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| /X/ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2010 |
|-----|-------------------------------------------------------------------------------------------------------------------------------------|

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

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

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| 1.   | As of September 30, 2010, we did not maintain effective controls over the control environment.  Specifically, we have not developed and effectively communicated to our employees our 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 material weakness. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | As of September 30, 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. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 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). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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 of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

| 31.2* | Statement Under Oath of Principal Financial Officer of the Company pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

| 32.1* | Statement Under Oath of Principal Executive Officer of the Company pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

| 32.2* | Statement Under Oath of Principal Financial Officer of the Company pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|-------|---------------------------------------------------------------------------------------------------------------------------|

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|                                                                                                               |   |   | INDEX TO FINANCIAL STATEMENTS |   |   |   |   |
|--------------------------------------------------------------------------------------------------------------------|--------|--------|-------------------------------|--------|--------|--------|--------|
|                                                                                                               |   |   |                          |   |   |   |   |   |   |   |
|                                                                                                               |   |   |                          |   |   |   |   |   |   | PAGE |
|                                                                                                               |   |   |                          |   |   |   |   |   |   |   |
| Consolidated Balance Sheets at September 30, 2010 (unaudited) and December 31, 2009                                |   | F-1    |
|                                                                                                               |   |   |                          |   |   |   |   |   |   |   |
| Consolidated Statements of Operations for six and three months ended as of September 30, 2010 and 2009 (unaudited) |   |   | F-3                           |
|                                                                                                               |   |   |                          |   |   |   |   |   |   |   |
| Consolidated Statements of Cash Flows as of September 30, 2010 and 2009 (unaudited)                                |   | F-4    |
|                                                                                                               |   |   |                          |   |   |   |   |   |
| Notes to Consolidated Financial Statements as of September 30, 2010 and 2009 (unaudited)                           |   | F-5    |

----

| Z TRIM HOLDINGS, INC.                                                              |          |                                                                                                                                                               |   |                                                                                                                                                               |
|------------------------------------------------------------------------------------|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE SHEET                                                                      |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
| SEPTEMBER 30, 2010 and DECEMBER 31, 2009                                           |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |   ASSETS |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          | (Unaudited)                                                                                                                                                        |   |                                                                                                                                                               |
|                                                                               |          | 9/30/2010                                                                                                                                                          |   | 12/31/2009                                                                                                                                                         |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
| Current Assets                                                                     |          |                                                                                                                                                               |   |                                                                                                                                                               |
| Cash and cash equivalents                                                          |          |  $                       40,321            |   |  $                    324,784                             |
| Accounts receivable                                                                |          |                         180,082            |   |                           96,024 |
| Inventory                                                                          |          |                           84,749 |   |                         118,979            |
| Prepaid expenses and other assets                                                  |          |                         127,982            |   |                           97,802 |
|         Prepaid Loan  Cost , Net |          |                           10,614 |   |                         368,171            |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
| Total current assets                                                               |          |                         443,748            |   |                     1,005,760                                  |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
| Property and equipment, net                                                        |          |                     3,119,003                                  |   |                     3,545,344                                  |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
| Other Assets                                                                       |          |                                                                                                                                                               |   |                                                                                                                                                               |
| Deposits                                                                           |          |                           15,003 |   |                           15,003 |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
| Total other assets                                                                 |          |                           15,003 |   |                           15,003 |
|                                                                               |          |                                                                                                                                                               |   |                                                                                                                                                               |
| TOTAL ASSETS                                                                       |          |  $                 3,577,754                                             |   |  $                 4,566,107                                             |

