**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        10-Q**
  **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
 **SECURITIES
        EXCHANGE ACT OF 1934**
 
 For
        the
        quarterly period ended June 30, 2008
  Commission
        file number: 0-32019
  **TASKER
        PRODUCTS CORP.**
 (Exact
        name of registrant as specified in its charter)
  **Delaware**
              
              **88-0426048**(State
                  of incorporation)
              
              (IRS
                  Employer Identification No.)
  **21-00
        Route 208,**
 **Fairlawn,
        NJ 07410**
 (Address
        of principal executive offices)
 
 **(201)
        796-0815**
 (Registrant’s
        telephone number)
  Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
        months
        (or for such shorter period that the registrant was required to file such
        reports), and (2) has been subject to such filing requirements for the past
        90
        days.  Yes xNo o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer or a smaller reporting company.
        See
        definition of “accelerated filer”, “large accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.
  Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer o
              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 oNo x
  The
        number of shares outstanding of the registrant’s common stock as of August 13,
        2008 was 142,883,078.
  
  **TASKER
        PRODUCTS CORP.**
  **INDEX**
  **PART
                  I. FINANCIAL INFORMATION****Item
                  1.**
              **Financial
                  Statements**
              2Unaudited
                  Condensed Consolidated Balance Sheets as of June 30, 2008 and December
                  31,
                  2007
              2Unaudited
                  Condensed Consolidated Statements of Operations for the three months
                  ended
                  June 30, 2008 and 2007
              3Unaudited
                  Condensed Consolidated Statements of Operations for the six months
                  ended
                  June 30, 2008 and 2007
              4Unaudited
                  Condensed Consolidated Statements of Cash Flows for the six months
                  ended
                  June 30, 2008 and 2007
              5Notes
                  to Unaudited Condensed Consolidated Financial Statements
              6**Item
                  2.**
              **Management’s
                  Discussion And Analysis Of Financial Condition And Results Of
                  Operations**
              23**Item
                  3.**
              **Quantitative
                  And Qualitative Disclosures About Market Risk**
              32**Item
                  4.**
              **Controls
                  And Procedures**
              32**PART
                  II. OTHER INFORMATION****Item
                  1A.**
              **Risk
                  Factors**
              34**Item
                  2.**
              **Unregistered
                  Sales Of Equity Securities And Use Of Proceeds**
              41**Item
                  6.**
              **Exhibits**
              42**SIGNATURES**
  **Forward-Looking
        Statements**
  In
        this
        Quarterly Report, we state our beliefs of future events and of our future
        financial performance. In some cases, you can identify those so-called
“forward-looking statements” by words such as “may,” “will,” “should,”
“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential,” or “continue” or the negative of those words and other comparable
        words. These forward-looking statements are subject to risks and uncertainties
        that could cause actual results to differ materially from historical results
        or
        those we anticipate. Factors that could cause actual results to differ from
        those contained in the forward-looking statements include, but are not limited
        to: our ability to obtain new financing and/or generate revenue growth in
        the
        near future; our history of losses; our limited experience in the marketing
        of
        our products; our ability to compete with other products in our market space;
        the risk of unfavorable federal regulation; and the other risks and
        uncertainties discussed in this Quarterly Report and in our Annual Report
        on
        Form 10-K for the year ended December 31, 2007 and such other reports and
        documents that we file from time to time with the Securities and Exchange
        Commission. Statements included in this Quarterly Report are based upon
        information known to us as of the date that this Quarterly Report is filed
        with
        the Securities and Exchange Commission, and we assume no obligation to update
        or
        alter our forward-looking statements made in this Quarterly Report, whether
        as a
        result of new information, future events or otherwise, except as otherwise
        required by applicable federal securities laws.
  1
  **PART
        I — FINANCIAL INFORMATION**
  **Item
        1. Financial Statements**
  **TASKER
        PRODUCTS CORP. AND SUBSIDIARIES**
 **UNAUDITED
        CONDENSED CONSOLIDATED BALANCE** **SHEETS**
 **(In
        thousands except per share data)**
  **June 30,**
              
              **December 31,****2008**
              
              **2007****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $119
              
              $2,671Accounts
                  receivable, net of allowance for doubtful accounts of $50 and $39,
                  respectively
              
              846
              
              283Notes
                  receivable
              
              64
              
              84Inventories
              
              252
              
              285Prepaid
                  expenses and other current assets
              
              51
              
              95Total
                  current assets
              
              1,332
              
              3,418Notes
                  receivable, net of current portion
              
              738
              
              707Property
                  and equipment, net
              
              882
              
              998Intangible
                  assets, net
              
              6,670
              
              7,084Goodwill
              
              9,835
              
              9,835Deferred
                  financing costs
              
              1,420
              
              1,866Deposits,
                  net
              
              12
              
              19Total
                  assets
              
              $
              20,889
              
              $
              23,927**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY (DEFICIT)**Current
                  liabilities:Accounts
                  payable
              
              $
              935
              
              $
              780Other
                  accrued liabilities
              
              
              1,407
              
              
              1,663Notes
                  payable, net of discount
              
              
              661
              
              
              40Demand
                  loans payable
              
              
              502
              
              
              —Derivative
                  liabilities
              
              
              6,311
              
              
              31,656Warrants
                  payable - placement agent
              
              
              —
              
              
              1,501Total
                  current liabilities
              
              
              9,816
              
              
              35,640Long-term
                  liabilities:Notes
                  payable-6% Notes, net of discount
              
              
              3,233
              
              
              965Other
                  long-term liabilities
              
              
              13
              
              
              19Total
                  long -term liabilities
              
              
              3,246
              
              
              984Total
                  liabilities
              
              
              13,062
              
              
              36,624Stockholders’
                  equity (deficit):Preferred
                  stock, $0.001 par value;15,000 shares authorized; none issued and
                  outstanding
              
              
              —
              
              
              —Common
                  stock, $0.001 par value; 450,000 shares authorized; 142,883and
                  121,456 shares issued and outstanding, respectively
              
              
              143
              
              
              121Additional
                  paid-in capital
              
              
              122,040
              
              
              117,584Accumulated
                  deficit
              
              
              (114,356
              )
              
              (130,402
              )Total
                  stockholders’ equity (deficit)
              
              
              7,827
              
              
              (12,697
              )Total
                  liabilities and stockholders’ equity (deficit)
              
              $
              20,889
              
              $
              23,927
  See
        accompanying notes
  2
  **TASKER
        PRODUCTS CORP. AND SUBSIDIARIES**
 **UNAUDITED
        CONDENSED CONSOLIDATED STATEMENTS OF** **OPERATIONS**
 **(In
        thousands except per share data)**
  **Three Months Ended**
                **June 30,****2008**
              
              **2007**Revenues
              
              $
              1,588
              
              $
              632Cost
                  of goods sold
              
              
              664
              
              
              73Gross
                  margin
              
              
              924
              
              
              559Operating
                  expensesSelling,
                  general & administrative (1)
              
              
              3,179
              
              
              3,420Product
                  development (1)
              
              
              208
              
              
              349Depreciation
                  and amortization
              
              
              280
              
              
              280Total
                  operating expenses
              
              
              3,667
              
              
              4,049Loss
                  from operations
              
              
              (2,743
              )
              
              (3,490
              )Other
                  income (expense):Interest
                  expense
              
              
              (214
              )
              
              (175
              )Interest
                  income
              
              
              16
              
              
              16Amortization
                  of fair value assigned to beneficial conversion feature and amortization
                  of fair value of warrants
              
              
              (1,482
              )
              
              (3,187
              )Amortization
                  of deferred financing costs
              
              
              (174
              )
              
              (1,200
              )Liquidated
                  damages
              
              
              (60
              )
              
              —Gain
                  on extinguishment of debt
              
              
              —
              
              
              4Gain
                  (loss) on change in value of derivative liabilities
              
              
              3,537
              
              
              (15
              )Total
                  other income (expense), net
              
              
              1,623
              
              
              (4,557
              )Net
                  loss before taxes
              
              
              (1,120
              )
              
              (8,047
              )Provision
                  for income tax
              
              
              —
              
              
              —Net
                  loss
              
              $
              (1,120
              )
              $
              (8,047
              )Net
                  loss per common share, basic
              
              $
              (.01
              )
              $
              (0.07
              )Net
                  loss per common share, diluted
              
              $
              (.01
              )
              $
              (0.07
              )Weighted
                  average common shares outstanding, basic and dilutive
              
              
              142,442
              
              
              108,958
 
 (1)
              Includes
                  stock-based compensation as
                  follows:
  **Three Months Ended**
                **June
                  30**,**2008**
              
              **2007**Selling,
                  general & administrative
              
              $
              951
              
              $
              1,219Product
                  development
              
              
              —
              
              
              13Total
              
              $
              951
              
              $
              1,232
  See
        accompanying notes ****
 
 3
  **TASKER
        PRODUCTS CORP. AND SUBSIDIARIES**
 **UNAUDITED
        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(In
        thousands except per share data)**
  **Six Months Ended**
                **June 30,****2008**
              
              **2007**Revenues
              
              $
              2,610
              
              $
              1,057Cost
                  of goods sold
              
              
              1,065
              
              
              168Gross
                  margin
              
              
              1,545
              
              
              889Operating
                  expensesSelling,
                  general & administrative (1)
              
              
              5,750
              
              
              6,606Product
                  development (1)
              
              
              534
              
              
              833Write-off
                  of raw material
              
              
              
              
              
              20Depreciation
                  and amortization
              
              
              559
              
              
              557Total
                  operating expenses
              
              
              6,843
              
              
              8,016Loss
                  from operations
              
              
              (5,298
              )
              
              (7,127
              )Other
                  income (expense):Interest
                  expense
              
              
              (443
              )
              
              (280
              )Interest
                  income
              
              
              45
              
              
              33Amortization
                  of fair value assigned to beneficial conversion feature and amortization
                  of fair value of warrants
              
              
              (2,676
              )
              
              (4,872
              )Amortization
                  of deferred financing costs
              
              
              (352
              )
              
              (1,722
              )Liquidated
                  damages
              
              
              (60
              )
              
              —Gain
                  on extinguishment of debt
              
              
              —
              
              
              55Gain
                  on change in value of derivative liabilities
              
              
              24,831
              
              
              (15
              )Total
                  other income (expense), net
              
              
              21,345
              
              
              (6,801
              )Net
                  income (loss) before taxes
              
              
              16,047
              
              
              (13,928
              )Provision
                  for income tax
              
              
              —
              
              
              —Net
                  income (loss)
              
              $
              16,047
              
              $
              (13,928
              )Net
                  income (loss) per common share, basic
              
              $
              .12
              
              $
              (0.13
              )Net
                  income (loss) per common share, diluted
              
              $
              .02
              
              $
              (0.13
              )Weighted
                  average common shares outstanding, basic
              
              
              136,798
              
              
              107,933Weighted
                  average common shares outstanding, dilutive
              
              
              282,327
              
              
              107,933
 
 (1)
              Includes
                  stock-based compensation as
                  follows:
  **Six Months EndedJune
                  30,****2008**
              
              **2007**Selling,
                  general & administrative
              
              $
              1,321
              
              $
              2,563Product
                  development
              
              
              2
              
              
              149Total
              
              $
              1,323
              
              $
              2,712
  See
        accompanying notes
  4
  **TASKER
        PRODUCTS CORP. AND SUBSIDIARIES**
 **UNAUDITED
        CONDENSED CONSOLIDATED STATEMENTS OF CASH** **FLOWS**
 **(In
        thousands)**
  **Six Months Ended****June 30,****2008**
              
              **2007****Cash
                  flows from operating activities:**Net
                  income (loss)
              
              $
              16,046
              
              $
              (13,928
              )Adjustments
                  to reconcile net income (loss) to net cash used in operating
                  activities:Non-cash
                  itemsDepreciation
                  and amortization
              
              
              559
              
              
              557Noncash
                  interest and liquidated damages
              
              
              234
              
              
              1Write-off
                  of raw materials
              
              
              —
              
              
              20Stock-based
                  compensation
              
              
              1,323
              
              
              2,712Allowance
                  for uncollectible accounts receivable
              
              
              12
              
              
              15Noncash
                  financing costs
              
              
              111
              
              
              —Amortization
                  of debt discount
              
              
              2,676
              
              
              4,873Amortization
                  of deferred financing costs
              
              
              352
              
              
              1,722Gain
                  on change in fair value of derivative liabilities
              
              
              (24,831
              )
              
              15Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (555
              )
              
              (301
              )Inventories
              
              
              33
              
              
              (118
              )Prepaid
                  expenses and other current assets
              
              
              137
              
              
              122Accounts
                  payable
              
              
              155
              
              
              (708
              )Other
                  accrued liabilities
              
              
              (325
              )
              
              (163
              )Net
                  cash used in operating activities
              
              
              (4,073
              )
              
              (5,181
              )**Cash
                  flows from investing activities:**Purchases
                  of property and equipment
              
              
              (28
              )
              
              (86
              )Payments
                  for deposits and other
              
              
              7
              
              
              —Net
                  cash used in investing activities
              
              
              (21
              )
              
              (86
              )**Cash
                  flows from financing activities:**Proceeds
                  from private placements, net of issue costs
              
              
              1,045
              
              
              6,375Proceeds
                  from short term loans
              
              
              500
              
              
              —Deferred
                  financing costs
              
              
              —
              
              
              (812
              )Exercise
                  of warrants / options
              
              
              —
              
              
              122Repayment
                  of auto loan
              
              
              (3
              )
              
              (5
              )Repayments
                  on notes payable
              
              
              —
              
              
              (605
              )Net
                  cash provided by financing activities
              
              
              1,542
              
              
              5,075**Net
                  decrease in cash and cash equivalents**
              
              
              (2,552
              )
              
              (192
              )**Cash
                  and cash equivalents, beginning of period**
              
              
              2,671
              
              
              932**Cash
                  and cash equivalents, end of period**
              
              $
              119
              
              $
              740**Supplemental
                  disclosures of cash flow information:**Interest
                  paid
              
              $
              6
              
              $
              6**Supplemental
                  disclosures of non-cash investing and financing
                  activities:**Fair
                  value of warrants issued as private placement fees
              
              $
              —
              
              $
              214Recognition
                  of debt discounts related to warrants , beneficial conversion and
                  derivative liabilities
              
              $
              1,186
              
              $
              4,161Conversion
                  of debt and accrued interest into long-term debt
              
              $
              389
              
              $
              —Conversion
                  of debt and accrued interest into common stock
              
