SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934

for the quarterly period ended – June 30, 2011.

OR

[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-30392

ENVIRONMENTAL SOLUTIONS WORLDWIDE,
INC.

(Exact name of Company as specified
in its charter)

|Florida                                                      | 13-4172059                                  
|------------------------------------------------------------ | --------------------------------------------
|State or other jurisdiction of incorporation or organization | (I.R.S. Employer
        Identification No.)

335 CONNIE CRESCENT, CONCORD, ONTARIO,
CANADA, L4K 5R2(Address of principal executive offices, including postal code.)

(905) 695-4142
(Registrant's telephone number, including area code)

COMMON STOCK, $0.001 PAR VALUE(Title of class)

Indicate by check mark whether the issuer (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES [X] NO [ ]

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). YES [ ] NO [ ] (Not yet applicable to issuer)

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.

Large Accelerated Filer | | Accelerated Filer | | Non-Accelerated
Filer | | Smaller reporting company [x]

Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).YES [ ] NO [X]

There were 218,633,779 shares of the registrant's
Common Stock outstanding as of August 22, 2011





PART I. FINANCIAL INFORMATION

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|Item 1.  | Financial Statements.                                             |       
|         |                                                                   |       
|         | Consolidated Condensed Balance Sheets as of                       | F2    
|         | June 30, 2011 (unaudited) and December 31, 2010                   |       
|         |                                                                   |       
|         | Consolidated Condensed Statements of Operations and               | F3    
|         | Comprehensive Income / (Loss) for the Six and Three Month Periods |       
|         | Ended June 30, 2011 and 2010 (unaudited)                          |       
|         |                                                                   |       
|         | Consolidated Condensed Statement of Changes in Stockholders'      | F4    
|         | Equity and Comprehensive Income for the Six Month                 |       
|         | Period Ended June 30, 2011 (unaudited)                            |       
|         |                                                                   |       
|         | Consolidated Condensed Statements of Cash Flows                   | F5    
|         | for the Six Month Period Ended June 30, 2011 and 2010             |       
|         | (unaudited)                                                       |       
|         |                                                                   |       
|         | Notes to Consolidated Condensed Financial Statements              | F6-F26
|         | (unaudited)                                                       |       
|         |                                                                   |       
|Item 2.  | Management's Discussion And Analysis Of Financial Condition       |       
|         | And Results Of Operations                                         | 2     
|         |                                                                   |       
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk.       | 16    
|         |                                                                   |       
|Item 4.  | Controls And Procedures                                           | 17    
|         |                                                                   |       
|PART II. | OTHER INFORMATION                                                 |       
|         |                                                                   |       
|Item 1A. | RISK FACTORS                                                      | 18    
|         |                                                                   |       
|Item 5.  | OTHER INFORMATION.                                                | 18    
|         |                                                                   |       
|Item 6.  | EXHIBITS.                                                         | 19    





|ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.                                                         
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|CONSOLIDATED CONDENSED BALANCE SHEETS                                                           
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|Property, plant and equipment under construction (Note 6)                                       
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|Property, plant and equipment, net of accumulated                                               
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|Internal use software under development (Note 2)                                                
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|Patents and trademarks, net of accumulated                                                      
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|LIABILITIES AND STOCKHOLDERS' EQUITY                                                            
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|Current Liabilities                                                                             
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|Long-term Liabilities                                                                           
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|Commitments and Contingencies (Note 15)                                                         
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|Stockholders' Equity (Notes 12 and 13)                                                          
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|The accompanying notes are an integral part of these consolidated condensed financial statements





|ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.                                                         
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|CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS                                                 
|AND COMPREHENSIVE INCOME / (LOSS)                                                               
|FOR THE SIX AND THREE MONTHS PERIODS ENDED JUNE 30,                                             
|(UNAUDITED)                                                                                     
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|Revenue                                                                                         
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|Cost of sales                                                                                   
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|Gross profit                                                                                    
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|Loss from operations                                                                            
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|Interest on long-term debt                                                                      
|Amortization of deferred costs                                                                  
|Long-term debt accretion                                                                        
|Inducement premium                                                                              
|Mark to market adjustment on advance share subscription                                         
|Change in fair value of exchange feature liability                                              
|Interest on notes payable to related party                                                      
|Interest accretion expense                                                                      
|Financing charge on embedded derivative liability  (Note 7)                                     
|Gain on convertible derivative                                                                  
|Bank fees related to credit facility covenant waivers (Note 8)                                  
|Gain on disposal of property and equipment                                                      
|Interest income                                                                                 
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|Net (loss) / income                                                                             
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|Other comprehensive income:                                                                     
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|Net comprehensive (loss) /  income                                                              
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|Net loss per share (basic and diluted) (Note16)                                                 
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|Weighted average number of shares outstanding (basic and diluted) (Note16)                      
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|The accompanying notes are an integral part of these consolidated condensed financial statements





|ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.                                                          
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|CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY                              
|AND COMPREHENSIVE INCOME FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2011                            
|(UNAUDITED)                                                                                      
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|Balance, January 1, 2011                                                                         
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|Net loss                                                                                         
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|Stock-based compensation                                                                         
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|Foreign currency translation of Canadian subsidiaries                                            
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|Shares to be issued for prior transactions (Note 12)                                             
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|Subscription of common stock (Note 12)                                                           
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|Right offering costs (Note 12)                                                                   
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|Balance, June 30, 2011                                                                           
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|The accompanying notes are an integral part of these consolidated  condensed financial statements





|ENVIRONMENTAL SOLUTIONS WORLDWIDE, INC.                                                         
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|CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS                                                 
|FOR THE SIX MONTH PERIOD ENDED JUNE 30,                                                         
|(UNAUDITED)                                                                                     
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|Net loss                                                                                        
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|Adjustments to reconcile net loss to net cash                                                   
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|Increase (decrease) in cash flows from operating                                                
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|Net cash used in operating activities                                                           
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|Investing activities:                                                                           
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|Net cash used in investing activities                                                           
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|Financing activities:                                                                           
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|Net cash provided by financing activities                                                       
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|Net change in cash and equivalents                                                              
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|Foreign exchange (gain) loss on foreign operations                                              
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|Cash and cash equivalents, beginning of period                                                  
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|Cash and cash equivalents, end of period                                                        
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|Supplemental disclosures:                                                                       
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|Cash interest received                                                                          
|Cash interest paid                                                                              
|Other non-cash conversion of loans and related interest                                         
|Reclassification of convertible derivative and exchange                                         
|liabilities to equity                                                                           
|Subscription receivable                                                                         
|Conversion of accrued expenses to equity                                                        
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|The accompanying notes are an integral part of these consolidated condensed financial statements





NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION

Environmental Solutions Worldwide, Inc. (the "Company"
or "ESW") through its wholly owned subsidiaries is engaged in the design, development, manufacturing and sales of emissions
technologies and emissions testing and environmental certification services with its primary focus on the North American on-road
and off-road diesel retrofit market. ESW currently manufactures and markets a line of catalytic emission control and enabling technologies
for a number of applications.

The unaudited consolidated condensed financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"),
which contemplates continuation of the Company as a going concern.

The Company has sustained recurring operating losses.
As of June 30, 2011, the Company had an accumulated deficit of $50,993,817 and cash and cash equivalents of $759,003. In addition,
the Company has $3,857,180 of subscription receivable related to the close of the Company’s rights offering and related agreements,
including the, Investment Agreement and Backstop Commitment as per our 8-K disclosures on July 15, 2011. During the six month period
ended June 30, 2011 there were significant changes made to ESW’s business. These changes in operations, the planned relocation
of the Company’s operations, (see Note 18), and the prevailing economic conditions all create uncertainty in the operating
results and accordingly there is no assurance that the Company will be successful in generating sufficient cash flow from operations
or achieving profitability in the near future. As a result, there is substantial doubt regarding the Company's ability to continue
as a going concern. The Company may require additional financing to fund its continuing operations. The Company's ability to continue
as a going concern is dependent on achieving and maintaining a profitable level of operations.

On February 17, 2011, the Company raised $3 million through
the issuance of unsecured subordinated promissory notes (the “Notes") to certain of its current shareholders, including
deemed affiliates of certain members of the board of directors of the Company. Proceeds from the Notes funded working capital,
capital investments and other general corporate purposes. On May 3, 2011, the Company raised an additional $1 million through the
issuance of unsecured subordinated promissory notes (the "Bridge Loan Notes") to certain of its current shareholders,
including deemed affiliates of certain members of the board of directors of the Company. Proceeds from the Bridge Loan Notes, along
with available cash, were used to fund the Company's additional working capital needs related to increased summer sales.

Effective May 10, 2011, the Company entered into an Investment
Agreement with certain of its current shareholders and subordinated lenders under unsecured promissory notes (the “Bridge
Lenders") for an aggregate amount of $4.0 million. As per the Investment Agreement, the Bridge Lenders agreed to provide a
backstop commitment (the "Backstop Commitment") to a rights offering targeted by the Company to raise up to $8 million
(the “Qualified Offering"). Under the Backstop Commitment, the Bridge Lenders agreed to purchase any shares offered
in the Qualified Offering that were not purchased by the Company's shareholders of record, after giving effect to any oversubscriptions.

Effective June 30, 2011
the Company completed its rights offering. The Company's shareholders subscribed to 38,955,629 shares including over subscriptions.
Under the Qualified Offering shareholders subscribed to $4.7 million, which was subscribed for via cash ( $1.9 million), and the
exchange of principal and accrued interest on the Notes and the Bridge Loan Notes (approximately $2.8 million). Under the
Backstop Commitment, the Bridge Lenders purchased 27,714,385 shares of Common Stock at price of $0.12
per share for approximately $3.3 million, of which $2.0 million was paid in cash and $1.3 million was paid for through the exchange
of the balance of principal and accrued interest due on the Notes and the Bridge Loan Notes. As
a result of these transactions, the Company satisfied its obligations with the Bridge Lenders and effectively cancelled the Notes
and the Bridge Loan Notes effective June 30, 2011.

These unaudited consolidated condensed financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern. All adjustments considered
necessary for fair presentation and of a normal recurring nature have been included in these consolidated condensed financial
statements. Revenues and operating results for the six month period ended June 30, 2011 are not necessarily indicative of the results
to be expected for the full year.

These statements have not been audited and should be read
in conjunction with the consolidated financial statements and the notes thereto included in ESW's Annual Report on Form 10-K, as
filed with the United States Securities and Exchange Commission for the year ended December 31, 2010. The methods and policies
set forth in the year-end audited consolidated financial statements are followed in these interim consolidated condensed financial
statements.





NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

The consolidated condensed financial statements include
the accounts of the Company and its wholly owned subsidiaries, ESW America Inc. ("ESWA"), ESW Technologies Inc. ("ESWT"),
ESW Canada Inc. ("ESWC") and BBL Technologies Inc. ("BBL"). All inter-company transactions and balances have
been eliminated on consolidation. Amounts in the consolidated condensed financial statements are expressed in US dollars.

ESTIMATES

The preparation of consolidated condensed financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expense during the reported period. Actual results could differ from those estimates. Significant estimates include
amounts for inventory valuation, impairment of property plant and equipment and intangible assets, share based compensation, redeemable
class A special shares, valuation of the warrants, the exchange feature liability, and the convertible derivative liability, accrued
liabilities and accounts receivable exposures.

CONCENTRATIONS OF CREDIT RISK

The Company's cash balances are maintained in various
banks in Canada and the United States. Deposits held in banks in the United States are insured up to $250,000 per depositor for
each bank by the Federal Deposit Insurance Corporation. Deposits held in banks in Canada are insured up to $100,000 Canadian per
depositor for each bank by The Canada Deposit Insurance Corporation, a federal Crown corporation. Actual balances at times may
exceed these limits.

Accounts Receivable and Concentrations of Credit Risk:
The Company performs on-going credit evaluations of its customers' financial condition and generally does not require collateral
from its customers. The Company also manages its credit risk by insuring certain of its accounts receivable. Three of its customers
accounted for 39%, 16%, and 12%, respectively, of the Company's revenue during the six month period ended June 30, 2011 and 28%,
18%, and 15%, respectively, of its accounts receivable as of June 30, 2011.

Three of the Company's customers accounted for 20.3%,
17.4%, and 14.1%, respectively of the Company's revenue during the six month period ended June 30, 2010 and 33.6%, 33.6%, and 5.4%,
respectively of its accounts receivable as at June 30, 2010.

As at June 30, 2011, the Company believes
that there are no uncollectible accounts and accordingly has not provided an allowance.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company extends unsecured credit to its customers
in the ordinary course of business but mitigates the associated credit risk by performing credit checks and actively pursuing past
due accounts. An allowance for doubtful accounts is estimated and recorded based on management's assessment of the credit history
with the customer and current relationships with them. On this basis management has determined that an allowance for doubtful accounts
of $0 and $70,028 was appropriate as of June 30, 2011 and December 31, 2010, respectively.

INVENTORY

Inventory is stated at the lower of cost or market determined
using the first-in first-out method. Inventory is periodically reviewed for use and obsolescence, and adjusted as necessary. Inventory
consists of raw materials, work in progress and finished goods.

PROPERTY, PLANT AND EQUIPMENT UNDER CONSTRUCTION

The Company capitalizes customized equipment built to
be used in the future day to day operations at cost. Once complete and available for use, the cost for accounting purposes is transferred
to property, plant and equipment, where normal depreciation rates apply.





PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation
is computed on a straight-line basis over the estimated useful lives of the assets, generally 5 to 7 years. Maintenance and repairs
are charged to operations as incurred. Significant renewals and betterments are capitalized. An impairment loss would be recognized
when the carrying amount of an asset exceeds the estimated discounted cash flow used in determining the fair value of the asset.
Due to changes in circumstances related to its on-going restructuring plan, ESW conducted a test for impairment as of June 30,
2011 and recognized an impairment loss (see Note 6 for details).

INTERNAL-USE SOFTWARE

ESW capitalizes costs related to computer software obtained
or developed for internal use. Software obtained for internal use is enterprise-level business and finance software that ESW is
customizing to meet specific operational needs. Costs incurred in the development phase are capitalized and amortized over the
useful life of the internal use software, which is generally from three to five years. Capitalized internal-use software development
costs for a project which is not yet complete is included as Internal-use Software under Development in the consolidated condensed
balance sheet. Capitalization of such costs ceases at the point at which the project is substantially complete and ready for its
intended purpose. Costs capitalized as of June 30, 2011 and December 31, 2010 was $130,282 and $126,340, respectively.

PATENTS AND TRADEMARKS

Patents and trademarks consist primarily of the costs
incurred to acquire them from an independent third party. Accounting Standards Codification ("ASC") Topic 350 requires
intangible assets with a finite life be tested for impairment whenever events or circumstances indicate that the carrying amount
of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset
exceeds the estimated discounted cash flow used in determining the fair value of the asset. ESW conducted a test for impairment
as of December 31, 2010 and found no impairment.

Patents and trademarks are being amortized on a straight-line
basis over their estimated life of ten years. Amortization expense for the six month periods ended June 30, 2011 and 2010 was $16,145
and $106,679 respectively. At June 30, 2011, Patents and trademarks were fully written down and have $0 carrying value.

FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC Topic 820 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements.

Included in the ASC Topic 820 framework is a three level
valuation inputs hierarchy with Level 1 being inputs and transactions that can be effectively fully observed by market participants
spanning to Level 3 where estimates are unobservable by market participants outside of the Company and must be estimated using
assumptions developed by the Company. The Company discloses the lowest level input significant to each category of asset or liability
valued within the scope of ASC Topic 820 and the valuation method as exchange, income or use. The Company uses inputs which are
as observable as possible and the methods most applicable to the specific situation of each company or valued item.

The carrying amounts of cash and cash equivalents, accounts
receivable, subscriptions receivable, accounts payable, accrued liabilities, bank loan, redeemable Class A special shares and capital
lease obligation approximate fair value because of the short-term nature of these items. Per ASC Topic 820 framework these are
considered Level 2 inputs where inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices
in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that
are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities. Interest rate risk is the risk that the value of a financial instrument might be adversely affected
by a change in the interest rates. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposure
through its normal operating and financing activities.

REVENUE RECOGNITION

The Company derives revenue primarily from the sale of
its catalytic products. In accordance with ASC Topic 605, revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the amount is fixed or determinable, risk of ownership has passed to the customer and collection is reasonably
assured.





The Company also derives revenue (less than 3.5% and 1.0%
of total revenue during the six months periods ended June 30, 2011 and 2010.) from providing air testing and environmental certification
services. Revenues are recognized upon delivery of testing services when persuasive evidence of an arrangement exists and collection
of the related receivable is reasonably assured.

RESEARCH AND DEVELOPMENT

The Company is engaged in
research and development work. Research and development costs are charged as operating expense of the Company as incurred. Any
grant money received for research and development work is used to offset these expenditures. For the six month periods ended June
30, 2011 and 2010, the Company expensed $333,897 and $284,300 net of grant revenues, respectively, towards research and development
costs. For the six month periods ended June 30, 2011 and 2010, gross research and development expense, excluding any offsetting
grant revenues amounted to $612,609 and $410,622 respectively,
and grant money amounted to $278,712 and $126,322, respectively.

PRODUCT WARRANTIES

The Company provides for estimated warranty costs at the
time of sale and accrues for specific items at the time their existence is known and the amounts are determinable. The Company
estimates warranty costs using standard quantitative measures based on industry warranty claim experience and evaluation of specific
customer warranty issues. The Company currently records warranty costs as 2% of revenue. As of June 30, 2011 and December 31, 2010,
$121,335 and $102,793, respectively, was accrued against warranty provision and included in accrued liabilities. For the six month
periods ended June 30, 2011 and 2010, the total warranty, service, service travel and installation costs included in cost of sales
was $93,733 and $120,942, respectively.

SEGMENTED REPORTING

ASC Topic 280 changed the way public companies report
information about segments of their business in their quarterly reports issued to shareholders. It also requires entity-wide disclosures
about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its
major customers.