----

| Z TRIM HOLDINGS, INC.                                                                                        |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|--------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE SHEET                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| SEPTEMBER 30, 2010 and DECEMBER 31, 2009                                                                     |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| LIABILITIES & CONVERTIBLE, REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY (DEFICIT)               |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   | (Unaudited)                                                                                                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   | 9/30/2010                                                                                                                                                                                           |                                                                                                                   | 12/31/2009                                                                                                                                                                                          |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Current Liabilities                                                                                          |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Accounts payable                                                                                             |                                                                                                                   |  $                    420,242                                                              |                                                                                                                   |  $                    373,841                                                              |
| Dividends payable                                                                                            |                                                                                                                   |                           25,508                                  |                                                                                                                   | 0                                                                                                                                                                                                   |
| Accrued expenses and other                                                                                   |                                                                                                                   |                         674,884                                             |                                                                                                                   |                         700,830                                             |
| Accrued Liquidated Damages                                                                                   |                                                                                                                   |                         111,028                                             |                                                                                                                   |                           80,100                                  |
|         Derivative Liabilities                                       |                                                                                                                   |                     7,592,678                                                                   |                                                                                                                   |                   10,285,578                                                                              |
|         Convertible Notes Payable, Net                               |                                                                                                                   |                     2,511,500                                                                   |                                                                                                                   |                     4,008,950                                                                   |
| Total Current Liabilities                                                                                    |                                                                                                                   |                   11,335,840                                                                              |                                                                                                                   |                   15,449,299                                                                              |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Long Term Liabilities                                                                                        |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|              Convertible Notes Payable, Net |                                                                                                                   |                         389,739                                             |                                                                                                                   | 0                                                                                                                                                                                                   |
| Total Long Term Liabilities                                                                                  |                                                                                                                   |                         389,739                                             |                                                                                                                   | 0                                                                                                                                                                                                   |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Total Liabilities                                                                                            |                                                                                                                   |                   11,725,579                                                                              |                                                                                                                   |                   15,449,299                                                                              |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Commitment & Contingencies                                                                               |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|   Convertible, Redeemable Preferred Stock                                                          |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|   Preferred stock, $0.01 par value; authorized 5,000,000 shares;                                   |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|   issued and outstanding 244,200 and 0 shares, September 30, 2010                                  |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |
|   and December 31, 2009  respectively                                                    |                                                                                                                   | 1,221,000                                                                                                                                                                                           |                                                                                                                   | 0                                                                                                                                                                                                   |
|   Discount on Preferred Stock                                                                      |                                                                                                                   | (1,082,881)                                                                                                                                                                                         |                                                                                                                   | 0                                                                                                                                                                                                   |
|     Net Preferred Stock                                                                  |                                                                                                                   | 138,119                                                                                                                                                                                             |                                                                                                                   | 0                                                                                                                                                                                                   |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Total Commitment & Contingencies                                                                         |                                                                                                                   | 138,119                                                                                                                                                                                             |                                                                                                                   | 0                                                                                                                                                                                                   |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Stockholders' Equity (Deficit)                                                                               |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Common stock, $0.00005 par value; authorized 200,000,000                                                     |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| shares; issued and outstanding 7,925,823 and                                                                 |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| 2,806,878 shares, September 30, 2010 and December 31, 2009                                                   |                                                                                                                   |                                 396 |                                                                                                                   |                                 140 |
| respectively                                                                                                 |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Additional paid-in capital                                                                                   |                                                                                                                   |                   83,741,198                                                                              |                                                                                                                   |                   75,119,074                                                                              |
| Accumulated deficit                                                                                          |                                                                                                                   |                 (92,027,538)                                                                                        |                                                                                                                   |                 (86,002,406)                                                                                        |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Total Stockholders' Equity (Deficit)                                                                         |                                                                                                                   |                    (8,285,944)                                                                       |                                                                                                                   |                 (10,883,192)                                                                                        |
|                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| TOTAL LIABILITIES & CONVERTIBLE REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY (DEFICIT)          |  $                 3,577,754 |                                                                                                                                                                                                |  $                 4,566,107 |

