----

| /X/ | QUARTERLY      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      FOR THE QUARTERLY PERIOD ENDED March 31,2010 |
|-----|------------------------------------------------------------------------------------------------------------------------------------------|

| /      / | TRANSITION      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF      1934 |
|----------|----------------------------------------------------------------------------------------------|

Z TRIM HOLDINGS, INC.

|        ILLINOIS                                                    |        36-4197173                               |
|-------------------------------------------------------------------------|------------------------------------------------------|
| (State      or Other Jurisdiction ofIncorporation      or Organization) |        (I.R.S. EmployerIdentification      No.) |

----

----

----

----

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OFMARKET RISKS

| 1.   | As      of March 31, 2010, we did not maintain effective controls over the control      environment.  Specifically we have not developed and effectively      communicated to our employees its accounting policies and      procedures.  This has resulted in inconsistent      practices.   Since these entity level programs have a pervasive      effect across the organization, management has determined that these      circumstances constitute a materialweakness. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | As      of March 31, 2010, we did not maintain effective controls over financial      statement disclosure. Specifically, controls were not designed and in      place to ensure that all disclosures required were originally addressed in      our financial statements.   Accordingly, management has      determined that this control deficiency constitutes a material      weakness. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| 3(i) | Restated      Articles of Incorporation of Z Trim Holdings, Inc. (filed as Exhibit 3(i)      to the Company's Form 10-K filed on April 9, 2010, and incorporated herein      by reference). |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(ii) | Bylaws      of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the      Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the      Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the      Company’s Form 8-K filed on November 16, 2007, and incorporated herein by      reference). |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(iii) | Amendment      to Bylaws of Z Trim Holdings, Inc. (filed as Exhibit 3.2 to the Company’s      Form 8-K filed on September 23, 2008, and incorporated herein by      reference). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

| 4.1 | Specimen      Certificate for common stock (filed as Exhibit 3.1 to the Company's Form      10-SB filed on August 21, 2000, and incorporated herein by      reference). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.2 | Form      of Subscription Agreement (filed as Exhibit 4.1 to the Company's Form 8-K      filed on March 30, 2006 and incorporated herein by    reference). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.3 | Form      of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company's      Form 8-K filed on March 30, 2006 and incorporated herein by      reference). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.4 | Form      of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's      Form 8-K filed on March 30, 2006 and incorporated herein by      reference). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.5 | Form      of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form      10-KSB filed on April 2, 2007 and incorporated herein by      reference). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.6 | Form      of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the Company’s      Form 10-KSB filed on April 2, 2007 and incorporated herein by      reference). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.7 | Form      of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s      Form 10-KSB filed on April 2, 2007 and incorporated herein by      reference). |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Steve      Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form      10-QSB for the quarter ending June 20, 2006 and incorporated herein by      reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Brian      Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit      10.2 to the Company’s Form 10-KSB filed on April 14, 2008 and incorporated      herein by reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Z      Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the      Z Trim's Proxy Statement for its Annual Meeting conducted on June 16, 2004      and approved by its Shareholders on that date and incorporated herein by      reference). |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.1* | Statement      Under Oath of Principal Executive Officer of the Company pursuant to      Section 302 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

| 31.2* | Statement      Under Oath of Principal Financial Officer of the Company pursuant to      Section 302 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

| 32.1* | Statement      Under Oath of Principal Executive Officer of the Company pursuant to      Section 906 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