The Company also derives revenue (less than 3.5% and 1.0%
of total revenue during the six months periods ended June 30, 2011 and 2010, respectively) from providing air testing and environmental
certification services. For six month periods ended June 30, 2011 and 2010, all revenues were generated from the United States.
During the six month periods ended June 30, 2011 and 2010, expenses incurred in the United States were cost of sales of $110,336
and $96,491, officers' compensation and directors fees of $56,642 and $58,278, marketing, office and general costs of $467,131
and $476,134, consulting and professional fees of $16,508 and $20,841, depreciation and amortization of $160,171 and $182,536 and
research and development of $104,274 and $(18,327) (net of grant funding) respectively.

As of the June 30, 2011 and December 31, 2010, $980,307
and $1,182,263, respectively, of property, plant and equipment, net of accumulated depreciation, is located at the air testing
facility in Pennsylvania and all remaining long lived assets are located in Concord, Ontario.

NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU 2011-5 –
“Comprehensive Income – Presentation of Comprehensive Income”.  This statement removed the presentation
of comprehensive income in the statement of changes in stockholders’ equity.  The only two allowable presentations are
below the components of net income in a statement of comprehensive income or in a separate statement of comprehensive income that
begins with total net income.  The guidance is effective for interim or annual reporting periods beginning after December
15, 2011.  The Company does not expect the adoption of this guidance to have a material impact on the Company’s results
of operations or financial position.

In May 2011, an update was made by the Financial Accounting
Standards Board (“FASB”) to achieve common fair value measurement and disclosure requirements in U.S. Generally Accepted
Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”).  It provides
amendments to the definition of fair value and the market participant concept, grants an exception for the measurement of financial
instruments held in a portfolio with certain offsetting risks, and modifies most disclosures.  The changes in disclosures
include, for all Level 3 fair value measurements, quantitative information about significant unobservable inputs used and a description
of the valuation processes in place.  The new guidance also requires disclosure of the highest and best use of a nonfinancial
asset.  This standard will be effective prospectively during interim and for annual periods beginning after December 15, 2011.  Early
application by public entities is not permitted.  The adoption is not expected to have a significant impact on the Company’s
consolidated condensed financial statements.





RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In August 2010, the FASB issued ASU No. 2010-22, Accounting
for Various Topics - Technical Corrections to SEC Paragraphs. This update amends various SEC paragraphs based on external comments
received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The adoption of this ASU had no
effect on the Company's consolidated condensed financial statements.

In August 2010, the FASB issued ASU No. 2010-21, Accounting
for Technical Amendments to Various SEC Rules and Schedules. This updates various SEC paragraphs pursuant to the issuance of Release
No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The adoption of
this ASU had no effect on the Company's consolidated condensed financial statements.

In April 2010, the FASB issued ASU No. 2010-17, Revenue
Recognition - Milestone Method. The objective of this Update is to provide guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments
in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements.

In April 2010, the FASB issued ASU No. 2010-013, Compensation
- Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU 2010-13 addresses
the classification of an employee share-based award with an exercise price denominated in the currency of a market in which the
underlying equity security trades. The amendments are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial
statements.

In October 2009, the FASB issued ASU No. 2009-13, Multiple
Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force ("ASU 2009-13") (codified within
ASC Topic 605). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption
of this ASU had no effect on the Company's consolidated condensed financial statements.

NOTE 4 - CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and highly liquid
investments purchased with an original or remaining maturity of 90 days or less at the date of purchase. At June 30, 2011 and December
31, 2010, all of the Company's cash and cash equivalents consisted of cash.

NOTE 5 - INVENTORY

Inventory consists of:

|                | JUNE 30,   | DECEMBER 31,
|--------------- | ---------- | ------------
|INVENTORY       | 2011       | 2010        
|Raw materials   | $1,128,707 | $1,669,481  
|Work-in-process | 2,225,272  | 2,737,545   
|Finished goods  | 140,486    | 7,492       
|TOTAL           | $3,494,465 | $4,414,518  

The Company recorded inventory write downs amounting to
$508,731 and $0 for the six month periods ended June 30, 2011 and 2010, respectively, related to certain inventory that was sold
at an amount lower than cost to recover cash.





NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

|                               | JUNE 30,    | DECEMBER 31,
|------------------------------ | ----------- | ------------
|CLASSIFICATION                 | 2011        | 2010        
|Plant, machinery and equipment | $ 5,988,267 | $ 5,790,507 
|Office equipment               | 395,724     | 384,902     
|Furniture and fixtures         | 468,674     | 461,817     
|Vehicles                       | 25,938      | 18,288      
|Leasehold improvements         | 1,049,706   | 1,041,023   
|                               | 7,928,309   | 7,696,537   
|                               |             |             
|Less: accumulated depreciation | (6,270,548) | (5,765,164) 
|Less: impairment loss          | (311,304)   | --          
|                               | $ 1,346,457 | $ 1,931,373 



|                                                                | JUNE 30, 
|--------------------------------------------------------------- | ---------
|Depreciation Expense                                            | 2011     
|Depreciation expense included in cost of sales                  | $ 163,544
|Depreciation expense included in operating expenses             | 198,360  
|Depreciation expense included in research and development costs | 58,191   
|Total depreciation expense                                      | $ 420,096

At June 30, 2011 and December 31, 2010, the Company had
$98,413 and $185,542, respectively, of customized equipment under construction.

The plant, machinery and equipment above include $39,549
and $37,939 in assets under capital lease with a corresponding accumulated depreciation of $32,300 and $25,723 as of June 30, 2011
and December 31, 2010, respectively.

As a result of the decision to relocate ESW’s manufacturing
operations (see Note 18), the Company determined an impairment loss of $311,304 on property, plant and equipment of ESW Canada
for the six months ended June 30, 2011. The estimated recovery from the sale of plant and machinery and office equipment is expected
to be immaterial and, accordingly, the Company determined that the carrying value of these assets exceeded the sum of undiscounted
cash flows from their use and eventual disposition. Due to uncertainties in both timing and amount of these cash flows, the Company
utilized an expected present value technique to estimate the fair value. Based on this valuation, the Company assessed a value
of $0 to these assets and recorded an impairment loss equal to the full amount of their carrying value.

The details of impairment loss recognized are as follows:

|Asset grouping         | Impairment loss recognized   
|---------------------- | -----------------------------
|Plant and Machinery    | $                     180,993
|Office equipment       | 36,983                       
|Leasehold improvements | 93,328                       
|Total                  | $                     311,304







NOTE 7 - NOTES PAYABLE TO RELATED PARTIES

On February 17, 2011, the Company entered into note subscription
agreements (collectively, the "Loan Agreements"), and issued unsecured subordinated promissory notes to, Orchard Investments,
LLC; Black Family 1997 Trust; Leon D. Black Trust UAD 11/30/92 FBO Alexander Black; Leon D. Black Trust UAD 11/30/92 FBO Benjamin
Black; Leon D. Black Trust UAD 11/30/92 FBO Joshua Black; Leon D. Black Trust UAD 11/30/92 FBO Victoria Black; Leon D. Black; John
J. Hannan and Richard Ressler (each individually a "Subordinated Lender" or "Holder" and collectively the "Subordinated
Lenders" or "Holders") who are current shareholders and deemed affiliates of certain members of the board of directors
of the Company. The Loan Agreements were approved by the independent directors of the Company.

As per the Loan Agreements, the Subordinated Lenders made
loans to the Company in the principal aggregate amount of $3 million, represented by unsecured subordinated promissory notes (the
"Notes"), dated February 17, 2011. Proceeds of the Loan, along with available cash funded working capital, capital investments
and other general corporate expenditures. The Notes bore interest at a rate of 10% per annum, payable in-kind on a monthly basis
commencing March 17, 2011, up to the date on which the Notes has been paid in full. The maturity date of the Loan was the earlier
of: (i) the closing of a rights offering of the Company's common stock, par value $.001 per share, at a sale price of $0.12 per
share (adjusted for any stock split, stock dividend or other similar adjustment) pursuant to which the Company planned to offer
rights to purchase approximately $8 million in shares of Common Stock (the "Qualified Offering"), and also permitted
all Subordinated Lenders to exchange their Notes, accrued interest (and any notes that may be issued for payment of interest) for
shares of Common Stock at $0.12 per share or (ii) June 17, 2011 (the "Outside Date").

The terms of the Loan Agreements were analyzed in accordance
with ASC 815 Derivatives and Hedging. The Loan Agreements allowed for the price for Notes exchanged for Common Stock to be adjusted
in certain circumstances. The potential adjustment in the exchange price precludes the Company from being qualified for the exemption
from being considered to be a derivative instrument. As such, the option of the Holders to exchange Notes for Common Stock and
the option of the Qualified Holders to invest the balance of $1 million aggregate amount to purchase Common Stock were determined
to be derivatives embedded in the Notes. These embedded derivatives are bundled together as a single, compound embedded derivative
and recorded and valued as a liability at the time of issuance on February 17, 2011 and on March 31, 2011.

The fair values of the embedded derivatives issued under
the Loan Agreements on February 17, 2011 and March 31, 2011 were determined to be $3,485,101 and $2,148,656, respectively with
the following assumptions: (1) risk free interest rate of 0.15% and 0.17%, (2) remaining contractual life of 4 and 2.5 months,
(3) expected stock price volatility of 194% and 201%, and (4) expected dividend yield of zero. Since the fair values of the embedded
derivatives were in excess of the proceeds, the Company recorded an immediate expense of $485,101 in the condensed consolidated
statement of operations as a financing charge on embedded derivative liability. The embedded derivatives liability was recorded
as a discount to the Notes at the time of issuance. The discount was recorded as interest accretion expense in the consolidated
condensed statement of operations using the effective-interest method. The change in the fair value of $1,336,445 of the embedded
derivative liability was recorded as gain in the consolidated condensed statements of operations for the six months ended June
30, 2011.

Subsequently, on May 3, 2011, the Company entered into
additional note subscription agreements and issued unsecured subordinated promissory notes (the “Bridge Notes”), with
Orchard Investments, LLC ("Orchard"); Black Family 1997 Trust; Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon
D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria
Black; Leon D. Black; John J. Hannan and Richard Ressler ("Ressler") who are current shareholders and were subordinated
lenders under prior loan agreements in the aggregate amount of $3 million with the Company entered into on February 17, 2011 and
may be deemed affiliates of the Company. The Bridge Notes were approved by the Company's independent directors. Pursuant to the
Loan agreements, the Subordinated Lenders made loans to the Company in the principal aggregate amount of $1 million subject to
the terms and conditions set forth in the Loan Agreements and represented by unsecured subordinated convertible promissory notes.
Proceeds of the Bridge Loan, along with available cash, were used by the Company to fund working capital.

The fair value of the embedded derivatives issued under
The Bridge Notes Agreements effective May 3, 2011 was determined to be $506,074 with the following assumptions: (1) risk free interest
rate of 0.60% (2) remaining contractual life of 48 days, (3) expected stock price volatility of 212%, and (4) expected dividend
yield of zero. The embedded derivative liability was recorded as a discount to the Notes at the time of issuance. The discount
is recorded as interest accretion expense in the consolidated condensed statements of operations using the effective-interest method.





Effective May 10, 2011, the Company entered into an Investment
Agreement (the "Investment Agreement") with Orchard Investments, LLC ("Orchard"); Black Family 1997 Trust;
Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO
Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler ("Ressler")
(each individually a "Bridge Lender" and collectively the "Bridge Lenders"). Pursuant to the Investment Agreement,
the Bridge Lenders agreed to provide a backstop commitment to the Qualified Offering and have agreed to collectively backstop the
Qualified Offering by purchasing from the Company at a subscription price of $0.12 per share of Common Stock any shares not purchased
by the Company's shareholders of record who were entitled to participate in the rights offering (after giving effect to any oversubscriptions)
up to 29,166,667 shares of Common Stock for a total purchase price of $3.5 million (the "Backstop Commitment"). In addition
to their rights to purchase shares pursuant to the Qualified Offering and the Backstop Commitment, the Bridge Lenders have the
option, in their sole discretion, to purchase from the Company, at the subscription price, any other shares not purchased by the
Company's stockholders through the Qualified Offering (the "Purchase Option"). If, after giving effect to the Qualified
Offering, the Backstop Commitment and the Purchase Option, any of the Bridge Lenders shall have been unable to exchange any portion
of his or its Notes, the Company will also offer each Bridge Lender the right to purchase additional shares of Common Stock at
the subscription price (payable through the exchange of Bridge Loans for Common Stock) such that each Bridge Lender shall have
exchanged all of his or its notes for shares of Common Stock (the "Additional Subscription Offer"). In addition, if Ressler
and Orchard collectively acquire less than $1.0 million worth of shares of Common Stock as part of the Qualified Offering, the
Backstop Commitment, the Purchase Option and the Additional Subscription Offer, the Company has agreed to offer to Ressler and
Orchard an additional number of shares of Common Stock equal to the shortfall amount at the subscription price.

Effective June 14, 2011, the respective holders of ESW’s
10% unsecured subordinated promissory notes issued February 17, 2011 and May 3, 2011 in the aggregate principal amount of $4 million
(collectively the "Notes") pursuant to the terms of the Notes, extended the maturity date of the Notes to July 15, 2011.

Effective June 30, 2011 the Company closed its rights
offering. As part of the rights offering and the Investment Agreement, the principal due on the Notes and the Bridge Notes in the
aggregate amount of $4,000,000, and corresponding interest in the amount of $126,850, were converted into Common stock at the rights
offering price of $0.12 per share. As a result of these transactions, the Company satisfied its obligations with respect to the
Notes and the Bridge Notes and both were cancelled.

As of June 30, 2011 and December 31, 2010, there was no
outstanding principal and interest on notes payable to related parties.

The discount on the aggregate $4 million notes issued
on February 17, 2011 and May 3, 2011 was recorded as interest accretion expense in the consolidated condensed statements of operations
using the effective-interest method. Due to the conversion of the note the Company expensed the full amount of the interest accretion
expense in the amount of $3,506,074 in the consolidated condensed statement of operations for the six month period ended June 30,
2011. The convertible derivative liability in the aggregate amount of $2,654,730 recorded in relation to the aggregate $4 million
notes issued on February 17, 2011 and May 3, 2011 was transferred to equity on the consolidated condensed balance sheet at June
30, 2011 (see Note 12).

NOTE 8 - BANK LOAN

Effective March 31, 2010, ESW's subsidiary, ESW Canada,
entered into a demand revolving credit facility agreement with a Canadian chartered bank, Canadian Imperial Bank of Commerce ("CIBC")
to meet working capital requirements (the "Demand Credit Agreement"). The Demand Credit Agreement had a credit limit
of $4 million Canadian. Borrowings under the facility were limited to a percentage of accounts receivable plus a percentage of
inventories (capped at $1 million Canadian or 50% of the accounts receivable portion) less any prior ranking claims. The Demand
Credit Agreement was guaranteed by the Company and its subsidiaries, ESWC, ESWA, BBL, and ESWT, through a general security agreement
over all assets to CIBC. The facility had been guaranteed to CIBC under EDC's Export Guarantee Program. Borrowings under the Demand
Credit Agreement bore interest at 2.25% above CIBC's prime rate of interest. Obligations under the Demand Credit Agreement were
collateralized by a first-priority lien on the assets of the Company and its subsidiaries, including accounts receivable, inventory,
equipment and other tangible and intangible property, including the capital stock of all direct subsidiaries.





The terms relating to the Demand Credit Agreement specifically
note that the Company maintain a tangible net worth of at least $4.0 million Canadian. The Demand Credit Agreement contains, among
other things, covenants, representations and warranties and events of default customary for a facility of this type for the Company
and its subsidiaries. Such covenants include certain restrictions on the incurrence of additional indebtedness, liens, acquisitions
and other investments, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other repurchases
in respect of capital stock, voluntary prepayments of certain other indebtedness, capital expenditures and transactions with affiliates,
subject to certain exceptions. Under certain conditions amounts outstanding under the Demand Credit Agreement may be accelerated.
Such events include failure to comply with covenants, breach of representations or warranties in any material respect, non-payment
or acceleration of other material debt, entry of material judgments not covered by insurance, or a change of control of the Company.

On November 8, 2010, November 26, 2010, and December 23,
2010, the Company's wholly owned subsidiary, ESWC, received the first, second and third waivers, respectively, of certain financial
covenants under its Demand Credit Agreement with CIBC. Without the waiver, the Company's subsidiary would not be in compliance
with the current ratio and effective tangible net worth covenants as set forth in the Demand Credit Agreement. In the event the
Company and its subsidiary, ESWC, fail to comply with the terms of the waiver and meet the current ratio and effective tangible
net worth covenants prior to the end of the waiver period, same would constitute an event of default and the bank loan may need
to be repaid unless a further waiver or modification to the Demand Credit Agreement could be obtained.

The third waiver provided by CIBC was through January
31, 2011 and also provided for a fee payable to the lender for the extension, as well as a reduction in the maximum security margin
deficit as defined under the Demand Credit Agreement (by either reducing borrowing or increasing the borrowing base) and an increase
in the annual interest rate to CIBC's prime rate plus 4.50% from CIBC's prime rate plus 2.25% effective January 1, 2011.

Effective February 4, 2011, the Company's wholly owned
subsidiary, ESWC, received a fourth waiver of certain financial covenants under its Demand Credit Agreement with CIBC. Without
the waiver, the Company's subsidiary would not be in compliance with the current ratio and effective tangible net worth covenants
as set forth in the Demand Credit Agreement. The fourth waiver provided by CIBC extended the waiver period from January 31, 2011
through February 14, 2011 and also provided for a fee payable to CIBC for the extension as well as requiring the elimination of
any margin deficit by February 14, 2011. In the event the Company and its subsidiary, ESWC, failed to comply with the terms of
the waiver and meet the current ratio and effective tangible net worth covenants prior to the end of the waiver period, same will
constitute an event of default as set forth in the Demand Credit Agreement unless a further waiver or modification to the Demand
Credit Agreement could be obtained.