              $
              1,708
              
              $
              116
  See
        accompanying notes
  5
  **TASKER
        PRODUCTS CORP. AND SUBSIDIARIES**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  **1.**  **Basis
        of Presentation**
  Tasker
        Products Corp. (formerly known as Tasker Capital Corp.) was formed
        on May 13, 1996 and was in the development stage through December 31,
        2005. The quarterly period ended March 31, 2006 is the
        first period during which Tasker Products Corp. is considered an operating
        company.
  Tasker
        Products Corp. and its subsidiaries (collectively, the "Company") manufacture,
        distribute and market products using pHarlo technology, a process that enables
        copper sulfate, a compound with bacteriostatic properties, to remain active
        throughout a wide range of pH values. The Company currently markets the
        following: Unifresh Ò Footbath
        and other related products that clean and disinfect the hooves of dairy cows,
        Tasker Blue, an antimicrobial aid in the scalder (a stage in poultry processing
        designed to loosen feathers so that they can be picked and removed mechanically)
        and the post-feather picker process (the method used in chicken processing
        that
        receives chickens immediately after the scalder and mechanically removes
        feathers) sections of poultry processing; Tasker Clear (an acidifier that
        controls pH levels to enhance the effectiveness of liquid bacteriostatic
        applications) and Tasker Pacific Blue Ô Seafood
        Wash (a product used in commercial and retail seafood processing to extend
        shelf
        life and reduce or eliminate odors).
  The
        accompanying unaudited condensed consolidated financial statements of the
        Company as of June 30, 2008 and December 31, 2007 and for the three and six
        month periods ended June 30, 2008 and 2007 reflect all adjustments of a normal
        and recurring nature to present fairly the consolidated financial position,
        results of operations and cash flows for the interim periods.  These
        unaudited condensed, consolidated financial statements have been prepared
        by the
        Company pursuant to the instructions to Form 10-Q and Article 8 of Regulation
        S-X.  Pursuant to such instructions, certain financial information and
        footnote disclosures normally included in such financial statements have
        been
        condensed or omitted.
  These
        unaudited condensed consolidated financial statements should be read in
        conjunction with the audited consolidated financial statements of the Company
        and notes thereto, together with management’s discussion and analysis or plan of
        operations, contained in the Company’s annual report on Form 10-K for the year
        ended December 31, 2007. The results of operations for the three and six
        month
        periods ended June 30, 2008 are not necessarily indicative of the results
        that
        may occur for the year ending December 31, 2008.
  Certain
        prior period amounts have been reclassified to conform to the current year
        presentation. ****
  **2.
        Recently Adopted Accounting Pronouncements**
  In
        September 2006, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements
        (SFAS
        157) . This Standard defines fair value, establishes a framework for measuring
        fair value, and expands disclosures about fair value measurements. It applies
        to
        other accounting pronouncements where the FASB requires or permits fair value
        measurements but does not require any new fair value measurements. In February
        2008, FASB issued FASB Staff Position (FSP) No. 157-2, Effective Date of
        FASB
        Statement No. 157 , which delayed the effective date of SFAS 157 for certain
        non-financial assets and non-financial liabilities to fiscal years beginning
        after November 15, 2008, and interim periods within those fiscal years. The
        Company adopted SFAS 157 for financial assets and liabilities on January
        1,
        2008. It did not have any impact on the Company’s results of operations or
        financial position. The disclosures required under SFAS 157 are set forth
        in
        Note 15. The Company is in the process of evaluating the effect, if any,
        the
        adoption of FSP No. 157-2 will have on its results of operations or financial
        position.
  In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities- Including an amendment of FASB Statement
        No.
        155 (SFAS 159 ). This statement permits entities to choose to measure selected
        assets and liabilities at fair value. The Company adopted SFAS 159 on January
        1,
        2008 resulting in no impact to the Company’s financial condition, results of
        operations or cash flows.
  6
  **3.**  **New
        Accounting Pronouncements**
  In
        December 2007, the FASB issued SFAS No. 141 (Revised 2007) “Business
        Combinations” (“SFAS 141R”), which requires the acquiring entity in a business
        combination to recognize all (and only) the assets acquired and liabilities
        assumed in the transaction; establishes the acquisition-date fair value as
        the
        measurement objective for all assets acquired and liabilities assumed; and
        requires the acquirer to disclose to investors, and other users, all of the
        information they need to evaluate and understand the nature and financial
        effect
        of the business combination. SFAS 141R will be effective for acquisitions
        with a
        date on or after the beginning of the first annual reporting period beginning
        on
        or after December 15, 2008. The Company will apply SFAS 141R for any of our
        applicable acquisitions beginning January 1, 2009.
  In
        December 2007, the SEC issued SAB No. 110, “Share-Based Payment” (“SAB 110”).
        SAB 110 establishes the continued use of the simplified method for estimating
        the expected term of equity based compensation. The simplified method was
        intended to be eliminated for any equity based compensation arrangements
        granted
        after December 31, 2007. SAB 110 is being published to help companies that
        may
        not have adequate exercise history to estimate expected terms for future
        grants.
        The Company does not expect the adoption of SAB 110 to have a material effect
        on
        its consolidated financial statements.
  In
        December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
        Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”),
        which requires the recognition of a noncontrolling interest (minority interest)
        as equity in the consolidated financial statements and separate from the
        parent’s equity; the inclusion of the amount of net income attributable to the
        noncontrolling interest in consolidated income on the face of the income
        statement; and a parent recognize a gain or loss in net income when a subsidiary
        is deconsolidated. SFAS 160 will be effective for the fiscal years beginning
        on
        or after December 15, 2008. We will apply SFAS 160 to any applicable
        transactions beginning January 1, 2009.
  In
        March
        2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
        Instruments and Hedging Activities - an amendment to FASB Statement No. 133”.
        (“SFAS No. 161”). SFAS No. 161 is intended to improve financial standards for
        derivative instruments and hedging activities by requiring enhanced disclosures
        to enable investors to better understand their effects on an entity’s financial
        position, financial performance, and cash flows. Entities are required to
        provide enhanced disclosures about: (a) how and why an entity uses derivative
        instruments; (b) how derivative instruments and related hedged items are
        accounted for under Statement 133 and its related interpretations; and (c)
        how
        derivative instruments and related hedged items affect an entity’s financial
        position, financial performance, and cash flows. It is effective for financial
        statements issued for fiscal years beginning after November 15, 2008, with
        early
        adoption encouraged. The adoption of this statement is not expected to have
        a
        material effect on the Company’s financial statements.
  In
        May
        2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
        Accounting Principles”. SFAS 162 identifies the sources of accounting principles
        and the framework for selecting the principles to be used in the preparation
        of
        financial statements of nongovernmental entities that are presented in
        conformity with generally accepted accounting principles in the United States.
        It is effective 60 days following the SEC’s approval of the Public Company
        Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
        Fairly in Conformity With Generally Accepted Accounting Principles”. The
        adoption of this statement is not expected to have a material effect on the
        Company’s financial statements.
  In
        May
        2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163,
“Accounting for Financial Guarantee Insurance Contracts - An interpretation
        of
        FASB Statement No. 60”. SFAS 163 requires that an insurance enterprise recognize
        a claim liability prior to an event of default when there is evidence that
        credit deterioration has occurred in an insured financial obligation. It
        also
        clarifies how Statement 60 applies to financial guarantee insurance contracts,
        including the recognition and measurement to be used to account for premium
        revenue and claim liabilities, and requires expanded disclosures about financial
        guarantee insurance contracts. It is effective for financial statements issued
        for fiscal years beginning after December 15, 2008, except for some disclosures
        about the insurance enterprise’s risk-management activities. SFAS 163 requires
        that disclosures about the risk-management activities of the insurance
        enterprise be effective for the first period beginning after issuance. Except
        for those disclosures, earlier application is not permitted. The adoption
        of
        this statement is not expected to have a material effect on the Company’s
        financial statements.
  7
  **4.
        Liquidity**
  *Going
        Concern*
  At
        June
        30, 2008, the Company had a total of approximately $119,000 of cash and cash
        equivalents. The Company is rapidly depleting its cash resources and its
        ability
        to continue to operate and grow its business is dependent upon obtaining
        additional financing from the proposed Qualified Raise described below or
        a
        similar sale of debentures, the exercise of outstanding warrants, and/or
        generating revenue growth from operations. The Company anticipates that it
        will
        need approximately an additional $6 million to support its operations and
        meet
        its obligations over the next twelve months.
  The
        Company has incurred losses in its operations in each quarter since it changed
        its business direction in late 2002. For the three and six months ended June
        30,
        2008, the Company incurred a loss from operations of approximately $2.7 million
        and $5.3 million, respectively. The Company has not generated positive cash
        flow
        from operating activities for the six months ended June 30, 2008 and 2007.
        The
        Company expects to continue to incur operating losses for the foreseeable
        future. We anticipate operating expenses will increase as we attempt to build
        our brands, expand our customer base and develop new products. To become
        profitable, we must increase revenue substantially and achieve and maintain
        positive gross margins. We may not be able to increase revenue and gross
        margins
        sufficiently to operate and grow our business. While the Company has been
        in the
        process of aggressively developing, marketing and selling its products, there
        can be no assurance that those efforts will be met with success in the
        marketplace or that the timing of the Company’s efforts will be consistent with
        its cash availability and burn rate.
  If
        the
        Company is unable to obtain financing and/or generate sufficient revenue
        growth
        from existing and new business arrangements, the Company will not have
        sufficient cash to support its operations and meet its obligations and it
        will
        be forced to consider the further restructuring of its operations, disposition
        of various assets, seeking of protection from its creditors, or ceasing of
        operations and liquidation.
  As
        reported previously, the Company has entered into an agreement with a private
        placement agent to raise additional funds (the "Qualified Raise"), the terms
        of
        which are still under negotiation. The Company is currently seeking up to
        $6.0
        million through the Qualified Raise, and an additional $2.0 million through
        a
        receivables-based revolving financing (the “Revolving Financing.”) There can be
        no assurances that the Company will be able to raise any funds pursuant to
        this
        private placement agreement.
  In
        view
        of the matters described above, recoverability of a major portion of the
        recorded asset amounts shown in the accompanying balance sheet is dependent
        upon
        continued operations of the Company, which in turn is dependent upon the
        Company’s ability to raise additional capital, obtain financing and succeed in
        its future operations. The financial statements do not include any adjustments
        relating to the recoverability and classification of recorded asset amounts
        or
        amounts and classification of liabilities that might be necessary should
        the
        Company be unable to continue as a going concern.
  *Registration
        Rights Agreements*
  Since
        the
        Company’s inception, the Company has funded operations and investing activities
        through the sale of common stock, warrants and convertible debt under several
        private placements. Requirements for liquidated damages under some of these
        private placements may have an impact on the Company’s future liquidity.
  Registration
        statements with respect to the April 2004, July 2004 and December 2004 private
        placements were filed and declared effective in a timely manner. However,
        on
        June 14, 2006, we notified the holders of securities acquired in these private
        placements that the prospectuses contained within these registration statements
        contained financial and other information that was not current and that,
        as a
        result, such prospectuses could not be used to offer and sell such securities.
        Our obligation to accrue liquidated damages under these registration rights
        agreements ceased in April 30 and July 22, 2006, respectively. For the period
        through July 22, 2006, we have accrued $442,000 in liquidated damages related
        to
        these agreements.
  On
        April
        26, 2006, the Company filed a registration statement registering resale of
        securities purchased in the September 2005 and January 2006 private placements.
        This registration statement was declared effective by the SEC on October
        31,
        2006. As it relates to the September 2005 private placement, the Company
        believes that it has used its best efforts to cause the registration statement
        to be declared effective and, therefore, pursuant to the terms of the
        September 2005 registration rights agreement, the Company believes that it
        is not currently liable for liquidated damages as a result of the registration
        statement not being declared effective by May 23, 2006. Should the rights
        holders dispute that the Company used its best efforts, and the Company either
        accedes to their assertion or is found to not have used its best efforts,
        the
        estimated maximum amount of liquidated damages for which the Company would
        be
        liable, assuming ineffectiveness from May 23, 2006 to October 31, 2006 and
        for illustration purposes only, from October 1, 2007 to the end of the period
        covered by the registration agreement is approximately $43,000.
  8
  As
        it
        relates to the January 2006 private placement, the Company, despite using
        its best efforts, failed to have the registration statement declared effective
        by the SEC on or before October 26, 2006. Consequently, as of December 31,
        2006,
        the Company is required to issue to each holder of the January 2006 private
        placement, shares and warrants equal to one percent of the respective number
        of
        shares and warrants purchased by each holder or an aggregate of 133,359 shares
        of common stock and warrants to purchase 133,359 shares of common stock.
        As of
        June 30, 2008, the Company had not issued these shares and warrants.
  The
        Company is required to file a series of registration statements covering
        the
        resale of the shares of common stock underlying the long term 6% convertible
        notes and related warrants and interest notes, and the four-year warrants
        issued
        to purchasers of the bridge notes issued between December 1, 2006 and June
        4,
        2007 as well as the warrants issued to the placement agent in connection
        with
        the issuance of such bridge notes, and long term 6% convertible notes. In
        the
        event the Company fails to file or cause these registration statements to
        become
        effective within specified time periods, it is required to pay liquidated
        damages (except with respect to warrants issued to the placement agent) equal
        to
        1% of the principal amount of the affected notes and the purchase price of
        shares of common stock issued on conversion of these notes and exercise of
        related warrants for each 30-day delay in the filing or effectiveness of
        such
        registration statement (or such lesser pro-rata amount for any period of
        less
        than 30 days).
  The
        Company failed to cause the registration statement for the shares underlying
        the
        long term 6% convertible notes initially issued in December 2007 and related
        warrants, the warrants related to the bridge notes, and the interest notes
        issued in December 2007 to be declared effective by the SEC on or before
        April
        18, 2008. Liquidated damages therefore began to accrue on April 19, 2008.
        The
        estimated amount of liquidated damages (which are payable in cash) for which
        the
        Company would be liable, assuming ineffectiveness from April 18, 2008 to
        June
        30, 2008 is approximately $60,000.
  **5.
        Notes Receivable**
  On
        March 28, 2005, in connection with the 2005 acquisition of the pHarlo
        Assets, the Company issued to David Creasey, a principal of pHarlo Citrus
        Technologies and Indian River Labs, a loan of $625,000. This loan is secured
        by
        options and stock that Mr. Creasey holds in the Company. As of June 30,
        2008, the balance of this loan is approximately $798,000, including accrued
        interest of approximately $173,000.
 
 **6.
        Goodwill and Other Intangible Assets**
  The
        net
        carrying values of goodwill and other intangible assets at June 30, 2008
        were as
        follows (in thousands):
  **Carrying Amount**
              
              **Additions**
              
              **Amortization**
              
              **Net Carrying**
                **Amount/ Adjusted**
                **Basis**Amortizable
                  utility patents
              
              $
              7,084
              
              $
              —
              
              $
              414
              
              $
              6,670Goodwill
              
              $
              9,835
              
              $
              —
              
              $
              —
              
              $
              9,835
  9
  The
        net
        carrying values of goodwill and other intangible assets at December 31, 2007
        were as follows (in thousands):
  **Gross Carrying**
                **Amount**
              
              **Impairment**
                **Charges**
              
              **Accumulated**
                **Amortization**
              
              **Net Carrying**
                **Amount/ Adjusted**
                **Basis**Amortizable utility patents
              
              $
              22,525
              
              $
              12,239
              
              $
              3,202
              
              $
              7,084Goodwill
              
              $
              41,677
              
              $
              31,842
              
              $
              —
              
              $
              9,835
  The
        Company recorded amortization expense of approximately $207,000 and $414,000
        related to the other intangible assets for the three and six months ended
        June
        30, 2008, respectively. The Company recorded amortization expense of $207,000
        and $413,000 related to the other intangible assets for the three and six
        months
        ended June 30, 2007, respectively.
  Future
        expected amortization expense of intangible assets for the remaining two
        quarters of the current fiscal year and the subsequent fiscal years is as
        follows (in thousands):
  2008
              
              $
              4142009
              
              $
              8292010
              
              $
              8292011
              
              $
              8292012
              
              $
              8292013
                  and thereafter
              
              $
              2,939
  **7.**  **Warrants
        and Stock Options**
  **Warrants:**
  Outstanding
        warrants (excluding warrants issued for compensation subsequent to adoption
        of
        SFAS 123R included below under share-based payments) at June 30, 2008, were
        as
        follows:
  ·
              Warrants
                  to purchase 1,270,000 shares of common stock issued to consultants
                  in
                  November 2002. The warrants had an original five-year term, but
                  were
                  extended for one year in November 2007. These warrants have an
                  exercise
                  price of $0.25 per share.
  ·
              Warrants
                  to purchase 400,000 shares of common stock issued to a consultant
                  in May
                  2004. The warrants have a five-year term and were issued with an
                  exercise
                  price of $0.25 per share.
  ·
              Warrants
                  to purchase 562,500 shares of common stock issued to a placement
                  agent in
                  connection with the December 2004 private placement. The warrants
                  have a
                  five-year term and were issued with an exercise price of $2.00
                  per
                  share.
  ·
              Warrants
                  to purchase 1,473,770 shares of common stock issued to investors
                  in
                  connection with the September 2005 private placement. The warrants
                  have a
                  five-year term. The warrants granted pursuant to the September
                  2005
                  private placement originally had an exercise price of $3.00. In
                  January
                  2006, in connection with an amendment to the agreement the exercise
                  price
                  of the warrants was reduced from $3.00 to $1.00 per
                  share.
  ·
              Warrants
                  to purchase 13,335,925 shares of common stock issued to investors
                  in
                  connection with the January 2006 private placement. The warrants
                  have a
                  five-year term and were issued with an exercise price of $1.00
                  per
                  share.
  ·
              Warrants
                  to purchase 800,155 shares of common stock issued to a placement
                  agent in
                  connection with the January 2006 private placement. The warrants
                  have a
                  five-year term and were issued with an exercise price of $1.00
                  per
                  share.
  10


·
            Warrants
                to purchase 11,277,780 shares of common stock issued to lenders in
                connection with the sale of bridge notes between December 1, 2006
                and May
                1, 2007 (net of 23,694,955 converted to Note Payable). The warrants
                have a
                four-year term and were issued with an exercise price of $0.09 per
                share.




·
            Warrants
                to purchase 8,682,894 shares of common stock issued to a placement
                agent
                in connection with the sale of the bridge notes between December
                1, 2006
                and May 1, 2007. The warrants have a seven-year term and were issued
                with
                an exercise price of $0.0725 per share. On March 6, 2007, we issued
                2,000,000 shares of our common stock to our placement agent pursuant
                to
                the cashless exercise of 2,983,051 of these
                warrants.




·
            Warrants
                to purchase 1,000,000 shares of common stock issued to a lender in
                connection with the sale of the bridge notes on June 4, 2007. The
                warrants
                have a four-year term and were issued with an exercise price of $0.20
                per
                share.




·
            Warrants
                to purchase 2,020,202 shares of common stock issued to a placement
                agent
                in connection with the sale of bridge notes on June 4, 2007. The
                warrants
                have a seven-year term, were issued with an exercise price of $0.099,
                and
                contain a "cashless exercise" option.




·
            Warrants
                to purchase 35,176,849 shares of our common stock issued to lenders
                in
                connection with the sale of long term 6% convertible notes between
                September 28, 2007 and January 9, 2008. The warrants have a four-year
                term
                and were issued with an exercise price of $0.15.





·
            Warrants
                to purchase 3,590,909 shares of our common stock were issued to a
                placement agent in connection with the sale of the long term 6%
                convertible notes. The warrants have a seven- year term, were issued
                with
                an exercise price of $0.11 per share and contain a “cashless exercise”
                option.




·
            Warrants
                to purchase 2,843,394 shares of common stock issued to lenders
                between December 2007 and January 2008 in connection with the December
                20,
                2007 Tender Offer. The warrants have a four-year term and were issued
                with
                an exercise price of $0.15 per share.




·
            Warrants
                to purchase 2,258,382 shares of our common stock were issued to a
                placement agent in connection with the December 20, 2007 Tender Offer.
                The
                warrants have a seven-year term, and were issued with an exercise
                price of
                $0.09 per share.




·
            Warrants
                to purchase 15,160,600 shares of common stock are intended to be
                issued to
                lenders in connection with the Bridge Financing received between
                April and
                June of 2008. The warrants are expected to have a five year term,
                an
                exercise price of $0.06 per share and a “cashless exercise” option.
                Exercise of such warrants with respect to 6,843,000 shares would
                cause the
                Company’s issued and outstanding common stock, when added to the Company’s
                shares issuable upon the conversion of notes, exercise of warrants
                and
                exercise of options, to exceed the maximum number of shares of common
                stock the Company is currently authorized to issue under its certificate
                of incorporation.




In
      addition, if and when the Company consummates the Qualified Raise, warrants
      to
      purchase 1,970,368 shares of our common stock will be issuable to lenders in
      connection with a waiver signed by the majority of the noteholders authorizing
      the Company to issue notes in payment of quarterly interest, and to seek
      additional financing.




The
      following table summarizes the Company’s warrant activity (excluding warrants
      issued for compensation subsequent to adoption of SFAS 123R included below
      under
      share-based payments) for the quarter ended June 30, 2008:




**Number of**
              **warrants**
            
            **Exercise Price  per**
              **warrant**
            
            **Weighted average**
              **exercise price per**
              **warrant****Share**Outstanding,
                January 1, 2008
            
            
            82,520,823
            
            $
            0.0725
                - $2.00
            
            $
            0.32Granted
            
            
            300,000
            
            $
            0.15
            
            $
            0.15Converted
                to Note Payable
            
            
            (1,111,111
            )
            $
            0.09
            
            $
            0.09Outstanding,
                March 31, 2008
            
            
            81,709,712
            
            $
            0.0725
                - $2.00
            
            $
            0.32Granted
            
            
            15,160,600
            
            
            .06
            
            $
            0.06Exercised
            
            
            —
            
            
            —
            
            
            —Outstanding,
                June 30, 2008
            
            
            96,870,312
            
            $
            0.06
                - $2.00
            
            $
            0.27


11


As
      of
      June 30, 2008, the weighted average contractual life of warrants outstanding
      (excluding warrants issued for compensation subsequent to adoption of SFAS
      123R
      included below under share-based payments) is approximately 3.7
      years.




