Wellstar International, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - CERTIFICATION - Wellstar International, Inc.	f10q1010ex32i_wellstar.htm
EX-31.1 - CERTIFICATION - Wellstar International, Inc.	f10q1010ex31i_wellstar.htm
EX-31.2 - CERTIFICATION - Wellstar International, Inc.	f10q1010ex31ii_wellstar.htm
EX-32.2 - CERTIFICATION - Wellstar International, Inc.	f10q1010ex32ii_wellstar.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: October 31, 2010

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _________ to _________

WELLSTAR INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Nevada		20-1834908
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6911 Pilliod Road

Holland, Ohio 43528

(Address of principal executive offices)

419-865-0069

(Registrant’s telephone number, including area code)

Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

Large accelerated filer o	Accelerated filer o

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

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

The number of shares of the registrant's Common Stock, $0.001 par value per share, outstanding as of December 2, 2010 was 8,664,141,758.

Table of Contents

		Page

Part I –	Financial Information
	Item 1. Financial Statements (unaudited)	F-1
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	8
	Item 4. Controls and Procedures	8
Part II –	Other Information
	Item 1. Legal Proceedings	9
	Item 1A. Risk Factors	9
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	9
	Item 3. Defaults upon Senior Securities	9
	Item 4. Removed and Reserved	9
	Item 5. Other Information	9
	Item 6. Exhibits	9
Signatures		10

PART I

FINANCIAL INFORMATION

WELLSTAR INTERNATIONAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 31, 2010 AND 2009

SIMONTACCHI, MILLER & DeANGELIS, PA		170 E. MAIN STREET
CERTIFIED PUBLIC ACCOUNTANTS		ROCKAWAY, NEW JERSEY 07866

		TEL: (973) 664-1140
		FAX: (973) 664-1145

To The Board of Directors

Wellstar International, Inc.

Holland, Ohio 43528

Review Report of Independent Registered Public Accounting Firm

We have reviewed the accompanying consolidated balance sheet of Wellstar International, Inc. as of October 31, 2010, and the related statements of operations and cash flows for the three months ended October 31, 2010 and 2009, and the changes in stockholders' deficit for the three months ended October 31, 2010. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Wellstar International, Inc. as of July 31, 2010, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year then ended (not represented herein); and in our report dated November 12, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of July 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Simontacchi, Miller & DeAngelis, PA

Simontacchi, Miller & DeAngelis, PA

Rockaway, NJ 07866

December 9, 2010

MEMBER, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

MEMBER, NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS

F-i

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 31, 2010 AND 2009

CONTENTS

	PAGE
REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-i

CONSOLIDATED BALANCE SHEETS	F-1 - F-2

CONSOLIDATED STATEMENTS OF OPERATIONS	F-3

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)	F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS	F-5, F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-7 - F-29

F-ii

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

	October 31, 2010 (Unaudited)		July 31, 2010 (Audited)

Current Assets:
Cash	$	150,681	$	-
Prepaid Expenses		-		19.837
Total Current Assets		150,681		19,837

Fixed Assets:
Imaging Equipment		829,169		829,169
Office Equipment and Fixtures		157.213		157.213
Subtotal		986,382		986,382

Less: Accumulated Depreciation		799,656		748.925
Net Fixed Assets		186.726		237.457

Development of New Medical Camera, in Progress		380,893		380,893

Intangible Assets:
Manufacturing and Distribution Agreement		700,000		700,000
Subtotal		700,000		700,000

Less: Accumulated Amortization		618,880		586,849
Net Intangible Assets		81,120		113,151

Other Assets:
Loan Acquisition Cost (net of amortization of $405,285 @ 10/31/10 and $358,999 @ 7/31/09)		385,240		206,526
Software and Manuals (net of amortization of $55,400 @ 10/31/09 and $55,372 @ 7/31/10)		-		28
Security Deposit		-		-
Total Other Assets		385,240		206,554

Total Assets	$	1,184,660	$	957,892

See Accompanying Notes to Consolidated Financial Statements

F-1

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

LIABILITIES LESS SHAREHOLDERS' DEFICIT

	October 31, 2010 (Unaudited)			July 31, 2010 (Audited)
Current Liabilities:
Cash Book Overdraft	$	-		$	6,103
Due to Employees		-			7,136
Accounts Payable		809.535			866.615
Accrued Expenses		3,851,198			3,749,839
Note & Loan Payable - Other		63,382			63,382
Notes Payable		350,000			350,000
Derivative Instrument Liability - Convertible Notes		29,618,756			28,093,659
Convertible Debt		4,205,029			3.992 216
Total Current Liabilities		38,897,900			37.128,950

Long Term Liabilities:
Convertible Debt		3,261.836			2.959,105
Derivative Instrument Liability - Convertible Notes		16,453,223			15,902.472
Derivative Instrument Liability - Warrants		17			19
Contingent Liability		270.000
Total Long-Term Liabilities		19,985.076			18,861,596

Total Liabilities		58,882,976			55,990,546

Stockholders' Deficit:
Preferred Stock
Series A, Authorized 100,000 Shares, par value .001 per share
Issued and Outstanding Shares. 60.000		60			60
Paid in Surplus		59.940			59.940

Series B, Authorized 1,000,000 Shares, par value .001 per share
Issued and Outstanding Shares, 200,000 Shares,		200			200
Paid in Surplus		199,800			199,800

Series C. Authorized 1,000,000 Shares, par value .001 per share
Issued and Outstanding Shares, 200,000 Shares		200
Paid in Surplus		199,800

Common Stock
Authorized 15,000,000,000 Shares, par value .001 per share
Issued Shares. 6,293,999,155 - Outstanding Shares, 6,293,984,155 (10/31/10) and 3.565,354,384 (7/31/10)		6,293,984			3,565,354
Paid in Surplus		(2,239,823	)		396.351
Retained Earnings (Deficit)		(62,212,477	)		(59,254,359	)
Total Shareholders' Deficit		(57,698,316	)		(55,032,654	)

Total Liabilities Less Stockholder's Deficit	$	1,184,660		$	957,892

See Accompanying Notes to Consolidated Financial Statements

F-2

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

	Three Months October 31,
	2010			2009

Income:
Revenue from Medical Imaging	$	-		$	-
Cost of Sales		-			-
Gross Profit		-			-

Operating Expenses:
Selling. General and dministrative		315,962			409,145
Depreciation and Amortization		129,076			104,646
Total Operating Expenses		445,038			513,791

Loss from Operations		(445,038	)		(513,791	)

Other Expense (Income):
Interest Income		( 15	)		( 68	)
Interest Expense		437,249			183,169
Derivative Instrument (Income) Expense, Net		2,075,846			(7,331,453	)
Non-Registration Penalties		-			108,900
Total Other Expenses (Income)		2,513,080			(7,039,452	)

Income (Loss) before Provision for Taxes		(2,958,118	)		6,525,661
Provision for Taxes		-			-
Net Income (Loss)	$	(2,958,118	)	$	6,525,661

Net Income (Loss) Per Share, Basic and Diluted		(.0	)	$	(.0	)

Weighted Average Number of Common Shares Outstanding, Basic and Diluted		5,652,204,864			804,247,516

Note:

Effective January 15, 2010, the Company had a reverse Split of their Common Stock of 100 to 1. The above average number of Common Shares Outstanding reflects the split. The 3 months ended October 31, 2009 have been restated to reflect the split, and the net loss per share has also been restated.