| 32.2* | Statement      Under Oath of Principal Financial Officer of the Company pursuant to      Section 906 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                              |   |   | INDEX      TO FINANCIAL STATEMENTS |   |   |   |   |
|-----------------------------------------------------------------------------------|--------|--------|------------------------------------|--------|--------|--------|--------|
|                                                                              |   |   |                               |   |   |   |   |   |   |   |
|                                                                              |   |   |                               |   |   |   |   |   |   | PAGE |
|                                                                              |   |   |                               |   |   |   |   |   |   |   |
| Balance      Sheets at March 31, 2010 (unaudited) and December 31, 2009           |   |   | F-1                                |
|                                                                              |   |   |                               |   |   |   |   |   |   |   |
| Statements      of Operations for three months ended as of March 31, 2010         |   |   |
|  and      2009 (unaudited)                                                   |   |   |                               |   |   |   |   | F-3 |
|                                                                              |   |   |                               |   |   |   |   |   |   |   |
| Statements      of Cash Flows for the three months ended as of March 31,          |   |   | F-4                                |
|  2010      and 2009 (unaudited)                                              |   |   |                               |   |   |   |   |   |
|                                                                              |   |   |                               |   |   |   |   |   |   |   |
| Notes      to Financial Statements as of March 31, 2010 and 2009      (unaudited) |   | F-5    |

----

| Z      TRIM HOLDINGS, INC.                                                                         |   |                                                                                                               |   |                                                                                                                                                                |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE      SHEETS                                                                                |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| MARCH 31, 2010                                                                                     |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| ASSETS                                                                                             |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   | (Unaudited)                                                                                                        |   |                                                                                                                                                                |
|                                                                                               |   | 3/31/2010                                                                                                          |   | 12/31/2009                                                                                                                                                          |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| Current      Assets                                                                                |   |                                                                                                               |   |                                                                                                                                                                |
| Cash      and cash equivalents                                                                     |   |  $            564,766                             |   |  $            324,784                                                                              |
| Accounts      receivable                                                                           |   |                 110,420            |   |                   96,024                                                  |
| Inventory                                                                                          |   |                 122,926            |   |                 118,979                                                             |
| Prepaid      expenses and other assets                                                             |   |                 116,880            |   |                   97,802                                                  |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| Total      current assets                                                                          |   |                 914,992            |   |                 637,589                                                             |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| Property      and equipment, net                                                                   |   |             3,398,931                                  |   |             3,545,344                                                                                   |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| Long      Term Assets                                                                              |   |                                                                                                               |   |                                                                                                                                                                |
| Deposit      on Fixed Asset                                                                        |   |                 208,000            |   |                            - |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| Other      Assets                                                                                  |   |                                                                                                               |   |                                                                                                                                                                |
|         Prepaid      Loan  Cost - Long Term, Net |   |                 223,808            |   |                 368,171                                                             |
| Deposits                                                                                           |   |                   15,003 |   |                   15,003                                                  |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| Total      other assets                                                                            |   |                 238,811            |   |                 383,174                                                             |
|                                                                                               |   |                                                                                                               |   |                                                                                                                                                                |
| TOTAL      ASSETS                                                                                  |   |  $         4,760,734                                             |   |  $         4,566,107                                                                                              |