**Share-based
      payments:**




On
      January 1, 2006, the Company adopted the provisions of SFAS No. 123R
“Share-Based Payment” using the modified prospective transition method. The
      total expense associated with non-plan warrant and stock option based employee
      compensation was approximately $951,000 and $1,232,000 for the three months
      ended June 30, 2008 and 2007, respectively. The total expense associated with
      non-plan warrant and stock option based employee compensation was approximately
      $1,323,000 and $2,712,000 for the six months ended June 30, 2008 and 2007,
      respectively.




The
      aggregate intrinsic value in the tables below represents the total intrinsic
      value (the difference between the closing stock price on the last trading day
      of
      the quarter ended June 30, 2008 and the exercise price, multiplied by the number
      of in-the-money options and warrants) that holders would have received had
      all
      such holders exercised their options and warrants on June 30, 2008. This amount
      changes each reporting period based on changes in the fair market value of
      the
      Company’s common stock. No compensatory options or warrants were exercised
      during the three months ended June 30, 2008 or 2007.




As
      at
      June 30, 2008, future compensation cost related to non-vested stock options
      and
      warrants, less estimated forfeitures, is approximately $846,000 and will be
      recognized over an estimated weighted average period of 4.86 years.




A
                summary of stock option and warrants activity is as follows:
            
            **Number of**
              **options and**
              **warrants**
            
            **Weighted Average**
              **Exercise Price per**
              **option and**
              **warrant**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Term (years)**
            
            **Aggregate**
              **Intrinsic Value**Outstanding, January
                1, 2008
            
            
            69,857,460
            
            $
            0.25
            
            
            8.5
            
            $
            1,815,000Granted
            
            
            620,000
            
            $
            0.10Exercised
            
            
            —Cancelled/forfeited
            
            
            (775,000
            )
            $
            0.15Outstanding
                March 31, 2008
            
            
            69,702,460
            
            $
            0.23
            
            
            8.3
            
            $
            69,000Granted
            
            
            —Exercised
            
            
            —Cancelled/forfeited
            
            
            (666,563
            )
            $
            .16Outstanding
                June 30, 2008
            
            
            69,035,897
            
            $
            .21
            
            
            8.0
            
            $
            49,000Options
                and warrants exercisable at June 30, 2008
            
            
            60,476,068
            
            $
            0.22
            
            
            7.8
            
            $
            49,000




The
      following table summarizes additional information about stock options and
      warrants granted during the six months ended June 30:




**2008**
            
            **2007**Weighted-average
                fair value of grants
            
            $
            0.10
            
            $
            0.14Risk-free
                interest rate
            
            
            2.61%-2.90%
            
            
            4.44%-4.92%Expected
                option term
            
            
            4.46
                years
            
            
            4.0-6.1
                yearsStock
                price volatility
            
            
            130%
            
            
            138-141%Dividend
                yield
            
            
            —
            
            
            —


12


Outstanding
      compensatory stock options and warrants at June 30, 2008, included the following
      warrants:




·
            Warrants
                to purchase 18,000,000 shares of common stock issued to our President
                and
                Chief Executive Officer on December 1, 2006, as part of his compensation.
                The warrants have a ten-year term and were issued with exercise prices
                ranging from $0.11 to $0.18 per
                share.




·
            Warrants
                to purchase 2,515,624 shares of common stock issued to employees,
                directors and consultants on December 26, 2006, as part of their
                compensation. The warrants have a ten-year term and were issued with
                an
                exercise price of $0.14 per share.




·
            Warrants
                to purchase 750,000 shares of common stock issued to a director on
                January
                11, 2007, as part of his compensation. The warrants have a ten-year
                term
                and were issued with an exercise price of $0.15 per
                share.




·
            Warrants
                to purchase 8,263,750 shares of common stock issued to employees,
                directors and consultants on February 5, 2007, as part of their
                compensation. The warrants have a ten-year term and were issued with
                an
                exercise price of $0.14 per share.




·
            Warrants
                to purchase 850,000 shares of common stock issued to employees, directors
                and consultants on March 14, 2007, as part of their compensation.
                The
                warrants have a ten-year term and were issued with an exercise price
                of
                $0.19 per share.




·
            Warrants
                to purchase 50,000 shares of common stock issued to a former consultant
                to
                settle a pending litigation matter on March 14, 2007. The warrants
                have a
                five-year term and were issued with an exercise price of $0.15 per
                share.




·
            Warrants
                to purchase 10,125,000 shares of common stock issued to our Executive
                Chairman on March 14, 2007, as part of his compensation. The warrants
                have
                a ten-year term and were issued with an exercise price of $0.19 per
                share.




·
            Warrants
                to purchase 200,000 shares of common stock issued to two consultants
                on
                April 13, 2007, as part of their compensation. The warrants have
                a
                ten-year term and were issued with an exercise price of $0.33 per
                share.




·
            Warrants
                to purchase 1,400,000 shares of common stock issued to employees,
                directors and consultants on June 29, 2007, as part of their compensation.
                The warrants have a ten -year term and were issued with an exercise
                price
                of $0.20 per share.




·
            Warrants
                to purchase 5,000,000 shares of common stock issued to the placement
                agent
                on June 29, 2007, as a fee for various consulting services provided.
                The
                warrants have a ten-year term and were issued with an exercise price
                of
                $0.19 per share.




·
            Warrants
                to purchase 1,679,375 shares of common stock issued to employees,
                directors and consultants on September 19, 2007, as part of their
                compensation. The warrants have a ten-year term and were issued with
                an
                exercise price of $0.18 per share.





·
            Warrants
                to purchase 1,000,000 shares of common stock issued to consultants
                on
                November 8, 2007, as part of their compensation. The warrants have
                a
                four-year term and were issued with an exercise price of $0.001 per
                share.





·
            Warrants
                to purchase 1,100,000 shares of common stock issued to employees, on
                November 8, 2007, as part of their compensation. The warrants have
                a
                ten-year term and were issued with an exercise price of $0.26 per
                share.


13


·
            Warrants
                to purchase 60,000 shares of common stock issued to employees, on
                January 17, 2008, as part of their compensation. The warrants have
                a
                ten-year term and were issued with an exercise price of $0.13 per
                share.




·
            Warrants
                to purchase 200,000 shares of common stock issued to consultants, on
                January 17, 2008, as part of their compensation. The warrants have
                a
                five-year term and were issued with an exercise price of $0.13 per
                share.




·
            Warrants
                to purchase 320,000 shares of common stock issued to employees, on
                March 27, 2008, as part of their compensation. The warrants have
                a
                ten-year term and were issued with an exercise price of $0.07 per
                share.




**8.
      Net Income (Loss) Per Common Share**




The
      following tables set forth the computation of basic and diluted net income
      (loss) per common share for the three and six months ended June 30, 2008 and
      2007, respectively:




**Three Months Ended****June 30,****(in thousands except per share data)****2008**
            
            **2007**Numerator
                for basic and diluted net loss per share:
            
            $
            (1,120
            )
            $
            (8,047
            )Denominator
                for basic and diluted net loss per share – weighted average
                shares:
            
            
            142,442
            
            
            108,958Basic
                and diluted net loss per common share:
            
            $
            (0.01
            )
            $
            (0.07
            )




**Six Months Ended****June 30,****(in thousands except per share data)****2008**
            
            **2007**Numerator for
                basic net income (loss) per share:
            
            $
            16,047
            
            $
            (13,928
            )Numerator
                for diluted net income (loss) per share:
            
            $
            4,595
            
            $
            (13,928
            )Denominator
                for:Basic
                - weighted-average shares
            
            
            136,798
            
            
            107,933Convertible
                notes
            
            
            144,547Warrants
            
            
            982Diluted – weighted-average shares
            
            
            282,327
            
            
            107,933Basic
                net income (loss) per common share:
            
            $
            0.12
            
            $
            (0.13
            )Diluted
                net income (loss) per common share:
            
            $
            0.02
            
            $
            (0.13
            )




For
      the
      three months ended June 30, 2008, 164,906,209 options and warrants were excluded
      from the computation of net loss per share because the exercise price exceeded
      the average stock price for the period. Out-of-the-money options and warrants
      had average exercise prices of $.25. For the six months ended June 30, 2008,
      150,655,245 options and warrants were excluded from the computation of net
      income per share because the exercise price exceeded the average stock price
      for
      the period. Out-of-the-money options and warrants had average exercise prices
      of
      $.26. As of June 30, 2007, 131,723,190 options and warrants, and 109,556,114
      shares of common stock issuable upon the conversion of the convertible Notes
      were excluded from the computation of net loss per share because their effect
      would be anti-dilutive.


14


**9.
      Inventories**




Inventories
      consisted of the following:




**June 30,**
            
            **December 31,****2008**
            
            **2007****(in thousands)**Raw
                Materials
            
            $
            58
            
            $
            101Finished
                Goods
            
            
            194
            
            
            184$
            252
            
            $
            285




Inventories
      are stated at the lower of cost or market. Cost is determined using the
      first-in, first-out (FIFO) method.




**10.**  **Other
      Accrued Liabilities**




Other
      accrued liabilities consisted of the following (in thousands):




**June 30,**
              **2008**
            
            **December 31,**
              **2007**Accrued
                wages
            
            $
            121
            
            $
            132Accrued
                interest
            
            
            173
            
            
            141Liquidated
                damages
            
            
            525
            
            
            464Accrued
                legal and accounting fees
            
            
            267
            
            
            342Accrued
                consulting
            
            
            150
            
            
            139Accrued
                purchases
            
            
            3
            
            
            7Accrued
                rent (net)
            
            
            129
            
            
            227Other
            
            
            39
            
            
            211$
            1,407
            
            $
            1,663




**11.
      Notes Payable**




*Short-Term
      Loans and Convertible Bridge Notes*




On
      April
      20, 2007, the Company issued a 10% Convertible Promissory Note in the amount
      of
      $40,000 which matured on October 20, 2007. No demand for payment has been made
      by the holder. This outstanding note is convertible at a price of $0.0725 into
      551,724 shares of common stock. The Company will either pay such note and
      related interest when demand is made or, if elected by the holder, convert
      the
      note and accrued interest into common stock.




Between
      April and June 2008, the Company received cash in the amount of $910,000 in
      connection with the Bridge Loans as defined in Note 16. This cash reflects
      a
      discount of $182,000 from the expected face value of the corresponding 12%
      promissory notes (“2008 Bridge Notes”) that the Company intends to issue in the
      amount of $1,092,000 in connection with the corresponding Bridge Loans. In
      connection with these loans, it is anticipated that the Company will issue
      five-year warrants to purchase an aggregate of 15,160,600 shares of the
      Company’s common stock at an exercise price of $0.06 per share. Exercise of such
      warrants with respect to 6,843,000 shares would cause the Company’s issued and
      outstanding common stock, when added to the Company’s shares issuable upon the
      conversion of notes, exercise of warrants and exercise of options, to exceed
      the
      maximum number of shares of common stock the Company is currently authorized
      to
      issue under its certificate of incorporation.




Because
      the terms of the warrants to be issued may cause the potential number of shares
      issuable on conversion to be indeterminable due to an anti-dilution provision
      (in the event the Company does a subsequent financing, which event the Company
      cannot assert is improbable)  which
      is
      not limited by the terms of the agreements, and the Company is unable to assure
      it will have sufficient available shares to issue upon conversion of all
      convertible instruments, the warrants are required to be recorded as derivative
      liabilities and as a discount to the value of the notes (See Note 15). The
      Company recorded an original debt discount of approximately $710,000 associated
      with the 2008 Bridge Notes. The derivative liability was subsequently marked
      to
      fair value using the Black-Scholes model at June 30, 2008 which resulted in
      a
      derivative liability of approximately $658,000.




15





The
      discount of $182,000 has been recorded as debt discount and is being amortized
      as interest expense over the life of the notes. The carrying value of the 2008
      Bridge Notes at June 30, 2008 is $1,092,000, net of unamortized debt discount
      of
      $471,199, for a net carrying value of $620,801.




Between
      April and June, 2008, the Company also received cash in the aggregate amount
      of
      $500,000 in connection with short-term loans (“2008 Short-Term Loans”),
      repayable upon demand, and bearing interest at the rate of 12% per annum.




*Long-term
      6% Convertible Notes*




Between
      September 27, 2007 and December 31, 2007, the Company issued 6% Secured
      Convertible Promissory Notes initially due on September 2010 (the “6% Notes”) to
      accredited investors in the aggregate principal amount of $12,684,597. A similar
      6% Secured Convertible Promissory Note due September 2010 in the amount of
      $50,000 was issued on January 9, 2008, completing the subscription. The maturity
      of such notes was subsequently extended to March 2011. The aggregate
      consideration for such notes was in the form of cash or the exchange of bridge
      notes (including accrued interest) which had been issued in exchange for cash
      between December 1, 2006 and June 4, 2007. Such notes are convertible at
      $0.0725, $0.099 and $0.11 per share. As of December 31, 2007, $577,208 of the
      principal and accrued interest on these notes had been converted to common
      stock. A further $1,623,307 has been converted to common stock through June
      30,
      2008.




Between
      December 20 and December 31, 2007, the Company issued 6% Secured Convertible
      Promissory Notes due December 2010 in an aggregate principal amount of
      $2,032,546, convertible at $0.09 per share. A similar 6% Secured Convertible
      Promissory Note due December 2010 in the amount of $100,000 was issued on
      January 4, 2008, completing the subscription. The maturity of such notes was
      subsequently extended to June 2011. The Company primarily issued these notes
      in
      lieu of common stock in connection with its solicitation of the exercise of
      warrants to purchase common stock at an exercise price of $0.09 per share (the
      “Tender Offer”). The 6% Secured Convertible Promissory Notes issued between
      September 27, 2007 and January 9, 2008 are sometimes called “long term 6%
      convertible notes” in this report.




Interest
      on all of the 6% Secured Convertible Promissory Notes is payable quarterly
      in
      cash or by issuance of new notes. On December 31, 2007, additional 6% Secured
      Convertible Promissory Notes due September 2010 in the aggregate principal
      amount of $34,859 were issued to certain noteholders in lieu of cash payments
      of
      interest, on the same terms as the holder’s original 6% Secured Convertible
      Promissory Notes, except that interest on the interest notes cannot be paid
      by
      issuance of another 6% Secured Convertible Promissory Note. As of June 30,
      2008,
      in accordance with the terms of a consent signed by the holders of a
      majority of the aggregate principal amount of the notes outstanding, additional
      6% Secured Convertible Promissory Notes in the aggregate principal amount of
      $385,856 in lieu of cash interest payments due on March 31 and June 30, 2008
      were issued. These notes issued in lieu of cash interest are sometimes called
      “interest notes” in this report. The interest notes are materially identical in
      their terms to the original notes to which they relate, except that they are
      convertible at a conversion price of $0.11 per share. The maturity of these
      interest notes was subsequently extended by six months. In
      accordance with the terms of the consent signed by holders of a marjority
      of the aggregate principal amount of the 6% Secured Convertible Promissory
      Notes,the
      interest payments due on the last business day of September and December 2008
      and March and June 2009 will also be made in the form of interest notes in
      lieu
      of cash.




As
      described in Note 16 - Subsequent Events, the holders of the long-term 6%
      convertible senior notes and related warrants have recently amended the terms
      of
      such notes and related warrants.




The
      investors and the placement agent in these transactions also received warrants
      to purchase common stock at an exercise price of $0.15, as described more fully
      in Note 7. Because the terms of the instruments cause the potential number
      of
      shares issuable on conversion to be indeterminable due to an anti-dilution
      provision (in the event the Company does a subsequent financing which event
      the
      Company cannot assert is improbable) which is not limited by the terms of the
      agreements, and the Company is unable to assure it will have sufficient
      available shares to issue upon conversion of all convertible instruments, the
      conversion option and warrants are required to be recorded as derivative
      liabilities (See Note 15.)


16


The
      fair
      value of the derivative liabilities related to the long term 6% convertible
      notes totaled approximately $5,653,000 at June 30, 2008. The approximate net
      carrying amount of all the long term 6% convertible notes at June 30, 2008
      is
      $3,233,000.




Long Term
                Notes
                Payable
              
              Debt Discount
                Related to Issue
                Costs, Warrants, and
                Beneficial Conversion
                Features
              
              Net Carrying
                Value of NotesBalance at
                  December 31, 2007
              
              $
              14,175
              
              $
              (13,210
              )
              $
              965Notes
                  Converted to Common Stock
              
              
              (1,416
              )
              
              1,219Issuance
                  of New Notes
              
              
              150
              
              
              (147
              )Conversion
                  of Interest to Notes
              
              
              197
              
              
              (106
              )Amortization
                  of Debt Discount
              
              
              
              
              
              1,194Balance
                  at March 31, 2008
              
              $
              13,109
              
              $
              (11,050
              )
              $
              2,059Notes
                  Converted to Common Stock
              
              
              (207
              )
              
              183Issuance
                  of New Notes
              
              
              —
              
              
              —Conversion
                  of Interest to Notes
              
              
              192
              
              
              (50
              )Amortization
                  of Debt Discount
              
              
              
              
              
              1,061Balance
                  at June 30, 2008
              
              $
              13,089
              
              $
              (9,856
              )
              $
              3,233




*Notes
      Payable to Related Parties*




Greg
      Osborn, Executive Chairman and a director of the Company, has purchased
      convertible notes from the company at various times since December 1, 2006.
      As
      of June 30, 2008, the aggregate value of the long term 6% convertible notes
      held
      by Mr. Osborn, including related interest notes issued in lieu of cash, totaled
      $27,955. These notes are convertible to 381,716 shares of our common stock
      at
      conversion prices ranging from $0.0725 to $0.11 per share. In addition, as
      of
      June 30, 2008, Mr. Osborn had advanced cash in connection with the 2008 Bridge
      Loans in the aggregate amount of $120,000 accruing interest at 12% per annum.
      Mr. Osborn owns warrants to purchase 138,888 shares of our common stock with
      an
      exercise price of $0.09 per share; warrants to purchase 50,000 shares with
      an
      exercise price of $0.15 per share; and warrants to purchase 1,666,000 shares
      with an exercise price of $0.06 in connection with his personal investments
      in
      the Company’s Notes Payable. In addition, as of June 30, 2008, Mr. Osborn held a
      short-term note payable in the amount of $150,000, bearing interest at 12%,
      which is to be repaid from the proceeds of the anticipated Qualified
      Raise.