See Accompanying Notes to Consolidated Financial Statements

F-3

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010

	Preferred Stock						Common Stock
					Additional						Additional
	Shares		Amount		Paid in Capital		Shares		Amount		Paid in Capital			Accumulated Deficit			Total
Balance, July 31, 2010		260,000	$	260	$	259,740		3,565,354,384	$	3,565,354	$	396,351		$	(59,254,359	)	$	(55,032,654	)

Series C, Preferred		200,000		200		199,800												200,000

Conversion of Debentures								2,728,629,771		2,728,630		(2,636,174	)					92,456

Net Income for the Period															(2,958,118	)		(2,958,118	)

Balance, October 31 2010		460,000	$	460	$	459,540		6,293,984,155		6,293,984	$	(2,239,823	)	$	(62,212,477	)	$	(57,698,316	)

See Accountants' Report and Accompanying Notes to Financial Statements

F-4

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Three Month Ended October 31, 2010 2009
Cash Flows from Operating Activities:
Net Income (Loss)	$	(2,958,118	)	$	6,525,661
Adjustments to Reconcile Net Loss to Net Cash used in Operating Activities:
Depreciation and Amortization		129,076			104,646
Interest Added to Not Payable		207,000
Derivative Instrument (Income) Expense, Net		2,075,846			(7,331,453	)
Delinquent Registration Penalty					108,900
Changes in Operating Assets and Liabilities:
Increase (Decrease) In:
Prepaid Expenses		19,837			5,186
Accounts Payable		(63,183	)		44,496
Accrued Expenses		301,359			280,993
Net Cash Used in Operating Activities		(288,183	)		(261,571	)

Cash Flows from Investing Activities:
Purchase of Equipment and Software		-			(27,000	)
Security Deposit - Reduction		-			4,525
Net Cash Used in Investing Activities		-			(22,475	)

Cash Flows From Financing Activities:
Loan Payable - Other		(7,136	)
Proceeds from Issuance of Convertible Notes		176,000			260,000
Proceeds from Supply Agreement		270,000
Net Cash Provided by Financing Activities		438,864			260,000

Net Increase in Cash		150,681			(24,046	)

Cash at Beginning of Period		-			29,564
Cash at End of Period	$	150,681		$	5,518

Cash Paid for Interest	$	- 0 -		$	- 0 -

Cash Paid for Taxes	$	- 0 -		$	- 0 -

See Accompanying Notes to Consolidated Financial Statements

F-5

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED OCTOBER 31, 2010 AND 2009

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

1.	During the three months ended October 31, 2010, convertible debentures in the amount of $92,456 were converted into 2,728,629,771 shares of Common Stock.

2.	During the three months ended October 31, 2010, two officers were issued Series C Preferred Stock in lieu of salaries for a value of $200,000, no cash was expended.

3.	During the three months ended October 31, 2009, convertible debentures in the amount of $313,553 were converted into 9,399,081,801 shares of Common Stock.

4.	During the three months ended October 31, 2009, two officers were issued Series B Preferred Stock in lieu of salaries for a value of $100,000, no cash was expended.

5.	There was an assignment of Convertible Notes Payable of $70,000 from one Lender to new Lenders, which had no effect on cash.

F-6

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

(UNAUDITED)

NOTE 1 Summary of Significant Accounting Policies and Organization

a) Organization and Recent Company History

Wellstar International, Inc. (the “Company”) was incorporated December 15, 1997, under the laws of the State of Nevada. Through its wholly owned subsidiary, Trillennium Medical Imaging, Inc. (“TMI”), it is developing and licensing the use of advanced thermal imaging technology.

b) Principles of Consolidation

The consolidated financial statements include the accounts of Wellstar International, Inc. and its wholly owned subsidiary, Trillennium Medical Imaging, Inc. (collectively, the “Company”).

c) Interim Condensed Consolidated Financial Statements

The consolidated financial statements as of and for the three months ended October 31, 2010 and 2009 are unaudited. In the opinion of management, such consolidated financial statements include all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. The consolidated results of operations for the three months ended October 31, 2010 and 2009 are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet information as of July 31, 2010 was derived from the audited consolidated financial statements included in the Company’s annual report Form 10-K for the year ended July 31, 2010. The interim consolidated financial statements should be read in conjunction with that report.

d) Revenue Recognition

The Company recognizes revenues utilizing the accrual method of accounting. More specifically, the Company enters into licensing agreements for its advanced thermal imaging technology. Under the licensing agreements, the Company supplies the camera equipment, related software and training for each facility. Once the facility is operational, the licensing agreement provides for a fixed fee monthly fee for the use of the camera. Accordingly, the revenue is recognized in the month that the camera is in use at the customer’s facility, which represents the Company’s right to receive the fixed fee. The Company’s revenue recognition policy is in compliance with the provisions of EITF 00-21.

F-7

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

(UNAUDITED)

NOTE 1 Summary of Significant Accounting Policies and Organization (cont’d)

e) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

f) Cash

For the purpose of the Statement of Cash Flows, cash is defined as balances held in corporate checking accounts and money market accounts.

g) Income (Loss) Per Share

Basic and diluted net income (loss) per common share for the three months ended October 31, 2010 and 2009 are computed based upon the weighted average number of common shares outstanding. The assumed conversion of Common Stock equivalents was not included in the computation of diluted Income (loss) per share because the assumed conversion and exercise would be anti-dilutive due to the net Income (loss) incurred. Based on the conversion formula in the Agreements (see Note 2, 3 and 4) on the conversion of its convertible notes would have resulted in the issuance of additional common shares in the amount of 308,026,838,351 on October 31, 2010.

h) Stock Based Compensation

Stock based compensation will be valued in accordance with the Fair Valued based method. Compensation cost is measured at the grant date based on the value of the award and is recognized over the service period which is usually the vesting period. Transactions with non-employees shall be accounted for based on the Fair Value of the consideration received or Fair Value of the equity installments issued, whichever is more reliably measurable.

i) Derivative Instruments

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

F-8

NOTE 1 Summary of Significant Accounting Policies and Organization (cont’d)

i) Derivative Instruments (cont’d)

j) Income Taxes

The Company will provide for income taxes in accordance with ASC 740 “Accounting for Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns in different years. Under this method, deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

The Company has had operating losses each year throughout it’s existence. The Company has a Federal loss carry forward in the approximate amount of $12,151,147. Expiring for it’s year end July 31, between 2020 and 2025.

The Company has a potential deferred tax asset due to the operating loss which has been calculated at 35% of the operating loss. A 100% valuation allowance has been set up as management at this time does not anticipate its utilization.

Deferred Tax Asset	$	4,252,000
Reserve		(4,252,000	)
Balance	$	- 0 -

k) Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consists of a checking account with a financial institution in excess of insured limits. There was no excess above insured limits at October 31, 2010. The Company does not anticipate non-performance by the financial institution.

F-9

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

(UNAUDITED)

NOTE 1 Summary of Significant Accounting Policies and Organization (cont’d)

Fair Value of Financial Instruments

Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short maturities.

m) Equipment

Imaging and office equipment are recorded at cost and depreciated on the straight line method with an estimated life of five (5) years. Imaging equipment is at the customers facility where the equipment is used or stored by the Company until placed in use. The Company retains title to the imaging equipment while it is at the customers location. Depreciation expense for the three months ended October 31, 2010 and 2009 were $50,731 and $48,641, respectfully.

n) Intangible Assets

Loan acquisition costs are stated at cost and relate to the costs of acquiring the convertible notes (see Note 2, 3 and 4). Amortization is provided for under the straight line method over three (3) years, which is the term of the convertible notes. Total amortization for the three months ended October 31, 2010 and 2009 were $46,286 and $19,281, respectfully.