----

| Z      TRIM HOLDINGS, INC.                                                                                        |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE      SHEETS                                                                                               |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| MARCH 31, 2010                                                                                                    |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| LIABILITIES      AND STOCKHOLDERS' EQUITY (DEFICIT)                                                               |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   | (Unaudited)                                                                                                                                         |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   | 3/31/2010                                                                                                                                           |                                                                   | 12/31/2009                                                                                                                                                          |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Current      Liabilities                                                                                          |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Accounts      payable                                                                                             |                                                                   |  $            311,975                                                              |                                                                   |  $            373,841                                                                              |
| Accrued      expenses and other                                                                                   |                                                                   |                 889,658                                             |                                                                   |                 700,830                                                             |
| Accrued      Liquidated Damages                                                                                   |                                                                   |                 100,125                                             |                                                                   |                   80,100                                                  |
|         Derivative      Liabilities                                       |                                                                   |             8,477,231                                                                   |                                                                   |           10,285,578                                                                                              |
|         Convertible      Notes Payable, Net                               |                                                                   |             4,457,000                                                                   |                                                                   |             4,008,950                                                                                   |
| Total      Current Liabilities                                                                                    |                                                                   |           14,235,989                                                                              |                                                                   |           15,449,299                                                                                              |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Long      Term Liabilities                                                                                        |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|              Convertible      Notes Payable, Net |                                                                   |                 360,098                                             |                                                                   |                            - |
| Total      Long Term Liabilities                                                                                  |                                                                   |                 360,098                                             |                                                                   |                            - |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Total      Liabilities                                                                                            |                                                                   |           14,596,087                                                                              |                                                                   |           15,449,299                                                                                              |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Stockholders'      Equity (Deficit)                                                                               |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Common      stock, $0.00005 par value; authorized 200,000,000                                                     |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| shares;      issued and outstanding 3,535,068 and                                                                 |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| 2,806,878      shares, March 31, 2010 and December 31, 2009                                                       |                                                                   |                         177 |                                                                   |                         140                 |
| respectively                                                                                                      |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
|         Subscription      Payable-Preferred Stock                         |                                                                   |                     9,000                       |                                                                   |                            - |
| Additional      paid-in capital                                                                                   |                                                                   |           76,906,256                                                                              |                                                                   |           75,119,074                                                                                              |
| Accumulated      deficit                                                                                          |                                                                   |         (86,750,786)                                                                                        |                                                                   |         (86,002,406)                                                                                                        |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| Total      Stockholders' Equity (Deficit)                                                                         |                                                                   |            (9,835,353)                                                                       |                                                                   |         (10,883,192)                                                                                                        |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |
| TOTAL      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                         |  $         4,760,734 |                                                                                                                                                |  $         4,566,107 |
|                                                                                                              |                                                                   |                                                                                                                                                |                                                                   |                                                                                                                                                                |

----

| Z      TRIM HOLDINGS, INC.                                   |                                                                                                                                                          |   |                                                                                                                                                          |
|--------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| STATEMENTS      OF OPERATIONS                                |                                                                                                                                                          |   |                                                                                                                                                          |
|                                                         | (Unaudited)                                                                                                                                                   |   | (Unaudited)                                                                                                                                                   |
| FOR      THE QUARTER ENDED MARCH 31                          | 2010                                                                                                                                                          |   | 2009                                                                                                                                                          |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| REVENUES:                                                    |                                                                                                                                                          |   |                                                                                                                                                          |
|   Products                                         |  $           180,251                                                                              |   |  $           127,969                                                                              |
|     Total      revenues                  |                180,251                                                             |   |                127,969                                                             |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| COST      OF REVENUES:                                       |                                                                                                                                                          |   |                                                                                                                                                          |
|   Products                                         |                543,422                                                             |   |                350,617                                                             |
|     Total      cost of revenues          |                543,422                                                             |   |                350,617                                                             |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| GROSS      MARGIN                                            |              (363,171)                                                                       |   |              (222,648)                                                                       |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| OPERATING      EXPENSES:                                     |                                                                                                                                                          |   |                                                                                                                                                          |
| Selling,      general and administrative                     |    2,258,886                                                                                                                                   |   |    1,742,786                                                                                                                                   |
| Loss(Gain)      on asset disposals, net                      |                   -                                                 |   |        119,688                                                                                                             |
|     Total      operating expenses        |            2,258,886                                                                                   |   |            1,862,474                                                                                   |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| OPERATING      LOSS                                          |           (2,622,057)                                                                                       |   |           (2,085,122)                                                                                       |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| OTHER      INCOME (EXPENSES):                                |                                                                                                                                                          |   |                                                                                                                                                          |
| Rental      and other income                                 |                  40                                                      |   |            3,101                                                                                       |
| Interest      income                                         |                670                                                                 |   |                219                                                                 |
| Interest      expense                                        |                   -                                                 |   |                (55)                                                                |
| Interest      expense - Note Payable                         |   (1,139,973)                                                                                                                                       |   |      (403,135)                                                                                                                       |
| Liquidated      Damages                                      |        (20,025)                                                                                                            |   |                   -                                                 |
| Change      in Fair Value - Derivative                       |    3,358,893                                                                                                                                   |   |      (464,801)                                                                                                                       |
| Loss      on Derivative Settlement                           |      (320,294)                                                                                                                       |   |                   -                                                 |
| Loss      on Conversion of Note Payable                      |           (5,634)                                                                                           |   |                   -                                                 |
| Settlement      (loss) gain                                  |                           - |   |                           - |
|     Total      other income (expenses)   |            1,873,677                                                                                   |   |              (864,671)                                                                       |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| NET      LOSS                                                |  $          (748,380)                                                                                  |   |  $      (2,949,793)                                                                                                        |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| Deemed      Dividend                                         |                   -                                                 |   |                   -                                                 |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| NET      LOSS  ATTRIBUTABLE TO COMMON STOCKHOLDERS |  $          (748,380)                                                                                  |   |  $      (2,949,793)                                                                                                        |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| NET      LOSS PER SHARE - BASIC AND DILUTED                  |  $                 (0.22)                                           |   |  $                 (1.13)                                           |
|                                                         |                                                                                                                                                          |   |                                                                                                                                                          |
| Weighted      Average Number of Shares Basic and Diluted     |            3,363,577                                                                                   |   |            2,621,546                                                                                   |