Lanny
      Dacus, President, Chief Executive Officer and a director of the Company, has
      purchased convertible notes from the company at various times since December
      1,
      2006. As of June 30, 2008, the aggregate value of the long term 6% convertible
      notes held by Mr. Dacus, including related interest notes issued in lieu of
      cash, totaled $183,873. These notes are convertible to 2,360,064 shares of
      our
      common stock at conversion prices ranging from $0.0725 to $0.11 per share.
      In
      addition, as of June 30, 2008, Mr. Dacus held one 2008 Bridge Note, with a
      principal value of $60,000 accruing interest at 12% per annum, which is
      convertible into the anticipated Qualified Raise. Mr. Dacus owns warrants to
      purchase 300,000 shares of our common stock with an exercise price of $0.15,
      and
      warrants to purchase 833,000 shares with an exercise price of $0.06 in
      connection with his personal investments in the Company’s Notes Payable. In
      addition, as of June 30, Mr. Dacus held a short-term note payable in the amount
      of $150,000, bearing interest at 12%, which is to be repaid from the proceeds
      of
      the anticipated Qualified Raise.




Joseph
      Carfora, a director of the Company, has purchased convertible notes from the
      company at various times since January 25, 2007. As of June 30, 2008, the
      aggregate value of the long term 6% convertible notes held by Mr. Carfora,
      including related interest notes issued in lieu of cash, totaled $27,161. These
      notes are convertible to 347,359 shares of our common stock at conversion prices
      ranging from $0.0725 to $0.11 per share. Mr. Carfora owns warrants to purchase
      167,778 shares of our common stock, at exercise prices ranging from $0.09 to
      $0.15 per share, obtained in connection with his personal investments in the
      Company’s Notes Payable.


17




Timothy
      Lane, a director of the Company, has purchased convertible notes from the
      company at various times since May 1, 2007. As of June 30, 2008, the aggregate
      value of the long term 6% convertible notes held by Mr. Lane, including related
      interest notes issued in lieu of cash, totaled $53,649. These notes are
      convertible to 732,557 shares of our common stock at conversion prices ranging
      from $0.0725 to $0.11 per share. Mr. Lane owns warrants to purchase 377,778
      shares of our common stock, at exercise prices ranging from $0.09 to $0.15
      per
      share, obtained in connection with his personal investments in the Company’s
      Notes Payable.




Leonid
      Frenkel, who resigned as director of the Company on June 1, 2007, owns
      convertible notes purchased from the Company at various times since February
      14,
      2007. As of June 30, 2008, the aggregate value of the long term 6% convertible
      notes held by Mr. Frenkel, including related interest notes issued in lieu
      of
      cash, totaled $614,099. These notes are convertible to 7,847,644 shares of
      our
      common stock at conversion prices ranging from $0.0725 to $0.11 per share.
      Mr.
      Frenkel owns warrants to purchase 1,066,667 shares of our common stock at
      exercise prices ranging from $0.09 to $0.15 per share, obtained in connection
      with his personal investments in the Company’s Notes Payable.




Frederick
      Ledlow, a director of the Company, has purchased convertible notes from the
      company at various times since January 25, 2007. As of June 30, 2008, the
      aggregate value of the long term 6% convertible notes held by Mr. Ledlow,
      including related interest notes issued in lieu of cash, totaled $20,195. These
      notes are convertible to 258,997 shares of our common stock at conversion prices
      ranging from $0.0725 to $0.11 per share. Mr. Ledlow owns warrants to purchase
      33,333 shares of our common stock, at exercise prices ranging from $0.09 to
      $0.15 per share, obtained in connection with his personal investments in the
      Company’s Notes Payable.




Peter
      O’Gorman, a director of the Company, has purchased convertible notes from the
      company at various times since January 25, 2007. As of June 30, 2008, the
      aggregate value of the long term 6% convertible notes held by Mr. O’Gorman,
      including related interest notes issued in lieu of cash, totaled $40,390. These
      notes are convertible to 517,994 shares of our common stock at conversion prices
      ranging from $0.0725 to $0.11 per share. Mr. O’Gorman owns warrants to purchase
      66,667 shares of our common stock, at exercise prices ranging from $0.09 to
      $0.15 per share, obtained in connection with his personal investments in the
      Company’s Notes Payable.




**12.
      Contractual Obligations and Commitments**




The
      Company has the following off-balance sheet commitments as of June 30, 2008,
      which are comprised primarily of a research and development fee contract,
      consulting and employment contracts, vendor agreements, notes payable, as well
      as numerous operating leases.




**(in thousands)****Payments**
              **Due by****Period**
            
            **Less Than**
            
            **1-3**
            
            **3-5**
            
            **More Than****Contractual Obligations**
            
            **Total**
            
            **1 Year**
            
            **Years**
            
            **Years**
            
            **5 Years**Research &
                development (“R&D”) fees (1)
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Consulting
                agreements
            
            
            49
            
            
            49
            
            
            —
            
            
            —
            
            
            —Employment
                agreements (2)
            
            
            333
            
            
            235
            
            
            98
            
            
            —
            
            
            —Vendor
                agreements
            
            
            6
            
            
            6
            
            
            —
            
            
            —
            
            
            —Operating
                leases
            
            
            581
            
            
            348
            
            
            234
            
            
            —
            
            
            —**Total**
            
            **$**
            969
            
            $
            638
            
            $
            332
            
            **$**
            —
            
            **$**
            **—**





(1)          
      On January 26, 2006, R&D fees payable under a Patent and Sub-License
      Agreement with pHarlo IP were amended so as to have no minimum amounts payable
      after 2006; however, they are capped at $2,000,000 for 2007, $4,000,000 for
      2008, $8,000,000 for 2009 and $10,000,000 for 2010 and beyond. During the six
      months ended June 30, 2008, we paid approximately $71,000 and accrued
      approximately $31,000 R&D fees.




(2)          
      As of June 30, 2008 the estimated future minimum annual compensation under
      these
      employment agreements, for 2008, 2009, and 2010 and beyond is approximately
      $130,000, $150,000 and $37,500.


18


**13.
      Related Party Transactions**




*Greg
      Osborn*




In
      April
      2007, the Company entered into an employment agreement with Greg Osborn in
      connection with his appointment as Executive Chairman, effective March 14,
      2007.
      Mr. Osborn is the Managing Partner of Indigo Ventures, LLC, an affiliate of
      Middlebury Securities,LLC, formerly known as Indigo Securities, LLC, the firm
      that served as the placement agent for the offerings of the bridge notes issued
      in 2007 and the 6% Interest Notes due in September and December 2010. Mr. Osborn
      is also a registered representative of Middlebury Securities, formerly known
      as
      Indigo Securities. In connection with its services as placement agent in these
      transactions, Indigo Securities received an aggregate cash fee of $1,427,763
      and
      seven-year warrants to purchase an aggregate of approximately 16,552,377 shares
      of our common stock at exercise prices between $0.0725 and $0.11 per share.
      Indigo Securities is entitled to a placement agent’s fee with respect to any
      securities purchased in any subsequent offering by any investors introduced
      to
      us by the placement agent, if such subsequent offering is consummated any time
      within the twelve month period following the final closing of the offering
      of
      the long term 6% convertible notes.




**14.
       Segments — Enterprise Wide Disclosures**




The
      Company owns several utility patents and patent applications that cover certain
      product applications that are marketed and sold by the Company. The Chief
      Operating Decision Maker (CODM) of the Company is the President and CEO. The
      operating results of each product application, other than for revenue, are
      not
      separately tracked or reported. Operating results by product application are
      not
      reviewed by the CODM because discrete financial information is not available.
      Consequently, as permitted by the provisions of SFAS No. 131, “Disclosure About
      Segments of an Enterprise and Related Information,” the Company has one
      reportable segment for financial statement purposes.




*Dependence
      on Certain Customers*




The
      Company’s dependence on certain customers as a percentage of total revenue is as
      follows:




**Three Months Ended**
              **June 30,****2008**
            
            **2007**Customer A
            
            
            24%
            
            
            18%Customer
                B
            
            
            15%
            
            
            8%Customer
                C
            
            
            15%
            
            
            10%Customer
                D
            
            
            14%
            
            
            —%




**Six Months Ended**
              **June 30,****2008**
            
            **2007**Customer
                A
            
            
            16%
            
            
            15%Customer
                B
            
            
            9%
            
            
            10%Customer
                C
            
            
            10%
            
            
            6%Customer
                D
            
            
            13%
            
            
            —%




*Accounts
      Receivable Concentration*




**Three Months Ended**
              **June 30,****2008**
            
            **2007**Customer
                A
            
            
            30%
            
            
            17%Customer
                B
            
            
            11%
            
            
            10%Customer
                C
            
            
            16%
            
            
            2%Customer
                D
            
            
            18%
            
            
            —%


19


**15.
       Derivative Instruments**




To
      date,
      the Company has entered into several debt and equity transactions to fund its
      operations. A number of these transactions involved the issuance of convertible
      debt and warrants. Certain of these transactions also included registration
      rights agreements that impose significant penalties on the Company if certain
      conditions are not met. As a result of these transactions the Company faces
      a
      number of unique and complex accounting issues such as the ones discussed below.




The
      Company has issued and outstanding financial instruments with embedded
      derivative features consisting of convertible debt and warrants. **** The
      Company analyzes these financial instruments in accordance with Statement of
      Financial Accounting Standards (“SFAS”) No. 133 and Emerging Issues Task Force
      (“EITF”) Issue No. 00-19 to determine if these hybrid contracts have embedded
      derivatives that must be bifurcated. In addition, free standing warrants are
      accounted for as either equity or liabilities in accordance with the provisions
      of EITF Issue No. 00-19.




EITF
      Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
      Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock’” addresses financial instruments, such as convertible notes and stock
      purchase warrants, which are accounted for under EITF 00-19, that are issued
      with a corresponding right to have these securities registered pursuant to
      a
      registration rights agreement that includes a liquidated damages clause.
      Alternative accounting treatments of registration rights are discussed in EITF
      Issue No. 05-4. The Company has adopted View C as described in the EITF Issue
      No. 05-4 Issue Summary No. 1. Under View C, registration rights agreements
      and
      the associated financial instruments are accounted for as separate instruments.
      Accordingly, the Company has given only prospective application to this
      guidance. On December 21, 2006 the Financial Accounting Standards Board issued
      FASB Staff Position (FSP) EITF No. 00-19-2 which is effective for fiscal years
      beginning after December 15, 2006. This FSP specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration rights agreement, whether issued as a separate agreement or
      included as a provision of a financial instrument or other agreement, should
      be
      separately recognized and measured in accordance with FASB Statement No. 5, *Accounting
      for Contingencies* EITF.
      The Company’s treatment of the registration rights agreement as separate
      instruments is consistent with this FSP.




In
      connection with the examination of past transactions by the Company for
      application of EITF Issue No. 05-4, it noted that for the period from entering
      into the April 2004 Securities Purchase Agreement until it increased its
      authorized shares in August 2004, it had insufficient shares to meet all
      potential obligations to issue shares under its convertible notes and
      exercisable warrants and options. Under EITF Issue No. 00-19, a liability should
      be recognized for those financial instruments for that period, with any changes
      in the fair value of such liabilities recognized in the Company’s consolidated
      statement of operations. Based on the Company’s analysis of such liabilities, it
      determined the effect of any such amounts to be immaterial.




In
      April
      2004 and July 2004, the Company entered into private placement agreements,
      and
      registration rights agreements for convertible debentures and warrants. Based
      on
      the interpretive guidance in EITF Issue No. 05-4 due to an uncapped liquidated
      damages provision in the registration rights agreements, it determined that
      the
      registration rights are derivative liabilities that should be bifurcated from
      the related financial instruments. Accordingly, the estimated fair value of
      the
      registration rights derivative of $244,000 was recorded as a liability as of
      October 1, 2005, the beginning of the first fiscal period after September 15,
      2005, the date that EITF postponed further deliberations. As of December 31,
      2006, the full amount of the derivative liability balance was reversed since
      the
      shares purchased under the April 2004 and July 2004 private placements could
      be
      sold under Rule 144(k) of the Securities Act of 1933 and it had recorded the
      full and maximum amount of the actual incurred liquidated damages of
      approximately $442,000, associated with these registration rights agreements.
      Additionally, the Company recorded approximately $141,000 of interest and late
      fees related to the April 2004 and July 2004 convertible debentures. Both of
      these amounts are included in the other accrued liabilities.


20


As
      disclosed in Note 11, beginning with the bridge note transaction in June 2007,
      the Company’s issuance of convertible notes have included provisions which
      require it to account for the conversion feature of the notes and the warrants
      issued in connection with the notes, as well as all other potentially issuable
      share instruments except share-based compensation to employees and non-employee
      directors, as derivative liabilities. Such instruments are recorded at fair
      value when issued and adjusted to fair value at each reporting date or when
      extinguished, converted or exercised, with the change in fair value reported
      in
      the statements of operations. As a result of changes in fair value since the
      later of December 31, 2007 or their issuance, we have recorded a gain on changes
      in fair value during the three and six month periods ended June 30, 2008 of
      approximately $3.5 million and $24.8 million respectively.




SFAS
        157
        clarifies that fair value is an exit price, representing the amount that
        would
        be received to sell an asset or paid to transfer a liability in an orderly
        transaction between market participants. As such, fair value is a market-based
        measurement that should be determined based on assumptions that market
        participants would use in pricing an asset or liability. SFAS 157 establishes
        a
        fair value hierarchy that prioritizes the inputs to valuation techniques
        used to
        measure fair value. The hierarchy gives the highest priority to unadjusted
        quoted prices in active markets for identical assets or liabilities (Level
        1
        measurements) and the lowest priority to unobservable inputs (Level 3
        measurements). The derivative liabilities are valued using the Black-Scholes
        model using inputs applicable to each issuance. Such valuation falls under
        Level
        3 of the fair value hierarchy under FAS 157.
  The
        following table provides information by level for assets and liabilities
        that
        are measured at fair value, as defined by SFAS No. 157, on a recurring
        basis.
  **Fair
                  Value Measurements Using****Quoted
                  Price in**
              
              **Significant****Active
                  Markets**
              
              **Other**
              
              **Significant****Fair
                  Value**
              
              **for
                  Identical**
              
              **Observable**
              
              **Unobservable****at**
              
              **Assets**
              
              **Inputs**
              
              **Inputs****Description**
              
              **June 30,
                  2008**
              
              **(Level
                  1)**
              
              **(Level
                  2)**
              
              **(Level
                  3)**Liabilities:Derivative
                  liabilities
              
              $
              6,311,000
              
              
              —
              
              
              —
              
              $
              6,311,000
  The
        following two tables represent the reconciliation required for Level 3 inputs
        and the valuation inputs to the Black-Scholes model.
  Balance
                  - December 31, 2007
              
              $
              31,656,000Additions
                  and settlements
              
              
              (1,146,000
              )Changes
                  in fair value
              
              
              (21,294,000
              )Balance
                  - March 31, 2008
              
              $
              9,216,000Additions
                  and settlements
              
              
              632,000Changes
                  in fair value
              
              
              (3,537,000
              )Balance
                  - June 30, 2008
              
              $
              6,311,000Unrealized
                  gains (losses) included in earnings for the six months ended June
                  30, 2008
                  attributable to derivative liabilities still held at June 30,
                  2008
              
              $
              (22,629,000
              )-
                  Cumulative
              
              $
              (38,708,000
              )
  **2008**Risk-free
                  interest rate
              
              
              1.7%-3.4
              %Term
                  of note or warrant
              
              
              3-4
                  yearsStock
                  price volatility
              
              
              128%-136
              %Dividend
                  yield
              
              
              —




**16.
      Subsequent Events**




As
      of
      August 6, 2008, holders of 6% Secured Convertible Notes due September 27, 2010
      and 6% Secured Convertible Notes due December 20, 2010 (collectively, the
“Notes”) representing greater than 80% of the outstanding principal amount of
      such notes have agreed to waive and/or amend (the “Consent and Agreement”)
      certain terms and conditions with respect to the Notes, the related warrants
      and
      the related subscription agreements.




As
      reported previously, the Company has received, at various dates since April
      2008, cash in connection with bridge loans (the “Bridge Loans”) and has entered
      into an agreement with a private placement agent to raise additional funds
      (the
“Qualified Raise”), the terms of which are still under negotiation. The Company
      is currently seeking up to $6.0 million through the Qualified Raise (which
      amount includes the Bridge Loans), and an additional $2.0 million through a
      receivables-based revolving financing (the “Revolving Financing”). There can be
      no assurances that the Company will be able to raise any funds pursuant to
      this
      private placement agreement.


21


The
      material waivers and/or amendments to the Notes are as follows:




•
            The
                Qualified Raise, the Revolving Financing and the Bridge Loans will
                be
                senior to the Notes.




•
            The
                conversion price adjustments applicable to the Notes that would otherwise
                be made in connection with the Qualified Raise, the Revolving Financing
                and the Bridge Loans have been waived in favor of a new conversion
                price
                as follows: (A) in the event that the conversion price for the notes
                expected to be issued in connection with the Qualified Raise, the
                Revolving Financing and the Bridge Loans is greater than or equal
                to
                $0.040 per share, the new conversion price is reduced to $0.044 per
                share,
                and the effective date for this new conversion price is July 30,
                2008; (B)
                in the event that the conversion price for the notes expected to
                be issued
                in connection with the Qualified Raise, the Revolving Financing and
                the
                Bridge Loans is less than $0.040 per share, the new conversion price
                will
                be further reduced to the price that equals the product of the conversion
                price of such notes multiplied by
                1.1.




•
            The
                maturity of the Notes will be extended by six
                months.