The closing of the $3 million unsecured subordinated promissory
notes effective February 17, 2011 allowed the Company and its subsidiaries to comply with covenants and obligations under the Demand
Credit Agreement with CIBC dated March 10, 2010.

Effective May 31, 2011, the Company's wholly owned subsidiary
ESWC entered into a further modification of its Demand Credit Agreement dated March 10, 2010 (the "Credit Agreement")
whereby it received an extension on the term of its Demand Credit Agreement from its commercial lender through June 30, 2011. The
new modification was subject to all covenants and the security margin under the Demand Credit Agreement remaining in order at all
times. The commercial lender and the Company agreed to reduce the Operating Loan limit as defined in the Demand Credit Agreement
to a maximum of $1,500,000 Canadian or the borrowing base established by the security margin if less; all loans made by the commercial
lender were to be satisfied and the credit facilities cancelled upon the earlier of the completion of the Company's rights offering
or June 30, 2011. The commercial lender had also advised that any reasonable request for an extension of the June 30, 2011 date
would be considered in light of the Company's rights offering. With the modification to the Demand Credit Agreement, the Company's
wholly owned subsidiary ESWC agreed to pay a fee to its commercial lender for the extension including reasonable legal and advisory
fees.

As of June 30, 2011 and December 31, 2010, $1,626,160
and $3,424,889, respectively, was owed under the credit facility to CIBC.





NOTE 9 - REDEEMABLE CLASS A SPECIAL SHARES

|700,000 Class A special  | $453,900 (based on the historical
|------------------------ | ---------------------------------
|shares authorized,       | exchange rate at the time of     
|issued, and outstanding. | issuance.)                       

The redeemable Class A special shares were issued by the
Company's wholly owned subsidiary, BBL, without par value, and are redeemable on demand by the holder of the shares, which is a
private Ontario Corporation, at $700,000 Canadian (which translates to $725,767 US and $703,801 US at June 30, 2011 and December
31, 2010, respectively). As the redeemable Class A special shares were issued by the Company's wholly owned subsidiary, BBL, the
maximum value upon which the Company is liable is the net book value of BBL. As of June 30, 2011 and December 31, 2010, BBL had
an accumulated deficit of $1,192,858 US ($1,845,375 Canadian), and therefore, the holder would be unable to redeem the redeemable
Class A special shares at their ascribed value.

NOTE 10 - CONVERTIBLE DEBENTURES

Convertible debentures issued by the Company are summarized
as follows:

|                                    |                    |  |                    |  |                    |  | TOTAL             
|----------------------------------- | ------------------ |  | ------------------ |  | ------------------ |  | ------------------
|                                    | 2008 DEBENTURES    |  | 2009 DEBENTURES    |  | 2010 DEBENTURES    |  | JUNE 30, 2011     
|Face value of convertible debenture | $ 9,000,000        |  | $ 1,600,000        |  | $ 3,000,000        |  | $ 13,600,000      
|Less: Beneficial conversion feature | --                 |  | (256,000)          |  | (540,000)          |  | (796,000)         
|Deferred costs                      | (59,738)           |  | --                 |  | (80,625)           |  | (140,363)         
|Book value upon issuance            | 8,940,262          |  | 1,344,000          |  | 2,379,375          |  | 12,663,637        
|Accretion of the debt discount      | --                 |  | 256,000            |  | 540,000            |  | 796,000           
|Amortization of deferred costs      | 59,738             |  | --                 |  | 80,625             |  | 140,363           
|Carrying Value                      | 9,000,000          |  | 1,600,000          |  | 3,000,000          |  | 13,600,000        
|                                    |                    |  |                    |  |                    |  |                   
|Conversion (March 25, 2010)         | (9,000,000)        |  | (1,600,000)        |  | (3,000,000)        |  | (13,600,000)      
|Carrying Value (June 30, 2011)      | $               -- |  | $               -- |  | $               -- |  | $               --

Effective March 19, 2010, the Company issued $3,000,000
of its 9% convertible debentures (the "2010 Debentures") to five (5) accredited investors under Rule 506 of Regulation
D of Section 4(2) of the Securities Act. The 2010 Debentures were for a term of three (3) years and were convertible into shares
of the Company's common stock at the option of the holder by dividing the principal amount of the 2010 Debenture to be converted
by $0.50. The 2010 Debentures earned interest at a rate of 9% per annum payable in cash or in shares of the Company's common stock
at the option of the holder. If the holder elected to receive interest in shares of common stock, the number of shares of common
stock to be issued for interest would be determined by dividing accrued interest by $0.50. The 2010 Debentures had a mandatory
conversion feature that required the holders to convert in the event a majority of the Company's pre-existing outstanding 9% convertible
debentures converted. Subject to the holder's right to convert and the mandatory conversion feature, the Company had the right
to redeem the 2010 Debentures at a price equal to one hundred and ten percent (110%) multiplied by the then outstanding principal
amount plus unpaid interest to the date of redemption. Upon maturity, the debenture and interest was payable in cash or common
stock at the option of the Holder. The Company also had provided the holders of the Debentures registration rights. The 2010 Debentures
contained customary price adjustment protections.

At the time the 2010 Debentures were issued, the Company
recorded a debt discount for a beneficial conversion feature in the amount of $540,000. The debt discount being the aggregate intrinsic
value calculated as the difference between the market price of the Company's share of stock on March 19, 2010 and the conversion
price of the 2010 Debentures. The debt discount was being accreted over the three (3) year life of the debentures using the effective
yield method. The effective yield on the debentures was 16.36%.

Effective March 25, 2010, the November 2008 and the August
2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective debenture agreements.
The early conversion of the debentures was a condition precedent to the Company's wholly owned subsidiary, ESWC, entering into
a new credit facility with CIBC (see Note 8). A total of $10,600,000 in principal and $1,176,445 of accrued interest was converted
into 43,756,653 shares of restricted common stock. The conversion of the November 2008 and the August 2009 debentures also triggered
the mandatory conversion feature on the March 19, 2010 debentures. A total of $3,000,000 in principal and $3,797 in accrued interest
was converted into 6,007,595 shares of restricted common stock. With these transactions effective March 25, 2010, the Company has
$0 of convertible debentures and accrued interest on convertible debenture.





As part of the agreement to convert all existing convertible
debentures, the Company was committed to pay a premium as an inducement to convert all debentures. The premium was payable to all
converting debenture holders and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent
Directors of the Company's Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,668
shares of common stock. As the Company did not have sufficient authorized shares as of the date of conversion of the debentures
to fulfill the premium, the premium had been recorded as an advance share purchase agreement at a fair market value of $2,909,872
as of March 31, 2010. The agreement was without interest, subordinated to the bank's position and payable in a fixed number of
common shares (4,375,668 shares) of the Company upon increase in the authorized share capital of the Company.

Up to October 14, 2010, the Company did not have sufficient
authorized and unissued shares to fulfill the advance share subscription. Under these conditions, FASB ASC Subtopic 815-40, Contracts
in Entity' Own Equity, precludes equity classification of this obligation. As such, the advance share subscription was classified
as a liability and periodically marked to market. The fair value of the obligation was determined to be $1,662,753 at October 14,
2010. The fair value of the obligation was determined by the cash settlement value at the end of each period based on the closing
price of the Company's common stock. The decrease in fair value of this liability of $1,247,119 was recorded as a mark to market
adjustment on advance share subscription in the condensed consolidated statement of operations and comprehensive loss.

Effective October 14, 2010, the Company's Board of Directors
ratified certain corporate action approved by the written consent of a majority of the Company's shareholders pursuant to a Definitive
Information Statement on Schedule 14C that the Company filed with the Securities and Exchange Commission on September 3, 2010 (the
"Definitive Information Statement") and distributed to shareholders of record. The Board of Directors ratified an amendment
to the Company's articles of incorporation whereby the Company proceeded to file an amendment to its articles of incorporation
increasing its authorized shares of common stock from 125,000,000 to 250,000,000 shares.

Effective November 30, 2010, the Company issued an aggregate
of 4,375,668 restricted shares of common stock to thirteen (13) prior debenture holders in connection with the early conversion
of their debentures.

Included in the consolidated condensed financial statements
at June 30, 2011 is the effect of an exchange feature included in the terms of the Share Subscription Agreement for $3,000,000
of Convertible Debentures issued on March 19, 2010, ("2010 Debentures") . The March 2010 Convertible Debentures were
fully converted, including interest, into 6,007,595 shares of common stock on March 25, 2010. The exchange feature provided that
if within twelve months from March 19, 2010, the Company enters into or closes another financing or other transaction (which for
securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to
another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable terms. The exchange
feature was determined by the Company to be a freestanding financial instrument and also to be a liability within the scope of
ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and
the Company's obligation. On December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability
of closing another financing by March 18, 2011, and the fair value of the number of incremental shares to be issued at a lower
estimated issue price. The probability of closing another financing by March 18, 2011, was estimated to be 100% on December 31,
2010. The fair value of the Company's common stock was determined by the closing price on the valuation date. On December 31, 2010,
an exchange feature liability of $1,680,000 was recorded for the 2010 Debentures (see Note 12). Effective February 17, 2011, the
Company and the 2010 Debenture investors reached an agreement (“the anti-dilution agreement”) whereby the investors
would receive an approximate aggregate of 19,000,000 additional shares of Common Stock at an estimated price of $0.12 in conjunction
with certain rights under the Prior Subscription Agreements in the event the Company closed a Qualified Offering (see Note 7).
At March 31, 2011, the exchange feature liability related to the 2010 Debenture was recorded at a fair value of $2,280,000 with
the change in fair value of exchange feature liability of $600,000 recorded as an expense in the consolidated condensed statement
of operations and comprehensive loss.

At June 30, 2011, concurrent with the closing of the rights
offering, the anti-dilution agreements were also closed. The $2,280,000 exchange feature liability was transferred to equity towards
the issuance of 19,000,000 shares of Common Stock.





EXCHANGE FEATURE LIABILITY TABLE

|                       |                           |            | Exchange Feature
        Liability | Change in fair
        value of exchange
        feature liability | Exchange Feature
        Liability | Exchange Feature
        Liability |            
|---------------------- | ------------------------- | ---------- | ---------------------------------- | ------------------------------------------------------------------ | ---------------------------------- | ---------------------------------- | -----------
|                       |                           |            |                                    |                                                                    |                                    |                                    |            
|                       |                           | Additional | December 31,                       |                                                                    |                                    |                                    |            
|Transaction Detail     | Original Instrument       | Shares     | 2010                               | March 31, 2011                                                     | March 31, 2011                     | June 30, 2011                      | Comments   
|March 2010 Offering    | Convertible Debenture     | 19,000,000 | $       1,680,000                  | $       600,000                                                    | $          2,280,000               | $          --                      | See Note 10
|November 2010 Offering | Common Stock and Warrants | 1,750,000  | 225,600                            | (9,300)                                                            | 216,300                            | --                                 | See Note 12
|December 2010 Offering | Common Stock and Warrants | 1,750,000  | 228,262                            | (11,962)                                                           | 216,300                            | --                                 | See Note 12

There were no convertible debentures outstanding and zero
corresponding accrued interest as of June 30, 2011 and December 31, 2010. As of December 31, 2010, the debt discount of $768,981
and deferred cost of $117,131 were fully amortized and expensed due to the conversion of the debentures effective March 25, 2010.

LEGAL FEES RELATED TO THE 2010 CONVERTIBLE DEBENTURES

The Company had also recorded a deferred cost asset of
$80,625 for legal fees paid in relation to the issuance of the 2010 Debentures. The deferred costs were being amortized over the
term of the 2010 Debentures using the straight line method. At December 31, 2010, the deferred cost assets were fully amortized
due to the conversion of the debentures effective March 25, 2010.

NOTE 11- INCOME TAXES

As of June 30, 2011, there are tax loss carry forwards
for Federal income tax purposes of approximately $26,973,016 available to offset future taxable income in the United States. The
tax loss carry forwards expire in various years through 2031. The Company does not expect to incur a Federal income tax liability
in the foreseeable future. Accordingly, a valuation allowance for the full amount of the related deferred tax asset of approximately
$9,440,556 has been established until realizations of the tax benefit from the loss carry forwards meet the "more likely than
not" criteria.

|      |  | LOSS CARRY  
|----- |  | ------------
|YEAR  |  | FORWARD     
|1999  |  | $    407,067
|2000  |  | 2,109,716   
|2001  |  | 2,368,368   
|2002  |  | 917,626     
|2003  |  | 637,458     
|2004  |  | 1,621,175   
|2005  |  | 2,276,330   
|2006  |  | 3,336,964   
|2007  |  | 3,378,355   
|2008  |  | 3,348,694   
|2009  |  | 2,927,096   
|2010  |  | 2,389,225   
|2011  |  | 1,254,942   
|Total |  | $26,973,016 





Additionally, as of June 30, 2011, the Company's two
wholly owned Canadian subsidiaries had non-capital tax loss carry forwards of approximately $12,717,655 available to be used, in
future periods, to offset taxable income. The loss carry forwards expire in various years through 2031. The deferred tax asset
of approximately $3,941,201 has been fully offset by a valuation allowance until realization of the tax benefit from the non-capital
tax loss carry forwards are more likely than not.

|      |  | LOSS CARRY     
|----- |  | ---------------
|      |  | FORWARD FOREIGN
|YEAR  |  | OPERATIONS     
|2006  |  | $     591,161  
|2007  |  | 7,436          
|2008  |  | 4,176,363      
|2009  |  | 2,861,430      
|2010  |  | 2,915,991      
|2011  |  | 2,165,274      
|Total |  | $12,717,655    



|                                                         | For the period ended June 30,
|-------------------------------------------------------- | -----------------------------
|                                                         | 2011                         
|Statutory tax rate:                                      |                              
|U.S.                                                     | 35.00%                       
|Foreign                                                  | 31.00%                       
|                                                         |                              
|Loss before income taxes:                                |                              
|U.S.                                                     | $(4,544,792)                 
|Foreign                                                  | (2,478,004)                  
|                                                         | $(7,022,796)                 
|Expected income tax recovery                             | $(2,358,611)                 
|                                                         |                              
|Differences in income tax resulting from:                |                              
|Depreciation and impairment(Foreign operations)          | 103,041                      
|Change in fair value of exchange feature liability       | 202,559                      
|Financing charge on embedded derivative liability        | 169,785                      
|Inducement premium on conversion of Debentures           | --                           
|Stock based compensation                                 | 19,733                       
|Gain on convertible derivative                           | (467,756)                    
|Long-term debt interest expense accretion                | 1,227,126                    
|Mark to market adjustment on advance share subscription  | --                           
|Accrued interest on loans                                | --                           
|                                                         | (1,104,123)                  
|Benefit of losses not recognized                         | 1,104,123                    
|Income tax provision (recovery) per financial statements | $                --          

Components of deferred income tax assets are as follows:

|                              | As at June 30,     
|----------------------------- | -------------------
|                              | 2011               
|Property, plant and equipment | $      190,500     
|Tax loss carry forwards       | 13,381,757         
|Total                         | 13,572,257         
|Valuation allowance           | (13,572,257)       
|Carrying Value                | $                --





Effective January 1, 2007, the Company adopted FASB's
guidance on accounting for uncertainty in income taxes. This guidance prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return.
For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
There was no material impact on the Company's consolidated financial position and results of operations as a result of the adoption
of this guidance. The Company does not believe there will be any material changes in its unrecognized tax positions over the next
twelve months.

The Company will recognize interest and penalties related
to unrecognized tax benefits within the income tax expense line in the consolidated statement of operations and comprehensive loss.
Accrued interest and penalties will be included within the related tax liability line in the consolidated condensed balance sheet.

In many cases the Company's uncertain tax positions are related
to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction,
as of June 30, 2011:

|United States - Federal | 2007 - present
|----------------------- | --------------
|United States - State   | 2007 - present
|Canada - Federal        | 2008 - present
|Canada - Provincial     | 2008 - present

Valuation allowances reflect the deferred tax benefits
that management is uncertain of the Company's ability to utilize in the future.

NOTE 12 - STOCKHOLDERS' EQUITY

On March 25, 2010, the Company issued 43,756,653 shares
of common stock in connection with the conversion of 2008 Debentures and 2009 Debentures into equity (see Note 10).

On March 25, 2010, the Company issued 6,007,595 shares
of restricted common stock in connection with the conversion of 2010 Debentures into equity (see Note 10).

On November 30, 2010, the Company issued 4,375,668 shares
as an inducement premium to the holders to convert all convertible debentures outstanding as of March 25, 2010 (see Note 10). As
fully disclosed in Note 10 to the consolidated condensed financial statements, the Company's Board of Directors approved the increase
in the authorized share capital effective October 14, 2010.

Effective November 9, 2010 and December 8, 2010, the Company
closed on its first tranche and second tranche of a unit offering in the amount of $300,000 per tranche for gross proceeds of $600,000
whereby the Company issued 1,500,000 ("Unit Offering") units. The unit offering was for up to $5 million. The units were
in the form of shares of the Company's common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed
to under the unit offer the investor would receive one warrant, the exercise price will be $0.55; if an Investor Warrant was exercised
between the first and second years from issuance, the exercise price will be $0.65. All investor warrants as issued will be subject
to adjustment in all respects in the event of a stock split or similar adjustment by the Company. A commission of 4% of the gross
proceeds was paid from the proceeds of the unit offering and 7.5 units for every $100 of the gross proceeds raised were payable
for brokers’ fees were treated as a cost of capital and no income statement recognition was required.