----

| Z      TRIM HOLDINGS, INC.                                                                                             |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| STATEMENTS      OF CASH FLOWS                                                                                          | (Unaudited)                                                                                                                                                                                                   |   | (Unaudited)                                                                                                                                                                                             |
| FOR      THE QUARTER  ENDED MARCH 31                                                                         | 2010                                                                                                                                                                                                          |   | 2009                                                                                                                                                                                                    |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                              |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Net      loss                                                                                                          |                      (748,380)                                                                       |   |                   (2,949,793)                                                                                 |
| Adjustments      to reconcile loss from continuing operations to                                                       |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| net      cash used in operating activities:                                                                            |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Depreciation                                                                                                           |                        200,047                                                             |   | 253,148                                                                                                                                                                                                 |
| Loss      on asset disposal                                                                                            |                                  -       |   |                        119,688                                                       |
| Change      in  Derivative Liability, net of bifurcation                                                     |                   (3,038,599)                                                                                       |   |                        464,801                                                       |
| Stock      based compensation                                                                                          |                        684,434                                                             |   |                        774,221                                                       |
| Shares      issued for director fees                                                                                   |                        234,000                                                             |   |                          46,200                                            |
| Shares      issued per Legend Agreement                                                                                |                        490,000                                                             |   |                                  - |
| Interest      Charge on BCF                                                                                            |                        811,058                                                             |   |                                                                                                                                                                                                    |
| Loan      Cost Amortization                                                                                            |                        144,363                                                             |   |                        118,800                                                       |
| Loss      on conversion of NP                                                                                          |                            5,634                                       |   |                        195,195                                                       |
| Changes      in operating assets and liabilities                                                                       |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Accounts      receivable                                                                                               |                        (14,396)                                                            |   |                        115,477                                                       |
| Inventory                                                                                                              |                          (3,947)                                                 |   |                            8,860                                 |
| Prepaid      expenses and other assets                                                                                 |                        (19,078)                                                            |   |                          23,725                                            |
| Increase/(Decrease)      in:                                                                                           |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Accounts      payable and accrued expenses                                                                             |                        127,724                                                             |   |                        545,020                                                       |
| Accrued      Liquidated Damages                                                                                        |                          20,025                                                  |   |                                  - |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| CASH      USED FOR OPERATING ACTIVITIES                                                                                |                   (1,107,115)                                                                                       |   |                      (284,658)                                                                 |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                              |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Purchase      of Fixed Assets                                                                                          |                      (261,634)                                                                       |   |                      (293,107)                                                                 |
| Proceeds      from asset disposals                                                                                     |                                  -       |   |                          90,000                                            |
| CASH      USED FOR INVESTING ACTIVITIES                                                                                |                      (261,634)                                                                       |   |                      (203,107)                                                                 |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM FINANCING ACTIVITES                                                                               |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Loan      Costs                                                                                                        |                                  -       |   |                                  - |
| Rescinded      Shares                                                                                                  |                                  -       |   |                                  - |
| Borrowing      on debt                                                                                                 |                     1,596,000                                                                             |   |                                  - |
| Proceeds      from sale of stock                                                                                       |                            9,000                                       |   |                                                                                                                                                                                                    |
| Exercise      of options and warrants for cash                                                                         |                            3,731                                       |   |                                  - |
| CASH      PROVIDED BY FINANCING ACTIVITIES                                                                             |                     1,608,731                                                                             |   |                                  - |
| NET      (DECREASE)INCREASE IN CASH                                                                                    |                        239,982                                                             |   |                      (487,765)                                                                 |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| CASH      AT BEGINNING OF YEAR                                                                                         |                        324,784                                                             |   |                        592,696                                                       |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| CASH      AT THE QUARTER  ENDED MARCH 31                                                                     |                        564,766                                                             |   |                        104,931                                                       |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Supplemental      Disclosures of Cash Flow Information:                                                                |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
|                                                                                                                   |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
| Issuance      of common stock for issuance of stock                                                                    |                                                                                                                                                                                                          |   |                                                                                                                                                                                                    |
|         Cash      less exercise of warrants                                    |                                   9 |   |                                                                                                                                                                                                    |
|         Note      Payable conversion                                           |                          20,762                                                  |   |                                                                                                                                                                                                    |
|         Discount      on convertible debentures                                |                     1,596,000                                                                             |   |                                                                                                                                                                                                    |
|         Change      in derivative liability due to exercise of warrants        |                        354,292                                                             |   |                                                                                                                                                                                                    |
|         Transfer      from Deposit on Fixed Assets to Construction in Progress |                                                                                                                                                                                                          |   |                        240,000                                                       |
|         Cummulative      Effect - Adoption of EITF07-5                         |                                                                                                                                                                                                          |   |                     2,219,530                                                                       |
|         Reverse      Stock split                                               |                                                                                                                                                                                                          |   |                            3,775                                 |