Software and manuals, Covenant Not To Compete and Manufacturing & Distribution Agreement acquired in the acquisition of Micro Health Systems, Inc. (See Note 3) with cost of $80,000, $20,000 and $700,000 respectively are being amortized over a 24 month period for the software and the Covenant and 5 ½ years for the manufacturing and distri-ution agreement. The total amortization expense for the three months ended October 31, 2010 and 2009 were $32,059 and $36,724, respectfully.

Derivative Instruments

Because of the limited trading history of our Common Stock, we have estimated the future volatility of our Common Stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.

F-10

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2010

NOTE 1 Summary of Significant Accounting Policies and Organization (cont’d)

p) Registration Rights Agreements

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

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

NOTE 2 Convertible Notes

On September 5, 2008, The Company and AJW partners, LLC and it’s related entities amended their agreement related to all the notes, which are convertible, into shares of the Company’s Common Stock. The applicable percentage shall be 25% of the computed conversion price and the interest rate, as defined in each of the notes, shall be 13%. All other provisions, as amended from time to time, shall remain in full force and effect.

On October 31, 2005, the Company entered into a Securities Purchase Agreement with AJW Partners, LLC and its related entities for the sale of $3,000,000 of 8% (amended to 13%) secured convertible notes, each advance is evidenced by a note which is due three years from the date of the advance, and for stock purchase warrants exercisable for a total of 5,000,000 shares of Common Stock each issuance of warrants expiring on the fifth anniversary from the date of issue. The warrants are issued at the time funds are advanced at 1,666,667 per $1 million advanced. The notes are convertible, at the holder’s option, into shares of Common Stock, in whole or in part, at any time after the original issue date. No interest shall be due and payable for any month in which the Company’s stock trading price is greater than $0.1125 for each trading day of the month.

F-11

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2010

NOTE 2 Convertible Notes (cont’d)

The number of shares of Common Stock issuable upon a conversion is to be determined by dividing the outstanding principal amount of the notes to be converted, plus related accrued interest, by the conversion price. The conversion price in effect on any conversion date will be at the selling stockholder’s option, at the lower of (i) $0.12 or (ii) as amended 75% discount to the average of the three lowest intraday trading prices for the Common Stock on a principal market for the twenty trading days preceding, but not including, the conversion date for all notes. The total shares available for conversion at October 31, 2010 were 231,794,600,000.

The stock purchase warrants have an exercise price of $0.50 per share.

The Company has closed on the entire $3,000,000 of convertible notes contemplated by the Securities Purchase Agreement and issued stock purchase warrants exercisable for 5,000,000 shares of Common Stock in connection therewith. The dates of the advance of the funds of $1 million each were October 31, 2005 and January 20, 2006 and $500,000 each on July 25, 2006 and August 8, 2006. The stock registration was effective August 4, 2006. $270,500 of the $500,000 Notes issued August 8, 2006 have been sold to JMJ Financial by the holder in an agreement dated June 18, 2009 (See Note 4).

On November 30, 2006, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $400,000 of 8% (amended to 13%) secured convertible notes due November 30, 2009, and for stock purchase warrants of 4,000,000 shares of Common Stock exercisable at anytime at $.08 per share, expiring on the seventh anniversary from the date of issue, November 30, 2013.

The funds were advanced on November 30, 2006, in the amount of $392,500, less a $7,500 charge as a loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of Common Stock, in whole or in part, at any time after the original issue date.

No interest shall be due on any payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On March 26, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $165,000 of 8% (amended to 13%) secured convertible notes due March 26, 2010, and for stock purchase warrants of 1,000,000 shares of Common Stock exercisable at anytime at $.03 per share, expiring on the seventh anniversary from the date of issue, March 26, 2014.

F-12

NOTE 2 Convertible Notes (cont’d)

The funds were advanced on March 26, 2007, in the amount of $150,000, less a $15,000 charge as a loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of Common Stock, in whole or in part, at any time after the original issue date.

On May 30, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $435,000 of 8% (amended to 13%) secured convertible notes due May 30, 2010, and for stock purchase warrants of 10,000,000 shares of Common Stock exercisable at anytime at $.02 per share, expiring on the seventh anniversary from the date of issue, May 30, 2014.

The funds were advanced on May 30, 2007, in the amount of $415,000, less a $20,000 charge as a loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of Common Stock, in whole or in part, at any time after the original issue date. No interest shall be due on any payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On October 12, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $175,000 of 8% (amended to 13%) secured convertible notes due October 12, 2010, and for stock purchase warrants of 15,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue October 12, 2014.

The funds were advanced on October 12, 2007 in the amount of $170,000, less a $5,000 charge as loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date. No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .0775 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

F-13

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 2 Convertible Notes (cont’d)

On November 15, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $325,000 of 8% (amended to 13%) secured convertible notes due November 15, 2010, and for stock purchase warrants of 10,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue November 15, 2014.

The funds were advanced on November 15, 2007 in the amount of $310,000, less a $15,000 charge as loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date. No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .0775 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On December 14, 2007, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $315,000 of 8% (amended to 13%) secured convertible notes due December 14, 2010, and for stock purchase warrants of 10,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue December 14, 2014.

The funds were advanced on December 14, 2007 in the amount of $300,000, less a $15,000 charge as loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date. No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .0775 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On December 31, 2007, the Lender issued the Company a new note for all accrued unpaid interest. The Lender applied all of its conversions from convertible notes into stock to the principal of its original note issued October 31, 2005. The Company which had been applying the conversions to interest first then principal made this adjustment to be in agreement with the Lender and will apply all conversion to principal beginning January 1, 2008. The Callable Secured Convertible Note dated December 31, 2007 in the amount of $427,759.61 bears interest at 2% (amended to 13%) per annum, payable quarterly. The note is due December 31, 2010. All of the terms are identical to the above notes, including the conversion options.

F-14

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 2 Convertible Notes (cont’d)

On April 22, 2008, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $190,000 of 8% (amended to 13%) secured convertible notes due April 22, 2011, and for stock purchase warrants of 20,000,000 shares of common stock exercisable at anytime at $ .0001 per share expiring on the seventh anniversary from the date of issue April 22, 2015. On May 19, 2009, $76,000 of these notes were sold to JMJ Financial by the Holder (See Note 4).

The funds were advanced on April 22, 2008 in the amount of $185,000, less a $5,000 charge as loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date. No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On June 12, 2008, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $135,000 of 8% (amended to 13%) secured convertible notes due June 12, 2011.

The funds were advanced on June 12, 2008 in the amount of $115,000, less a $20,000 charge as loan acquisition cost, amortized over the loan period of 36 months. The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date. No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $.0775 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On August 29, 2008, AJW Partners, LLC and its related entities (the Lender) issued the Company a new Note for all accrued unpaid interest from January 1, 2008 through August 29, 2008. The accrued interest has been reclassified to a convertible note payable. The Callable Secured Convertible Note, dated August 29, 2008, in the amount of $235,113.84, bears interest at 2% (amended to 13%) per annum, payable quarterly. The Note is due on August 29, 2011. The conversion price is the average of the three (3) lowest trading prices in the 20 days prior to conversion (before the conversion date) X 32.5% (amended to X 25%) = conversion price. All other terms are identical with the other Note.