The Share Subscription Agreement for the units contained
an exchange feature which provides that if within six months from effective date of closing, the Company entered into or closed
another financing or other transaction (which for securities law purposes would be integrable with the offer and sale of the Securities)
on terms and conditions more favorable to another purchaser, the terms and conditions of the unit offering shall be adjusted to
reflect the more favorable terms. The exchange feature was determined by the Company to be freestanding financial instrument and
also to be a liability within the scope of ASC 480 Distinguishing Liabilities from Equity since there is an inverse relationship
between the stock price of the Company and the Company's obligation. On November 9, 2010, December 8, 2010 and December 31, 2010,
the Company evaluated the fair value of the exchange feature based on the probability of closing another financing within six months
and the fair value of the number of incremental shares and warrants to be issued at a lower estimated issue price for units. The
probability of closing another financing in the next six months on November 9, 2010 and December 8, 2010 was estimated to be 50%
and on December 31, 2010 was estimated to be 100%.





The fair value of the Company's common stock was determined
by the closing price on the valuation date and the fair value of the warrants was determined using a binomial option valuation
model. Key assumptions for the binomial option valuation were as follows:

|November 9, 2010 Offering  |              |                 |               |                
|-------------------------- | ------------ | --------------- | ------------- | ---------------
|                           |              |                 |               |                
|                           |              | Nov. 9, 2010 -  |               | Dec. 31, 2010 -
|                           |              | lower estimated |               | lower estimated
|Valuation Date             | Nov. 9, 2010 | strike price    | Dec. 31, 2010 | strike price   
|Strike Price - second year | $0.65        | $0.63           | $0.65         | $0.36          
|Strike Price - first year  | $0.55        | $0.54           | $0.55         | $0.30          
|Closing market price       | $0.39        | $0.39           | $0.22         | $0.22          
|Volatility                 | 135.72%      | 135.72%         | 113.47%       | 113.47%        
|Time to expiration         | 2 years      | 2 years         | 1.83 years    | 1.83 years     
|Risk free rate             | 0.46%        | 0.46%           | 0.61%         | 0.61%          
|Dividend yield             | 0%           | 0%              | 0%            | 0%             
|                           |              |                 |               |                
|December 8, 2010 Offering  |              |                 |               |                
|                           |              | Dec. 8, 2010 -  |               | Dec. 31, 2010 -
|                           |              | lower estimated |               | lower estimated
|Valuation Date             | Dec. 8, 2010 | strike price    | Dec. 31, 2010 | strike price   
|Strike Price - second year | $0.65        | $0.39           | $0.65         | $0.36          
|Strike Price - first year  | $0.55        | $0.33           | $0.55         | $0.30          
|Closing market price       | $0.24        | $0.24           | $0.22         | $0.22          
|Volatility                 | 132.07%      | 132.07%         | 117.03%       | 117.03%        
|Time to expiration         | 2 years      | 2 years         | 1.92 years    | 1.92 years     
|Risk free rate             | 0.63%        | 0.63%           | 0.61%         | 0.61%          
|Dividend yield             | 0%           | 0%              | 0%            | 0%             

On December 31, 2010, an exchange feature liability of
$453,862 was recorded for the unit offering.

Effective February 17, 2011, the Company and the Unit
Offering investors reached an agreement whereby the investors will receive an approximate aggregate of 3,500,000 additional shares
of Common Stock at an estimated price of $0.12 in conjunction with certain rights under the Share Subscription Agreements in the
event the Company closes a Qualified Offering (see Note 7). At March 31, 2011 the exchange feature liability related to the shares
in the Unit Offering was recorded at a fair value of $432,600. At March 31, 2011 the exchange feature liability related to the
warrants in the Unit Offering was recorded at a fair value of $0 since the probability of Company exchanging warrants with a lower
strike price is estimated to be 0%. The change in fair value of exchange feature liability related to the Unit Offering of $(21,262)
was recorded as a reduction of the loss on fair value of exchange feature liability related to the 2010 Debentures.

The following table sets forth a summary of the shares
to be issued as a result of the closing of the rights offering on June 30, 2011:

|                                                                                         | Number of Shares | Amount       
|---------------------------------------------------------------------------------------- | ---------------- | -------------
|                                                                                         |                  |              
|Subscription receivable                                                                  | 32,143,170       | $   3,857,180
|Conversion of notes payable to related parties and related accrued interest (see Note 7) | 34,390,419       | 4,126,850    
|Conversion of accrued expenses                                                           | 136,425          | 16,374       
|Reclassification of conversion option liabilities to equity (see Note 7)                 | --               | 2,654,730    
|Conversion of exchange feature liabilty (see Note 10)                                    | 22,500,000       | 2,712,600    
|Rights offering costs                                                                    | --               | (373,615)    
|Total                                                                                    | 89,170,014       | $ 12,994,119 





NOTE 13 - STOCK OPTIONS AND WARRANT GRANTS

On April 15, 2010 the Board of Directors granted an
aggregate award of 900,000 stock options to a former executive officer and former director and one director. The options vest over
a period of three years with an exercise price of $0.65 (fair market value of the Company's common stock as of the date of grant)
with expiry five years from the date of award. Effective February 7, 2011, with the resignation of a director, the unvested portion
of the stock options has lapsed, and ceased to vest. The balance of the stock option expense of the April 15, 2010 award is as
follows:

|DATE           | Stock Option
|-------------- | ------------
|               | Expense     
|April 15, 2011 | $ 62,127    
|April 15, 2012 | $ 82,836    
|April 15, 2013 | $ 20,709    

During the six month period ended June 30, 2011, 475,000
stock options were issued of which 225,000 of the stock options vest over three years starting June 30, 2012 and the balance vest
immediately.

During the six month periods ended June 30, 2011 and 2010,
$56,381 and $31,063, respectively, has been recorded in the consolidated condensed statements of operations and comprehensive loss
for stock based compensation.

A summary of option transactions, including those granted
pursuant to the terms of certain employment and other agreements is as follows:

|                               | STOCK     |  | WEIGHTED      
|------------------------------ | --------- |  | --------------
|                               | PURCHASE  |  | AVERAGE       
|DETAILS                        | OPTIONS   |  | EXERCISE PRICE
|OUTSTANDING, JANUARY 1, 2010   | 3,670,000 |  | $ 0.76        
|Granted                        | 900,000   |  | $ 0.65        
|Expired                        | (970,000) |  | ($ 0.97)      
|OUTSTANDING, DECEMBER 31, 2010 | 3,600,000 |  | $ 0.68        
|                               |           |  |               
|Granted                        | 475,000   |  | $ 0.12        
|Expired                        | (500,000) |  | ($ 0.73)      
|OUTSTANDING, JUNE 30, 2011     | 3,575,000 |  | $ 0.60        

At June 30, 2011, and December 31, 2010 the outstanding
options have a weighted average remaining life of 19 months and 23 months respectively.

The weighted average fair value of options granted
during 2011 and 2010 was $0.02 was $0.41 and was estimated using the Black-Scholes option-pricing model, using the following assumptions:

|                        | 2010  | 2011   
|----------------------- | ----- | -------
|Expected volatility     | 117%  | 111%   
|Risk-free interest Rate | 1.08% | 0.42%  
|Expected life           | 4 yrs | 1.5 yrs
|Dividend yield          | 0.00% | 0.00%  
|Forfeiture rate         | 0.00% | 0.00%  

The Black-Scholes option-pricing model used by the Company
to calculate options and warrant values was developed to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's stock purchase options and warrants. The model also
requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly
affect the calculated values. Accordingly, management believes that this model does not necessarily provide a reliable single measure
of the fair value of the Company's stock options and warrants.





At June 30, 2011, the Company had outstanding options as follows:

|NUMBER OF | EXERCISE |                 
|--------- | -------- | ----------------
|OPTIONS   | PRICE    | EXPIRATION DATE 
|2,150,000 | $0.71    | February 16,2012
|100,000   | $1.00    | February 8,2013 
|250,000   | $0.27    | August 6,2013   
|600,000   | $0.65    | April 15,2015   
|250,000   | $0.12    | December 31,2012
|225,000   | $0.12    | June 30,2016    
|3,575,000 |          |                 

Warrants issued in connection with various private
placements of equity securities are treated as a cost of capital and no income statement recognition is required. A summary of
warrant transactions is as follows:

|                                               |                | WEIGHTED AVERAGE
|---------------------------------------------- | -------------- | ----------------
|DETAILS                                        | WARRANT SHARES | EXERCISE PRICE  
|OUTSTANDING, JANUARY 1, 2010                   | --             | $      --       
|Granted                                        | 1,545,000      | $ 0.65          
|Exercised                                      | --             | $      --       
|Expired                                        | --             | $      --       
|OUTSTANDING, DECEMBER 31, 2010 & JUNE 30, 2011 | 1,545,000      | $ 0.65          

Effective November 9, 2010 and December 8, 2010, the Company
closed on its first tranche and second tranche of a unit offering in the amount of $300,000 per tranche for gross proceeds of $600,000
whereby the Company issued 1,500,000 units. The unit offering was for up to $5 million. The units were in the form of shares of
the Company's common stock, par value $0.001 at $0.40 per share plus for each share of Common Stock subscribed to under the unit
offer the investor received one warrant exercisable for 1 share of common stock, the exercise price being $0.55; if an Investor
Warrant is exercised between the first and second years from issuance, the exercise price will be $0.65. All investor warrants
as issued are subject to adjustment in the event of a stock split or similar adjustment by the Company. A commission of 4% of the
gross proceeds was paid and 7.5 units for every $100 of the gross proceeds raised were payable for brokers’ fees.

No warrants were issued during the six month periods ended
June 30, 2011 and 2010.

NOTE 14 - RELATED PARTY TRANSACTIONS

During the six month period ended June 30, 2011, in addition
to fees and salaries as well as reimbursement of business expenses, transactions with related parties include:

• $4,000,000 issuance of unsecured subordinated promissory
notes (see Note 7 to the consolidated condensed financial statements).

• Investment agreement with Bridge lenders Effective
May 10, 2011, (see Note 7 to the consolidated condensed financial statements).





• The effect of an exchange feature included in the
terms of the Share Subscription Agreement for $3,000,000 of Convertible Debentures issued on March 19, 2010 ("2010 Debentures")
and fully converted including interest into 6,007,595 shares of common stock on March 25, 2010. The exchange feature provides that
if within twelve months from March 19, 2010, the Company entered into or closed another financing or other transaction (which for
securities law purposes would be integrable with the offer and sale of the Securities) on terms and conditions more favorable to
another purchaser, the terms and conditions of the 2010 Debentures shall be adjusted to reflect the more favorable terms. The exchange
feature was determined by the Company to be freestanding financial instrument and also to be a liability within the scope of ASC
480 Distinguishing Liabilities from Equity since there is an inverse relationship between the stock price of the Company and the
Company's obligation. On December 31, 2010, the Company evaluated the fair value of the exchange feature based on the probability
of closing another financing by March 18, 2011 and the fair value of the number of incremental shares to be issued at a lower estimated
issue price. The probability of closing another financing by March 18, 2011 was estimated to be 100% on December 31, 2010. The
fair value of the Company's common stock was determined by the closing price on the valuation date. On December 31, 2010, an exchange
feature liability of $1,680,000 was recorded for the 2010 Debentures (see Note 12). Effective February 17, 2011, the Company and
the 2010 Debenture investors reached an agreement whereby the investors will receive an approximate aggregate of 19,000,000 additional
shares of Common Stock in conjunction with certain rights under the Prior Subscription Agreements in the event the Company closed
a qualified offering (see Note 7). At March 31, 2011 the exchange feature liability related to the convertible debentures was re-valued
to $2,280,000 with the change in fair value of exchange feature liability of $578,738 expense recorded in the consolidated condensed
statements of operations and comprehensive loss. In March 2010, Orchard invested $1 million in the $3 million convertible debentures
offering; of the exchange feature liability $760,000 was attributed to the investment made by Orchard based on their relative contribution
to the March 2010 subscription, this amount was transferred to equity as of June 30, 2011. Orchard received 6,333,333 additional
shares of Common Stock in conjunction with certain rights under the Prior Subscription Agreements as the Company closed its Qualified
Offering on June 30, 2011 (see Note 7).

• $125,000 related to services provided by Orchard
Capital Corporation under a services agreement effective January 30, 2011. On April 19, 2011, the Company's board of directors
ratified a Services Agreement ("Agreement") between the Company and Orchard Capital Corporation ("Orchard")
which was approved by the Company's Compensation Committee. Under the Agreement, which was effective as of January 30, 2011, Orchard
agreed to provide services that may be mutually agreed to by and between Orchard and the Company including those duties customarily
performed by the Chairman of the Board and executive of the Company as well as providing advice and consultation on general corporate
matters and other projects as may be assigned by the Company's Board of Directors as needed. Orchard has agreed to appoint Mark
Yung, who is also employed by Orchard, as the Company's Executive Chairman to act on Orchard's behalf and provide the services
to the Company under the Agreement. Orchard reserves the right to replace Mr. Yung as the provider of services under the Agreement
at its sole option. The Agreement may be terminated by either party upon thirty (30) days written notice unless otherwise provided
for under the Agreement. Compensation under the agreement is the sum of $300,000 per annum plus reimbursement for out-of-pocket
expenses incurred by Orchard. The agreement includes other standard terms including indemnification and limitation liability provisions.
Orchard is controlled by Richard Ressler; affiliated entities of Orchard as well as Richard Ressler own shares of the Company.

• Mr. Nitin Amersey who is a director of the Company
is listed as a control person with the Securities and Exchange Commission of Bay City Transfer Agency Registrar Inc., the Company's
transfer agent. He has no ownership equity in Bay City Transfer Agency Registrar Inc. nor is he an officer or a director of Bay
City Transfer Agency Registrar Inc. For the six month periods ended June 30, 2011 and 2010, the Company paid Bay City Transfer
Agency Registrar Inc. $17,005 and $2,518, respectively.

During the six month period ended June 30, 2010, transactions
with related parties included $6,134,024 related to conversion of convertible debentures including interest of $634,024 thereon
into common stock; $1,032,849 related to inducement on early conversion of convertible debentures; and the repayment of $511,342
principal and interest on promissory note in addition to salaries and reimbursement of business expenses.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

LEASES

Effective November 24, 2004, the Company's wholly-owned
subsidiary, ESWA, entered into a lease agreement for approximately 40,220 square feet of leasehold space at 2 Bethlehem Pike Industrial
Center, Montgomery Township, Pennsylvania. The leasehold space houses the Company's research and development facilities. The lease
commenced on January 15, 2005 and expired January 31, 2010. Effective October 16, 2009, the Company's wholly-owned subsidiary ESWA
entered into a lease renewal agreement with Nappen & Associates for the leasehold property in Pennsylvania. There were no modifications
to the original economic terms of the lease under the lease renewal agreement. Under the terms of the lease renewal, the lease
term will now expire February 28, 2013. Effective March 31, 2011, ESWA entered into a lease amendment agreement with Nappen &
Associates for the leasehold property at Pennsylvania, whereby ESWA has the sole option to extend the expiry of the lease agreement
by an additional 3 years six months prior to February 28, 2013; there were no modifications to the original economic terms of the
lease.





Effective December 20, 2004, the Company's wholly-owned subsidiary,
ESWC, entered into an offer to lease agreement for approximately 50,000 square feet of leasehold space in Concord, Ontario, Canada.
The leasehold space houses the Company's executive offices and a high volume manufacturing plant. The possession of the leasehold
space took place on May 24, 2005 and the term of the lease was extended to September 30, 2010. ESWC renewed its lease agreement
at the current property for an additional five year term. The renewed lease period commenced on October 1, 2010 and ends on September
30, 2015.

The following is a summary of the minimum annual lease
payments, for both leases.

|YEAR |           
|---- | ----------
|2011 | $234,766  
|2012 | 469,531   
|2013 | 321,330   
|2014 | 299,034   
|2015 | 224,275   
|     | $1,548,936

LEGAL MATTERS

From time to time, the Company may be involved in a variety
of claims, suits, investigations and proceedings arising from the ordinary course of our business, breach of contract claims, labor
and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and
their results cannot be predicted with certainty, ESW believes that the resolution of current pending matters will not have a material
adverse effect on its business, consolidated financial position, results of operations or cash flow. Regardless of the outcome,
litigation can have an adverse impact on ESW because of legal costs, diversion of management resources and other factors. In addition,
it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect
ESW's financial position, results of operations or cash flows in a particular period.

CAPITAL LEASE OBLIGATION

The Company is committed to the following lease payments
in connection with the acquisition of equipment under capital leases:

|YEAR                                 |        
|------------------------------------ | -------
|2011                                 | $ 1,502
|2012                                 | 1,252  
|TOTAL                                | 2,754  
|                                     |        
|Less imputed interest                | (126)  
|Total obligation under capital lease | 2,628  
|                                     |        
|Less current portion                 | (1,289)
|TOTAL LONG-TERM PORTION              | $ 1,339

The Company incurred $104 and $949 of interest expense
on capital lease obligation for the six month periods ended June 30, 2011 and 2010, respectively.

RESTRUCTURING EXPENSES AND SEVERANCE AGREEMENTS

Restructuring charges relate to changes in the management
and reductions in work force of the Company's subsidiary, ESW Canada Inc., and consist mainly of severance expenses amounting to
$478,274, travel costs of $24,127, legal fees of $16,408 and other expenses of $4,465. The Company accrued a portion of the expenses
related to severance agreements with its former Chief Executive Officer, Vice President of Operations and Director of Sales. As
of June 30, 2011, $171,925 (June 30, 2010 - $0) was included in accrued liabilities related to the balance of severance payments
still outstanding.





PRODUCT REPLACEMENT OBLIGATIONS

ESW is currently negotiating with one of its customers
the replacement of units that were sold in 2009. The product in question was subsequently discontinued for sale, and the potential
replacement costs for these units are estimated to be approximately $150,000.

NOTE 16 - LOSS PER SHARE

Potential common shares of 3,575,000 related to ESW's
outstanding stock options, 1,545,000 shares related to ESW's outstanding warrants, common shares of 66,670,033 from the exchange
of unsecured subordinated promissory notes and rights offering and 22,500,000 shares of common stock under the exchange feature
liability were excluded from the computation of diluted loss per share for the six and three month periods ended June 30, 2011
because the inclusion of these shares would be anti-dilutive.

