The prevalence of end-stage renal disease, or ESRD, particularly in the United States, has increased in recent years due to the heightened incidence of contributing diseases such as diabetes, hypertension and obesity, overall aging of the population, decreasing mortality from conditions such as cardiovascular disease, and increasing use of drugs and other treatments for serious medical conditions that can cause damage to kidneys. According to the United States Renal Data System, or the USRDS, the number of patients in the United States diagnosed with ESRD has almost doubled in the past decade to approximately 431,000 patients in 2002 from approximately 228,000 patients in 1992. According to the Journal of the American Society of Nephrology, the ESRD patient population in the United States is expected to continue to increase at a rate of 6% annually, reaching approximately 650,000 patients by 2010. Worldwide, the total diagnosed ESRD patient population is estimated to be almost four times that of the United States at 1.7 million in 2003.

Acute kidney failure, the temporary loss of kidney function, frequently occurs in conjunction with other serious medical conditions, particularly loss of other organ functions, severe infection, poisoning or post-surgical trauma. Regardless of the cause, patients experiencing acute kidney failure require some form of kidney replacement therapy, and will die if untreated. It is estimated that there are over 200,000 cases of acute kidney failure in the United States each year. Congestive heart failure, or CHF, is a common form of heart failure that typically results in fluid overload, a patient’s inability to dispose of fluids, often leading to swelling of the legs and ankles and congestion in the lungs. Fluid overload can result in further impairment of heart function, which, in turn, further reduces the patient’s ability to remove fluid. If untreated, fluid overload from CHF will lead to death. Approximately five million people in the United States suffer from CHF, and the incidence of CHF is increasing. According to the American Heart Association, it is estimated that 550,000 new cases of CHF are diagnosed in the United States annually. There are approximately one million patients discharged from hospitals annually for the treatment of fluid overload associated with CHF.

For the ESRD market, the System One, which is specifically FDA cleared for hemodialysis use in the home, is designed to make home treatment and more frequent treatment easier and more practical. Although not performed using the Company’s product, studies suggest that therapy administered five to six times per week, commonly referred to as daily therapy, better mimics the natural functioning of the human kidney and can lead to improved clinical outcomes, including reduction in hypertension, improved anemia status, reduced reliance on pharmaceuticals, improved nutritional status, reduced hospitalizations and overall improved quality of life as patients feel better. Other published literature also supports the clinical and quality of life benefits associated with home dialysis therapy. The Company believes traditional equipment cannot satisfy the demand for home and more frequent treatment due to its complexity, lack of portability, size and infrastructure requirements. The costs of delivering more frequent therapy in center, as well as clinic scheduling limitations, present further obstacles to the broader adoption of more frequent therapy, and the Company believes the System One addresses many of the barriers to more frequent and home therapy.

For the critical care market, the Company’s System One is designed to offer clinicians an alternative that simplifies the delivery of acute kidney replacement therapy and makes longer or continuous critical care therapies easier to deliver. Because of its small size, portability and lack of infrastructure requirements, the Company’s system can be easily moved between patient rooms, set up and taken down. It can also be easily moved from the ICU to the CCU or telemetry floor to treat patients with fluid overload. The Company’s use of volumetric balancing rather than scales eliminates the frequent nursing interventions required by existing ICU dialysis systems. The ability of the Company’s system to perform hemofiltration, for which the System One is also FDA cleared in addition to hemodialysis, is advantageous, as many clinicians choose to prescribe this therapy for patients with acute kidney failure.

Cost of revenues increased by 255% to $1.8 million for the three months ended March 31, 2005 from $502.6 thousand for the three months ended March 31, 2004.

Research and development expenses decreased by 5% to $1.4 million for the three months ended March 31, 2005 from $1.5 million for the three months ended March 31, 2004.

Interest income increased by 173% to $72.1 thousand for the three months ended March 31, 2005 from $26.5 thousand for the three months ended March 31, 2004.

Interest expense increased to $145.8 thousand for the three months ended March 31, 2005 from $4.3 thousand for the three months ended March 31, 2004.