On May 15, 2009, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $79,500 of 13% secured convertible notes due May 15, 2012.

F-15

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 2 Convertible Notes (cont’d)

The funds were advanced on May 15, 2009 in the amount of $79,500. The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date. No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $ .045 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

On June 30, 2009, AJW Partners, LLC and its related entities (the Lender) issued the Company a new Note for all accrued unpaid interest from August 30, 2008 through June 30, 2009. The accrued interest has been reclassified to a convertible note payable. The Callable Secured Convertible Note, dated June 30, 2009 in the amount of $551,564.55 bears interest at 2% per annum, payable quarterly. The Note is due on June 30, 2012. The conversion price is the average of the three (3) lowest trading prices in the 20 days prior to conversion (before the conversion date) X 25% = conversion price. All other terms are identical with the other Notes.

On December 7, 2009, the Company entered into an additional securities purchase agreement with AJW Partners, LLC and its related entities for the sale of $50,000 of 13% secured convertible notes due December 7, 2012.

The funds were advanced on December 7, 2009 in the amount of $50,000. The notes are convertible, at the holders option, into shares of common stock, in whole or in part, at any time after the original issue date. No interest shall be due or payable for any month in which the Company’s stock trading price is greater than $0.00438 for each trading day of the month. The notes are secured by all the assets and intellectual property of the Company.

See Paragraph 2 of this note related to the terms of conversion. The total shares at October 31, 2010, included in Paragraph 2 above, includes all additional convertible notes.

All notes include a Registration Rights Agreement. The Company was required to register additional shares in relation to all the additional agreements listed above, this was not done. There is a penalty of 2% per month of the note amount, a penalty of $1,585,774 was accrued through July 31, 2010. The Company has stopped accruing penalties as of July 31, 2010, as the intent of the penalties is to compensate the lender for the inability to sell shares because of a lack of registration. The lender has been converting shares and conversion of any of the applicable notes could, at this point, be freely sold under Rule 144 without registration.

F-16

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 2 Convertible Notes (cont’d)

In connection with the aforementioned issuance of the $1,000,000 of convertible notes, on October 31, 2005, the Company granted a first priority security interest in all the assets of the Company. The issuance of convertible notes resulted in conversion features being accounted for as embedded derivative liabilities in accordance with U.S. GAAP (see Note 5). The note holder’s have converted notes of $1,116,880 into 1,484,722,162 shares of Common Stock as of October 31, 2010 after reflecting a 100-1 reverse stock split. The balance of the notes are $4,780,556 at October 31, 2010. Interest due of $1,014,307 is included in Accrued Expenses.

The classification as short-term and long-term derivative instrument liabilities-convertible notes, derivative instrument liabilities warrants and convertible debt is based upon the due date of the notes and the date the warrants expire. Some of the notes have passed their due dates and others are due within one year; these are shown as current liabilities, the other are shown as long-term liabilities. The warrants are shown as long-term as the expiration dates are over one year.

NOTE 3 Notes Payable

The Company has borrowed $150,000 from an unrelated individual. The Note is dated August 1, 2005. The outstanding balance of the loan shall bear monetary interest at the fixed rate of six percent (6%) simple, non-compounding interest payable in arrears per annum.

The outstanding balance of principal and interest is due and payable on demand on or after August 1, 2006. All payments shall apply first to interest accrued and then principal. The Company may prepay all or part without a pre-payment penalty. The loan was not paid on August 1, 2006 and was extended under the same terms by mutual agreement. Interest due of $47,925 is included in Accrued Expenses.

Default shall occur upon (1) failure to make payment on the note or transfer of stock when due, (2) Company institutes bankruptcy or solvency proceedings or make an assignment for the benefit of creditors.

Note Payable - October 31, 2010 $150,000

The Company has entered into a loan agreement with an unrelated individual. The note is dated October 11, 2005. The note provides for a total loan of $400,000, the Company received $190,000 by October 31, 2005. The balance of $210,000 was subsequently received on November 29, 2005. The note bears interest at a fixed rate of 8%, plus the prevailing variable margin rate charged to the lender.

F-17

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 3 Notes Payable (cont’d)

In addition, the lender has the option to convert the loan into fully registered, unsecured Common Stock of the Company at a conversion price on the day of conversion, minus 40%. The lender shall have the right to convert on the prepayment date or the due date, whichever occurs first. The issuance of the notes and warrants resulted in conversion features being accounted for as embedded derivative liabilities in accordance with U.S. GAAP (see Note 5).

On August 20, 2009, the Lender assigned $70,000 of its Notes Receivable to two individuals for $30,000 and $40,000 and assigned $80,000 in December 2009 to a company and an individual and $60,000 in March 2010 to a different company and individual. In May and July 2010, he assigned $80,000 to an individual and a company. The balance of the Notes of $110,000 and accrued interest of $245,344 was assigned to another company. The Company accepted the assignment of the Notes and drew an agreement with the New Lenders, (see Note 3-E and Note 4).

Balance due at October 31, 2010 $ - 0 -

On December 21, 2005, the Company completed the purchase of certain assets of Micro Health Systems, Inc. (“MHS”) under a definitive agreement.

Total consideration paid by the Company was $600,000, plus 2,000,000 shares of Restricted Common Stock. The Company paid $400,000 at closing. A promissory note was executed for $200,000 with interest at 8% per annum. $100,000 was due with accrued interest on or before the 180th day following the date of the Note which is June 19, 2006, with the balance of principal and interest due and payable on or before the 365th day following the date of the note.

The 2,000,000 shares of Restricted Common Stock were issued on December 21, 2005 and priced at the market price of $ .10 per share for a total value of $200,000. The cost was allocated as follows:

Mikron Manufacturing Distribution Agreement
Customer List and Intangible Assets	$	700,000
Tangible Assets		80,000
Covenant Not-To-Compete		20,000
Total	$	800,000

In addition, 15,000 shares of Restricted Common Stock reflecting a 1 for 100 reverse split are being held in escrow as security for the note payable of $200,000. These shares have been shown as issued but not outstanding. The Company is in default on $200,000 of the Note Payable and interest of $4,000 which was due June 19, 2006 on the first $100,000 of notes due. Due to the default, the interest charged from June 19, 2006 is 18% on the $200,000 Note Payable. Interest expense of $169,320 is included in Accrued Expenses at October 31, 2010.

F-18

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 3 Notes Payable (cont’d)

On November 28, 2006, the Company received a letter due to the default, giving it ten (10) days to pay the note and accrued interest or the 15,000 shares held in escrow will be issued to the shareholder of Micro Health Systems, Inc.

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

Balance due at October 31, 2010 $200,000

The Company has borrowed $16,912 from an unrelated party. The note is dated January 16, 2009, and was due on February 16, 2009 (maturity date). The note has an interest rate of 12% per annum. Per the terms of the note, the Company is in default as it failed to pay the principal and interest due upon the maturity date. In the event of default, the lender, by notice given to the borrower, may declare the unpaid principal and accrued interest owing to be paid. The Company (borrower) has not received any demand for payment as of November 30, 2010. The note is included as a current liability in Notes and Loans Payable - Other in the amount of $16,912.