----

----

|   |   | Level      one — Quoted market prices in active markets for identical assets or      liabilities; |
|--------|--------|---------------------------------------------------------------------------------------------------------|

|                                       |                                                                                                                                                                                                                                                                                                                                  | Level      two — Inputs other than level one inputs that are either directly or      indirectly observable; and |
|--------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|         |                           Level three — Unobservable inputs developed using estimates and      assumptions, which are developed by the reporting entity and reflect      those assumptions that a market participant would  use. |

----

----

|                             | 3/31/2010                                                                     |   | 12/31/2009                                                                    |
|----------------------------------|-------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
| Raw      materials               |  $      34,149                             |   |  $      23,773                             |
| Packaging                        |             1,046 |   |             1,010 |
| Work-in-process                  |             8,928 |   |             7,437 |
| Finished      goods              |          74,393                  |   |          80,299                  |
| Other      Inventory             |             4,410 |   |             6,461 |
|   Total      inventory |  $    122,926                                        |   |  $    118,979                                        |
|                             |                                                                          |   |                                                                          |

|                                             |   | 3/31/2010    |   | 12/31/2009   |
|--------------------------------------------------|--------|--------------|--------|--------------|
| Production,      engineering and other equipment |   | $5,651,279   |   | $5,651,279   |
| Leasehold      improvements                      |   | $2,822,834   |   | $2,822,834   |
| Office      equipment and furniture              |   | $577,226     |   | $577,226     |
| Computer      equipment and related software     |   | $140,245     |   | $140,246     |
| Construction      in process - Equipment         |   | $125,810     |   | $72,177      |
| Construction      in process - Leasehold Impr    |   | $0           |   | $0           |
|                                             |   | $9,317,394   |   | $9,263,762   |
| Accumulated      depreciation                    |   | ($5,918,463) |   | ($5,718,418) |
| Property      and equipment, net                 |   | $3,398,931   |   | $3,545,344   |