•
            The
                adjustments to the face value and exercise price of the warrants
                that were
                issued with the Notes that would otherwise be made to such warrants
                in
                connection with the Qualified Raise, the Revolving Financing and
                the
                Bridge Loans have been waived in favor of keeping the same number
                of
                warrants at a new exercise price as follows: (A) in the event that
                the
                exercise price of the warrants expected to be issued in connection
                with
                the Qualified Raise, the Revolving Financing and the Bridge Loans
                equals
                or exceeds $0.07 per share, the new exercise price will remain at,
                or be
                reduced to, $0.07 per share, and (B) in the event that the exercise
                price
                of the warrants expected to be issued in connection with the Qualified
                Raise, the Revolving Financing and the Bridge Loans is, or should
                become,
                less than $0.07 per share, the new exercise price will be reduced
                by an
                amount equal to the product of the then exercise price of such warrants
                multiplied by 1.2.




•
            The
                adjustments to the conversion and exercise price described above
                will not
                result in further adjustment to the conversion and exercise price,
                except
                as described above.




•
            Piggy
                back registration rights and participation rights are waived with
                respect
                to the Qualified Raise, the Revolving Financing and the Bridge Loans
                and
                the Company is permitted to grant immediate registration rights to
                any
                shares underlying the notes and/or warrants to be issued in the Qualified
                Raise, the Revolving Financing and the Bridge
                Loans.




•
            The
                collateral agent with respect to the Notes is authorized to subordinate
                any collateral securing the Notes to the proposed security interest
                with
                respect to the Qualified Raise, the Revolving Financing and the Bridge
                Loans.




•
            The
                amendment provisions of the Notes are changed to permit each holder
                to
                consent to the amendment of its Note without affecting other Notes
                and to
                permit amendment of all Notes upon the consent of at least 95% of
                the
                aggregate principal amount of the Notes then outstanding and amendment
                of
                all related warrants upon the consent of holders of warrants exercisable
                for at least 95% of shares issuable upon exercise of all
                warrants.




In
      addition, the Consent and Agreement provides that options and/or warrants
      exercisable for up to 4,500,000 shares of Common Stock to employees and/or
      consultants of the Company are permitted to be subject to exercise price
      anti-dilution protection under certain conditions.




In
      exchange for the above, the Company has agreed promptly to change its transfer
      agent to Continental Stock Transfer & Trust Company and to enter into an
      agreement with Conversion Agents LLC relating to the Notes and related
      warrants.




For
      those
      holders with respect to whom the Company receives a fully completed Consent
      and
      Agreement, the new exercise price for the related warrants, as described above,
      is effective from July 30, 2008.





Subsequent
      to June 30, 2008, the Company received
      additional cash in the aggregate amount of $300,000 in connection with the
      Bridge Loans.


22


**** **Item
      2. Management’s Discussion And Analysis of Financial Condition And Results Of
      Operations**




The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with the condensed consolidated
      financial statements and notes thereto appearing elsewhere in this Quarterly
      Report on Form 10-Q. This discussion contains forward-looking statements that
      involve risks and uncertainties. See “Forward-Looking Statements” for a
      description of the important factors that could cause actual results to differ
      materially from those contained in these forward-looking
      statements.




**Business
      Overview**





We
      manufacture, distribute and market a variety of products using a process we
      refer to as “pHarlo technology.” These products are covered by one or more
      patents, or base patents, and manufactured using the pHarlo technology, which
      is
      covered by those patents. The pHarlo technology utilizes a safe solution, which
      we call the pHarlo concentrate, a solution whose components have been accepted
      as Generally Recognized as Safe by the U.S. Food and Drug Administration, or
      FDA. This safe solution enables copper sulfate, a compound with bacteriostatic
      properties, i.e., the ability to inhibit bacteria growth, to remain active
      throughout a wide range of pH values, or measurements of acidity or alkalinity
      in a solution.




We
      currently market:




·
            Unifresh
                ® Footbath and other related products that clean and disinfect the
                hooves
                of dairy cows;




·
            Tasker
                Blue, an antimicrobial aid to be used in the scalder process of poultry
                processing, a stage in poultry processing designed to loosen feathers
                so
                that they can be picked and removed mechanically, and the post-feather
                picker process, which is the method used in chicken processing that
                receives chickens immediately after the scalder and mechanically
                removes
                feathers.




·
            Tasker
                Clear, an acidifier that controls pH levels to enhance the effectiveness
                of liquid bacteriostatic applications. Currently, the product is
                marketed
                for use in intervention points of poultry processing and was recently
                approved for use in red meat
                processing.




·
            Tasker
                Pacific Blue Seafood Wash, a product used in commercial and retail
                seafood
                processing to extend shelf life and reduce or eliminate odors; and




We
      are
      currently seeking to license and/or sell the Close CallTM brand an oral hygiene
      drink, and derivative applications.




**Financial
      Overview**




Until
      December 31, 2005, we were a development stage company. The quarterly period
      ended March 31, 2006 was the first period we were considered an operating
      company.




We
      are
      rapidly depleting our cash resources and our ability to continue to operate
      and
      grow our business is dependent upon obtaining additional financing from the
      proposed Qualified Raise or a similar sale of debentures, the exercise of
      outstanding warrants, and/or generating revenue growth from operations. While
      we
      have been in the process of aggressively developing, marketing and selling
      our
      products, there can be no assurance that those efforts will be met with success
      in the marketplace or that the timing of our efforts will be consistent with
      our
      cash availability and burn rate. If we are unable to obtain financing and/or
      generate sufficient revenue growth from existing and new business arrangements,
      we will not have sufficient cash to support our operations and meet our
      obligations and we will be forced to consider the further restructuring of
      our
      operations, disposition of various assets, seeking of protection from our
      creditors, or ceasing of operations and liquidation. We anticipate that we
      will
      need approximately an additional $6 million to support our operations and meet
      our obligations over the next twelve months.


23




**Related
      Party Transactions**





*Greg
      Osborn*




In
      April
      2007, the Company entered into an employment agreement with Greg Osborn in
      connection with his appointment as Executive Chairman, effective March 14,
      2007.
      Mr. Osborn is the Managing Partner of Indigo Ventures, LLC, an affiliate of
      Middlebury Securities, LLC, formerly known as Indigo Securities, LLC, the firm
      that served as the placement agent for the offerings of the bridge notes issued
      in 2007 and the 6% Interest Notes due in September and December 2010. Mr. Osborn
      is also a registered representative of Middlebury Securities, formerly known
      as
      Indigo Securities. In connection with its services as placement agent in these
      transactions, Indigo Securities received an aggregate cash fee of $1,427,763
      and
      seven-year warrants to purchase an aggregate of approximately 16,552,377 shares
      of our common stock at exercise prices between $0.0725 and $0.11 per share.
      Indigo Securities is entitled to a placement agent’s fee with respect to any
      securities purchased in any subsequent offering by any investors introduced
      to
      us by the placement agent, if such subsequent offering is consummated any time
      within the twelve month period following the final closing of the offering
      of
      the long term 6% convertible notes.




**Critical
      Accounting Policies and Estimates**




We
      believe that several accounting policies are important to understanding our
      historical and future performance. We refer to these policies as “critical”
because these specific areas generally require us to make judgments and
      estimates about matters that are uncertain at the time we make the estimate,
      and
      different estimates—which also would have been reasonable—could have been used,
      which would have resulted in different financial results.




The
      critical accounting policies we identified in our Annual Report on Form 10-K
      for
      the fiscal year ended December 31, 2007 related to stock-based compensation,
      derivative instruments, goodwill and intangible assets and the valuation of
      acquired intangible assets. It is important that the discussion of our operating
      results that follows be read in conjunction with the critical accounting
      policies disclosed in our Annual Report on Form 10-K, as filed with the SEC
      on
      March 31, 2008.




In
      addition, the Company adopted the following critical accounting policies during
      2008 as set forth below:




In
      September 2006, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS
      157) . This Standard defines fair value, establishes a framework for measuring
      fair value, and expands disclosures about fair value measurements. It applies
      to
      other accounting pronouncements where the FASB requires or permits fair value
      measurements but does not require any new fair value measurements. In February
      2008, FASB issued FASB Staff Position (FSP) No. 157-2, Effective Date of FASB
      Statement No. 157 , which delayed the effective date of SFAS 157 for certain
      non-financial assets and non-financial liabilities to fiscal years beginning
      after November 15, 2008, and interim periods within those fiscal years. The
      Company adopted SFAS 157 for financial assets and liabilities on January 1,
      2008. It did not have any impact on the Company’s results of operations or
      financial position. The disclosures required under SFAS 157 are set forth in
      Note 15. The Company is in the process of evaluating the effect, if any, the
      adoption of FSP No. 157-2 will have on its results of operations or financial
      position.




**Three
      Months Ended June 30, 2008 Compared to Three Months Ended June 30,
      2007**




*Revenues*




Revenues
      for the three months ended June 30, 2008 were approximately $1,588,000 compared
      with approximately $632,000 for the corresponding period in 2007. This increase
      is primarily due to increased sales of Unifresh ® Footbath and related products
      used in the Dairy industry, offset by reduced sales of our poultry processing
      products. We expect that revenue will continue to increase throughout fiscal
      year 2008, primarily due to our intensified marketing efforts of our poultry
      processing products and the expansion of our distributor network for our
      Unifresh® Footbath product.




*Gross
      Margin*




Gross
      margin for the three months ended June 30, 2008 was $924,000 compared to
      $559,000 for the same period of the prior year. The gross margin percent
      decreased from 88% for the three months ended June 30, 2007 to 58% for the
      three
      months ended June 30, 2008. This decrease was primarily due to higher sales
      of a
      lower margin product mix in the dairy business.


24


*Selling,
      General and Administrative*




Selling,
      General and Administrative (“SGA”) expenses are primarily comprised of sales and
      marketing expenses, compensation expenses, professional fees, and general and
      administrative expenses. SGA expenses for the three months ended June 30, 2008
      decreased by approximately $241,000 from approximately $3.4 million for the
      three months ended June 30, 2007, to approximately $3.2 million for the three
      months ended June 30, 2008.




Sales
      and
      marketing expenses consist primarily of salaries and other related expenses
      for
      sales and marketing personnel, sales commissions, promotional expenses,
      advertising, public relations and trade show expenses. Sales and marketing
      expenses for the three months ended June 30, 2008 decreased by approximately
      $68,000 compared to the three months ended June 30, 2007, primarily due to
      a
      decrease in sales related commissions.




Compensation
      expense consists primarily of salaries and other related expenses for senior
      management, sales and field service personnel, and finance and administrative
      employees of our company. Compensation expense charged to Selling, General
      and
      Administrative expense increased by approximately $355,000 for the three months
      ending June 30, 2008 compared to the same period in 2007, primarily due to
      an
      increase in field service personnel through additional hiring and the
      reassignment of personnel who had previously been engaged in research and
      development.




Professional
      fees for the three months ended June 30, 2008 compared to the same period in
      2007 decreased by $404,000, primarily because a net accrual of $320,000 for
      fees
      related to the 2007 financing activities was not repeated in 2008. Accounting
      and audit fees were reduced by $63,000 and legal fees were reduced by $21,000
      for the three months ended June 30, 2008 as compared to the three months ended
      June 30, 2007.




General
      and administrative expenses consist primarily of rent, insurance, freight,
      and
      travel and entertainment expenses. Travel and entertainment expenses for the
      three months ended June 30, 2008 increased by $80,000 compared to the same
      period in 2007, due to increased travel in support of national marketing
      activities. We also experienced an increase of approximately $19,000 in outbound
      freight expense due to increased shipments and the increased costs of fuel
      reflected in our carriers’ charges. These costs were partially offset by reduced
      rent expense of $35,000 and other general cost reductions of $47,000 for the
      three months ended June 30, 2008 compared to the same period in
      2007.




Stock
      based compensation expense for selling, general and administrative employees
      decreased by approximately $268,000, to approximately $951,000 for the three
      months ended June 30, 2008 as compared to $1.2 million for the same time period
      in 2007. The expense associated with these awards is recorded as expense within
      the same functional expense category that the respective employee’s compensation
      is recorded. For the three months ended June 30, 2008, stock compensation
      expense was allocated as follows:




**(in thousands)**Sales and
                marketing
            
            $
            68General
                and administrative
            
            
            883$
            951




*Product
      Development*




Product
      development consists primarily of product supplies and personnel expenses to
      support product development. Product development and research expenses for
      the
      three months ended June 30, 2008 decreased by approximately $141,000 to
      approximately $280,000 from approximately $349,000 for the three months ended
      June 30, 2007. This decrease is primarily due to our decision to focus our
      development efforts in a select smaller number of products. The decrease in
      the
      number of products we are developing and testing in the three months ended
      June
      30, 2008 resulted in a decrease in consulting expenses and wages of
      approximately $134,000, and a decrease in stock based compensation expense
      of
      $13,000. These cost savings were partially offset by the consumption of an
      additional $14,000 of product supplies in support of research and development.


25


*Depreciation
      and Amortization Expense*




Depreciation
      and amortization expense, which includes the amortization of identifiable
      intangible assets as well as machinery and office equipment, remained consistent
      for the three months ending June 30, 2008 with the same expense for the three
      months ending June 30, 2007.




*Interest
      Expense*




Interest
      expense increased by approximately $39,000 from $175,000 for the three months
      ended June 30, 2007, to approximately $214,000 for the three months ended June
      30, 2008. The increase was primarily due to accrued interest expense related
      to
      the long term 6% convertible notes primarily issued in 2007 and to the Bridge
      Loans issued in 2008.




*Interest
      Income*




Interest
      income remained constant for the three months ended June 30, 2008 compared
      with
      the three months ended June 30, 2007. Interest earned during these periods
      was
      related to the Note Receivable.




*Amortization
      of fair value assigned to beneficial conversion feature and amortization of
      fair
      value of warrants*




In
      connection with our financing arrangements we have issued equity instruments
      or
      included conversion terms at discount to the current market. We are required
      to
      allocate a portion of the proceeds to these features, which result in a debt
      discount. Such amounts are amortized over the stated life of the loan. We
      amortized approximately $1,482,000 related to debt discounts for all notes
      during the three months ended June 30, 2008, a reduction in amortization expense
      of approximately $1,705,000 from approximately $3,187,000 for the three months
      ended June 30, 2007. The reduction is due to the longer term to maturity for
      the
      majority of our Notes Payable at June 30, 2008 as compared to June 30, 2007.




*Amortization
      of deferred financing costs*




In
      connection with our financing arrangements we engaged a placement agent to
      facilitate the process. In connection with that engagement we paid a cash fee,
      issued equity instruments or made some combination of those payments. Such
      amounts are amortized over the stated life of the financing if it is a debt
      transaction or recorded as a cost of the offering if it is an equity
      transaction. We amortized approximately $174,000 related to debt financing
      during the three months ended June 30, 2008, a reduction in amortization expense
      of approximately $1,026,000 from approximately $1,200,000 for the three months
      ended June 30, 2007. The reduction is due to the longer term to maturity for
      the
      majority of our Notes Payable at June 30, 2008 as compared to June 30,
      2007.




*Change
      of value of derivative liability*




Derivative
      liabilities result from the requirement to treat certain embedded features
      of
      our debt and equity instruments as liabilities. Such items are required to
      be
      recorded at, and subsequently adjusted at each reporting date to, fair value.
      Changes in fair value are recognized in our statement of operations. For the
      three months ended June 30, 2008, we recorded a non cash gain of $3.5 million
      due to the change in the fair value of the derivative liability related to
      the
      conversion features and warrants issued in connection with the long term 6%
      convertible notes and the changes in the fair value of the derivative liability
      related to the placement agent warrants.




**Six
      Months Ended June 30, 2008 Compared to Six Months Ended June 30,
      2007**




*Revenues*




Revenues
      for the six months ended June 30, 2008 were approximately $2,610,000 compared
      with approximately $1,057,000 for the corresponding period in 2007. This
      increase is primarily due to increased sales of Unifresh ® Footbath and related
      products used in the Dairy industry, offset by reduced sales of our poultry
      processing products. We expect that revenue will continue to increase throughout
      fiscal year 2008, primarily due to our intensified marketing efforts of our
      poultry processing products and the expansion of our distributor network for
      our
      Unifresh® Footbath product.


26


*Gross
      Margin*




Gross
      margin for the six months ended June 30, 2008 was $1,545,000 compared to
      $889,000 for the same period of the prior year. The gross margin percent
      decreased from 84% for the six months ended June 30, 2007 to 59% for the six
      months ended June 30, 2008. This decrease was primarily due to higher sales
      of a
      lower margin product mix in the dairy business.




*Selling,
      General and Administrative*




Selling,
      General and Administrative (“SGA”) expenses are primarily comprised of sales and
      marketing expenses, compensation expenses, professional fees, and general and
      administrative expenses. SGA expenses for the six months ended June 30, 2008
      decreased by approximately $856,000 from approximately $6.6 million for the
      six
      months ended June 30, 2007, to approximately $5.8 million for the six months
      ended June 30, 2008.




Sales
      and
      marketing expenses consist primarily of salaries and other related expenses
      for
      sales and marketing personnel, sales commissions, promotional expenses,
      advertising, public relations and trade show expenses. Sales and marketing
      expenses for the six months ended June 30, 2008 decreased by approximately
      $92,000 compared to the six months ended June 30, 2007, primarily due to a
      decrease in sales related commissions.




Compensation
      expense consists primarily of salaries and other related expenses for senior
      management, sales and field service personnel, and finance and administrative
      employees of our company. Compensation expense charged to Selling, General
      and
      Administrative expense increased by approximately $584,000 for the six months
      ending June 30, 2008 compared to the same period in 2007, primarily due to
      an
      increase in field service personnel through additional hiring and the
      reassignment of personnel who had previously been engaged in research and
      development.




Professional
      fees for the six months ended June 30, 2008 compared to the same period in
      2007
      decreased by approximately $215,000, primarily because a net accrual of $320,000
      for fees related to the 2007 financing activities was not repeated in 2008.
      This
      reduction was partially offset by an increase in legal fees of $155,000 for
      the
      six month period, related to proposed financing transactions, registration
      statements, and to protecting the company’s patents, intellectual property and
      trademarks. Other professional fees, including accounting and audit fees, were
      reduced by $50,000 for the six months ended June 30, 2008 as compared to the
      six
      months ended June 30, 2007.