----

| Z TRIM HOLDINGS, INC.                                 |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
|-------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|---------------------------------------------------------------------|
| STATEMENT OF OPERATIONS (Unaudited)                   |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
|                                                  |   | Three months ended                                                                                            |   | Nine months ended                                                             |   |
|                                                  |   | September 30                                                                                                  |   |                                                                          |   | September 30                                                        |   |                                                                |
|                                                  |   | 2010                                                                                                          |   | 2009                                                                          |   | 2010                                                                |   | 2009                                                                |
| REVENUES:                                             |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
|   Products                                  |   |  $     220,863                                                                  |   |  $     150,050                                  |   |  $     602,252                        |   |  $     440,979                        |
|     Total revenues                |   |         220,863                                                       |   |         150,050                       |   |         602,252             |   |         440,979             |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| COST OF REVENUES:                                     |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
|   Products                                  |   |         649,741                                                       |   |         458,682                       |   |      1,773,446                             |   |      1,211,339                             |
|     Total cost of revenues        |   |         649,741                                                       |   |         458,682                       |   |      1,773,446                             |   |      1,211,339                             |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| GROSS MARGIN                                          |   |       (428,878)                                                                 |   |       (308,632)                                 |   |    (1,171,194)                                       |   |       (770,360)                       |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| OPERATING EXPENSES:                                   |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| Selling, general and administrative                   |   |      1,319,287                                                                       |   |         843,536                       |   |      5,583,050                             |   |      3,511,873                             |
| Loss/(Gain) on asset disposals, net                   |   |                   - |   |             9,463 |   |           40,359  |   |         126,651             |
|     Total operating expenses      |   |      1,319,287                                                                       |   |         852,999                       |   |      5,623,409                             |   |      3,638,524                             |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| OPERATING LOSS                                        |   |    (1,748,165)                                                                                 |   |    (1,161,631)                                                 |   |    (6,794,603)                                       |   |    (4,408,884)                                       |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| OTHER INCOME (EXPENSES):                              |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| Rental and other income                               |   | 342                                                                                                           |   | 220                                                                           |   | 397                                                                 |   | 3,826                                                               |
| Interest income                                       |   | 115                                                                                                           |   | 0                                                                             |   | 1,222                                                               |   | 226                                                                 |
| Interest expense                                      |   | 0                                                                                                             |   | (2,456)                                                                       |   | (7)                                                                 |   | (5,683)                                                             |
| Finance charge                                        |   | (7,500)                                                                                                       |   | 0                                                                             |   | (7,500)                                                             |   |                                                                |
| Interest expense - Note Payable                       |   | (1,067,492)                                                                                                   |   | (625,938)                                                                     |   | (3,495,999)                                                         |   | (1,515,138)                                                         |
| Liquidated Damages                                    |   | 0                                                                                                             |   | 0                                                                             |   | (30,928)                                                            |   | 0                                                                   |
| Derivative  (loss) gain                     |   | 1,174,011                                                                                                     |   | 510,001                                                                       |   | 4,355,060                                                           |   | (910,990)                                                           |
| Loss on Conversion of Note Payable                    |   | 0                                                                                                             |   | 0                                                                             |   | (5,634)                                                             |   | 0                                                                   |
| Settlement (loss) gain                                |   | (47,140)                                                                                                      |   | 0                                                                             |   | (47,140)                                                            |   | (195,608)                                                           |
|     Total other income (expenses) |   |           52,336                                            |   |       (118,173)                                 |   |         769,471             |   |    (2,623,367)                                       |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| LOSS FROM CONTINUING OPERATIONS                       |   |  $(1,695,829)                                                                                            |   |  $(1,279,804)                                                            |   |  $(6,025,132)                                                  |   |  $(7,032,251)                                                  |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| NET LOSS                                              |   |  $(1,695,829)                                                                                            |   |  $(1,279,804)                                                            |   |  $(6,025,132)                                                  |   |  $(7,032,251)                                                  |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| Net Loss per Share from continuing operations         |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
|  - Basic and Diluted                             |   |  $         (0.24)                                           |   |  $         (0.46)           |   |  $         (1.28) |   |  $         (2.60) |
| Net Loss per Share - Basic and Diluted                |   |  $         (0.24)                                           |   |  $         (0.46)           |   |  $         (1.28) |   |  $         (2.60) |
|                                                  |   |                                                                                                          |   |                                                                          |   |                                                                |   |                                                                |
| Weighted Average Number of Shares Basic and Diluted   |   |      6,935,971                                                                       |   |      2,756,686                                       |   |      4,715,246                             |   |      2,705,827                             |