Potential common shares of 4,395,000 related to ESW's
outstanding stock options were excluded from the computation of diluted loss per share for the period ended June 30, 2010 because
the inclusion of these shares would be anti-dilutive.

The reconciliation of the number of shares used to
calculate the diluted loss per share is calculated as follows:

|                                                                   | For the six month period ended June 30 |             | For the three month period ended June 30
|------------------------------------------------------------------ | -------------------------------------- | ----------- | ----------------------------------------
|                                                                   | 2011                                   | 2010        |                                         
|                                                                   |                                        | .           |                                         
|NUMERATOR                                                          |                                        |             |                                         
|Net (loss)  / income for the period                                | (7,022,796)                            | (4,845,492) |                                         
|                                                                   |                                        |             |                                         
|Interest on long-term debt                                         | -                                      | 183,858     |                                         
|Amortization of deferred costs                                     | -                                      | 117,131     |                                         
|Long-term debt accretion                                           | -                                      | 768,981     |                                         
|Inducement premium                                                 | -                                      | 2,909,872   |                                         
|Mark to market adjustment on advance share subscription            | -                                      | (722,039)   |                                         
|Change in fair value of exchange feature liability                 | 578,739                                | -           |                                         
|Interest on notes payable to related party                         | 126,850                                | 11,342      |                                         
|Interest accretion expense                                         | 3,506,074                              | -           |                                         
|Financing charge on embedded derivative liability                  | 485,101                                |             |                                         
|Gain on convertible derivative                                     | (1,336,445)                            | -           |                                         
|Bank fees related to credit facility covenant waivers              | 154,205                                | -           |                                         
|(Gain) / loss on disposal of property and equipment                | (5,583)                                | 8,791       |                                         
|Interest income                                                    | -                                      | (216)       |                                         
|                                                                   | (3,513,855)                            | (1,567,772) |                                         
|                                                                   | .                                      |             |                                         
|DENOMINATOR                                                        |                                        |             |                                         
|Weighted average number of shares outstanding                      | 129,463,767                            | 100,768,029 |                                         
|                                                                   |                                        |             |                                         
|Dilutive effect of :                                               |                                        |             |                                         
|Stock options                                                      | --                                     | --          |                                         
|Warrants                                                           | --                                     | --          |                                         
|Exchange feature liability share                                   | --                                     | --          |                                         
|Exchange of unsecured subordinated promissory notes     and rights | --                                     | --          |                                         
|                                                                   |                                        |             |                                         
|DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING                        | 129,463,767                            | 100,768,029 |                                         

NOTE 17 - COMPARATIVE FIGURES

Certain 2010 figures have been reclassified to conform
to the current financial statement presentation.





NOTE 18 - SUBSEQUENT EVENTS

Effective July 18, 2011, ESW’s wholly owned subsidiary
ESW Canada Inc, paid its senior lender the amount of $1.5 million (Canadian dollars) from the proceeds of the rights offering (see
Note 12) to liquidate the outstanding balance on the bank loan. The senior lender was also requested to discharge all liens, encumbrances
and securities against the Company and its subsidiaries and cancel the March 31, 2010 demand revolving credit facility agreement.
ESW has received the confirmation of discharge of liens, encumbrances and securities and awaits the written notice of cancellation
of the demand revolving credit facility agreement from its secured lender.

Effective July 12, 2011, as a condition to closing
the Investment Agreement, the Company entered into a registration rights agreement with the Bridge Lenders (the "Registration Rights
Agreement"). The Registration Rights Agreement provides the Bridge Lenders with certain customary registration rights, which include
demand and "piggyback" registration rights under the Securities Act of 1933 with respect to the shares of Common Stock purchased
under the Investment Agreement and any other securities owned by the Bridge Lenders. The Bridge Lenders are stockholders of the Company and
were subordinated lenders under unsecured promissory notes in the aggregate amount of $4.0 million which the Company issued on February 17,
2011 and April 27, 2011 (the "Notes"). The maturity date of the Notes was the earlier of: (1) the consummation of a rights
offering which permitted all Bridge Lenders to exchange their Notes (and the other notes paid in-kind for the payment of interest under the
Notes) for shares of Common Stock at $0.12 per share and (2) July 15, 2011. Under the Rights Offering, the Bridge Lenders subscribed for
23,228,970 shares of Common Stock at a price of $0.12 per share, which was paid for through the exchange of principal and accrued interest
on the Notes of approximately $2.8 million. Pursuant to backstop commitment, the Bridge Lenders purchased 27,714,385 shares of Common Stock
at a price of $0.12 per share for approximately $3.3 million, of which $2.0 million was paid in cash and $1.3 million was paid for through
the exchange of the balance of principal and accrued interest due on the Notes. As a result of these transactions, the Company satisfied its
obligations with respect to the Notes and the Notes were cancelled.

Effective July 15, 2011 ESW filed a Post-Effective Amendment
No. 1 to Form S-1 related to the Registration Statement on Form S-1 (Registration No. 333-174091) initially filed on Form S-3 on
May 10, 2011 (the "Registration Statement"). The Company's stockholders validly subscribed for 15,726,659 shares of the
Company's common stock in the rights offering. The rights were exercised at $0.12 per share, resulting in total gross proceeds
to the Company of approximately $1.9 million. The Company filed the Post-Effective Amendment No. 1 to deregister 26,714,248 shares
of the Company's common stock that had been registered for issuance pursuant to the Registration Statement. The shares of the Company's
Common Stock remained unsold as of the termination of the Company's rights offering for which the Registration Statement was filed.
Effective July 21, 2011 the SEC declared effective the Post-Effective Amendment.

Effective July 29, 2011 ESW’s board of directors
approved a transition plan to relocate ESW’s manufacturing operations from Concord, Ontario, Canada to Montgomeryville, Pennsylvania,
United States. ESW aims to reduce its overhead costs by re streamlining operations from two services and manufacturing facilities
into one. ESW believes that the synergies from operating at a single location in the United States will provide significant financial
and logistical advantages, as well as synergies between its manufacturing and emissions testing operations. In addition, the Company
will mitigate its Canadian currency exposure as currently all of ESW’s revenues are from the United States and a significant
portion of ESW’s raw materials and components will be sourced out of the United States upon conclusion of the transition
plan. Key components of ESW’s transition plan will be completed by October 31, 2011.





ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction
with ESW's consolidated condensed financial statements and Notes thereto included elsewhere in this Report.

This Form 10-Q contains certain forward-looking statements
regarding, among other things, the anticipated financial and operating results of ESW's business. Investors are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of the date hereof. ESW undertakes no obligation
to publicly release any modifications or revisions to these forward-looking statements to reflect events or circumstances occurring
after the date hereof or to reflect the occurrence of unanticipated events. In connection with the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, ESW cautions investors that actual financial and operating results may differ
materially from those projected in forward-looking statements made by, or on behalf of, ESW. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be
materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.
This report should be read in conjunction with ESW's Annual Report on Forms 10-K, for the year ended December 31, 2010 as filed
with the Securities and Exchange Commission.

GENERAL OVERVIEW

Environmental Solutions Worldwide Inc. ("we,"
"us," "ESW" or the "Company") is a publicly traded company engaged through its wholly owned subsidiaries
ESW Canada Inc., ESW America Inc. and ESW Technologies Inc. (the "ESW Group of Companies") in the design, development,
manufacture and sale of emission technologies and services. ESW is currently focused on the international medium duty and heavy
duty diesel engine market for on-road and off-road vehicles as well as the utility engine, mining, marine, locomotive and military
industries. ESW also offers engine and after treatment emissions verification testing and certification services.

ESW's focus is to be an integrated solutions provider
to the environmental emissions market by providing leading-edge catalyst technology as well as best-in-class engine and vehicle
emissions testing and certification services. The Company's strategy is centered on identifying and deploying resources against
its "sweet-spot" products, where ESW has identified its core competencies and differentiation in the marketplace. ESW's
core geography focus is North America, and will opportunistically explore business development opportunities in other markets if
accretive to the Company in the short term. By focusing financial, human and intellectual capital on ESW's core competencies and
markets, the Company is targeting profitable growth in the short term and value creation for its shareholders over the long term.

ESW was incorporated in the State of Florida in 1987.
Our principal executive offices are located at 335 Connie Crescent, Concord, Ontario, Canada L4K 5R2. Our telephone number is (905)
695-4142. Our web site is www.cleanerfuture.com. Information contained on our web site does not constitute a part of this 10-Q
report.

In 2011, ESW is focused on optimizing the Company's operations
around its "sweet spots" and capturing a greater market share in the catalytic converter and emissions testing markets
whilst ensuring steps towards profitable growth as compared to 2010. The key factors that are in ESW's favor are: (a) continued
regulatory push for emissions reductions in the United States, (b) funding available from public agencies, (c) a market-leading
Level III active catalytic converter technology and an established distribution network in North America, and (d) CARB and EPA
certification and verification capable emissions and durability testing services.

ESW believes that it can improve and achieve profitability
and grow its business by pursuing the following strategy:

• Focus on delivering controlled and profitable growth
to its shareholders.

• Provide integrated solutions to the emissions market
by leveraging its product development, testing and certification services, and distribution and post-sale services capabilities.

• Center the Company's sales strategy around identified
"sweet-spots" that will allow manufacturing efficiency gains and optimized resource allocation.

• Educate the end customers about the technology
and ensure realistic delivery timeline expectations.

• Enhance scheduling and customer service functions
and importance.

• Work with vendors to optimize ESW's material buys
and lead times.

• Constantly review operations, processes, product
under a Continuous Improvement / Performance Based culture.





To deliver against this strategic intent, in February
and May 2011, ESW secured a total of $4 million in financing through certain note subscription agreements and issued unsecured
subordinated promissory notes to affiliate shareholders (the "Bridge Lenders"). Proceeds of the notes, along with available
cash, were used to fund working capital, capital investments and other general corporate purposes. The notes allowed the Company
and its subsidiaries to comply with covenant obligations under the credit agreement with its senior lender dated March 10, 2010
for which the Company and subsidiaries had previously obtained waivers of covenant obligations that expired February 15, 2011.

Effective May 10, 2011, the Company announced that it
had entered into an Investment Agreement with the Bridge Lenders, who are current shareholders and at the time were also subordinated
lenders to ESW under unsecured promissory notes totalling $4.0 million. The Bridge Lenders agreed to provide a backstop commitment
to a rights offering of the Company's common stock at a sale price of $0.12 per share (Qualified Offering) and agreed to collectively
backstop the Qualified Offering by purchasing from the Company at a subscription price of $0.12 per share of Common Stock. The
backstop provided for the participants of the Investment Agreement to buy any shares not purchased by the Company's shareholders
of record that were entitled to participate in the rights offering (after giving effect to any oversubscriptions) up to 29,166,667
shares of Common Stock for a total purchase price of $3.5 million.

On May 10, 2011 the Company filed a Registration Statement
related to subscription rights to purchase Common Stock, $0.001 par value and the shares of Common Stock deliverable upon the exercise
of the subscription rights pursuant to the rights offering. The registration statement was declared effective by the Securities
and Exchange Commission on June 9, 2011. The Company offered rights to existing shareholders of record as of June 9, 2011 to purchase
approximately $8 million in shares of common stock. The rights offering sought to raise cash for the Company to meet its working
capital needs and pay down ESW’s senior lender. The rights offering allowed for all subordinated lenders to exchange their
unsecured subordinated promissory notes (and the other notes paid in-kind for the payment of interest under the notes) for shares
of common stock under the offering. On June 30, 2011, the Company closed its rights offering. A total of 66,670,012 shares were
issued as part of the rights offering and related transactions, $3.9 million was raised in cash and $4.1 million was paid for through
the exchange of principal and accrued interest on the Notes. Under the Rights Offering, shareholders subscribed for 15,590,234
shares for approximately $1.9 million in cash. The Bridge Lenders subscribed for 23,228,970 shares of Common Stock at a price of
$0.12 per share, which was paid for through the exchange of principal and accrued interest on the Notes of approximately $2.8 million.
Pursuant to the backstop commitment, the Bridge Lenders purchased 27,714,385 shares of Common Stock at price of $0.12 per share
for approximately $3.3 million, of which $2.0 million was paid in cash and $1.3 million was paid for through the exchange of the
balance of principal and accrued interest due on the Notes. As a result of these transactions, the Company satisfied its obligations
with respect to the Notes and the Notes were cancelled.

Effective July 18, 2011, ESW’s wholly owned subsidiary
ESW Canada Inc, paid its senior lender the amount of $1.5 million (Canadian dollars) from the proceeds of the rights offering to
liquidate the outstanding balance on the bank loan. The senior lender has discharged all liens, encumbrances and securities against
ESW and its subsidiaries. We have also requested the senior lender to cancel the March 31, 2010 demand revolving credit facility
agreement.

The additional capital raised by the rights offering is
expected to give ESW the opportunity to execute against its short term and medium term plans.

ESW has made significant investments in research and development
and obtaining regulatory approvals for its technologies. The products that ESW is pursuing for verification / certification to
cover the following primary technology levels established by CARB:

• Expansion of On Road Active Diesel Particulate
Filter verification to include Exhaust Gas Recirculation engines for Level III +- PM reduction greater than 85%

• ESW's XtrmCat(TM) product designed for marine and
rail, Tier 0, turbocharged EMD 645 and 710 engines was tested at an EPA recognised facility for certification during March and
April 2011. Certification applications are pending with the EPA.

ESW believes that with the additional certifications/verification
of the above range of products, ESW will cover a significant portion of the market and give ESW the competitive advantage to be
the technology of first choice in retrofit and OEM applications. . We are also contemplating pursuing verification for a Level
II and/or Level I product.

The cost of developing a complete range of products to
meet regulations is substantial. ESW believes that it possesses a competitive advantage in ensuring regulatory compliance by leveraging
its Testing and Research facility in Montgomeryville, Pennsylvania to support its certification and verification efforts. ESW has
also managed to offset some of these development costs through the application of research grants and tax refunds.





ESW has made the following adjustments to its business
in the first half of 2011:

1) ESW has reviewed and continues to review its costs
for inefficiencies and has taken steps to reduce its operating expenses. Key cost reduction initiatives during the first half 2011
included the restructuring of its management team, the termination of certain contracts and the re-negotiation of board and consulting
obligations, amongst others.

In addition, ESW is reducing its overhead costs by re-locating
its Canadian manufacturing operations into its facilities located in the State of Pennsylvania in the United States. ESW believes
that the synergies from operating at a single location will provide significant financial and logistical advantages, as well as
synergies with its testing operations also located in the same facility. In addition, the move to the United States will help mitigate
currency risk as currently all of ESW’s revenues are from the United States and going forward a significant portion of ESW’s
raw materials and components will be sourced from the United States. Key components of our transition plan will be completed by
October 31, 2011. For the Canadian facility at Concord, Ontario ESW has retained a commercial real estate broker and the facility
is being marketed for a sub-lease or re-lease. ESW is also offsetting a portion of the relocation and training costs through state
grants provided by the State of Pennsylvania.

ESW will continuously revisit opportunities to further
streamline the business.

2) Since January 2010 there has been a significant increase
in the cost of material and components that ESW uses. ESW has revised the pricing to its dealers to help recover product margins.
The first phase of the price increases was implemented on June 30, 2011. ESW has also revised its overall commercial policies,
including its general terms and conditions and lead time expectations on its products. Changes have also been implemented to ESW's
costing and quoting processes, including frequent periodic review of its bill of materials and the proactive negotiation of raw
material prices.

3) ESW is focusing on increasing sales volumes on its
core "sweet spot" products to reduce production complexities and improve inventory management. ESW is has also implemented
new continuous improvement programs such as the cross-functional "Product and Process Review" stream led by ESW's engineering
team searching for product, product quality and product development process enhancements.

4) ESW has revisited relationships with critical vendors,
in addition to setting up favorable payment plans to reduce the outstanding balances with the vendors. ESW has also secured and
continues to secure volume discounts on critical components. ESW has also identified and engaged new vendors in the US for parts
supply. In addition, there is a greater focus on outsourcing opportunity for labor intensive parts.

5) ESW has revised and implemented its new warranty policy
to ensure that warranty terms and conditions meet industry standards whilst mitigating warranty risks to the fullest extent possible.

6) ESW is in the process of continuously engaging its
existing dealers to help better understand ESW's business and product positioning and to strengthen ESW's partnership with its
distribution base. ESW is also opportunistically adding new independent dealers to enhance the Company’s North American sales
coverage.

7) ESW is focusing on increasing testing services provided
to third parties from its Air Testing Facility in Montgomeryville, Pennsylvania.

As a result from these actions we expect to improve our
operational results in 2011. The Company has reduced inefficiencies in personnel-related costs, manufacturing costs and other discretionary
expenditures that are within the Company's control. The Company is also seeking to lower its overhead costs while maintaining its
focus on the Sales, Marketing and Customer Service efforts. The changes in the business are anticipated to lower the overall operating
costs in the Company and improve the Company's overall results, without affecting the Company's positioning of its existing products
and testing services as well as its efforts to develop and deliver to market the next generation of leading emissions products
and services.





COMPARISON OF THE THREE MONTH PERIOD ENDED JUNE 30, 2011 TO THE
THREE MONTH PERIOD ENDED JUNE 30, 2010

RESULTS OF OPERATIONS

The following management's discussion and analysis of
financial condition and results of operations (MD&A) should be read in conjunction with the MD&A included in ESW's Annual
Report on Forms 10-K, for the year ended December 31, 2010.

Revenues for the three month
period ended June 30, 2011, decreased by $544,283, or 15.1 percent, to $3,054,847 from $3,599,130
for the three month period ended June 30, 2010. The decrease in revenue is mainly related to ESW's customers facing delays in obtaining
funding from public agencies to retrofit diesel vehicles which negatively impacted the month of April.