| Depreciation      expense was $200,047 and $253,148 for the three months ended March 31,      2010 and March 31, 2009 respectively.                                                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| During      the first quarter of 2010, no equipment was sold, but in 2009, the Company      sold an unused piece of equipment of  bottling equipment for      $90,000.  The Company recognized a loss with respect to such      equipment, totaling $119,688.  |   |

|                                    | 3/31/2010                                                                                                                                         |   | 12/31/2009                                                                                                          |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| Accrued      legal                      |  $             15,940                                                       |   |  $                -            |
| Accrued      payroll and taxes          |                   6,230                                 |   |              4,787                                 |
| Accrued      settlements                |                         - |   |                    - |
| Accrued      Interest                   |               772,219                                                       |   |          575,357                                                       |
| Accrued      expenses and other         |                 95,269                                            |   |          120,686                                                       |
| Total      accrued expenses & other |  $           889,658                                                                  |   |  $      700,830                                                                  |

----

----

|                                                           |   | March      31, 2010 |   | December      31, 2009 |
|----------------------------------------------------------------|--------|---------------------|--------|------------------------|
|                                                           |   |                |   |                   |   |   |
| Common      stock warrants                                     |   | 4,881,634           |   |                   |   | 5,387,788 |
| Embedded      conversion features –part of note discount |   |  3,595,597     |   |                   |   | 4,897,790 |
|                                                           |   |                |   |                   |   |   |
| Total                                                          |   | $8,477,231          |   |                   | $ | $10,285,578 |

|                                      |   | March      31, 2010 |   |
|-------------------------------------------|--------|---------------------|--------|
| Beginning      Balance                    |   | 10,285,577          |   |
| Bifurcated      Amount                    |   | 1,596,000           |   |
| Conversion      and Exercise of Warrants  |   | (365,748)           |   |
|  Change      in Derivative Liability |   |  (3,038,599)   |   |
| Total                                     |   | $    8,477,231      |   |

----

|                                  |   | 3/31/2010                                                                                                                 |                                                                                         |   | 3/31/2009                                                                                                                 |                                                                                               |
|---------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                  |   |                                                                                                                      | Weghted                                                                                      |   |                                                                                                                      | Weghted                                                                                            |
|                                  |   | Number                                                                                                                    | Average                                                                                      |   | Number                                                                                                                    | Average                                                                                            |
|                                  |   | of                                                                                                                        | Exercise                                                                                     |   | of                                                                                                                        | Exercise                                                                                           |
|                                  |   | Shares                                                                                                                    | Price                                                                                        |   | Shares                                                                                                                    | Price                                                                                              |
| Outstanding      at beginning of year |   |      1,405,062                                                                                   |  $           0.66                |   |         431,073                                                                   |  $         32.04                                 |
| Granted                               |   |      1,592,000                                                                                   |  $           1.46                |   |      1,320,000                                                                                   |  $           0.45                      |
| Exercised                             |   |                     - | $               - |   |                     - |  $               - |
| Expired      and Cancelled            |   |           (9,399)                                                       |  $         35.65                           |   |       (316,678)                                                                             |  $         31.75                                 |
| Outstanding      at end of period     |   |      2,987,663                                                                                   |  $           0.98                |   |      1,434,395                                                                                   |  $           3.04                      |
|                                  |   |                                                                                                                      |                                                                                         |   |                                                                                                                      |                                                                                               |
| Exercisable      at end of period     |   |      1,879,913                                                                                   |  $           2.12                |   |      1,381,895                                                                                   |  $           3.42                      |