General
      and administrative expenses consist primarily of rent, insurance, freight,
      and
      travel and entertainment expenses. The increase in general and administrative
      expenses for the six months ended June 30, 2008 compared to the same period
      in
      2007 of approximately $108,000 was primarily due to an increase of $212,000
      in
      travel and entertainment expense related to increased travel in support of
      national marketing activities. There was also an increase of approximately
      $47,000 in outbound freight expense due to increased shipments and the increased
      costs of fuel reflected in our carriers’ charges. These costs were partially
      offset by reduced rent expense of $66,000 and other general cost reductions
      of
      $85,000. Costs related to exiting the lease on our former offices in Danbury,
      CT, were recognized in 2007.




Stock
      based compensation expense for selling, general and administrative employees
      decreased by approximately $1,242,000, to approximately $1,321,000 for the
      six
      months ended June 30, 2008 as compared to $2.6 million for the same time period
      in 2007. The expense associated with these awards is recorded as expense within
      the same functional expense category that the respective employee’s compensation
      is recorded. For the six months ended June 30, 2008, stock compensation expense
      was allocated as follows:




**(in thousands)**Sales and
                marketing
            
            $
            165General
                and administrative
            
            
            1,156Product
                development
            
            
            2$
            1,323


27


*Product
      Development*




Product
      development consists primarily of product supplies and personnel expenses to
      support product development. Product development and research expenses for
      the
      six months ended June 30, 2008 decreased by approximately $299,000 to
      approximately $534,000 from approximately $833,000 for the six months ended
      June
      30, 2007. This decrease is primarily due to our decision to focus our
      development efforts in a select smaller number of products. The decrease in
      the
      number of products we are developing and testing in the six months ended June
      30, 2008 resulted in a decrease in consulting expenses and wages of
      approximately $351,000, and a decrease in stock based compensation expense
      of
      $147,000. These cost savings were partially offset by the consumption of an
      additional $246,000 of product supplies in support of research and development.




*Depreciation
      and Amortization Expense*




Depreciation
      and amortization expense, which includes the amortization of identifiable
      intangible assets as well as machinery and office equipment, remained consistent
      for the six months ending June 30, 2008 with the same expense for the six months
      ending June 30, 2007.




*Interest
      Expense*




Interest
      expense increased by approximately $163,000 from $280,000 for the six months
      ended June 30, 2007, to approximately $443,000 for the six months ended June
      30,
      2008. The increase was primarily due to accrued interest expense related to
      the
      long term 6% convertible notes issued primarily in 2007 and to the Bridge Loan
      in 2008.




*Interest
      Income*




Interest
      income increased by approximately $12,000 from $33,000 for the six months ended
      June 30, 2007, to $45,000 for the six months ended June 30, 2008. The increase
      during the period was due to $12,000 interest on increased cash reserves in
      the
      first three months of 2008. The remainder of the interest earned during the
      six
      months ended June 30, 2007 and 2008 was related to the Note
      Receivable.




*Amortization
      of fair value assigned to beneficial conversion feature and amortization of
      fair
      value of warrants*




In
      connection with our financing arrangements we have issued equity instruments
      or
      included conversion terms at discount to the current market. We are required
      to
      allocate a portion of the proceeds to these features, which result in a debt
      discount. Such amounts are amortized over the stated life of the loan. We
      amortized approximately $2,676,000 related to debt discounts for all notes
      during the six months ended June 30, 2008, a reduction in amortization expense
      of approximately $2,196,000 from approximately $4,872,000 for the six months
      ended June 30, 2007. The reduction is due to the longer term to maturity for
      the
      majority of our Notes Payable at June 30, 2008 as compared to June 30, 2007.




*Amortization
      of deferred financing costs*




In
      connection with our financing arrangements we engaged a placement agent to
      facilitate the process. In connection with that engagement we paid a cash fee,
      issued equity instruments or made some combination of those payments. Such
      amounts are amortized over the stated life of the financing if it is a debt
      transaction or recorded as a cost of the offering if it is an equity
      transaction. We amortized approximately $352,000 related to debt financing
      during the six months ended June 30, 2008, a reduction in amortization expense
      of approximately $1,370,000 from approximately $1,722,000 for the six months
      ended June 30, 2007. The reduction is due to the longer term to maturity for
      the
      majority of our Notes Payable at June 30, 2008 as compared to June 30,
      2007.




*Change
      of value of derivative liability*




Derivative
      liabilities result from the requirement to treat certain embedded features
      of
      our debt and equity instruments as liabilities. Such items are required to
      be
      recorded at, and subsequently adjusted at each reporting date to, fair value.
      Changes in fair value are recognized in our statement of operations. For the
      six
      months ended June 30, 2008, we recorded a non cash gain of $24.8 million due
      to
      the change in the fair value of the derivative liability related to the
      conversion features and warrants issued in connection with the long term 6%
      convertible notes and the changes in the fair value of the derivative liability
      related to the placement agent warrants.


28




**Liquidity
      and Capital Resources**




*Liquidity
      - Going Concern*




We
      are
      rapidly depleting our cash resources and our ability to continue to operate
      and
      grow our business is dependent upon obtaining additional financing from the
      proposed Qualified Raise or a similar sale of debentures, the exercise of
      outstanding warrants, and/or generating revenue growth from operations. While
      we
      have been in the process of aggressively developing, marketing and selling
      our
      products, there can be no assurance that those efforts will be met with success
      in the marketplace or that the timing of our efforts will be consistent with
      our
      cash availability and burn rate. If we are unable to obtain financing and/or
      generate sufficient revenue growth from existing and new business arrangements,
      we will not have sufficient cash to support our operations and meet our
      obligations and we will be forced to consider the further restructuring of
      our
      operations, disposition of various assets, seeking of protection from our
      creditors, or ceasing of operations and liquidation. We anticipate that we
      will
      need approximately an additional $6 million to support our operations and meet
      our obligations over the next twelve months.




*Potential
      Liquidated Damages*




Since
      our
      inception, we have funded operations and investing activities through the sale
      of common stock, warrants and convertible debt under several private placements.
      Requirements for liquidated damages under some of these private placements
      may
      have an impact on our future liquidity. To date we have satisfied and/or
      received waivers for the provisions of a majority of the agreements, that would
      have otherwise required us to pay liquidated damages, with the following
      exceptions:




-
      We have
      not received waivers and from time to time we have not satisfied some of the
      provisions of the registration rights agreements for the April 2004 and July
      2004 convertible debt. Nevertheless, our obligation to accrue liquidated damages
      under these registration rights agreements ceased on April 30 and July 22,
      2006,
      respectively. Through June 30, 2008, we have accrued $442,000 in liquidated
      damages related to these agreements.




-
      As of
      June 30, 2008, we have accrued the full amount of liquidated damages of $23,000
      required under the January 26, 2006 registration rights agreement.




-
      The
      registration statement for the shares underlying the long term 6% convertible
      notes issued in December 2007 and related warrants, the interest notes related
      to the 6% convertible notes issued between September 2007 and January 2008
      and
      the four-year warrants issued to purchasers of the bridge notes which had been
      issued in exchange for cash between December 1, 2006 and June 4, 2007 as well
      as
      the warrants issued to the placement agent in connection with the issuance
      of
      such bridge notes, and the long term 6% convertible notes, was not declared
      effective by the SEC on or before April 18, 2008, as required under the relevant
      registration rights provisions. Liquidated damages therefore began to accrue
      on
      April 19, 2008. The estimated amount of liquidated damages (which are payable
      in
      cash) for which the Company would be liable, assuming ineffectiveness from
      April
      18, 2008 to June 30, 2008, is approximately $60,000.




The
      total
      accrual for liquidated damages at June 30, 2008 is $525,000.




*Operating
      Activities*




At
      June
      30, 2008 our cash and cash equivalent balances were approximately $119,000
      compared with $2,671,000 at December 31, 2007.


29


Net
      cash
      used in operating activities for the six months ended June 30, 2008 was
      approximately $4.1 million, primarily due to a net loss from operations of
      $5.3
      million. Net cash used in operating activities for the six months ended June
      30,
      2007 was approximately $5.2 million.




*Investing
      Activities*




Net
      cash
      used in investing activities for the six months ended June 30, 2008 was
      approximately $21,000 as compared to approximately $86,000 for the six months
      ended June 30, 2007. The decrease in net cash used in investing activities
      was
      due to a reduction in purchases of equipment and the return of deposits
      previously made.




*Financing
      Activities*




Net
      cash
      provided by financing activities during the six months ended June 30, 2008
      was
      approximately $1.5 million as compared to approximately $5.1 million for the
      six
      months ended June 30, 2007.




Of
      this
      amount, $90,000 was the result of the exchange of warrants to purchase common
      stock at an exercise price of $0.09 per share for a 6% Note and associated
      Warrants, and $45,000 was the result of the issuance of a 6% Note for cash.
      The
      proceeds from these two Notes were net of original issue discounts of $15,000.




Between
      April and June 2008, the Company received cash in the amount of $910,000 in
      connection with the Bridge Loans . This cash reflects a discount of $182,000
      from the expected face value of the corresponding 12% promissory notes (“2008
      Bridge Notes”) that the Company intends to issue in the amount of $1,092,000 in
      connection with the corresponding Bridge Loans. In connection with these loans,
      it is anticipated that the Company will issue five-year warrants to purchase
      an
      aggregate of 15,160,600 shares of the Company’s common stock at an exercise
      price of $0.06 per share. Exercise of such warrants with respect to 6,843,000
      shares would cause the Company’s issued and outstanding common stock, when added
      to the Company’s shares issuable upon the conversion of notes, exercise of
      warrants and exercise of options, to exceed the maximum number of shares of
      common stock the Company is currently authorized to issue under its certificate
      of incorporation.




Because
      the terms of the warrants issued may cause the potential number of shares
      issuable on conversion to be indeterminable due to an anti-dilution provision
      (in the event the Company does a subsequent financing, which event the Company
      cannot assert is improbable)  which
      is
      not limited by the terms of the agreements, and the Company is unable to assure
      it will have sufficient available shares to issue upon conversion of all
      convertible instruments, the warrants are required to be recorded as derivative
      liabilities and as a discount to the value of the notes (See Note 15). The
      Company recorded an original debt discount of approximately $710,000 associated
      with the 2008 Bridge Notes. The derivative liability was subsequently marked
      to
      fair value using the Black-Scholes model at June 30, 2008 which resulted in
      a
      derivative liability of approximately $658,000.




The
      discount of $182,000 has been recorded as debt discount and is being amortized
      as interest expense over the life of the notes. The carrying value of the 2008
      Bridge Notes at June 30, 2008 is $1,092,000, net of unamortized debt discount
      of
      $471,199, for a net carrying value of $620,801.




Between
      April and June 2008, the Company also received cash in the aggregate amount
      of
      $500,000 in connection with short-term loans (“2008 Short-Term Loans”),
      repayable upon demand, and bearing interest at the rate of 12% per annum.




Interest
      on all of the 6% Secured Convertible Promissory Notes is payable quarterly
      in
      cash or by issuance of new notes. As of June 30, 2008, in accordance with the
      terms of a consent signed by the majority of the noteholders, additional long
      term 6% convertible notes in the aggregate principal amount of $385,856 in
      lieu
      of cash interest payments due on March 31 and June 30, 2008 (the “Interest
      Notes”) were issued. The Interest Notes are materially identical in their terms
      to the original Notes, except that they are convertible at a conversion price
      of
      $0.11 per share.




**Registration
      Rights Agreements**




Registration
      statements with respect to the April 2004, July 2004 and December 2004 private
      placements were filed and declared effective in a timely manner. However, on
      June 14, 2006, we notified the holders of securities acquired in these private
      placements that the prospectuses contained within these registration statements
      contained financial and other information that was not current and that, as
      a
      result, such prospectuses could not be used to offer and sell such securities.
      Our obligation to accrue liquidated damages under these registration rights
      agreements ceased in April 30 and July 22, 2006, respectively. For the period
      through July 22, 2006, we have accrued $442,000 in liquidated damages related
      to
      these agreements.


30





On
      April
      26, 2006, we filed a registration statement registering the resale of securities
      purchased in the September 2005 and January 2006 private placements. This
      registration statement was declared effective by the SEC on October 31, 2006.
      As
      it relates to the September 2005 private placement, we have used our best
      efforts to cause the registration statement to be declared effective and,
      therefore, pursuant to the terms of the September 2005 registration rights
      agreement, we believe that we are not currently liable for liquidated damages
      as
      a result of the registration statement not being declared effective by May
      23,
      2006. Should the rights holders dispute that our best efforts were used, and
      we
      either accede to their assertion or are found to not have used our best efforts,
      the estimated maximum amount of liquidated damages for which we would be liable,
      assuming ineffectiveness from May 23, 2006 to October 31, 2006 and for
      illustration purposes only, from April 1, 2007 to the end of the period covered
      by the registration agreement is approximately $43,000.





As
      it
      relates to the January 2006 private placement, despite using our best
      efforts, we failed to have the registration statement declared effective by
      the
      SEC on or before October 26, 2006. Consequently, as of December 31, 2006 we
      were
      required to issue to each holder of the January 2006 private placement,
      shares and warrants equal to one percent of the respective number of shares
      and
      warrants purchased by each holder or an aggregate of 133,359 shares of common
      stock and warrants to purchase 133,359 shares of common stock. As of June 30,
      2008, 2008, we had not issued these shares and warrants.





The
      Company is required to file a series of registration statements covering the
      resale of the shares of common stock underlying the long term 6% convertible
      notes and related warrants and interest notes and the four-year warrants issued
      to purchasers of the bridge notes which had been issued in exchange for cash
      between December 1, 2006 and June 4, 2007 as well as the warrants issued to
      the
      placement agent in connection with the issuance of such bridge notes and long
      term 6% convertible notes.




The
      shares underlying such notes and warrants have the following registration
      rights:




Ÿ
            *Upfront
                Registration:*We
                are required to file a registration statement covering the resale
                of
                shares of common stock underlying such notes and warrants within
                60 days
                of the issue dates of such notes and warrants (the “Filing Date”) and to
                cause the registration statement to become effective within 120 days
                of
                such issue dates (the “Effective Date”). The registration statement with
                respect to the long term 6% notes initially issued in September 2007
                and
                related warrants was filed on November 9, 2007 and declared effective
                on
                January 16, 2008. A registration statement with respect to the long
                term
                6% convertible notes issued in December 2007 and related warrants,
                the
                warrants related to the bridge notes, and the interest notes issued
                in
                December 2007 was filed on February 4, 2008, but has not yet been
                declared
                effective. To the extent we fail to file or cause to be declared
                effective
                any registration statement within specified time periods, we are
                required
                to pay liquidated damages (except with respect to warrants issued
                to the
                placement agent) equal to 1% of the principal amount of the affected
                notes
                and the purchase price of shares of common stock issued on conversion
                of
                these notes and exercise of related warrants for each 30-day delay
                in the
                filing or effectiveness of such registration statement (or such lesser
                pro-rata amount for any period of less than 30
                days).




Ÿ
            *Additional
                Registration Statement:*Because we could not include all of the common stock underlying the
                long
                term 6% convertible notes and related warrants in a registration
                statement
                without it being deemed a primary offering by the Securities and
                Exchange
                Commission, we were required to include in the registration statement
                the
                maximum number of securities that could be included therein, with
                the
                number of such securities allocated among the investors in proportion
                to
                the total registrable securities held by each investor on the date
                that
                the registration statement is filed. The registration rights of the
                shares
                underlying the long term 6% convertible notes issued in December
                2007 and
                related warrants, the warrants related to the bridge notes, and the
                Interest Notes contain similar provisions. With respect to any securities
                that were not included in the registration statement, we will include
                the
                maximum amount of such securities in subsequent registration statements
                that will be filed on the earliest possible date on which such securities
                can be included without the subsequent registration statement being
                deemed
                a primary offering of securities by us.


31




Ÿ
            *Demand
                and Piggy-back Registrations:*The holders of more than 50% of the shares of common stock issued
                and
                issuable upon conversion of the long term convertible notes and exercise
                of related warrants shall be entitled to one demand registration
                right
                commencing 121 days after the date of issuance of such notes and
                warrants
                (the “Closing Date”) until the second anniversary of the Closing Date. The
                investors will also be entitled to “piggy-back” registration rights on all
                registration statements filed by us (other than registration statements
                on
                Form S-4 or S-8 relating to issuances of securities in connection
                with
                business acquisitions or in connection with stock option or other
                employee
                benefit plans and other than any registration statement filed in
                connection with the Qualified Raise and/or Revolving Financing).
                In the
                event we fail to file these registration statements within 60 days
                or
                cause the registration statements to become effective within 150
                days
                after a written request by the holders, we will be required to pay
                liquidated damages equal to 1% of the purchase price of the long
                term 6%
                convertible notes and the related warrants for each 30-day delay
                in the
                effectiveness of such registration
                statements.




Ÿ
            We
                will bear all registration expenses (other than brokers' commissions
                and
                similar expenses and legal and other costs of the holders of
                securities).





The
      Company failed to cause the registration statement for the shares underlying
      the
      long term 6% convertible notes initially issued in December 2007 and related
      warrants, the warrants related to the bridge notes, and the interest notes
      issued in December 2007 to be declared effective by the SEC on or before April
      18, 2008. Liquidated damages therefore began to accrue on April 19, 2008. The
      estimated amount of liquidated damages (which are payable in cash) for which
      the
      Company would be liable, assuming ineffectiveness from April 18, 2008 to June
      30, 2008 is approximately $60,000.





**Off-Balance
      Sheet Arrangements**




During
      the six months and twelve months ended June 30, 2008 and December 31, 2007,
      respectively, we did not engage in material off-balance sheet activities,
      including the use of structured finance, special purpose entities; material
      trading activities in non-exchange traded commodity contracts; or transactions
      with persons or entities that benefit from their non-independent relationship
      with us.




**Item
      3. Quantitative and Qualitative Disclosures about Market Risk**




Our
      exposure to market risk, including changes in interest rates, relates primarily
      to cash and cash equivalents. These investments bear interest at a variable
      interest rate, which is subject to market changes. We have not entered into
      any
      interest rate swap agreements, or invested in other instruments to minimize
      our
      exposure to interest rate fluctuations. We have not invested in any derivative
      instruments in the past and do not presently plan to in the future. Our
      investment portfolio consists of demand deposits and money market mutual funds.
      Due to the highly liquid nature of our investment, a sudden sharp change in
      interest rates would not have a material adverse effect on the value of the
      portfolio.