See Note 3(b), this Lender assigned $290,000 of his Notes Receivable to two individuals and two Companies and entered into agreements with them. The Notes are convertible into the Company’s Common Stock and are being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (See Note 5). The Lenders have converted $234,465 of these Notes into 749,162,474 shares of Common Stock after reflecting a reverse split of 100 - 1 in January 2010. The Notes have an interest rate of 0.0% and mature August 20, 2011. Total shares available for conversion at October 31, 2010 are 1,662,645,020.

On July 13, 2010, the Lender assigned the balance of the Notes due him of $110,000 and accrued interest of $245,344 to Aguna Networks, Inc. The total due of $355,344 plus $40,000 loan acquisition cost, equaling $395,345 is a convertible debenture into the Company’s Common Stock. The Conversion price shall be 35% of the lowest trading price in 20 days previous to conversion. In order to determine the number of shares issuable, the conversion amount shall be divided by the conversion price. The issuance of notes resulted in conversion features being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (See Note 5). Total shares available for conversion at October 31, 2010 are 11,234,485,714.

F-19

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 4 Convertible Notes - Other

On June 18, 2009, JMJ Financial purchased $270,500 of certain Convertible Notes from AJW Partner and related entities (see Note 2). Through April 30, 2010, $270,500 of these Notes were converted to Common Stock. These Notes bear interest at 8% per annum. The Company has consented to the sale of these Notes. The Notes bear the same terms as in the hands of the seller, AJW Partners, and related entities.

Balance Due at July 31, 2010 $ - 0 -

The Company has entered into an agreement with JMJ Financial, the Lender, and the Company as the Borrower. They will loan to the Company the principal sum of $575,000 of which $75,000 has been recorded as a loan acquisition cost and is being amortized over 36 months. The loan has a 12% one time interest charge on the principal sum of $69,000 which is included in the balance due. No interest or principal payments are required until the maturity date three (3) years from the effective date (May 22, 2009). Both principal and interest may be included in conversion prior to maturity date. The conversion formula, the number of shares issued through conversion, is the conversion amount, divided by the conversion price which is 70% which was amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion, as applied to the Company’s voting Common Stock. Prepayment of the loan is not permitted, unless approved by Holder.

The Company entered into an additional agreement to borrow up to $1,150,000 from JMJ Financial of which $150,000 has been recorded as a loan acquisition cost and is being amortized over 36 months. The interest rate will be 12% one time interest charge on the principal sum of $138,000 which is included in the balance due. No interest or principal payments are required until the maturity date, but both principal and interest may be included in the conversion prior to maturity. Maturity is three (3) years from the effective date (August 19, 2009). The loan is convertible into voting common stock of the Company. The conversion formula, the number of shares issued through conversion is the conversion amount, divided by the conversion price which is 70% amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion. Prepayment of the loan is not permitted, unless approved by holder.

The Company has an additional commitment to borrow up to $1,725,000 from JMJ Financial of which $225,000 will be recorded as a loan acquisition cost and will be amortized over 36 months. The interest rate will be 12% one time interest charge on the principal sum of $207,000 interest. No interest or principal payments are required until the maturity date, but both principal and interest may be included in the conversion prior to maturity. Maturity is three (3) years from the effective date of August 3, 2010. The loan is convertible into voting common stock of the Company. The conversion formula, the number of shares issued through conversion is the conversion amount, divided by the conversion price which is 70% amended to 35% on March 9, 2010 of the lowest trading price in the 20 trading days previous to the conversion. Prepayment of the loan is not permitted unless approved by holder.

Balance Due at October 31, 2010 $2,127,054

F-20

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 4 Convertible Notes - Other (cont’d)

d)	On July 26, 2010, JMJ assigned $25,000 of its $1,150,000 convertible notes receivable to Redwood Management, LLC. The assignment was accepted by the Company.

e)	On July 28, 2010, JMJ assigned $75,000 of its $1,150,000 convertible notes receivable to Black Mountain Equities, Inc. The terms of conversion are the same as JMJ Financial. There is no interest on this note. The assignment was accepted by the Company.

Black Mountain Equities, Inc. has converted $14,490 of its notes to stock as of October 31, 2010. The conversion features are being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (see Note 5). Total shares available for conversion are 1,728,857,142 at October 31, 2010.

f)	In December 2009, JMJ Financial was assigned a note of $40,000 from another lender (see Note 3 (b). The Lender converted $40,000 into Common Stock, there is no balance due.

The issuance of convertible notes resulted in conversion features being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (See Note 5).

Total shares available for conversion on all Notes A, B & C above, are 60,772,917,142 at October 31, 2010.

The Company entered into an agreement to borrow $50,000 from Asher Enterprises, Inc. The loan is dated May 5, 2010, and has an interest rate of 8%. The Company promises to pay the accrued and unpaid interest and the balance of principal due on the maturity date of February 5, 2011. Any amount not paid when due shall bear an interest rate of 22%, the default rate.

The holder may convert principal and interest into shares of the Company’s Common Stock at any time to the maturity date. The conversion price means the average of the lowest three (3) trading prices for the Common Stock in the ten (10) trading day period ending one trading day prior to the conversion date X 60%.

Events of default are (1) failure to pay principal or interest at maturity, and (2) failure to issue stock upon conversion.

The Company has instructed the stock transfer agent to reserve a sufficient number of shares of Common Stock for the conversion, initially 441,176,471 shares.

There were no conversions through October 31, 2010. The conversion features are accounted for as Embedded Derivative Liabilities (See Note 5).

Total shares available for conversion are 833,333,333 at October 31, 2010.

Balance due at October 31, 2010 $50,000

F-21

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 4 Convertible Notes - Other (cont’d)

On July 26, 2010, JMJ Financial assigned $25,000 of its convertible note receivable to Redwood Management, LLC (See Note 4(d)). The terms are the same as the assigner. Redwood has converted $25,000 of the notes for 714,285,713 shares of the Company’s Common Stock. The conversion features are being accounted for as Embedded Derivative Liabilities in accordance with U.S. GAAP (See Note 5) total shares available for conversion are - 0 - at October 31, 2010.

Balance due at October 31, 2010 $ - 0 -

NOTE 5 Derivative Financial Instrument Liabilities

We use the Black-Scholes option pricing model to value options and warrants, and the embedded conversion option components of any bifurcated embedded derivative instruments that are recorded as derivative liabilities. See Note 1, related to embedded derivative instruments accounting policy.

In valuing the options and warrants and the embedded conversion option components of the bifurcated embedded derivative instruments, at the time they were issued and at April 30, 2010, we used the market price of our Common Stock on the date of valuation, an expected dividend yield of 0% and the remaining period to the expiration date of the options or warrants or repayment date of the convertible debt instrument. All options, warrants and conversion options can be exercised by the holder at any time.

Because of the limited historical trading period of our Common Stock, the expected volatility of our Common Stock over the remaining life of the options and warrants has been estimated at 123%, based on a review of the historical volatility and of entities considered by management as comparable. The risk-free rates of return used ranged from 0.03% to 0.15%, based on constant maturity rates published by the U.S. Treasury Department, applicable to the remaining life of the options or warrants.