Cost of sales as a percentage of revenues for the three
month period ended June 30, 2011 was 81.6 percent compared to 62.9 percent for the three month period ended June 30, 2010. Cost
of sales for the three month period ended June 30, 2011 increased by $227,714 or 10.1 percent. The primary reason for lower gross
margin for the three month period ended June 30, 2011 was the write-down of inventory in the amount of $271,212 as the Company
focuses its “Sweetspot” products to reduce variability in manufacturing operations. The increase in cost of sales in
the current period is related to the following:
(a) an increase in overhead costs of $251,262 as we apply higher overheads to our cost of sales due to improved visibility on the
costs enabling better allocation of the overhead expenses, previously expensed as operating expenses, (b) adverse currency fluctuation,
and (c) an increase in the cost of materials from 52% of revenues in the three month period ended June 30, 2010, to 59% of revenue
for the comparable period in 2011, reflecting an increased cost of precious metals, components and other raw materials .The increases
experienced over the comparable periods in 2010 and 2011 were offset by lower labour costs of $37,878. Other than the aforementioned
drivers, ESW’s gross profit margin in June 30, 2011 was negatively impacted by a reduced operating leverage resulting from
the decreased revenue relative to the comparable period in 2010. The Company is constantly reviewing its production costing and
has updated the pricing of its products to distributors. ESW is also further reducing its overhead expenses and production costs
by streamlining its manufacturing operations into Pennsylvania in order to enhance margins.

Marketing, office and general expenses for the three month
period ended June 30, 2011, decreased by $195,356, or 16.3 percent, to $1,003,506 from $1,198,862 for the three month period ended
June 30, 2010. The decrease is primarily due to the following: (a) a decrease of $133,534 in facility costs, resulting from higher
overheads applied to cost of sales, (b) a decrease in factory expense of $75,843 resulting from cost saving initiatives, and (c)
a decrease in administration salaries and wages of $39,029 and decreases in Sales and Marketing wages and selling expenses by $6,581
both resulting from the restructuring of operations in the first quarter of 2011. These decreases were offset by adverse currency
fluctuations as well as an increase in investor relation costs of $22,181 due to higher filing and legal fees and a $37,450 increase
in general administration expenses.

The Company incurred $4,465 as restructuring charges for
the three month period ended June 30, 2011.

Research and development ("R&D") expenses
for the three month period ended June 30, 2011 decreased by $8,714, or 5.5 percent, to $150,272 from $158,986 for the three month
period ended June 30, 2010. The primary driver of R&D expenses for the three month period ended June 30, 2011 was related to
ESW's pursuit of the certification of its locomotive and marine product, the XtrmCat(TM). To offset this increase during the three
month period ended June 30, 2011, the Company received grant money amounting to $48,713 compared to $24,797 for the three month
period ended June 30, 2010.

Officers’ compensation and directors’ fees
for the three month period ended June 30, 2011 decreased by $82,705, or 29.7 percent, to $195,342 from $278,047 for the three month
period ended June 30, 2010. The decrease in fees is mainly due to changes in executive management and the board compensation structure
of ESW.

Consulting and professional fees for the three month period
ended June 30, 2011 increased by $33,536, or 85.7 percent, to $72,661 from $39,125 for the three month period ended June 30, 2010.
The current period included expenses related to a consulting contract per the Separation Agreement with ESW’s former CEO,
as well as audit related expenses which were not incurred in the prior period.

Foreign exchange loss for the three month period ended
June 30, 2011, was $24,594 as compared to a gain of $7,029 for the three month period ended June 30, 2010. This is a result of
the fluctuation in the exchange rate of the Canadian Dollar to the United States Dollar.

Depreciation and amortization expense for the three month
period ended June 30, 2011 decreased by $133,408, or 58.6 percent to $94,155 from $227,563 for the three month period ended June
30, 2010. In the three month period ended June 30, 2011 we applied $18,373 of additional depreciation to cost of sales, reduced
by $53,261 due to the full amortization of patents and $61,774 from assets that have been fully depreciated.





The Company has recorded an impairment loss of $311,304
on property, plant and equipment of ESW Canada for the three months ended June 30, 2011. ESW is consolidating its manufacturing
operations into its Montgomeryville, PA facility, with a minimal estimated recovery from the sale of plant and machinery and office
equipment. The balance of the plant and machinery and office equipment will be transferred to Montgomeryville, PA. The leasehold
improvements have been fully written down as the operations will be relocated from its Concord, Ontario facility. Loss on impairment
of property plant and equipment for the three month period June 30, 2010 was $0.

Loss from operations for the three month period ended
June 30, 2011, increased by $732,742, or 130.5 percent, to $1,294,104 from $561,362 for the three month period ended June 30, 2010.
ESW’s loss from operations for the three month period ended June 30, 2011 was impacted substantially by non-cash expenses
amounting to $848,142, , including depreciation of $210,537, loss on impairment of property plant and equipment of $311,304, write-down
of inventory in the amount of $271,212, stock based compensation of $30,495 and a foreign exchange loss of $24,594.

Effective March 25, 2010, the November 2008 and the August
2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective debenture agreements.
The early conversion of the debentures was a condition precedent to the Company's wholly owned subsidiary, ESW Canada, entering
into a new credit facility with CIBC. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory
conversion feature on the March 19, 2010, debentures. As part of the agreement to convert all existing convertible debentures the
Company has paid a premium as an inducement to convert all debentures. The premium was payable to all converting debenture holders
and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent directors of the Company's
Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,665 shares of Common Stock.
As the Company did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill the premium,
the premium had been recorded as an advance share purchase agreement at fair market value $2,909,872 at March 31, 2010 (March 31,
2011 - $0). The agreement was without interest, subordinated to the banks position and payable in a fixed number of common shares
(4,375,665 shares) of the Company upon increase in the authorized share capital of the Company. In summary, the fair value of the
advanced share subscription was dependent on the market price of the Company's common stock, as the Company did not have sufficient
available authorized common shares to fulfill this obligation as on June 30, 2010. The advanced share subscription was re-valued
based on the market price of the Company's common stock at the end of each reporting period until it was fulfilled by the issuance
of authorized common shares. The resulting revaluations either cause gains or losses on the consolidated condensed statement of
operations and comprehensive loss. For the three month period ended June 30, 2011, the mark to market adjustment on advance share
subscription was $0 as this obligation was settled in November 2010 by the issuance of shares. For the three months period ended
June 30, 2010, the mark to market adjustment on advance share subscription resulted in a $722,039 gain on the consolidated condensed
statement of operations and comprehensive loss.

The Company incurred $92,329 interest expense on notes
payable to a related party for the $4 million unsecured subordinated promissory notes for the three month period ended June 30,
2011, as compared to $8,791 interest expense on notes payable to related party for the $500,000 for the three month period ended
June 30, 2010.

For the three months period ended June 30, 2011, the Company
recorded interest accretion expense of $2,456,074 (June 30, 2010 - $0) related to the discount feature and the embedded derivative
features in the $4 million notes payable to related party. The obligations on the notes were settled effective June 30, 2011.

Bank fees related to credit facility covenant waivers
amounted to $47,693 for the three month period ended June 30, 2011 (June 30, 2010 - $0) in relation to ESW’s secured demand
credit agreement.

Gain on disposal of property and equipment amounted to
$2,033 for the three month period ended June 30, 2011 (June 30, 2010 - $0).





COMPARISON OF THE SIX MONTH PERIOD ENDED JUNE 30, 2011 TO THE
SIX MONTH PERIOD ENDED JUNE 30, 2010

RESULTS OF OPERATIONS

The following management's discussion and analysis of
financial condition and results of operations (MD&A) should be read in conjunction with the MD&A included in ESW's Annual
Report on Forms 10-K, for the year ended December 31, 2010.

Revenues for the six month period ended June 30, 2011,
decreased by $747,141, or 12.8 percent, to $5,100,585 from $5,847,726 for the six month period ended June 30, 2010. The decrease
in revenue is mainly related to ESW's customers facing delays in obtaining funding from public agencies to retrofit diesel vehicles
during the first quarter and April 2011.

Cost of sales as a percentage of revenues for the six
month period ended June 30, 2011 was 89.9 percent compared to 64.6 percent for the six month period ended June 30, 2010. Cost of
sales for the six month period ended June 30, 2011 increased by $809,306 or 21.4 percent. The primary reason for low gross margin
for the six month period ended June 30, 2011 was the write-down of inventory in the amount of $500,434. The increase in cost of
sales in the current period also is related to the following:
(a) increases in the cost of materials of $473,275 mainly driven by the increasing cost of precious metals, components and supplies
used in production, as well as a write-down of inventory, and (b) an increase in overhead costs of $347,651 as we apply higher
overheads to our cost of sales due to improved visibility on the costs enabling better allocation of the overhead expenses, previously
expensed as operating expenses. These increases were offset by a decrease of $11,620 in labour cost. Cost of sales as a percentage
of sales were further impacted by with a decrease in revenue of $747,141. The Company is constantly reviewing its production costing
and has updated the pricing of its products to distributors, in addition, ESW has embarked in a plant streamlining program that
will further reduce overhead expenses and production costs to improve and maintain future margins.

Marketing, office and general expenses for the six month
period ended June 30, 2011, decreased by $187,099, or 8.5 percent, to $2,007,565 from $2,194,664 for the six month period ended
June 30, 2010. The decrease is primarily due to: (a) a decrease in Sales and Marketing wages and selling expenses by $74,094, resulting
from a decrease in Sales and Marketing wages and a reversal of bad debt provisions on December 31, 2010, (b) a decrease of $158,613
in facility costs, (c) a decrease in administration salaries and wages of $35,024 from restructuring activities, and (d) a decrease
in investor relation costs of $12,587. These decreases were offset by increases in the following areas: higher general administration
costs of $70,186 mainly due to increased financing charges related to ESW's secured credit facility, accounts receivable insurance
and business insurance costs, and increased factory expenses of $23,033.

The Company incurred $523,274 in restructuring
charges for the six month period ended June 30, 2011, due to various severances and other related payments. The Company incurred
severance expenses related to separation agreements with its former Chief Executive Officer, Vice President of Operations and Director
of Sales in the amount of $432,377, of which $171,925 was included in accrued liabilities at June 30, 2011 and will run-off during
the balance of the period stipulated in the separation agreements.

Research and development ("R&D") expenses
for the six month period ended June 30, 2011 increased by $49,597, or 17.4 percent, to $333,897 from $284,300 for the six month
period ended June 30, 2010. The primary driver of R&D expenses for the first six months of fiscal year 2011 related to ESW's
pursuit of the certification of its locomotive and marine product, the XtrmCat(TM), including the final EPA certification testing
at a recognised testing facility. To offset this increase, the Company received grant money amounting to $278,712 and $126,322
for the six month periods ended June 30, 2011 and 2010 respectively.

Officers’ compensation and directors’ fees
for the six month period ended June 30, 2011 decreased by $69,418, or 14.6 percent, to $406,986 from $476,404 for the six month
period ended June 30, 2010. The decrease is mainly due to changes in executive management and the Company’s board compensation
structure.

Consulting and professional fees for the six month period
ended June 30, 2011 decreased by $2,356, or 1.6 percent, to $147,456 from $145,100 for the six month period ended June 30, 2010.

Foreign exchange loss for the six month period ended June
30, 2011, was $84,719 as compared to a loss of $49,194 for the six month period ended June 30, 2010. This is a result of the fluctuation
in the exchange rate of the Canadian Dollar to the United States Dollar.

Depreciation and amortization expense for the six month
period ended June 30, 2011 decreased by $275,903, or 56.3 percent to $214,505 from $490,408 for the six month period ended June
30, 2010. In the six month period ended June 30, 2011 we applied $53,053 of additional depreciation to cost of sales, there was
a reduction of $90,533 related to the full amortization of our patents, and $ 132,317 from assets that have been fully depreciated.





The Company has recorded an impairment loss of $311,304
for property, plant and equipment of ESW Canada for the six months ended June 30, 2011. ESW is consolidating its manufacturing
operations into its Montgomeryville, PA facility, with a minimal estimated recovery from the sale of plant and machinery and office
equipment. The balance of the plant and machinery and office equipment will be transferred to Montgomeryville, PA. The leasehold
improvements have been fully written down as the operations will be relocated from its Concord, ON facility. Loss on impairment
of property plant and equipment for the six month period June 30, 2010 was $0.

Loss from operations for the six month period ended June
30, 2011, increased by $1,946,083, or 124.1 percent, to $3,513,855 from $1,567,772 for the six month period ended June 30, 2010.
Of the $3,513,822 in loss from operations, $1,397,436 was attributed to non cash losses for the six month period ended June 30,
2011, including depreciation of $436,241, loss on impairment of property plant and equipment of $311,304, write-down of inventory
in the amount of $508,731, stock based compensation of $56,381 and a foreign exchange loss of $84,719. In addition, the Company
has also incurred $523,274 of expenses related to the restructuring of its operations.

Interest expense on long-term debt related to Convertible
Debentures was $0 for the six month period ended June 30, 2011 as compared to $183,858 for the six month period ended June 30,
2010. Amortization of deferred costs amounted to $0 for the six month period ended June 30, 2011 as compared to $117,131 for the
six month period ended June 30, 2010. Long term debt accretion expenses amounted to $0 for the six month period ended June 30,
2011 as compared to $768,981 for the six month period ended June 30, 2010.

Effective March 25, 2010, the November 2008 and the August
2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective debenture agreements.
The early conversion of the debentures was a condition precedent to the Company's wholly owned subsidiary, ESW Canada, entering
into a new credit facility with CIBC. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory
conversion feature on the March 19, 2010, debentures. As part of the agreement to convert all existing convertible debentures the
Company has paid a premium as an inducement to convert all debentures. The premium was payable to all converting debenture holders
and was subject to a positive fairness opinion, approval by a Fairness Committee consisting of independent directors of the Company's
Board of Directors and an increase in the share capital of the Company. The premium consists of 4,375,665 shares of Common Stock.
As the Company did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill the premium,
the premium had been recorded as an advance share purchase agreement at fair market value $2,909,872 at June 30, 2010 (June 30,
2011 - $0). The agreement was without interest, subordinated to the banks position and payable in a fixed number of common shares
(4,375,665 shares) of the Company upon increase in the authorized share capital of the Company. In summary, the fair value of the
advanced share subscription was dependent on the market price of the Company's common stock, as the Company did not have sufficient
available authorized common shares to fulfill this obligation as on June 30, 2010. The advanced share subscription was re-valued
based on the market price of the Company's common stock at the end of each reporting period until it was fulfilled by the issuance
of authorized common shares in November 2010. The resulting revaluations either cause gains or losses on the consolidated condensed
statement of operations and comprehensive loss.

The Share Subscription Agreement for the 2010 Debentures
contains an exchange feature. The exchange feature provides that if within twelve months from March 19, 2010, the Company entered
into or closed another financing or other transaction (which for securities law purposes would be integrable with the offer and
sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures
shall be adjusted to reflect the more favorable terms. On March 31, 2011, the Company re-evaluated the fair value of the exchange
feature and determined that the probability of closing another financing was 100% and the conversion price of the 2010 Debentures
would be reset. On March 31, 2011, an additional liability of $578,739 was recorded for the exchange feature in these consolidated
condensed financial statements with a $578,739 expense related to change in fair value of exchange feature liability recorded in
the consolidated statements of operations and comprehensive loss. Change in fair value of exchange feature liability for the six
month period ended June 30, 2011, amounted to $578,739 as compared to $0 for the six month period ended June 31, 2010.

The Company incurred $126,850 interest cost on notes payable
to related party for the $4 million unsecured subordinated promissory notes during for the six month period ended June 30, 2011,
as compared to $11,342 for the $500,000 unsecured subordinated promissory notes during the six month period ended June 30, 2010.

At June 30, 2011, the Company recorded interest accretion
expense of $3,506,074 (June 30, 2010 - $0), financing charge on embedded derivative liability of $485,101 (June 30, 2010 - $0)
and a gain on convertible derivative of $1,336,445 (June 30, 2010 - $0) related to the discount feature and the embedded derivative
features in the $4 million notes payable to related party.

Bank fees resulting from credit facility covenant waivers
related to ESW’s secured demand credit agreement amounted to $154,205 for the six month period ended June 30, 2011 (June
30, 2010 - $0).





Gain on disposal of property and equipment amounted to
$5,583 for the six month period ended June 30, 2011 (June 30, 2010 – $(8,791).

Restructuring of manufacturing operations: In August
2011, ESW adopted a reorganization plan to reduce its overhead costs by re-locating its Canadian manufacturing operations into
its facilities located the United States. ESW believes that the synergies from operating at a single location will provide significant
financial and logistical advantages, as well as synergies with its testing operations also located in the same facility. ESW is
transitioning the production from Concord, Ontario, Canada to its existing facility located in Montgomeryville, PA, United States.
ESW reorganised a loss on impairment of property plant and equipment of $0.3 million for the six month period ended June 30, 2011.
In addition, ESW expects to incur approximately $0.1 million of severance charges during the remainder of 2011. We expect to incur
$0.4 million of restructuring charges associated with the closure of the facility, transfer of manufacturing equipment excluding
severance charges during the remainder of 2011.

ESW expects to incur approximately $0.14 million of additional
restructuring charges associated with the release of its manufacturing facility at Concord, Ontario, Canada. This charge will be
recorded as a liability at December 31, 2011 the expected release date of the facility, any sub-lease or rent earned from the Concord,
Ontario, Canada facility in excess of the expected rent amount will be used to offset this liability.

LIQUIDITY AND CAPITAL RESOURCES

ESW's principal sources of operating capital have been
the proceeds from its various financing transactions. During the six month period ended June 30, 2011, the Company used $948,729
of cash to sustain operating activities compared with $3,831,954 for the six month period ended June 30, 2010. As of June 30, 2011
and 2010, the Company had cash and cash equivalents of $759,003 and $119,692, respectively. In addition as of June 30, 2011, the
Company had subscriptions receivable of $3,857,180.