**Item
      4. Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**




We
      maintain a system of disclosure controls and procedures, as defined in Exchange
      Act Rule 13a-15(e),which is designed to provide reasonable assurance that
      information, which is required to be disclosed in our reports filed pursuant
      to
      the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is
      accumulated and communicated to management in a timely manner. Under the
      supervision and with the participation of management, including our Chairman,
      Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
      of our effectiveness of disclosure controls and procedures as of the end of
      the
      period covered by this quarterly report. Based on that evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls as of the end of the period covered by the report were not effective
      due to the deficiencies described in our Management’s Report on Internal Control
      over Financial Reporting contained in our Annual Report on Form 10-K for the
      year ended December 31, 2007.


32


We
      have
      instituted and are continuing to implement corrective actions with respect
      to
      the deficiencies in our disclosure controls and procedures. The deficiencies
      will not be considered remediated until the applicable remedial procedures
      are
      tested and management has concluded that the procedures are operating
      effectively. Management recognizes that use of our financial resources will
      be
      required not only for implementation of these measures, but also for testing
      their effectiveness.




**Changes
      in Internal Control over Financial Reporting**




There
      has
      not been any change in our internal control over financial reporting in
      connection with the evaluation required by Rule 13a-15(d) under the Exchange
      Act
      that occurred during the three months or the six months ended June 30, 2008,
      that has materially affected, or is reasonably likely to materially affect,
      our
      internal control over financial reporting.


33




**PART
      II — OTHER INFORMATION**




**Item
      1A. Risk Factors**




**RISKS
      RELATED TO OUR BUSINESS**




***Unless
      we obtain new financing and/or generate revenue growth in the near future,
      our
      liquidity position will become significantly impaired.***





At
      June
      30, 2008, the Company had a total of approximately $119,000 of cash and cash
      equivalents. The Company is rapidly depleting its cash resources and its ability
      to continue to operate and grow its business is dependent upon obtaining
      additional financing from the proposed Qualified Raise described below or a
      similar sale of debentures, the exercise of outstanding warrants, and/or
      generating revenue growth from operations. The Company anticipates that it
      will
      need approximately an additional $6 million to support its operations and meet
      its obligations over the next twelve months.




The
      Company has incurred losses in its operations in each quarter since it changed
      its business direction in late 2002. For the three and six months ended June
      30,
      2008, the Company incurred a loss from operations of approximately $2.7 million
      and $5.3 million, respectively. The Company has not generated positive cash
      flow
      from operating activities for the six months ended June 30, 2008 and 2007.
      The
      Company expects to continue to incur operating losses for the foreseeable
      future. We anticipate operating expenses will increase as we attempt to build
      our brands, expand our customer base and develop new products. To become
      profitable, we must increase revenue substantially and achieve and maintain
      positive gross margins. We may not be able to increase revenue and gross margins
      sufficiently to operate and grow our business. While the Company has been in
      the
      process of aggressively developing, marketing and selling its products, there
      can be no assurance that those efforts will be met with success in the
      marketplace or that the timing of the Company’s efforts will be consistent with
      its cash availability and burn rate.




If
      the
      Company is unable to obtain financing and/or generate sufficient revenue growth
      from existing and new business arrangements, the Company will not have
      sufficient cash to support its operations and meet its obligations and it will
      be forced to consider the further restructuring of its operations, disposition
      of various assets, seeking of protection from its creditors, or ceasing of
      operations and liquidation.




In
      view
      of the matters described above, recoverability of a major portion of the
      recorded asset amounts shown in the accompanying balance sheet is dependent
      upon
      continued operations of the Company, which in turn is dependent upon the
      Company’s ability to raise additional capital, obtain financing and succeed in
      its future operations. The financial statements do not include any adjustments
      relating to the recoverability and classification of recorded asset amounts
      or
      amounts and classification of liabilities that might be necessary should the
      Company be unable to continue as a going concern.





***We
      have lost money in each fiscal quarter since we changed our business model
      to
      the development of products in the oral care, food processing, skin care, water
      purification and pet industries*** **.** ***We
      expect future losses and we may never become
      profitable.***




We
      have
      incurred losses from operations in each quarter since we changed our business
      direction in late 2002. We had a net loss from operations of approximately
      $5.3
      million for the six months ended June 30, 2008, and net income overall of
      approximately $16 million. Our net losses for the years ended December 31,
      2007, 2006 and 2005 were approximately, $41,394,000, $62,943,000, and
      $18,269,000, respectively. We expect to continue to incur losses for the
      foreseeable future. We anticipate operating expenses will increase as we attempt
      to build our brands, expand our customer base and develop new products. To
      become profitable, we must increase revenue substantially and achieve and
      maintain positive gross margins. We may not be able to increase revenue and
      gross margins sufficiently to achieve profitability. If we are not able to
      achieve profitability, our results of operations and financial condition will
      be
      materially and adversely affected.


34





Our
      consolidated financial statements have been prepared assuming that we will
      continue as a going concern. As discussed in the consolidated financial
      statements, we have incurred negative cash flow from operations and net losses
      since inception and have a working capital deficiency. These conditions, among
      others, raise substantial doubt about our ability to continue as a going
      concern.




***To
      the extent that future impairment charges occur, they will likely have a
      material impact on our financial results.***




In
      the
      second quarter of 2006, we tested for impairment of our intangible assets and
      our goodwill in accordance with Statement of Financial Accounting Standards
      (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
(SFAS No. 144) and SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS No.
      142), respectively. Our testing was triggered by the following events and
      circumstances that constitute impairment indicators under the literature:




•
            a
                preliminary expectation that revenues originally projected for the
                third
                and fourth quarters of 2006 would not be attained;




•
            a
                decrease in expected future cash flows; and




•
            a
                decline in the market price of our common stock




Upon
      completion of the impairment tests during the second quarter of 2006, we
      recorded non-cash impairment charges to intangible assets and goodwill of $12.2
      million and $17.9 million, respectively.




Also
      in
      the fourth quarter of 2006, we tested for impairment of our intangible assets
      and our goodwill as part of our annual goodwill impairment review. Upon
      completion of the impairment tests, we recorded non-cash impairment charges
      to
      goodwill of $13.9 million. There was no impairment of our intangible assets.




Note
      6 to
      our audited consolidated financial statements for the year ended December 31,
      2007 and December 31, 2006 describes the impairment tests performed and their
      impact during the fourth quarter of 2006 and the second quarter of 2006. There
      can be no assurance that there will not be impairment charges in subsequent
      periods as a result of our future periodic impairment reviews. To the extent
      that future impairment charges occur, they will likely have a material impact
      on
      our financial results.




***We
      have a limited operating history in our present market and prospective investors
      have a limited historical basis on which to judge our ability to be successful.***




We
      were
      originally organized for the purpose of engaging in the acquisition and
      exploration of mineral properties, primarily in the Province of British
      Columbia, Canada. During 2001, we allowed the option on our mineral property
      to
      lapse and began to investigate other business opportunities. In late 2002,
      we
      entered into an exclusive license to sell, develop, market and distribute
      consumer deodorant breath products, animal deodorant breath products and soft
      drink products using the pHarlo technology. Since late 2002, we have pursued
      this business plan and have expanded it to include the use of the pHarlo
      technology in the pre- and post-harvest food processing, skin care, pet care,
      hangover remedy, alcohol abatement and water purification industries.




Since
      inception, we have suffered recurring losses and net cash outflows from
      operations. We expect to continue to incur substantial losses to complete the
      development of our business. We have a limited operating history upon which
      investors may evaluate our likely future performance.




***We
      completed in July 2005 a significant acquisition of certain assets of pHarlo
      Citrus Technologies, Inc. and other related entities. We cannot guarantee that
      we will be able to manage these new assets profitably*** .




On
      July
      15, 2005, we purchased certain assets of pHarlo Citrus Technologies, Inc.,
      Indian River Labs, LLC, pHarlo Citrus Properties Partnership, LLLP and Coast
      to
      Coast Laboratories, LLC, which four entities are referred to in this annual
      report as the “Selling Entities.” This acquisition (the “2005 Acquisition”),
      represented a highly significant event for our company. Prior to the
      acquisition, we licensed the use of certain patent applications covering various
      uses for the pHarlo technology and improvements from the Selling Entities and
      also purchased the pHarlo concentrate, a concentrate made using the pHarlo
      technology from Indian River Labs. As a result of the 2005 Acquisition and
      the
      purchase of all of the working assets of Indian River Labs, we now control
      various uses of pHarlo technology in the manufacturing process for the pHarlo
      concentrate. Our business, financial condition and results of operations could
      suffer materially if we fail to successfully manage these assets and the
      manufacturing process.


35




***Past
      restatements and amendments to our interim financial statements and quarterly
      reports, as well as deficiencies in our disclosure controls and procedures
      and
      internal control over financial reporting, may present a risk of future
      restatements and disclosure compliance errors which could lead to legal
      exposure*** .




We
      restated and amended our interim financial statements for the periods ended
      June
      30, 2004, September 30, 2004 and September 30, 2005 and filed amendments to
      our
      quarterly reports on Form 10-QSB for each of those periods reflecting these
      restatements. While in the process of amending our quarterly reports on Form
      10-QSB to restate these financial statements, we became aware of certain
      required information that had been omitted and other information that needed
      to
      be changed or corrected. As a result of the foregoing, we revised these
      quarterly reports to correct this information and to state, among other things,
      that our disclosure controls and procedures were not effective as of June 30,
      2004, September 30, 2004 and September 30, 2005.




As
      of
      December 31, 2006, and December 31, 2007, our management concluded that our
      disclosure controls and procedures were not effective. We continue taking what
      we believe to be reasonable and appropriate steps to correct these deficiencies.
      We will also continue to assess the adequacy and appropriateness of these
      actions and adjust our remediation plan as needed or to reflect changes in
      our
      business. However, we cannot be certain when these deficiencies will ultimately
      be remediated and we expect that we will need a period of time over which to
      demonstrate that our disclosure controls are functioning appropriately to
      conclude that we have adequately remediated the deficiencies. Any failure to
      implement and maintain improvements in our disclosure and internal controls
      may
      present a risk of future restatements and disclosure compliance errors and
      could
      in turn lead to legal exposure. Any failure to improve these controls to address
      the identified deficiencies, or any other unidentified deficiencies, could
      also
      cause investors to lose confidence in our reported financial information, which
      could have a negative impact on the trading price of our common stock. This
      could have a material adverse effect on our business and financial results.




***We
      have limited experience in the marketing of our products and may not be able
      to
      market them successfully*** .




We
      currently market Unifresh® Footbath and related products that clean and
      disinfect the hooves of dairy cows, Tasker Blue, an antimicrobial aid used
      in
      the scalder process of poultry processing and the post-feather picker process,
      Tasker Clear, an acidifier that controls pH levels to enhance the effectiveness
      of liquid bacteriostatic applications, and Tasker Pacific BlueTM Seafood Wash, a
      product used in commercial and retail seafood processing to extend shelf life.
      Shelf life extension is the act of increasing the length of the time a product
      can spend during processing, distribution and retail before becoming
      unacceptable for consumption.




The
      markets to which we sell our products are diverse and we may not be aware of
      all
      the customs and practices and may not be able to successfully compete in these
      industries. We believe that we will need to hire appropriate consultants and
      staff to reach all of these markets successfully. The consultants that we may
      retain may not have sufficient experience to enable us to completely understand
      the characteristics of these diverse industries. There can be no assurance
      that
      we will properly ascertain or assess any and all risks inherent in our proposed
      markets or that we will successfully enter into new markets or grow in our
      existing markets.




***Our
      ability to reach some of the markets currently set forth in our business plan
      will require regulatory approval. In addition, new products that we may develop
      or acquire may also require regulatory approval.***




The
      ingredients that we use to produce the pHarlo concentrate are classified by
      the
      United States Food and Drug Administration (“USDA”) as “Generally Recognized as
      Safe”. Therefore, we believe that our current line of products that utilize the
      pHarlo concentrate, including the intended uses of these products, do not
      require further approval by the USDA. However, we may develop or acquire future
      products that use ingredients that will need to be approved by the USDA, or
      we
      may alter the intended uses of our current product, such that those products
      require additional USDA approval(s). There can be no assurance that USDA
      approval, if necessary, will be obtained.




We
      have
      begun in-plant testing of the pHarlo technology in certain intervention stages
      of poultry processing which will require USDA approval, in the form of a Letter
      of No Objections from the Food Safety and Inspection Service (“FSIS”). We have
      received such authorization from FSIS to market Tasker Blue in a post-chill
      spray application. There can be no assurance that we will receive the necessary
      authorization for applications in other intervention stages in poultry
      processing.


36




We
      have
      begun the commercialization phase of several applications of the pHarlo
      technology. There can be no assurance that we will successfully complete the
      commercial verification process. If we do not successfully complete the
      commercial verification process, this may have a material adverse effect on
      our
      business plan. In addition to the poultry processing industry, we are currently
      marketing the pHarlo technology for use in seafood processing. There can be
      no
      assurance that the products will obtain all necessary approvals, or, if granted,
      that the approvals will not include significant limitations on the indicated
      uses for which the products may be marketed or other restrictions or
      requirements that may reduce the value of the products.




***A
      key component of our business strategy is the proprietary nature of the pHarlo
      concentrate, and, therefore, our inability to protect our intellectual property
      rights could materially harm our business.***




The
      pHarlo concentrate that we produce is based upon both the patent applications
      that we purchased in the 2005 Acquisition, as well as on certain base patents
      and base patent applications, or patents and applications that we license.
      We
      have entered into an exclusive worldwide royalty free sub-license with pHarlo
      IP, the exclusive licensee of the base patents and base patent applications,
      to
      exploit these base patents and applications in certain fields of use. Protecting
      this intellectual property, in addition to protecting the patent applications
      that we purchased in the 2005 Acquisition, is a key component to the success
      of
      our business. If an infringement occurs within the field of use specified in
      our
      sub-license agreement, there can be no assurance that we would be successful
      in
      any action to protect our rights under the patent applications that we have
      purchased. In addition, there can be no assurance that the base patent
      applications or the patent applications that we have purchased will ultimately
      be protected by an issued patent.




***Intense
      competition could harm our financial performance and the value of your
      investment*** .




Some
      of
      the industries in which we are or will be marketing our products are
      characterized by intense competition.




Our
      Unifresh ® Footbath and related products control a hoof infection known as
      digital dermatitis that causes lameness, swelling and fever in dairy cows,
      resulting in a drastic decrease in milk production. Forms of treatment include
      antibiotic bandaging and topical sprays using Terramycin® (oxytetracycline — an
      antibiotic) and footbaths using Formalin (a saturated solution of formaldehyde),
      copper sulfate, Tetracycline (a broad-spectrum antibiotic) or Peracetic Acid
      (a
      disinfectant and sanitizer). Unifresh Footbath’s underlying technology, pHarlo
      technology, uses a highly acidified form of copper sulfate that helps control
      the bacteria that cause digital dermatitis. Some competing products using copper
      sulfate include QuickHit, Healthy Foot and HoofPro+ by SSI Corporation;
      Double-ActionTM Hoof Treatment by West Agro, Inc.; and Hoofcare Supercharger
      manufactured by Marabo.




Currently,
      there is little competition for bacterial inhibitors in the scalding process
      of
      poultry processors. We intend to expand the use of the pHarlo technology into
      the remaining operations of poultry processing. However, we believe we will
      encounter competition in the chill process from manufacturers of sodium
      hydrochloride or sodium hypochlorite, chemical compound solutions frequently
      used as disinfectants and bleaching agents. The chill process is cold water
      or
      air that is used in poultry processing to reduce the temperature of the carcass
      to 40 degrees Fahrenheit in order to maintain food safety.




Currently,
      our seafood application product, Pacific BlueTM, is being marketed as a treatment
      that reduces odors on seafood by reducing the bacteria that causes spoilage.
      When and if the market for Pacific BlueTM develops, additional products created
      by competitors may enter the market and compete.




There
      may
      be a number of companies, universities and research organizations actively
      engaged in research and development of technology that could be similar to
      our
      processes and ultimately become our competitors. We cannot assure you that
      we
      will be able to successfully compete with current or future competitors who
      may
      have substantially greater assets, technical staff, established market share
      and
      greater financial and operating resources than we have. If we are unable to
      successfully compete with these industry competitors, it may have a material
      adverse effect on our business plan.




***Some
      provisions of our amended and restated articles of incorporation, bylaws, and
      Delaware law may inhibit potential acquisition bids that may be considered
      favorable to our stockholders.***




Our
      corporate documents contain provisions that may enable our board of directors
      to
      resist a change in control of our company even if a change in control were
      to be
      considered favorable by our stockholders. These provisions include:




•
            limitations
                on persons authorized to call a special meeting of stockholders;




•
            the
                ability of a majority of the directors then in office to fill vacancies
                in
                directorships; and




•
              no
                  cumulative voting.


37






These
      and
      other provisions contained in our amended and restated articles of incorporation
      and bylaws could delay or discourage transactions involving an actual or
      potential change in control of us or our management, including transactions
      in
      which our stockholders might otherwise receive a premium for their shares over
      then current prices, and may limit the ability of stockholders to remove our
      current management or approve transactions that our stockholders may deem to
      be
      in their best interests and, therefore, could adversely affect the price of
      our
      common stock.




In
      addition, we are subject to control share acquisitions provisions and affiliated
      transaction provisions of the Delaware General Corporation Law, the applications
      of which may have the effect of delaying or preventing a merger, takeover or
      other change of control of us and therefore could discourage attempts to acquire
      our company.




**RISKS
      RELATED TO OUR COMMON STOCK**




***If
      we are unable to comply with the terms of registration rights agreements to
      which we are a party, we may be obligated to pay liquidated damages to some
      of
      our security holders.***





In
      connection with our April 2004, July 2004, December 2004, September 2005 and
      January 2006 private placements, as well as in connection with the issuance
      of
      the long term 6% convertible notes, we entered into registration rights
      agreements with certain of our security holders in which we agreed to prepare
      and file with the SEC registration statements to register certain shares of
      common stock, which registration statements must be maintained effective for
      certain specified periods. If we are unable to comply with these provisions
      of
      these registration rights agreements, we may be obligated to pay liquidated
      damages to the holders of the securities covered by such registration rights
      agreements. If we are required to pay such liquidated damages or other amounts
      to these holders, our business, financial condition, operating results and
      cash
      flows would be materially adversely affected.