F-22

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 5 Derivative Financial Instrument Liabilities (cont’d)

At October 31, 2010, the following derivative liabilities related to Common Stock options and warrants and embedded derivative instruments were outstanding (see Notes 2, 3 and 4):

Issue Date	Expiry Date	No. of Warrants		Issued To	Exercise Price Per Share		Value - Issue Date		Value - October 31, 2010



10/31/2005	10/31/2010		16,667	AJW Partners	$	0.50	$	169,629	$	0

1/20/2006	1/20/2011		16,667	AJW Partners	$	0.50		81,321		0

7/25/2006	7/25/2011		8,333	AJW Partners	$	0.50		146,197		0

8/4/2006	8/4/2011		8,333	AJW Partners	$	0.50		102,816		0

11/30/2006	11/30/2013		40,000	AJW Partners	$	0.08		158,741		0

3/26/2007	3/26/2014		10,000	AJW Partners	$	0.03		25,433		0

5/30/2007	5/30/2014		100,000	AJW Partners	$	0.02		163,409		0

10/12/2007	10/12/2014		150,000	AJW Partners	$	0.00		179,353		7

11/15/2007	11/15/2014		100,000	AJW Partners	$	0.00		39,649		5

12/14/2007	12/14/2014		100,000	AJW Partners	$	0.00		24,000		5

4/22/2008	4/22/2015		200,000	AJW Partners	$	0.00		17,540		0
Fair value of derivative instrument liabilities for warrants							$	1,108,088	$	17

The number of shares have been adjusted to reflect the 100 - 1 reverse split.

F-23

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 5 Derivative Financial Instrument Liabilities (cont’d)


Issue Date	Due Date	Note Amount		Instrument	Exercise Price Per Share	Value - Issue Date		Value - October 31, 2010

10/31/2005	10/31/2008	$	1,000,000	Convertible Notes	Various	$	2,681,204	$	0

1/20/2006	1/20/2009		1,000,000	Convertible Notes	Various		1,363,058		6,358,464

7/25/2006	7/25/2009		500,000	Convertible Notes	Various		791,994		3,600,000

8/4/2006	8/4/2009		500,000	Convertible Notes	Various		616,127		1,652,400

11/30/2006	11/30/2009		400,000	Convertible Notes	Various		523,047		2,448,000

3/26/2007	3/26/2010		165,000	Convertible Notes	Various		274,500		237,600

5/30/2007	5/30/2010		435,000	Convertible Notes	Various		825,801		2,786,400

10/12/2007	10/12/2010		175,000	Convertible Notes	Various		711,289		1,260,000

11/15/2007	11/15/2010		325,000	Convertible Notes	Various		465,052		2,275,019

12/14/2007	12/14/2007		315,000	Convertible Notes	Various		631,254		2,205,059

12/31/2007	12/31/2010		427,760	Convertible Notes	Various		894,835		2,994,422

4/22/2008	4/22/2011		190,000	Convertible Notes	Various		569,394		798,662

6/12/2008	6/12/2011		135,000	Convertible Notes	Various		555,374		946,969

8/29/2008	8/29/2011		235,114		Various		875,919		1,654,188
Fair value of bifurcated embedded derivative instrument liabilities carry forward						$	12,149,037	$	29,217,183

F-24

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENT

AS OF OCTOBER 31, 2010

NOTE 5 Derivative Financial Instrument Liabilities (cont’d)

Carry Forward	Issue Date	Due Date	Note Amount		Instrument	Exercise Price Per Share	Value - Issue Date		Value - October 31, 2010

	5/15/2009	5/15/2012	$	79,500	Convertible Notes	Various		79,500		567,912

	6/30/2009	6/30/2012		551,565	Convertible Notes	Various		551,565		3,951,699

	5/27/2009	5/27/2012		575,000	Convertible Notes	Various		575,000		1,528,036

	8/20/2009	8/20/2011		70,000	Convertible Notes	Various		70,000		55,817

	12/7/2009	12/7/2012		50,000	Convertible Notes	Various		177,486		361,903

	8/19/2009	8/19/2012		1,188,000	Convertible Notes	Various		1,188,000		5,835,987

	5/5/2010	2/5/2011		50,000	Convertible Notes	Various		165,721		117,298

	5/19/2010	5/19/2012		40,000	Convertible Notes	Various		40,000		150,049

	7/13/2010	7/13/2012		395,344	Convertible Notes	Various		395,344		1,869,360

	7/26/2010	8/19/2012		25,000	Convertible Notes	Various		25,000		- 0 -

	7/27/2010	7/27/2012		40,000	Convertible Notes	Various		40,000		78,411

	7/28/2010	7/28/2012		75,000	Convertible Notes	Various		75,000		270,185

	7/25/2010	7/25/2013		421,000	Convertible Notes	Various		421,000		2,068,140
	Fair value of bifurcated embedded derivative instrument liabilities						$	15,952,653	$	46,071,980
	Total derivative financial instruments						$	17,060,741	$	46,071,997

F-25

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2010

NOTE 6 Accrued Expenses

The following are the components of Accrued Expenses:

	Oct. 31, 2010		31-Jul-10

Penalties - Registrations	$	1,585,774	$	1,585,774
Interest on Debt		1,223,514		993,977
Payroll and Payroll Taxes		1,026,057		1,158,835
Professional Fees		15,600		11,000
Accrued Trade Payables		253		253
	$	3,851,198	$	3,749,839

NOTE 7 Stockholders’ Equity (Deficit)

On August 18, 2010, the Company amended its certificate of incorporation to increase its authorized shares of common stock from 5,000,000,000 to 15,000,000,000 (the “Increase Amendment”). The Increase Amendment was approved by the board of directors as well as the shareholders holding a majority of the issued and outstanding shares of common stock pursuant to a written consent dated August 18, 2010.

On August 17, 2010, the Board of Directors authorized filing of a Certificate of Designation, Powers, Preferences and Right of Series C Preferred Stock.

The Series C Preferred Stock does not pay dividends but each holder of Series C Preferred Stock shall be entitled to 1000 votes for each share of common stock that the Series C Preferred Stock shall be convertible into. The Series C Preferred Stock has a conversion price of $0.001 (the “Conversion Price”) and a stated value of $1.00 (the “Stated Value”). Each share of Series C Preferred Stock is convertible, at the option of the holder, into such number of shares of common stock of the Company as determined by dividing the Stated Value by the Conversion Price. The Series C Preferred Stock has no liquidation preference.

The issuance of the Series C Preferred Stock was made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506 promulgated under Regulation D, Thereunder. The holders of Series C Preferred Stock are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933.

On August 17, 2010, the Company entered into conversion agreements with John Antonio and Kenneth McCoppen both executive officers and directors of the Company, pursuant to which the Company agreed to convert $150,000 in outstanding wages owed to McCoppen and $50,000 in outstanding wages owed to Antonio into a total of 200,000 shares of Series C Preferred Stock. The above transactions were approved by the Board of Directors of the Company.

F-26

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2010

NOTE 7 Stockholders’ Equity (Deficit) (cont’d)

On September 10, 2009, the Board of Directors authorized the filing of a Certificate of Designation, Powers, Preferences, and Right of Series B Preferred Stock. The Series B Preferred Stock does not pay dividends but each holder is entitled to 100 votes for each of common stock that the Series B Preferred Stock shall be convertible into. Series B Preferred Stock has a conversion price of $0.001 (the “Conversion Price”) and a stated value of $1.00 (the “Stated Value”). Each share of Series B Preferred Stock is convertible into shares of common stock, at the option of the holder, determined by dividing the Stated Value by the Conversion Price. There is no liquidation preference associated with the Series B Preferred Stock.

On October 1, 2009, with the unanimous written consent of the Directors, the Chief Executive Officer John Antonio and the Vice President Ken McCopper, each converted $50,000 of accrued salary owed to them into shares of the Company’s Series B Preferred Stock. Each received 50,000 shares of Series B Preferred Stock, par value $.001 per share, $1.00 stated value.

