of its assets or the acquisition of the Company, as defined in the warrant. The relative fair value of the warrants at the time of issuance was determined to be $83,597, using the Black-Scholes option-pricing model, and was recorded as a discount to the note payable upon issuance. The relative fair value of the will be amortized to interest expense over the term of the note using the straight-line method. In March 2010, the $200,000 note, with accrued interest of $4,077, was paid in full.

On February 23, 2010, the Company entered into a $45,000 uncollateralized promissory note agreement with Robert M. Snukal, director and chief executive officer, bearing interest at 5% per annum, and payable on February 23, 2011. This note was paid in full in March 2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

We conducted an evaluation, with the participation of our Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the period covered by this Report. Based on that evaluation, our Chief Executive Officer has concluded that as of September 30, 2009, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses.

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses in our disclosure controls and procedures:

1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

3. We do not have review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the accuracy of financial information reported. The failure to review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible or economically possible. Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Management also retained outside consultants to assist it in the preparation of consolidated financial statements and footnotes.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

On December 1, 2006, Xcorporeal filed a demand for arbitration at JAMS in Santa Monica, California against the Company, alleging an unspecified anticipatory breach of the License Agreement that the Company entered into with Xcorporeal on September 1, 2006. At the same time that the Company entered into the License Agreement, the Company entered into an interrelated and inter-dependent Merger Agreement with Xcorporeal. Effective as of December 29, 2006, the Company terminated the Merger Agreement and the License Agreement due to Xcorporeal’s continuing, uncured and incurable breaches of the Merger Agreement and its other wrongful conduct related to the merger and license agreements and certain related matters. At the same time that the Company terminated the Merger Agreement and the License Agreement, the Company filed a lawsuit against Xcorporeal and against Victor Gura, a former officer and director of the Company. Xcorporeal and Gura stipulated to the filing of the Company’s claims against them as part of the arbitration proceedings related to the License Agreement, and the Company dismissed its lawsuit without prejudice. The arbitration was terminated with the closing of the Asset Sale in March 2010. A description of the Asset Sale is set forth at “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Sale of Assets”.

On February 17, 2011, the Company commenced a binding arbitration proceeding with its former law firm regarding a fee dispute that arose as a result of claimed attorneys' fees incurred by the former law firm in connection with an arbitration proceeding between the Company and Xcorporeal, and certain transactional matters handled by the law firm for the Company. The former law firm has asserted that approximately $2,729,000 in fees and costs are owed to it by the Company for services rendered during 2008, 2009 and 2010, plus interest. The arbitrators have heard all of the testimony presented by the parties, and the parties submitted their final closing briefs on November 10, 2011. As of January 13, 2012, the arbitrators had not rendered their decision on this matter. The Company believes that it has adequately and appropriately provided for the fees incurred through September 30, 2009 in the accompanying condensed consolidated financial statements. Given the Company’s limited liquidity and working capital resources, it is uncertain whether the Company would be able to satisfy such obligation should a decision adverse to the Company be rendered.

Item 1A – Risk Factors

Not applicable.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Information with respect to the sales of unregistered equity securities can be found at Note 5 to the September 30, 2009 condensed consolidated financial statements. The proceeds from such sales were used to fund the Company’s operating activities.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Reserved

Item 5 – Other Information

None.

Item 6 – Exhibits

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which is presented elsewhere in this document, and is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NATIONAL QUALITY CARE, INC.
Date: January 13, 2012	By:	/s/Robert M. Snukal
		Robert M. Snukal
		Chief Operating Officer and President
		(Principal Executive Officer)

Date: January 13, 2012	By:	/s/Leonardo Berezovsky
		Leonardo Berezovsky
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

Exhibit No.		Description
2.1		Agreement for Exchange of Stock dated May 11, 1996, by and among the Company, Los Angeles Community Dialysis, Inc., Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald P. Lang, M.D. (1)
3.1		Restated Certificate of Incorporation (2)
3.2		Bylaws (2)
31.1		Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.1		Certification of CEO and CFO pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of CEO pursuant to Securities Exchange Act rules 13a-15 and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
1.		Incorporated by reference herein to its Current Report on Form 8-K dated May 24, 1996.
2.		Incorporated by reference herein to its Quarterly Report on Form 10-QSB for the quarterly period ended April 30, 1996.

Filing Compare · NATIONAL QUALITY CARE INC