|                                                | 3/31/2010                                                                                                                                             |   | 2009                                                                                                                                                  |
|-----------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| Weighted      average fair value per option granted |  $                       1.44 |   |  $                       0.43 |
| Risk-free      interest rate                        | 0.92%                                                                                                                                                 |   |            1.99      - 2.99%                                                                   |
| Expected      dividend yield                        | 0.00%                                                                                                                                                 |   | 0.00%                                                                                                                                                 |
| Expected      lives                                 |  1      - 2.5                                                                                                                                    |   |  1      - 2.5                                                                                                                                    |
| Expected      volatility                            | 267.54%                                                                                                                                               |   | 130.25%                                                                                                                                               |

|                  |   |                                                                                                         |   | Weighted                                                                                      |   |                                                  |   |                                                                                                         |
|-----------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                         |   | Average                                                                                       |   | Weighted                                              |   |                                                                                                         |
| Range      of         |   |                                                                                                         |   | Remaining                                                                                     |   | Average                                               |   |                                                                                                         |
| Exercise              |   | Options                                                                                                      |   | Contractual                                                                                   |   | Exercise                                              |   | Options                                                                                                      |
| Prices                |   | Outstanding                                                                                                  |   | Life                                                                                          |   | Price                                                 |   | Exercisable                                                                                                  |
| $0.01-$1.50           |   |             2,587,000                            |   |                4.5 |   |  $       0.97 |   |             1,636,750                            |
| $1.51-$3.00           |   |                325,000            |   |                4.8 |   |  $       1.58 |   |                167,500            |
| $3.01      & over |   |                  75,663 |   |                0.5 |   |  $     35.27            |   |                  75,663 |
|                  |   |             2,987,663                            |   |                4.3 |   |  $       1.87 |   |             1,879,913                            |

----

|                                  |   | Quarter  Ended                                                   |                                 |                                                                          |                                 | Quarter       Ended                                                                                                              |   |                                                                                               |
|---------------------------------------|--------|----------------------------------------------------------------------------|--------------------------------------|-------------------------------------------------------------------------------|--------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                  |   | 3/31/2010                                                                  |                                 |                                                                          |                                 | 3/31/2009                                                                                                                             |   |                                                                                               |
|                                  |   | Number      of Shares                                                      | Weighted      Average Exercise Price | Number      of Shares                                                         | Weighted      Average Exercise Price |
| Outstanding      at beginning of year |   |        9,682,380                        |                                 |  $           1.61 |                                 |           943,804                                                                   |   |  $           5.86                      |
| Granted                               |   |        2,394,000                        |                                 |  $           1.50 |                                 |                       - |   |  $               - |
| Exercised                             |   |            (60,769) |                                 |  $           0.06 |                                 |                       - |   |  $               - |
| Cashless                              |   |          (198,085)            |                                 |  $           0.16 |                                 |                       - |   |  $               - |
| Expired      and Cancelled            |   |          (350,000)            |                                 |  $           1.10 |                                 |                       - |   |  $               - |
|                                  |   |      11,467,526                                   |                                 |                                                                          |                                 |           943,804                                                                   |   |                                                                                               |
|                                  |   |                                                                       |                                 |                                                                          |                                 |                                                                                                                                  |   |                                                                                               |
| Outstanding,      end of period       |   |      11,467,526                                   |                                 |  $           1.63 |                                 |           943,804                                                                   |   |  $           5.86                      |
|                                  |   |                                                                       |                                 |                                                                          |                                 |                                                                                                                                  |   |                                                                                               |
|                                  |   |                                                                       |                                 |                                                                          |                                 |                                                                                                                                  |   |                                                                                               |
| Exercisable      at end of period     |   |      11,467,526                                   |                                 |  $           1.63 |                                 |           943,804                                                                   |   |  $           5.86                      |
|                                  |   |                                                                       |                                 |                                                                          |                                 |                                                                                                                                  |   |                                                                                               |

|        Year Ended | Rentals                                                                                                                                                             |
|------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2011                   |                   252,000                                                 |
| 2012                   |                     42,000                                      |
| 2013                   |                            - |
| 2014                   |                                                                                                                                                                |
| 2012                   |                            - |
|                   |  $               294,000                                                            |

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