Net cash used in operating activities for the three month
period ended June30, 2011 amounted to $948,729. This amount was attributable to the net loss of $7,022,796, plus non cash expenses
such as depreciation, amortization, interest accretion expense, change in fair value of exchange feature liability and others of
$4,661,834, and an increase in net operating assets and liabilities of $1,412,233. Net cash used in operating activities for the
six month period ended June 30, 2010 amounted to $3,831,954. This amount was attributable to the net loss of $4,845,492, plus non
cash expenses such as depreciation, amortization, interest and accretion on long term debt, inducement premium on conversion of
debentures and others of $3,911,764, and a decrease in net operating assets and liabilities of $2,898,226.

Net cash used in investing activities was $28,544 for
the six month period ended June 30, 2011, as compared to $173,656 used in investing activities for the six month period ended June
30, 2010.

Net cash provided by financing activities totalled $1,732,767
for the six month period ended June 30, 2011, as compared to $3,433,019 for the six month period ended June 30, 2010. In the current
period of 2011, $4,000,000 was provided through the issuance of the notes payable to related parties, $373,615 was paid towards
rights offering costs, $1,891,079 was repaid under ESW's CIBC credit facility and $2,539 was repaid under capital lease obligation.
In the prior year period of 2010, $3,000,000 was provided through issuance of convertible debentures, $945,157 net was provided
by ESW`s bank loan, $500,000 was repaid promissory notes to a related party, and $12,138 was repaid under capital lease obligation.

Based on ESW's current operating plan, management believes
that the combination of the June 30, 2011 cash balance and anticipated cash flows from operating activities will be sufficient
to meet our working capital needs on a short-term basis. Overall, capital adequacy is monitored on an ongoing basis by our management
and reviewed quarterly by the Board of Directors.

ESW operates in a capital intensive and highly regulated
industry, where a long lead time to bring new products into market is considered normal. ESW continues to invest in research and
development to improve its technologies and bring them to the point where its customers have a high confidence level to purchase
our products.

During the first half of 2011 and 2010, ESW did not produce
sufficient cash from operations to support its expenditures. Prior financings, including the increased utilization of ESW's CIBC
credit facility, supported the Company's operations during the period. ESW's principal use of liquidity relates to the Company's
working capital needs and to finance any further capital expenditures or tooling needed for production and/or its testing facilities.

ESW anticipates certain capital expenditures in 2011 related
to the general operation of its business as well as to upgrade the air testing facilities in Montgomeryville, Pennsylvania. ESW
does not expect that total capital expenditures for 2011 will amount to more than $1,400,000.





Effective March 31, 2010, ESW's subsidiary, ESW Canada,
entered into a demand revolving credit facility agreement with a Canadian chartered bank, CIBC to meet working capital requirements
(the "Demand Credit Agreement"). The Demand Credit Agreement had a credit limit of $4 million Canadian. Borrowings under
the Demand Credit Agreement were limited to a percentage of accounts receivable plus a percentage of inventories (capped at CAD$
1 million or 50% of the accounts receivable portion) less any prior ranking claims.

Effective May 31, 2011, the Company's wholly owned subsidiary
ESW Canada, Inc. entered into a modification of its Demand Credit Agreement dated March 10, 2010 (the "Credit Agreement")
whereby it received an extension on the term of its Credit Agreement from its commercial lender through June 30, 2011. The new
modification was subject to all covenants and the security margin under the Credit Agreement remaining in order at all times. The
commercial lender and the Company agreed to reduce the Operating Loan limit as defined in the Credit Agreement to a maximum of
$1,500,000 Canadian or the borrowing base established by the security margin if less; all loans made by the commercial lender were
to be satisfied and the credit facilities cancelled upon the earlier of the completion of the Company's rights offering or June
30, 2011.

In February 2011, ESW secured
$3 million in additional financing through certain note subscription agreements and issued unsecured subordinated promissory notes
(collectively, "the Notes"). Proceeds of the Notes, along with available cash, will be used to fund working capital,
planned capital investments and other general corporate purposes. The
Company required additional working capital to secure and deliver the second quarter sales opportunities. On May 3, 2011, the Company
secured $1 million in additional financing through certain note subscription agreements and issued unsecured subordinated promissory
notes to affiliate shareholders.

On June 30, 2011, the Company closed its rights offering.
A total of 66,670,012 shares were issued as part of the rights offering and related transactions, $3.9 million was raised in cash
and $4.1 million was paid for through the exchange of principal and accrued interest on the Unsecured Subordinated Promissory Notes
(the “Notes”) issued to related parties (the “Bridge Lenders”) in February and May of 2011. Under the Rights
Offering, shareholders subscribed for 15,590,234 shares for approximately $1.9 million in cash. The Bridge Lenders subscribed for
23,228,970 shares of Common Stock at a price of $0.12 per share, which was paid for through the exchange of principal and accrued
interest on the Notes of approximately $2.8 million. Pursuant to backstop commitment, the Bridge Lenders purchased 27,714,385 shares
of Common Stock at price of $0.12 per share for approximately $3.3 million, of which $2.0 million was paid in cash and $1.3 million
was paid for through the exchange of the balance of principal and accrued interest due on the Notes. As a result of these transactions,
the Company satisfied its obligations with respect to the Notes and the Notes were cancelled.

Effective July 18, 2011, ESW’s wholly owned subsidiary
ESW Canada Inc, paid its senior lender the amount of $1.5 million (Canadian dollars) from the proceeds of the rights offering to
liquidate the outstanding balance on the bank loan. The senior lender has discharged all liens, securities and encumbrances against
ESW and its subsidiaries. The senior lender has been requested to cancel the March 31, 2010 demand revolving credit facility agreement.
Competition is expected to intensify as the market for ESW's products expands. ESW's ability to continue to gain significant market
share will depend upon its ability to continue to develop strong relationships with distributors, customers and develop new products.
Increased competition in the market place could result in lower average pricing which could adversely affect ESW's margins and
pricing for its products.

ESW has 700,000 Class A special shares, authorized, issued
and outstanding, recorded at $453,900 (based on the historical exchange rate at the time of issuance). The Class A special shares
are issued by ESW's wholly-owned subsidiary BBL Technologies, Inc. ("BBL") without par value, and are redeemable on demand
by the Holder of the shares which is a private Ontario Corporation at $700,000 Canadian (which translates to $725,767 US and $703,801
US at June 30, 2011 and December 31, 2010, respectively). As the redeemable Class A special shares were issued by the Company's
wholly owned subsidiary, BBL, the maximum value upon which the Company is liable is the net book value of BBL. As of June 30, 2011
and December 31, 2010, BBL had an accumulated deficit of $1,192,858 US ($1,845,375 Canadian), and therefore, the holder would be
unable to redeem the redeemable Class A special shares at their ascribed value.

DEBT STRUCTURE

Effective March 19, 2010, the Company issued $3,000,000
of its 9% convertible debentures (the "Debentures") to five (5) accredited investors under Rule 506 of Regulation D.
The Debentures were for a term of three (3) years and were convertible into shares of the Company's common stock at the option
of the holder by dividing the principal amount of the Debenture to be converted by $0.50. The Debentures earned interest at a rate
of 9% per annum payable in cash or in shares of the Company's common stock at the option of the holder. If the Holder elected to
receive interest in shares of common stock, the number of shares of common stock to be issued for interest would be determined
by dividing accrued interest by $0.50. The Debentures had a mandatory conversion feature that required the holders to convert in
the event a majority of the Company's pre-existing outstanding 9% convertible debentures converted. Subject to the holder's right
to convert and the mandatory conversion feature, the Company had the right to redeem the Debentures at a price equal to one hundred
and ten percent (110%) multiplied by the then outstanding principal amount plus unpaid interest to the date of redemption. Upon
maturity, the debenture and interest was payable in cash or common stock at the option of the Holder. The Company also had provided
the holders of the Debentures registration rights. The Debentures contained customary price adjustment protections.





Effective March 25, 2010, the November 2008 and the August
2009 debenture holders agreed to convert all outstanding convertible debentures as per the terms of the respective debenture agreements.
The early conversion of the debentures was a condition precedent to the Company's wholly-owned subsidiary ESW Canada entering into
a new credit facility with CIBC. The conversion of the November 2008 and the August 2009 debentures also triggered the mandatory
conversion feature on the March 19, 2010 debentures. As part of the agreement to convert all existing convertible debentures the
Company has paid a share-based premium as an inducement to convert all debentures. The premium was payable to all converting debenture
holders and was subject to a positive fairness opinion, provided by a Fairness Committee consisting of independent directors of
the Company's Board of Directors, and an increase in the share capital of the Company. The premium consisted of 4,375,665 shares
of Common Stock. As the Company did not have sufficient authorized shares as of the date of conversion of the debentures to fulfill
the premium, the premium had been recorded as an advance share purchase agreement at fair market value $2,909,872 at June 30, 2010
($0 at June 30, 2011), the agreement was without interest, subordinated to the banks position and payable in a fixed number of
common shares (4,375,665 shares) of the Company upon a subsequent increase in the authorized share capital of the Company. In summary,
the fair value of the advanced share subscription was dependent on the market price of the Company's common stock, as the Company
did not have sufficient available authorized common shares to fulfill this obligation as on June 30, 2010, it was treated as a
liability. The advanced share subscription was re-valued based on the market price of the Company's common stock at the end of
each reporting period until it was fulfilled by the issuance of authorized common shares in November 2010. Gains and losses from
the resulting revaluations were recognized on the consolidated condensed statement of operations and comprehensive loss.

The Share Subscription Agreement for the 2010 Debentures
contained an exchange feature. The exchange feature provides that if within twelve months from March 19, 2010, the Company entered
into or closed another financing or other transaction (which for securities law purposes would be integrable with the offer and
sale of the Securities) on terms and conditions more favorable to another purchaser, the terms and conditions of the 2010 Debentures
shall be adjusted to reflect the more favorable terms. On March 31, 2011, the Company re-evaluated the fair value of the exchange
feature and determined that the probability of closing another financing was 100% and the conversion price of the 2010 Debentures
would be reset. On March 31, 2011 an additional liability of $578,739 was recorded for the exchange feature in these consolidated
condensed financial statements with a $578,739 expense related to change in fair value of exchange feature liability recorded in
the consolidated statements of operations and comprehensive loss. On June 30, 2011 concurrent with the closing of the rights offering
the exchange feature liability was moved to paid in capital.

Effective March 31, 2010 ESW's subsidiary, ESW Canada
Inc., entered into the Demand Credit Agreement. The Demand Credit Agreement has a credit limit of CAD $4 million. Borrowings under
the facility were limited to a percentage of accounts receivable plus a percentage of inventories (capped at CAD $1 million or
50% of the accounts receivable portion) less any prior ranking claims. The Demand Credit Agreement was guaranteed by the Company
and its subsidiaries ESW Canada Inc., ESW America Inc., BBL Technologies Inc., and ESW Technologies Inc., through a general security
agreement over all assets to its senior lender. The Demand Credit Agreement had been guaranteed to the bank under the EDC's Export
Guarantee Program. Borrowings under the Demand Credit Agreement bear interest at 4.5% above the bank's prime rate of interest.
Obligations under the Demand Credit Agreement were collateralized by a first-priority lien on the assets of the Company and its
subsidiaries, including, accounts receivable, inventory, equipment and other tangible and intangible property, including the capital
stock of all direct subsidiaries.

The terms relating to the Demand Credit Agreement specifically
note that the Company maintain a tangible net worth of at least $4.0 million. The Demand Credit Agreement contained, among other
things, covenants, representations and warranties and events of default customary for a facility of this type for the Company and
its subsidiaries. Such covenants include certain restrictions on the incurrence of additional indebtedness, liens, acquisitions
and other investments, mergers, consolidations, liquidations and dissolutions, sales of assets, dividends and other repurchases
in respect of capital stock, voluntary prepayments of certain other indebtedness, capital expenditures and transactions with affiliates,
subject to certain exceptions. Under certain conditions amounts outstanding under the credit agreements may be accelerated. Such
events include failure to comply with covenants, breach of representations or warranties in any material respect, non-payment or
acceleration of other material debt, entry of material judgments not covered by insurance, or a change of control of the Company.

From November 8, 2010 through February 14, 2011, the Company's
wholly owned subsidiary, ESW Canada Inc., received waivers of certain financial covenants under the Demand Credit Agreement. Without
the waivers, the Company's subsidiary would not be in compliance with certain covenants in the Demand Credit Agreement. On February
17, 2011, the Company raised a $3 million through the issuance of unsecured subordinated promissory notes. With the proceeds of
the Notes, the Company and its subsidiaries were in compliance with covenant obligations under the Demand Credit Agreement with
CIBC.





The closing of the $3 million unsecured subordinated promissory
notes effective February 17, 2011 allowed the Company and its subsidiaries to comply with covenants and obligations under the Demand
Credit Agreement with CIBC dated March 10, 2010.

As of June 30, 2011, $1,626,157 was owed under the Demand
Credit Agreement compared to $1,622,096 as of June 30, 2010.

On February 17, 2011, the Company entered into note subscription
agreements (collectively, the "Loan Agreements"), and issued unsecured subordinated promissory notes to, nine lenders,
who are current shareholders and deemed affiliates of certain members of the board of directors of the Company (the “Subordinated
Lenders"). The Loan Agreements were approved by the independent directors of the Company. As per the Loan Agreements, the
Subordinated Lenders made loans to the Company in the principal aggregate amount of $3 million, represented by unsecured subordinated
promissory notes (the "Notes"), dated February 17, 2011. Proceeds of the Loan, along with available cash, were used to
fund working capital, planned capital investments and other general corporate purposes. The Notes bore interest at a rate of 10%
per annum, payable in-kind on a monthly basis commencing March 17, 2011, up to the date on which the Note has been paid in full.
The maturity date of the Loans was the earlier of: (i) the closing of a rights offering of the Company's common stock, par value
$.001 per share, at a sale price of $0.12 per share ( adjusted for any stock split, stock dividend or other similar adjustment)
pursuant to which the Company planned to offer rights to purchase approximately up to $8 million in shares of Common Stock the
("Qualified Offering"), and would also permit all Subordinated Lenders to exchange their Notes, accrued interest (and
the any Notes that may be issued for payment of interest) for shares of Common Stock at $0.12 per share or (ii) June 17, 2011 (the
"Outside Date"). The Qualified Offering was also been approved by the independent directors of the Company.

Subsequently on May 3, 2011, the Company entered into
additional note subscription agreements and issued unsecured subordinated promissory notes (the “Bridge Notes”) to,
nine lenders, who are current shareholders and were subordinated lenders under prior loan agreements in the aggregate amount of
$3 million with the Company entered into February 17, 2011 and may be deemed affiliates of the Company. The Bridge Notes were approved
by the Company's independent directors. Pursuant to the Loan agreements, the Subordinated Lenders agreed made loans to the Company
in the principal aggregate amount of $1 million subject to the terms and conditions set forth in the Loan Agreements and represented
by unsecured subordinated convertible promissory notes, effective as of April 27, 2011. Proceeds of the Bridge Loan, along with
available cash, were used by the Company to fund working capital.

Effective May 10, 2011, the Company entered into an Investment
Agreement (the "Investment Agreement") with Orchard Investments, LLC ("Orchard"); Black Family 1997 Trust;
Leon D. Black, UAD 11/30/92 FBO Alexander Black; Leon D. Black, UAD 11/30/92 FBO Benjamin Black; Leon D. Black, UAD 11/30/92 FBO
Joshua Black; Leon D. Black, UAD 11/30/92 FBO Victoria Black; Leon D. Black; John J. Hannan and Richard Ressler ("Ressler")(each
individually a "Bridge Lender" and collectively the "Bridge Lenders"). Pursuant to the Investment Agreement,
the Bridge Lenders agreed to provide a backstop commitment to the Qualified Offering and have agreed to collectively backstop the
Qualified Offering by purchasing from the Company at a subscription price of $0.12 per share of Common Stock any shares not purchased
by the Company's shareholders of record who were entitled to participate in the rights offering (after giving effect to any oversubscriptions)
up to 29,166,667 shares of Common Stock for a total purchase price of $3.5 million (the "Backstop Commitment"). In addition
to their rights to purchase shares pursuant to the Qualified Offering and the Backstop Commitment, the Bridge Lenders have the
option, in their sole discretion, to purchase from the Company, at the subscription price, any other shares not purchased by the
Company's stockholders through the Qualified Offering (the "Purchase Option"). If, after giving effect to the Qualified
Offering, the Backstop Commitment and the Purchase Option, any of the Bridge Lenders shall have been unable to exchange any portion
of his or its Notes, the Company will also offer each Bridge Lender the right to purchase additional shares of Common Stock at
the subscription price (payable through the exchange of Bridge Loans for Common Stock) such that each Bridge Lender shall have
exchanged all of his or its notes for shares of Common Stock (the "Additional Subscription Offer"). In addition, if Ressler
and Orchard collectively acquire less than $1.0 million worth of shares of Common Stock as part of the Qualified Offering, the
Backstop Commitment, the Purchase Option and the Additional Subscription Offer, the Company has agreed to offer to Ressler and
Orchard an additional number of shares of Common Stock equal to the shortfall amount at the subscription price.

Effective June 14, 2011, the respective holders of ESW’s
10% unsecured subordinated promissory notes issued February 17, 2011 and May 3, 2011 in the aggregate principal amount of $4 million
(collectively the "Notes") pursuant to the terms of the Notes, extended the maturity date of the Notes to July 15, 2011.

Effective June 30, 2011, the Company closed its rights
offering, as part of the rights offering and the Investment Agreement, the principal due on the Notes and the Bridge Notes in the
aggregate amount of $4,000,000 and corresponding interest in the amount of $126,850 were converted into Common stock at the rights
offering price of $0.12 per share. As a result of these transactions, the Company satisfied its obligations with respect to the
Notes and the Notes were cancelled.