On October 2, 2009, the Company amended its Certificate of Incorporation to increase its authorized shares of common stock from 10 billion to 20 billion. The increase amendment was approved by the Board of Directors as well as the Shareholders holding a majority of the issued and outstanding voting shares of the Company.

NOTE 8 Contingent Liability

On October 1, 2010, the Company entered into a supply agreement with CAS Resources, Inc. (“CAS”). The Company is in need of financing resources capable of meeting camera manufacturer requirements which the Company cannot independently fulfill and which CAS has the ability to fulfill.

In consideration of the mutual covenants and agreements herein contained, Mikron and distributor agree as follows:

a)	CAS agrees that it shall pay to the Company $300,000. Through October 31, 2010, the amount of $270,000 has been advanced, the balance of $30,000 was received by the Company in November 2010.

AGREEMENT TO FINANCE CAMERA PURCHASES. The parties agree that the Company shall place purchase orders for cameras with such manufacturers or suppliers as the Company in its sole discretion shall determine. The Company agrees that it shall contemporaneous with payment for each camera delivered per the Company’s orders, pay to CAS the principal sum of $2,000 per camera. The Company agrees that it shall pay said $2,000 per camera to CAS’s order until such time as the Company exercises its option to pay CAS, and completes payment to CAS of its return on purchase funds. The Company can terminate the agreement by payment to CAS of the principal sum of $900,000, exclusive of any payments made or accrued per camera prior to the date of such $900,000 payment.

F-27

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2010

NOTE 8 Contingent Liability (cont’d)

OPTION TO PURCHASE AND SELL CAMERAS. The Company agrees that if the Company ceases to do business, files bankruptcy or is involuntarily placed into any receivership or bankruptcy, files for reorganization of debts or in the event that the Company, after a period of four months next following the month of execution hereof does not commence ordering and continue to order a minimum average of 20 cameras per month, then and upon the occurrence of any such event(s), CAS shall be entitled to purchase such cameras as Company was purchasing pursuant hereto for use and/or sale by CAS as CAS shall in its sole discretion determine; provided further, that the Company shall sign such documents and/or transfer such proprietary information to CAS as is reasonable or necessary for CAS to purchase cameras directly from such manufacturers and/or suppliers as were being utilized by the Company. Nothing set forth herein shall be construed as prohibiting the Company from continuing to purchase cameras for its own account, however, any such purchases shall continue to be subject to the obligation to pay CAS $2,000 per camera until such time as the Return on Purchase Funds as set forth hereinabove is paid in full. Further, nothing set forth herein shall be construed as obligating the Company to release to, provide to or otherwise license authorize CAS to utilize the Company’s proprietary and/or patented technology, software, system or system components.

NOTE 9 Derivative Instruments Income, Net

Derivative instruments expense of $2,075,846 represents the net unrealized (non-cash) change during the three months ended October 31, 2009, in the fair value of our derivative instrument liabilities related to certain warrants and embedded derivatives in our convertible debt that have been bifurcated and accounted for separately.

NOTE 10 Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

As reflected in the accompanying consolidated financial statements, the Company had a net loss of $2,958,118 including a derivative loss of $2,075,846 and a negative cash flow from operations of $288,183 for the three months ended October 31, 2010, negative working capital of $38,747,217, and a stockholders’ deficiency of $57,698,316 at October 31, 2010.

The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional funds and implement its business plan. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management’s plans include the raising of additional capital through private or public transactions and implementation of its business and marketing plan to increase revenues.

F-28

WELLSTAR INTERNATIONAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF OCTOBER 31, 2010

NOTE 11 Subsequent Events

AJW Partners, LLC and related entities converted a portion of their notes (See Note 2) into 612,068,001 shares of Common Stock during the period November 1, 2010 through December 2, 2010. From November 1, 2010 through December 2, 2010, JMJ Financial converted a portion of their notes in 320,000,000 shares of Common Stock (see Note 4). During the period November 1, 2010 through December 2, 2010, 2,370,242,603 shares of Common Stock were issued through conversion of Convertible Notes Payable.

F-29

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note on Forward-Looking Statements

Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements". These forward-looking statements generally are identified by the words "believe," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight including changes in the trends of the mobile computing industry, formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors and related notes included in the Company’s Form 10-K and other SEC filings.

Overview

The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of Wellstar International, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements ("Notes").

Plan of Operation and Financing Needs

We are seeking financing in different amounts and up to 12 million dollars. Currently the company has exhausted its funding from past agreements with JMJ Financial and is actively trying to secure financing to continue operations. Currently, the company has no available options for financing and may cease operations in the near future.

If the company is successful in securing financing the company will continue to develop its camera and complete the Beta Test that is currently in operation in a long term care facility.

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

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

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

If we are unable to obtain additional funding, our business operations will be harmed. In addition, section 4e of the October 2005 Securities Purchase Agreements contain certain restrictions and limitations on our ability to seek additional financing. If we do obtain additional financing, our then existing shareholders will suffer substantial dilution.

Results of Operations

Quarter Ended October 31, 2010 compared to Quarter Ended October 31, 2009 (all references are to the Quarter Ended October 31)

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

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

Operating, Selling, General and Administrative Expenses: Operating, selling, general and administrative expenses decreased by $68,753, or 13% in the 2010 first fiscal quarter to $445,038 from $513,791 in 2009. This decrease reflects a decrease in salaries by $60,900 from $182,700 to $121,800.

Loss from Operations: Loss from operations for the quarter ended October 31, 2010 was $445,038, a decrease of $68,753 or 13% from the loss from operations in the same period in 2009 of $513,791 as a result of the aforementioned decreases in operating, sales and administrative expenses.

Other Income and Expense: Total other expenses of $2,513,080 in the quarter ended October 31, 2010 represent an increase in other expenses of $9,552,532 from the income of $7,039,452 in 2009 as a result of a greater expense from derivative instrument expense for the period related to a increase in derivative instrument liabilities caused by a decrease in our stock prices.

Net Loss: Net loss of $2,958,118 for the quarter ended October 31, 2010 was $9,483,779 greater than the net income of $6,525,661 for the same period in 2009 due to the greater amount of derivative instrument expense.

Liquidity and Capital Resources

It is Management’s opinion that the current financial position of the company is in dire straits and the Company will need to obtain additional funding to continue operations. The Company expects that it will not be able to continue operating. If the Company does not obtain financing immediately, it will be required to cease operations.

As of October 31, 2010, we had a working capital deficit of approximately $38,747,219, and cash of $150,681. We do not have the funds necessary to maintain our operations for the coming fiscal year, and will need to raise additional funding.

The liquidity impact of our outstanding debt is as follows:

Our unsecured demand note with Michael Sweeney (the "Sweeney Note"), in the principal amount of $150,000, matured on August 1, 2006 and remains outstanding. In addition to the outstanding principal, we also owe accrued interest in the amount of $47,925. We are in default pursuant to the terms of the Sweeney Note and we have not received a notice of default from Mr. Sweeney, nor has Mr. Sweeney indicated to the Company that he intends to place the Company in default under the note.