----

| Z TRIM HOLDINGS, INC.                                                                                             |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| STATEMENT OF CASH FLOWS (Unaudited)                                                                               |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                              | (Unaudited)                                                                                                                                                                                        |   | (Unaudited)                                                                                                                                                             |
| FOR THE NINE MONTHS ENDED SEPTEMBER 30                                                                            | 2010                                                                                                                                                                                               |   | 2009                                                                                                                                                                    |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Net loss                                                                                                          |                   (6,025,132)                                                                            |   |                   (7,032,252)                                                 |
| Adjustments to reconcile loss from continuing operations to                                                       |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| net cash used in operating activities:                                                                            |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Depreciation                                                                                                      | 626,941                                                                                                                                                                                            |   | 720,760                                                                                                                                                                 |
| Loss on asset disposal                                                                                            | 40,359                                                                                                                                                                                             |   | 126,651                                                                                                                                                                 |
| Change in  Derivative Liability, net of bifurcation                                                     | (4,355,060)                                                                                                                                                                                        |   | 910,990                                                                                                                                                                 |
| Stock based compensation                                                                                          | 2,339,461                                                                                                                                                                                          |   | 565,844                                                                                                                                                                 |
| Stock based compensation - warrants                                                                               | 0                                                                                                                                                                                                  |   | 526,454                                                                                                                                                                 |
| Shares issued for director fees                                                                                   | 234,000                                                                                                                                                                                            |   | 46,201                                                                                                                                                                  |
| Shares and Warrants issued for debt                                                                               | 0                                                                                                                                                                                                  |   | 195,608                                                                                                                                                                 |
| Shares & Warrants issued for Services                                                                         | 490,000                                                                                                                                                                                            |   | 6,263                                                                                                                                                                   |
| Interest Charge on BCF                                                                                            | 2,592,199                                                                                                                                                                                          |   | 840,313                                                                                                                                                                 |
| Loan Cost Amortization                                                                                            | 357,557                                                                                                                                                                                            |   | 375,014                                                                                                                                                                 |
| Loss on conversion of NP                                                                                          | 5,634                                                                                                                                                                                              |   | 0                                                                                                                                                                       |
| Changes in operating assets and liabilities                                                                       |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Accounts receivable                                                                                               | (84,058)                                                                                                                                                                                           |   | 103,612                                                                                                                                                                 |
| Inventory                                                                                                         | 34,230                                                                                                                                                                                             |   | 72,602                                                                                                                                                                  |
| Prepaid expenses and other assets                                                                                 | (30,180)                                                                                                                                                                                           |   | (23,120)                                                                                                                                                                |
| Increase/(Decrease) in:                                                                                           |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Accounts payable and accrued expenses                                                                             | 666,578                                                                                                                                                                                            |   | 907,147                                                                                                                                                                 |
| Accrued Liquidated Damages                                                                                        | 30,928                                                                                                                                                                                             |   | 0                                                                                                                                                                       |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH USED FOR OPERATING ACTIVITIES                                                                                |                   (3,076,543)                                                                            |   |                   (1,657,913)                                                 |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Purchase of Fixed Assets                                                                                          |                      (314,759)                                                            |   |                      (313,205)                                 |
| Proceeds from asset disposals                                                                                     |                          73,800                                       |   |                          97,000            |
| CASH USED FOR INVESTING ACTIVITIES                                                                                |                      (240,959)                                                            |   |                      (216,205)                                 |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH FLOWS FROM FINANCING ACTIVITES                                                                               |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Borrowing on debt                                                                                                 |                     1,796,000                                                                  |   |                     1,346,500                                       |
| Proceeds from sale of preferred stock                                                                             |                     1,221,000                                                                  |   | 0                                                                                                                                                                       |
| Proceeds from sale of common stock                                                                                |                          16,039                                       |   |                            4,365 |
| CASH PROVIDED BY FINANCING ACTIVITIES                                                                             |                     3,033,039                                                                  |   |                     1,350,865                                       |
| NET (DECREASE)INCREASE IN CASH                                                                                    |                      (284,463)                                                            |   |                      (523,253)                                 |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH AT BEGINNING OF YEAR                                                                                         |                        324,784                                                  |   |                        592,696                       |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH AT THE QUARTER  ENDED SEPTEMBER 30                                                                 |                          40,321                                       |   |                          69,443            |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Supplemental Disclosures of Cash Flow Information:                                                                |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Issuance of common stock for issuance of stock                                                                    |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|         Cash less exercise of warrants                                    |                                 11 |   |                                                                                                                                                                    |
|         Note Payable conversion                                           |                     4,363,123                                                                  |   |                                                                                                                                                                    |
|         Discount on convertible debentures                                |                     1,796,000                                                                  |   |                     1,871,500                                       |
|         Discount on preferred stock                                       |                     1,188,749                                                                  |   |                                                                                                                                                                    |
|         Amortization on preferred stock                                   |                        105,868                                                  |   |                                                                                                                                                                    |
|         Change in derivative liability due to exercise of warrants        |                        372,462                                                  |   |                                                                                                                                                                    |
|         Change in derivative liability due to conversion of NP            |                        938,671                                                  |   |                                                                                                                                                                    |
|         Dividends Payable                                                 |                          25,508                                       |   |                                                                                                                                                                    |
|         Transfer from Deposit on Fixed Assets to Construction in Progress |                                                                                                                                                                                               |   |                        240,000                       |
|         Cummulative Effect - Adoption of derivative value                 |                                                                                                                                                                                               |   |                     2,129,951                                       |
|         Convertible Debr issued for settlement of AP                      |                                                                                                                                                                                               |   |                        525,000                       |