ESW's ability to service its future indebtedness, other
obligations and commitments in cash will depend on its future performance and ability to raise capital, which will be affected
by prevailing economic conditions, financial, business, regulatory and other factors. Certain of these factors are beyond ESW's
control. ESW believes that, based upon its current business plan it will meet its debt service obligations when due. ESW may need
additional financing after the completion of a Qualified Offering to meet its financial projections and obligations. Significant
assumptions underlie ESW's projections, including, among other things, that ESW will be successful in implementing its business
strategy, that some of ESW's products that have received verification from the appropriate regulatory authorities will obtain customer
and market acceptance, and that there will be no material adverse developments in ESW's business, liquidity or capital requirements.
If ESW cannot generate sufficient cash flow from operations to service its indebtedness and to meet other obligations and commitments,
ESW might be required to refinance or to dispose off assets to obtain funds for such purpose. There is no assurance that refinancing
or asset dispositions or raising funds from sales of equity or otherwise could be effected on a timely basis or on satisfactory
terms. In such circumstance, ESW would have to issue shares of its common stock as repayment of these obligations, which would
be of a dilutive nature to ESW's present shareholders.

CONTRACTUAL OBLIGATIONS

LEASES

Effective November 24, 2004, the Company's wholly-owned
subsidiary, ESWA, entered into a lease agreement for approximately 40,220 square feet of leasehold space at 2 Bethlehem Pike Industrial
Center, Montgomery Township, Pennsylvania. The leasehold space houses the Company's research and development facilities. The lease
commenced on January 15, 2005 and expired January 31, 2010. Effective October 16, 2009, the Company's wholly-owned subsidiary ESWA
entered into a lease renewal agreement with Nappen & Associates for the leasehold property at Pennsylvania. There were no modifications
to the original economic terms of the lease under the lease renewal agreement. Under the terms of the lease renewal, the lease
term will now expire February 28, 2013. Effective March 31, 2011, ESWA entered into a lease amendment agreement with Nappen &
Associates for the leasehold property at Pennsylvania, whereby ESWA has the sole option to extend the expiry of the lease agreement
by an additional 3 years six months prior to February 28, 2013; there were no modifications to the original economic terms of the
lease.

Effective December 20, 2004, the Company's wholly-owned subsidiary,
ESWC, entered into an offer to lease agreement for approximately 50,000 square feet of leasehold space in Concord, Ontario, Canada.
The leasehold space houses the Company's executive offices and a high volume manufacturing plant. The possession of the leasehold
space took place on May 24, 2005 and the term of the lease was extended to September 30, 2010. ESWC renewed its lease agreement
at the current property for an additional five year term. The renewed lease period commenced on October 1, 2010 and ends on September
30, 2015.

The following is a summary of the minimum annual lease
payments, for both leases.

|YEAR |           
|---- | ----------
|2011 | $234,766  
|2012 | 469,531   
|2013 | 321,330   
|2014 | 299,034   
|2015 | 224,275   
|     | $1,548,936

LEGAL MATTERS

From time to time, the Company may be involved in a variety
of claims, suits, investigations and proceedings arising from the ordinary course of our business, breach of contract claims, labor
and employment claims, tax and other matters. Although claims, suits, investigations and proceedings are inherently uncertain and
their results cannot be predicted with certainty, ESW believes that the resolution of current pending matters will not have a material
adverse effect on its business, consolidated financial position, results of operations or cash flow. Regardless of the outcome,
litigation can have an adverse impact on ESW because of legal costs, diversion of management resources and other factors. In addition,
it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect
ESW's financial position, results of operations or cash flows in a particular period.





CAPITAL LEASE OBLIGATION

The Company is committed to the following lease payments
in connection with the acquisition of equipment under capital leases:

|YEAR                                 |        
|------------------------------------ | -------
|2011                                 | $ 1,502
|2012                                 | 1,252  
|TOTAL                                | 2,754  
|                                     |        
|Less imputed interest                | (126)  
|Total obligation under capital lease | 2,628  
|                                     |        
|Less current portion                 | (1,289)
|TOTAL LONG-TERM PORTION              | $ 1,339

The Company incurred $104 and $949 of interest expense
on capital lease obligation for the six month periods ended June 30, 2011 and 2010, respectively.

RESTRUCTURING EXPENSES AND SEVERANCE AGREEMENTS

The Company accrued expenses related to separation agreements
with its former Chief Executive Officer, Vice President of Operations and Director of Sales. As of June 30, 2011, $171,925 was
included in accrued liabilities towards the balance of severance payments owing.

PRODUCT REPLACEMENT OBLIGATIONS

ESW is currently negotiating with one of its customers
the replacement of units that were sold in 2009. The product in question was subsequently discontinued for sale, and the potential
replacement costs for these units are estimated to be approximately $150,000.

NEW ACCOUNTING PRONOUNCEMENTS

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU 2011-5 –
“Comprehensive Income – Presentation of Comprehensive Income”.  This statement removed the presentation
of comprehensive income in the statement of changes in stockholders’ equity.  The only two allowable presentations are
below the components of net income in a statement of comprehensive income or in a separate statement of comprehensive income that
begins with total net income.  The guidance is effective for interim or annual reporting periods beginning after December
15, 2011.  The Company does not expect the adoption of this guidance to have a material impact on the Company’s results
of operations or financial position.

In May 2011, an update was made by the Financial Accounting
Standards Board (“FASB”) to achieve common fair value measurement and disclosure requirements in U.S. Generally Accepted
Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”).  It provides
amendments to the definition of fair value and the market participant concept, grants an exception for the measurement of financial
instruments held in a portfolio with certain offsetting risks, and modifies most disclosures.  The changes in disclosures
include, for all Level 3 fair value measurements, quantitative information about significant unobservable inputs used and a description
of the valuation processes in place.  The new guidance also requires disclosure of the highest and best use of a nonfinancial
asset.  This standard will be effective prospectively during interim and for annual periods beginning after December 15, 2011.  Early
application by public entities is not permitted.  The adoption is not expected to have a significant impact on the Company’s
consolidated condensed financial statements.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In August 2010, the FASB issued ASU No. 2010-22, Accounting
for Various Topics - Technical Corrections to SEC Paragraphs. This update amends various SEC paragraphs based on external comments
received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The adoption of this ASU had no
effect on the Company's consolidated condensed financial statements.





In August 2010, the FASB issued ASU No. 2010-21, Accounting
for Technical Amendments to Various SEC Rules and Schedules. This updates various SEC paragraphs pursuant to the issuance of Release
No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The adoption of
this ASU had no effect on the Company's consolidated condensed financial statements.

In April 2010, the FASB issued ASU No. 2010-17, Revenue
Recognition - Milestone Method. The objective of this Update is to provide guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The amendments
in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial statements.

In April 2010, the FASB issued ASU No. 2010-013, Compensation
- Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades a consensus of the FASB Emerging Issues Task Force. ASU 2010-13 addresses
the classification of an employee share-based award with an exercise price denominated in the currency of a market in which the
underlying equity security trades. The amendments are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. The adoption of this ASU had no effect on the Company's consolidated condensed financial
statements.

In October 2009, the FASB issued ASU No. 2009-13, Multiple
Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force ("ASU 2009-13") (codified within
ASC Topic 605). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The adoption
of this ASU had no effect on the Company's consolidated condensed financial statements.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

ESW's significant accounting policies are summarized in
Note 2 to the Consolidated Condensed Financial Statements included its quarterly reports and its 2010 Annual Report to Shareholders.
In preparing the consolidated condensed financial statements, we make estimates and assumptions that affect the expected amounts
of assets and liabilities and disclosure of contingent assets and liabilities. We apply our accounting policies on a consistent
basis. As circumstances change, they are considered in our estimates and judgments, and future changes in circumstances could result
in changes in amounts at which assets and liabilities are recorded.

FOREIGN CURRENCY TRANSACTIONS

The results of operations and the financial position of
ESW's operations in Canada are principally measured in Canadian currency and translated into U.S. dollars. The future effects of
foreign currency fluctuations between U.S. dollars and Canadian dollars will be somewhat mitigated by the fact that certain expenses
will be generally incurred in the same currency in which revenues will be generated. The future reported income of ESW's Canadian
subsidiary would be higher or lower depending on a weakening or strengthening of the U.S. dollar against the Canadian currency.
During the first quarter of 2011, the Company experienced a net loss on foreign exchange due the fluctuation of the U.S. dollar
against the Canadian dollar.

A portion of ESW's assets are based in its foreign operation
and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period, Accordingly, ESW's
consolidated investment will fluctuate depending upon the weakening or strengthening of the Canadian currency against the U.S.
dollar.

Adjustments resulting from ESW's foreign subsidiaries'
financial statements are included as a component of other comprehensive income within stockholders equity because the functional
currency of subsidiaries is not the U.S. dollar.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

ESW is exposed to financial market risks, including changes
in currency exchange rates and interest rates. The Company also has foreign currency exposures at its foreign operations related
to buying and selling currencies other than the local currencies. The risk under these interest rate and foreign currency exchange
agreement is not considered to be significant.

FOREIGN EXCHANGE RISK

ESW's foreign subsidiaries conduct their businesses in
local currency predominantly the Canadian Dollar. ESW's exposure to foreign currency transaction gains and losses is the result
of certain net receivables due from its foreign subsidiaries. ESW's exposure to foreign currency translation gains and losses also
arises from the translation of the assets and liabilities of its subsidiaries to U.S. dollars during consolidation. ESW recognized
a translation gain of $125,957 for the six month period ended June 30, 2011 as compared to a loss of $38,183 for the six month
period ended June 30, 2010 reported as comprehensive loss in the Consolidated Condensed Statements of Changes in Stockholders'
Equity and Comprehensive Income. ESW recognized a translation loss of $84,719 for the six month period ended June 30, 2011 as compared
to a loss of $49,194 for the six month period ended June 30, 2010 reported as foreign exchange loss in the Consolidated Condensed
Statements of Operations and Comprehensive Loss primarily as a result of exchange rate differences between the U.S. dollar and
the Canadian Dollar.

ESW's strategy for management of currency risk relies
primarily upon conducting its operations in the countries' respective currency and ESW may, from time to time, engage in hedging
intended to reduce its exposure to currency fluctuations. At June 30, 2011, ESW had no outstanding forward exchange contracts.

INTEREST RATE RISK

ESW currently has no variable-rate long-term debt that
exposes ESW to interest rate risk.





ITEM 4. CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE

EVALUATION OF THE COMPANY'S DISCLOSURE AND INTERNAL
CONTROLS

The Company evaluated the effectiveness of the design
and operation of its "disclosure controls and procedures" as of the end of the period covered by this report. This evaluation
was done with the participation of management, under the supervision of the Executive Chairman ("EC") and Chief Financial
Officer ("CFO").

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements
due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance,
where necessary, its procedures and controls.

CONCLUSIONS

Based on our evaluation, the EC and CFO concluded that
the registrant's disclosures, controls and procedures are effective to ensure that information required to be disclosed in reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the Security Exchange Commission rules and forms.

(c) CHANGES IN INTERNAL CONTROLS

Not applicable.





PART II OTHER INFORMATION

ITEM 1A. RISK FACTORS

In evaluating an investment in our common stock, investors
should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1 of our Annual Report to
the Securities and Exchange Commission for the year ended December 31, 2010, as well as the information contained in this report,
the Quarterly Report for the period ended March 31, 2011 and our other reports and registration statements filed with the Securities
and Exchange Commission. The following risk factors are intended to update and supplement, as applicable, the risk factors contained
in our Annual Report on Form 10-K for the year ended December 31, 2010, and the Quarterly Report for the period ended March 31,
2011to reflect material developments that occurred during the quarter ended June 30, 2011

ESW DEPENDS ON LOCAL, STATE AND FEDERAL GOVERNMENT FUNDING
FOR A SIGNIFICANT PORTION OF ITS REVENUES

ESW’s distributors and end customers depend on local,
state and federal government funding in order to meet emission regulation targets. A significant portion of ESW’s revenues,
directly or indirectly, depend on U.S. federal, state and local government retrofit grants and funding programs. As such, ESW’s
financial results are heavily impacted by a reduction of public funds available for diesel retrofit programs and government-funded
projects. A reduction in available public funding may in turn pressure government or regulatory agencies to differ or delay emission
regulation or ease emission targets, any such changes to the regulatory environment will impact our financial results.

ITEM 5. OTHER INFORMATION

Effective July 18, 2011, ESW’s wholly owned subsidiary
ESW Canada Inc, paid its senior lender the amount of $1.5 million (Canadian dollars) from the proceeds of the rights offering (see
Note 12) to liquidate the outstanding balance on the bank loan. The senior lender was also requested to discharge all liens, encumbrances
and securities against the Company and its subsidiaries and cancel the March 31, 2010 demand revolving credit facility agreement.
ESW has received the confirmation of discharge of liens, encumbrances and securities and awaits the written notice of cancellation
of the demand revolving credit facility agreement from its secured lender.

Effective July 12, 2011,
as a condition to closing the Investment Agreement, the Company entered into a registration rights agreement with the Bridge Lenders
(the "Registration Rights Agreement"). The Registration Rights Agreement provides the Bridge Lenders with certain customary
registration rights, which include demand and "piggyback" registration rights under the Securities Act of 1933 with respect
to the shares of Common Stock purchased under the Investment Agreement and any other securities owned by the Bridge Lenders.
The Bridge Lenders are stockholders of the Company and were subordinated lenders under unsecured
promissory notes in the aggregate amount of $4.0 million which the Company issued on February 17, 2011 and April 27, 2011 (the
"Notes"). The maturity date of the Notes was the earlier of: (1) the consummation of a rights offering which permitted
all Bridge Lenders to exchange their Notes (and the other notes paid in-kind for the payment of interest under the Notes) for shares
of Common Stock at $0.12 per share and (2) July 15, 2011. Under the Rights Offering, the Bridge Lenders subscribed for 23,228,970
shares of Common Stock at a price of $0.12 per share, which was paid for through the exchange of principal and accrued interest
on the Notes of approximately $2.8 million. Pursuant to backstop commitment, the Bridge Lenders purchased 27,714,385 shares of
Common Stock at a price of $0.12 per share for approximately $3.3 million, of which $2.0 million was paid in cash and $1.3 million
was paid for through the exchange of the balance of principal and accrued interest due on the Notes. As a result of these transactions,
the Company satisfied its obligations with respect to the Notes and the Notes were cancelled.

Effective July 15, 2011 ESW filed a Post-Effective Amendment
No. 1 to Form S-1 related to the Registration Statement on Form S-1 (Registration No. 333-174091) initially filed on Form S-3 on
May 10, 2011 (the "Registration Statement"). The Company's stockholders validly subscribed for 15,726,659 shares of the
Company's common stock in the rights offering. The rights were exercised at $0.12 per share, resulting in total gross proceeds
to the Company of approximately $1.9 million. The Company filed the Post-Effective Amendment No. 1 to deregister 26,714,248 shares
of the Company's common stock that had been registered for issuance pursuant to the Registration Statement. The shares of the Company's
Common Stock remained unsold as of the termination of the Company's rights offering for which the Registration Statement was filed.
Effective July 21, 2011 the SEC declared effective the Post-Effective Amendment.

Effective July 29, 2011 ESW’s board of directors
approved a transition plan to relocate ESW’s manufacturing operations from Concord, Ontario, Canada to Montgomeryville, Pennsylvania,
United States. ESW aims to reduce its overhead costs by re streamlining operations from two services and manufacturing facilities
into one. ESW believes that the synergies from operating at a single location in the United States will provide significant financial
and logistical advantages, as well as synergies between its manufacturing and emissions testing operations. In addition, the Company
will mitigate its Canadian currency exposure as currently all of ESW’s revenues are from the United States and a significant
portion of ESW’s raw materials and components will be sourced out of the United States upon conclusion of the transition
plan. Key components of ESW’s transition plan will be completed by October 31, 2011.

On August 16, 2011 ESW’s wholly owned subsidiary ESW Canada Inc.,
received notification from the Environmental Protection Agency ("EPA") that the Company’s XtrmCat(TM) Kit is now certified for 2 stroke,
category 2 marine engines. The issuance of the ’remanufacturing certificate’ by EPA is a significant milestone for the Company as it
validates the diesel oxidation catalyst technology for the marine market sector. The certifications are applicable to EMD 710 and 645
engines. The XtrmCat(TM) can achieve Tier 0 and Tier I compliance as per 40 CFR 1042 when retrofitted to EMD 710 and 645 engines. During the
emission test program at an independent EPA approved test facility, the XtrmCat(TM) Kit exceeded the minimum regulatory requirements throughout
the complete test program.





ITEM 6. EXHIBITS

EXHIBITS:

|31.1    | Certification of Executive Chairman and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002.            
|------- | -----------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                        
|31.2    | Certification of Chief Financial Officer, pursuant to the Sarbanes-Oxley Act of 2002.                                  
|        |                                                                                                                        
|32.1    | Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|        |                                                                                                                        
|32.2    | Certification pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|        |                                                                                                                        
|101.ins | XBRL Instance                                                                                                          
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|101.xsd | XBRL Schema                                                                                                            
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|101.cal | XBRL Calculation                                                                                                       
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|101.def | XBRL Definition                                                                                                        
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|101.lab | XBRL Label                                                                                                             
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|101.pre | XBRL Presentation                                                                                                      

SIGNATURE

Pursuant to the requirements 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.

DATED: August 22nd, 2011
Concord, Ontario Canada

ENVIRONMENTAL SOLUTIONS WORLDWIDE,
INC.

|BY: /S/ MARK YUNG
-------------------------
MARK YUNG
EXECUTIVE CHAIRMAN
/S/ PRAVEEN NAIR
-------------------------
PRAVEEN NAIR
CHIEF FINANCIAL OFFICER
|--------------------------------------------------------------------------------------------------------------------------------------------------------