Our unsecured demand note with Micro Health Systems (the "MHS Note"), dated December 21, 2005 in the principal amount of $200,000, with interest at 8% per annum, has two maturity dates: at the 180th day and the 365th day following issuance. A payment of $100,000.00 is due at each maturity date. We did not make the first or second payment. There is an acceleration provision in the MHS Note stipulating that the entire $200,000.00 was due upon non-payment of the first $100,000. The interest rate then goes to the highest rate allowed by Florida law. We received a notice of default from MHS on November 28, 2006 and on September 20, 2010 MHS filed a summons and complaint with the Circuit Court in Broward County, Florida demanding full payment of principal and accrued interest. The MHS Note is secured by a pledge of 150,000 shares of the Company's treasury stock.

To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with four accredited investors - AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium Partners II, LLC on October 31, 2005 for the sale of (i) $3,000,000 in secured convertible notes and (ii) warrants to buy 5,000,000 shares of our common stock. The gross financing proceeds were paid to the Company in three separate tranches of $1,000,000 each. The first tranche of the financing, in the amount of $1,000,000, was received by the Company upon closing. The second tranche was received on January 20, 2006. The third tranche of $50,000 was received in August 2006. The secured convertible notes issued pursuant to our October 2005 through June 2008 Securities Purchase Agreements bear interest originally at 8% but increasing to 13% effective September 8, 2009, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholders' option, at the lower of (i) $0.12 or (ii) generally a 75% discount to the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date. As of November 10, 2010, the average of the three lowest intraday trading prices for our common stock during the preceding 20 trading days as reported on the Over-The-Counter Bulletin Board was $ .0001 and, therefore, the conversion price for the secured convertible notes was $ .000025. Based on this conversion price, the $4,780,557 outstanding principal amount of the secured convertible notes, excluding interest, were convertible into approximately 191,222,280,000 shares of our common stock. The stock purchase warrants have an exercise price of $0.0001 and $0.50 per share. If the lender converts, the Company will issue the appropriate number of shares and will not be required to use cash to liquidate the debt. Additionally, the Company will receive cash proceeds in the amount of $3,055,000 if the lender exercises the warrants. If the lender converts, the Company will issue the appropriate number of shares and will not be required to use the cash to liquidate the debt.

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

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

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

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

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

JMJ Financing

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

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

Also, on August 19, 2009 Wellstar issued a Convertible Promissory Note to JMJ in aggregate principal amounts of $1,725,000 (the “Third JMJ Note” and together with the Initial JMJ Notes, the “JMJ Notes”). In consideration for Wellstar’s issuing of the Second JMJ Note, JMJ issued Wellstar a Secured and Collateralized Promissory Note in the principle amounts of $1,500,000 (the “Third Wellstar Note” and together with the Initial Wellstar Note, the “Wellstar Notes”).

The JMJ Notes bear interest at 12%, mature three years from the date of issuance, and are convertible into our common stock, at JMJ’s option, at a conversion price, equal to 35% of the lowest trade for our common stock during the 20 trading days prior to the conversion. Prior to the conversion of the JMJ Notes, JMJ must make a payment to Wellstar reducing the amount owed to Wellstar under the Wellstar Notes. As of November 10, 2010, the lowest trade for our common stock during the 20 trading days as reported on the Over-The-Counter Bulletin Board was $.0001 and, therefore, the conversion price for the JMJ Notes was $.000035. Based on this conversion price, the JMJ Notes in the aggregate amount of $2,127,054, excluding interest, are convertible into 60,772,971,429 shares of our common stock.

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

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

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

Sources and Uses of Cash

	Nine Months Ended November 30,
(In thousands)	2010			2009
Cash flow data:
Net cash (used in) operating activities		(288	)		(262	)
Net cash (used in) investing activities		(0	)		(22	)
Net cash provided (used) by financing activities		439			260
Net increase (decrease) in cash and cash equivalents		151			(24	)
Cash and cash equivalents, beginning of period		0			30
Cash and cash equivalents, end of period		151			6

Operating Activities

Net cash used in operating activities for the three months ended October 31, 2010 was $288,183, an increase of $26,612 from the same period in 2009 reflecting the change in operating expenses.

Investing Activities

Cash used in investing activities for the three months ended October 31, 2010 was zero, a decrease of $22,475 from the same period in 2009 representing a decrease in the purchase of equipment.

Financing Activities

Net cash provided by financing activities for the three months ended October 31, 2010 was $438,864 as compared with $260,000 for the same period last year. The increase is attributed to the proceeds from the issuance of convertible notes.

As of October 31, 2010 the Company had cash and cash equivalents in the amount of $150,681 as compared with $5,518 at October 31, 2009.

Critical Accounting Policies

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

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

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

Revenue Recognition

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

Derivative Instruments

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

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

Registration Rights Agreements

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

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

Recent Accounting Pronouncements

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets, which is effective January 1, 2010. The amendment eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. The effect of adoption on the Company’s financial position and results of operations is not expected to be material.

Also in June 2009, the FASB amended the existing accounting and disclosure guidance for the consolidation of variable interest entities, which is effective January 1, 2010. The amended guidance requires enhanced disclosures intended to provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The effect of adoption on the Company’s financial position and results of operations is not expected to be material.

In October 2009, the FASB issued new guidance for revenue recognition with multiple deliverables, which is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, although early adoption is permitted. This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. The selling price for each deliverable shall be determined using vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price shall be used. If neither exists for a deliverable, the vendor shall use its best estimate of the selling price for that deliverable. After adoption, this guidance will also require expanded qualitative and quantitative disclosures. The Company is currently assessing any future impact of adoption on its financial position and results of operations.

In January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which is effective January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective January 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and require certain Level 3 disclosures on a gross basis.

Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures and the Company currently does not have any assets requiring disclosure, the adoption will not affect the Company’s financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of October 31, 2010, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls.

There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material pending legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, management is not aware of any known litigation or liabilities involving the operators of our properties that could affect our operations. Should any liabilities be incurred in the future, they will be accrued based on management’s best estimate of the potential loss. As such, there is no adverse effect on our consolidated financial position, results of operations or cash flow at this time. Furthermore, Management of the Company does not believe that there are any proceedings to which any director, officer, or affiliate of the Company, any owner of record of the beneficially owned more than five percent of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.

Item 1A. Risk Factors.

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.

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

On May 5, 2010, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. ("Asher"), for the sale of an 8% convertible note in the principal amount of $50,000 (the "Note"). The financing closed on May 5, 2010.

The Note bears interest at the rate of 8% per annum. All interest and principal must be repaid on February 5, 2011. The Note is convertible into common stock, at Asher’s option, at a 40% discount to the average of the three lowest trading prices of the common stock during the 10 trading day period prior to conversion. The Note contains a prepayment option whereby the Company may make a payment to Asher equal to 150% of all amounts owed under the Note. The Company is required to provide Asher with 30 days notice of such prepayment.

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

Item 3. Defaults Upon Senior Securities.

The Company presently is in default under its financing agreements with Michael Sweeney and with AJW Partners LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New Millenium Partners, LLC for failure to pay such notes upon maturity.

Item 4.Removed and Reserved

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1	Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, promulgated pursuant to the Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as amended, promulgated pursuant to the Section 302 of the Sarbanes Oxley Act of 2002
32.1	Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

	WELLSTAR INTERNATIONAL, INC.

Date: December 14 , 2010	By:	/s/ John Antonio
		John Antonio
		Chief Executive Officer


Date: December 14, 2010	By:	/s/ Howard Bielski
		Howard Bielski
		Chief Financial Officer

Attached files

Wellstar International, Inc. Reports

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