----

----

| ·   | 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 |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                        | 9/30/2010                                                                     |   | 12/31/2009                                                                    |
|-----------------------------|-------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
| Raw materials               |  $      33,513                             |   |  $      23,773                             |
| Packaging                   |             3,743 |   |             1,010 |
| Work-in-process             |          16,837                  |   |             7,437 |
| Finished goods              |          26,436                  |   |          80,299                  |
| Other Inventory             |             4,220 |   |             6,461 |
|   Total inventory |  $      84,749                             |   |  $    118,979                                        |

----

|                                        |   | 9/30/2010    |   | 12/31/2009   |
|---------------------------------------------|--------|--------------|--------|--------------|
| Production, engineering and other equipment |   | $5,707,182   |   | $5,651,279   |
| Leasehold improvements                      |   | 2,901,002    |   | 2,822,834    |
| Office equipment and furniture              |   | 577,226      |   | 577,226      |
| Computer equipment and related software     |   | 140,246      |   | 140,246      |
| Construction in process - Equipment         |   | 19,620       |   | 72,177       |
|                                        |   | $9,345,276   |   | $9,263,762   |
| Accumulated depreciation                    |   | ($6,226,273) |   | ($5,718,418) |
| Property and equipment, net                 |   | $3,119,003   |   | $3,545,344   |

| Depreciation expense was $236,231 and $200,665 for the three months ended September 30, 2010 and September 30, 2009 respectively.  Depreciation expense was $626,941 and $720,761 for the nine months ended September 30, 2010 and September 30, 2009 respectively. During 2010, the Company sold equipment with a net book value of $114,160 for a total of $73,800. The Company recognized a loss of $40,359 with respect to such sale of equipment. During 2009, the Company sold an unused piece of bottling equipment for $90,000 and misc equipment for $7,000. The Company recognized a loss with respect to such equipment of $126,651.  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                               | 9/30/2010                                                                                                              |   | 12/31/2009 |    |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------|--------|------------|---------|
| Accrued legal                      |  $                  623 |   |  $    | 0       |
| Accrued payroll and taxes          |                   9,057      |   |       | 4,787   |
| Accrued Settlements                |                 47,140                 |   |       | 0       |
| Accrued Interest                   |               488,550                            |   |       | 575,357 |
| Accrued expenses and other         |               129,514                            |   |       | 120,686 |
| Total accrued expenses & other |  $           674,884                                       |   |  $    | 700,830 |