Registration
      statements with respect to the April 2004, July 2004 and December 2004 private
      placements were filed and declared effective in a timely manner. However, on
      June 14, 2006, we notified the holders of securities acquired in these private
      placements that the prospectuses contained within these registration statements
      contained financial and other information that was not current and that, as
      a
      result, such prospectuses could not be used to offer and sell such securities.
      Our obligation to accrue liquidated damages under these registration rights
      agreements ceased in April 30 and July 22, 2006, respectively. For the period
      through July 22, 2006, we have accrued $442,000 in liquidated damages related
      to
      these agreements.




On
      April
      26, 2006, we filed a registration statement registering the resale of securities
      purchased in the September 2005 and January 2006 private placements. This
      registration statement was declared effective by the SEC on October 31, 2006.
      As
      it relates to the September 2005 private placement, we have used our best
      efforts to cause the registration statement to be declared effective and,
      therefore, pursuant to the terms of the September 2005 registration rights
      agreement, we believe that we are not currently liable for liquidated damages
      as
      a result of the registration statement not being declared effective by May
      23,
      2006. Should the rights holders dispute that our best efforts were used, and
      we
      either accede to their assertion or are found to not have used our best efforts,
      the estimated maximum amount of liquidated damages for which we would be liable,
      assuming ineffectiveness from May 23, 2006 to October 31, 2006 and for
      illustration purposes only, from April 1, 2007 to the end of the period covered
      by the registration agreement is approximately $43,000.





As
      it
      relates to the January 2006 private placement, despite using our best
      efforts, we failed to have the registration statement declared effective by
      the
      SEC on or before October 26, 2006. Consequently, as of December 31, 2006 we
      were
      required to issue to each holder of the January 2006 private placement,
      shares and warrants equal to one percent of the respective number of shares
      and
      warrants purchased by each holder or an aggregate of 133,359 shares of common
      stock and warrants to purchase 133,359 shares of common stock. As of June 30,
      2008, 2008, we had not issued these shares and warrants.





The
      Company is required to file a series of registration statements covering the
      resale of the shares of common stock underlying the long term 6% convertible
      notes and related warrants and interest notes and the four-year warrants issued
      to purchasers of the bridge notes which had been issued in exchange for cash
      between December 1, 2006 and June 4, 2007 as well as the warrants issued to
      the
      placement agent in connection with the issuance of such bridge notes and long
      term 6% convertible notes. In the event the Company fails to file or cause
      these
      registration statements to become effective within specified time periods,
      it is
      required to pay liquidated damages (except with respect to warrants issued
      to
      the placement agent) equal to 1% of the principal amount of the affected notes
      and the purchase price of shares of common stock issued on conversion of these
      notes and exercise of related warrants for each 30-day delay in the filing
      or
      effectiveness of such registration statement (or such lesser pro-rata amount
      for
      any period of less than 30 days).


38


The
      Company failed to cause the registration statement for the shares underlying
      the
      long term 6% convertible notes initially issued in December 2007 and related
      warrants, the warrants related to the bridge notes, and the interest notes
      issued in December 2007 to be declared effective by the SEC on or before April
      18, 2008. Liquidated damages therefore began to accrue on April 19, 2008. The
      estimated amount of liquidated damages (which are payable in cash) for which
      the
      Company would be liable, assuming ineffectiveness from April 18, 2008 to June
      30, 2008 is approximately $60,000.




If
      we are
      required to pay such liquidated damages or other amounts to these holders,
      our
      business, financial condition, operating results and cash flows would be
      materially adversely affected.




***Future
      sales of our common stock may cause our stock price to decline.***




Since
      our
      inception, we have funded operations through common stock issuances in order
      to
      meet our strategic objectives. We have completed six private sales of common
      stock and securities convertible into common stock. We may, in the future,
      issue
      more shares of common stock in sales that may or may not be registered under
      the
      Securities Act of 1933, or the Securities Act. Our stock price may decline
      due
      to future sales of our shares or even the perception that such sales may occur.




***Our
      stock price has been extremely volatile in recent years and continues to
      fluctuate widely.***




Our
      common stock is traded on the OTC Bulletin Board. There can be no assurance
      that
      an active public market will continue for the common stock, or that the market
      price for the common stock will not decline below its current price. The price
      of our common stock may be influenced by many factors, including, but not
      limited to, investor perception of us and our industry and general economic
      and
      market conditions. The trading price of our common stock has fluctuated widely
      in recent years, ranging from a low of $0.04 per share in the quarter ended
      June
      30, 2008 to a high of $5.15 per share in the first quarter of fiscal year 2005,
      and continues to be subject to wide fluctuations in response to announcements
      of
      our business developments or our competitors, quarterly variations in operating
      results and other events or factors. In addition, stock markets have experienced
      extreme price volatility in recent years. This volatility has had a substantial
      effect on the market prices of companies, at times, for reasons unrelated to
      their operating performance. Such broad market fluctuations may adversely affect
      the price of our common stock.




***The
      large number of shares available for future sale through options, warrants
      and
      debt conversion rights, as highlighted in Notes 7 and 11 to the June 30, 2008
      financial statements, could adversely affect the price of our common stock.***




There
      are
      approximately 142,883,000 common shares issued and outstanding as of June 30,
      2008, an additional 148,054,000 potential shares issuable upon the conversion
      of
      notes, an additional 96,870,000 potential shares issuable upon the exercise
      of
      investor warrants, and an additional 69,036,000 potential shares issuable upon
      exercise of compensatory options, for a total of 456,843,000 potential shares.
      In addition, the registration rights agreement for the January 2006 private
      placement requires us to pay liquidated damages in the form of additional common
      stock and warrants. As of June 30, 2008, 133,359 shares and 133,359 warrants
      are
      issuable as liquidated damages under the terms of the January 2006 registration
      rights agreement. We intend to issue additional convertible 6% notes on a
      quarterly basis to the holders of our long term 6% notes in lieu of cash
      interest, which notes will have an additional potentially dilutive
      effect.





Substantially
      all of the shares underlying these notes, options and warrants have been or
      would be registered for resale, and none of them are subject to any contractual
      restrictions on resale. Future sales of any of these shares, or the anticipation
      of such sales, could adversely affect the market price of our common stock
      and
      could materially impair our future ability to raise capital through an offering
      of equity securities. Further, any issuance of a substantial number of these
      shares would dilute the ownership interest of existing stockholders and could
      result in increased volatility in the price of our common
      stock.


39


***The
      effect of a possible reverse split of our common stock is
      unknown.***




At
      our
      2007 Annual Meeting of Stockholders, our stockholders approved a proposal
      granting our board of directors the discretionary authority to affect a reverse
      stock split at any time prior to June 30, 2009, without further stockholders’
approval. The range at which the board could affect the reverse stock split
      is
      from one-for-five to one-for-twenty, with the exact exchange ratio to be set
      by
      the board of directors in its sole discretion within this range at the time
      it
      elects to affect a reverse split. The effect of the reverse split upon the
      market price for our common stock cannot be accurately predicted. In particular,
      there is no assurance that prices for shares of our common stock after the
      reverse split will be five to twenty times, as applicable, greater than the
      price for shares of our common stock immediately prior to the reverse split.
      Furthermore, there can be no assurance that the marketability of the common
      stock will improve and that the market price of our common stock immediately
      after the proposed reverse split will be maintained for any period of time.
      Moreover, because some investors may view the reverse split negatively, there
      can be no assurance that the reverse split will not adversely impact the market
      price of our common stock or, alternatively, that the market price following
      the
      reverse split will either exceed or remain in excess of the current market
      price.




***Our
      common stock, which is quoted on the OTC Bulletin Board, has several
      disadvantages from those securities traded on The Nasdaq Stock Market.***




Our
      common stock, which is quoted on the OTC Bulletin Board, has several
      disadvantages from those securities traded on The Nasdaq Stock Market. These
      disadvantages include the following:




•
            The
                SEC’s order handling rules, which apply to Nasdaq-listed securities,
                do
                not apply to securities quoted on the OTC Bulletin Board.




•
            While
                The Nasdaq Stock Market has rigorous listing standards to ensure
                the high
                quality of its issuers, and can delist issuers for not meeting those
                standards, the OTC Bulletin Board has no listing standards. Rather,
                it is
                the market maker who chooses to quote a security on the system by
                filing
                an application with the National Association of Securities Dealers,
                or
                NASD. The NASD cannot deny an application by a market maker to quote
                the
                stock of a company. The only requirement for inclusion in the OTC
                Bulletin
                Board is that the issuer be current in its reporting requirements
                with the
                SEC.


•
            Trading
                activity on the OTC Bulletin Board in general is not conducted as
                efficiently and effectively as with Nasdaq-listed securities. Investors
                must contact a broker-dealer to trade OTC Bulletin Board securities.
                Investors do not have direct access to the bulletin board service.
                For
                bulletin board securities, there only has to be one market maker.




•
            Bulletin
                board transactions are conducted almost entirely manually. Because
                there
                are no automated systems for negotiating trades on the bulletin board,
                they are conducted via telephone. In times of heavy market volume,
                the
                limitations of this process may result in a significant increase
                in the
                time it takes to execute investor orders. Therefore, when investors
                place
                an order to buy or sell a specific number of shares at the current
                market
                price, it is possible for the price of a stock to go up or down
                significantly during the lapse of time between placing a market order
                and
                getting execution.




•
            Shares
                traded on the OTC Bulletin Board generally are quoted with greater
                spreads
                between bid and ask prices and may be more expensive to buy or sell.




•
            Because
                bulletin board stocks are usually not followed by analysts, there
                may be
                lower trading volume than for Nasdaq-listed securities.




***If
      we fail to remain current on our reporting requirements, we could be removed
      from the OTC Bulletin Board, which would limit the ability of broker-dealers
      to
      sell our securities and the ability of stockholders to sell their securities
      in
      the secondary market.***




Companies
      like Tasker that trade on the OTC Bulletin Board must be reporting issuers
      under
      Section 12 of the Exchange Act of 1934, and must be current in their filing
      with
      the SEC of periodic reports under Section 13, in order to maintain price
      quotation privileges on the OTC Bulletin Board. If we fail to remain current
      with respect to reporting requirements, we could be removed from the OTC
      Bulletin Board. In such event, the market liquidity for our securities could
      be
      severely adversely affected because the ability of broker-dealers to sell our
      securities and the ability of stockholders to sell their securities in the
      secondary market would be limited.


40




***Since
      our common stock is subject to the SEC’s penny stock rules, broker-dealers may
      experience difficulty in completing customer transactions and trading activity
      in our securities may be adversely affected.***




A
      public
      company’s common stock is subject to the penny stock rules promulgated under the
      Securities Exchange Act of 1934, or Exchange Act, unless its net tangible assets
      are greater than $2,000,000 or its common stock has a market price per share
      greater than $5.00. Under these rules, broker-dealers who recommend such
      securities to persons other than institutional accredited investors must:




•
            make
                a special written suitability determination for the purchaser;




•
            receive
                the purchaser’s written agreement to a transaction prior to sale;




•
            provide
                the purchaser with risk disclosure documents that identify certain
                risks
                associated with investing in “penny stocks” and that describe the market
                for these “penny stocks,” as well as a purchaser’s legal remedies; and




•
            obtain
                a signed and dated acknowledgment from the purchaser demonstrating
                that
                the purchaser has actually received the required risk disclosure
                document
                before a transaction in “penny stock” can be completed.




Since
      our
      common stock is subject to these rules, broker-dealers may find it difficult
      to
      effect customer transactions and trading activity in our securities may be
      adversely affected. As a result, the market price of our securities may be
      depressed, and you may find it more difficult to sell our securities.





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





During
      the three-month period ended June 30, 2008, we issued the following stock
      options, warrants and common stock:




In
      April
      2008, several investors in the long term 6% convertible notes converted $207,134
      of principal and accrued interest into 6,718,465 shares of common stock. These
      shares were not registered under the Securities Act because such issuances
      were
      exempt from registration pursuant to Section 3(a)(9) of the Securities Act
      of 1933, as no commission or other remuneration was paid or given in connection
      with the conversion.




Between
      April and June 2008, the Company received cash in the amount of $910,000 in
      connection with the Bridge Loans . This cash reflects a discount of $182,000
      from the expected face value of the corresponding 12% promissory notes (“2008
      Bridge Notes”) that the Company intends to issue in the amount of $1,092,000 in
      connection with the corresponding Bridge Loans. In connection with these loans,
      it is anticipated that the Company will issue five-year warrants to purchase
      an
      aggregate of 15,160,600 shares of the Company’s common stock at an exercise
      price of $0.06 per share. These securities are not being registered under the
      Securities Act because such issuances are exempt from registration pursuant
      to
      Section 4(2) of the Securities Act of 1933, as they are transactions by an
      issuer that do not involve a public offering of securities.




As
      of
      June 30, 2008, in accordance with the terms of a consent signed by the majority
      of the noteholders, additional long term 6% convertible notes in the aggregate
      principal amount of $385,856 in lieu of cash interest payments due on March
      31
      and June 30, 2008 (the “Interest Notes”) were issued. The Interest Notes are
      materially identical in their terms to the original Notes, except that they
      are
      convertible at a conversion price of $0.11 per share. These securities were
      not
      registered under the Securities Act because such issuances were exempt from
      registration pursuant to Section 4(2) of the Securities Act of 1933, as they
      were transactions by an issuer that did not involve a public offering of
      securities.


41




**Item
      6. Exhibits**




10.26
            Form
                of 6% Secured Convertible Promissory Note due September 27, 2010
                (incorporated by reference to Exhibit 10.84 to the Registrant’s
                Registration Statement on Form S-1 (File No. 333-133549 filed on
                November 5, 2007))10.27
            Form
                of Warrant between Registrant and Purchasers of the 6% Secured Convertible
                Promissory Notes due September 27, 2010 (incorporated by reference
                to
                Exhibit 10.85 to the Registrant’s Registration Statement on
                Form S-1 (File No. 333-133549 filed on November 5,
                2007))10.28
            Form
                of Warrant between Registrant and Placement Agent of the 6% Secured
                Convertible Promissory Notes (incorporated by reference to
                Exhibit 10.86 to the Registrant’s Registration Statement on
                Form S-1 (File No. 333-133549 filed on November 5,
                2007))10.29
            Form
                of 6% Secured Convertible Promissory Note due December 20, 2010
                (incorporated by reference to Exhibit 99(d)(2) to the Registrant’s
                Tender Offer Statement on Schedule TO (File No. 005-78706 filed on
                November 21, 2007))10.30
            Form
                of Warrant issued to Purchasers of the 6% Secured Convertible Promissory
                Notes due December 20, 2010 (incorporated by reference to
                Exhibit 99(d)(3) to the Registrant’s Tender Offer Statement on
                Schedule TO (File No. 005-78706 filed on November 21, 2007))10.31
            Form
                of Consent of Holders of 6% Secured Convertible Notes due September
                27,
                2010 and/or 6% Secured Convertible Notes due December 20, 2010, as
                of
                March 24, 200810.32
            Notice
                and Form of Consent and Agreement of Holders of 6% Secured Convertible
                Notes due September 27, 2010 and/or 6% Secured Convertible Notes
                due
                December 20, 201010.33
            Summary
                of Oral Agreement Relating to Notice and Form of Consent31.1
            Rule
                13a-14(a)/15d-14(a) Certification by Principal Executive
                Officer31.2
            Rule
                13a-14(a)/15d-14(a) Certification by Principal Financial
                Officer32.1
            Section
                1350 Certifications by Principal Executive Officer32.2
            Section
                1350 Certifications by Principal Financial
                Officer


42




**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




TASKER
                PRODUCTS CORP.Date: August
                14, 2008
            By:
            /s/ Doreen
                J. RemmenDoreen
                J. RemmenChief
                Financial Officer
              (Principal
                Financial and Accounting
                Officer)





**Exhibit
      Index**




10.26
            Form
                of 6% Secured Convertible Promissory Note due September 27, 2010
                (incorporated by reference to Exhibit 10.84 to the Registrant’s
                Registration Statement on Form S-1 (File No. 333-133549 filed on
                November 5, 2007))10.27
            Form
                of Warrant between Registrant and Purchasers of the 6% Secured Convertible
                Promissory Notes due September 27, 2010 (incorporated by reference
                to
                Exhibit 10.85 to the Registrant’s Registration Statement on
                Form S-1 (File No. 333-133549 filed on November 5,
                2007))10.28
            Form
                of Warrant between Registrant and Placement Agent of the 6% Secured
                Convertible Promissory Notes (incorporated by reference to
                Exhibit 10.86 to the Registrant’s Registration Statement on
                Form S-1 (File No. 333-133549 filed on November 5,
                2007))10.29
            Form
                of 6% Secured Convertible Promissory Note due December 20, 2010
                (incorporated by reference to Exhibit 99(d)(2) to the Registrant’s
                Tender Offer Statement on Schedule TO (File No. 005-78706 filed on
                November 21, 2007))10.30
            Form
                of Warrant issued to Purchasers of the 6% Secured Convertible Promissory
                Notes due December 20, 2010 (incorporated by reference to
                Exhibit 99(d)(3) to the Registrant’s Tender Offer Statement on
                Schedule TO (File No. 005-78706 filed on November 21, 2007))10.31
            Form
                of Consent of Holders of 6% Secured Convertible Notes due September
                27,
                2010 and/or 6% Secured Convertible Notes due December 20, 2010, as
                of
                March 24, 200810.32
            Notice
                and Form of Consent and Agreement of Holders of 6% Secured Convertible
                Notes due September 27, 2010 and/or 6% Secured Convertible Notes
                due
                December 20, 201010.33
            Summary
                of Oral Agreement Relating to Notice and Form of Consent31.1
            Rule
                13a-14(a)/15d-14(a) Certification by Principal Executive
                Officer31.2
            Rule
                13a-14(a)/15d-14(a) Certification by Principal Financial
                Officer32.1
            Section
                1350 Certifications by Principal Executive Officer32.2
            Section
                1350 Certifications by Principal Financial
                Officer


44