----

----

|                                                                          |   | September 30, 2010                                                                                                                                                     | December 31, 2009 |
|-------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
| Common stock warrants                                                         |   | 4,310,756                                                                                                                                                              |              |   | 5,387,788 |
| Embedded conversion features –part of note and preferred stock discount |   |  3,281,922                                                                                                                                                        |              |   | 4,897,790 |
|                                                                          |   |                                                                                                                                                                   |              |   |   |
| Total                                                                         |   | $                          7,592,678 |              | $ | 10,285,578 |

|                                                                           |   | September 30, 2010 |   |
|--------------------------------------------------------------------------------|--------|--------------------|--------|
| Beginning Balance                                                              |   | 10,285,577         |   |
| Bifurcated Amount                                                              |   | 2,984,749          |   |
| Change in Derivative Liability                                                 |   | (4,355,060)        |   |
| Change in Derivative Liability due to conversion of Note Payables and Warrants |   | (1,322,588)        |   |
| Total                                                                          |   | $ 7,592,678        |   |

----

----

|                             |   | 9/30/2010                               |     |   | 12/31/2009                                                                                                                |                                                                                               |
|----------------------------------|--------|-----------------------------------------|----------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                             |   |                                    | 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                          |   |      3,674,500 | $2.45    |   |      1,320,000                                                                                   |  $           0.45                      |
| Exercised                        |   | 0                                       | $0.00    |   |                     - |  $               - |
| Expired and Cancelled            |   |    (1,664,397)           | $2.16    |   |       (346,011)                                                                             |  $         31.24                                 |
| Outstanding at end of period     |   |      3,415,165 | $1.84    |   |      1,405,062                                                                                   |  $           2.56                      |
|                             |   |                                    |     |   |                                                                                                                      |                                                                                               |
| Exercisable at end of period     |   |      2,976,165 | $1.30    |   |      1,405,062                                                                                   |  $           0.66                      |

|                                           | 9/30/2010                                                                                                                                             |
|------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| Weighted average fair value per option granted |  $                       2.39 |
| Risk-free interest rate                        | 87.00%                                                                                                                                                |
| Expected dividend yield                        | 0.00%                                                                                                                                                 |
| Expected lives                                 |  1 - 2.5                                                                                                                                         |
| Expected volatility                            | 190.09%                                                                                                                                               |

|             |   |                                                                                                         |   | Weighted                                                                                      |   |                                                                            |   |                                                                                                         |
|------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                         |   | Average                                                                                       |   | Weighted                                                                        |   |                                                                                                         |
| Range of         |   |                                                                                                         |   | Remaining                                                                                     |   | Average                                                                         |   |                                                                                                         |
| Exercise         |   | Options                                                                                                      |   | Contractual                                                                                   |   | Exercise                                                                        |   | Options                                                                                                      |
| Prices           |   | Outstanding                                                                                                  |   | Life                                                                                          |   | Price                                                                           |   | Exercisable                                                                                                  |
| $0.01-$1.50      |   |             3,178,500                            |   |                6.4 |   |  $       1.49                           |   |             2,792,000                            |
| $1.51-$3.00      |   |                225,000            |   |                3.3 |   |  $       1.10                           |   |                172,500            |
| $3.01 & over |   |                  11,665 |   |                0.9 |   |  $     33.43                                      |   |                  11,665 |
|             |   |             3,415,165                            |   |                5.0 |   |        $       1.31 |   |             2,971,165                            |

|                             |   | Year  Ended                                                      |                            |             |                            | Year  Ended                                                                 |   |   |
|----------------------------------|--------|----------------------------------------------------------------------------|---------------------------------|------------------|---------------------------------|---------------------------------------------------------------------------------------|--------|--------|
|                             |   | 9/30/2010                                                                  |                            |             |                            | 12/31/2009                                                                            |   |   |
|                             |   | Number of Shares                                                           | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price |
| Outstanding at beginning of year |   |        9,682,380                        |                            | $1.61            |                            |        1,084,368                                   |   | $7.55  |
| Granted                          |   |        4,525,500                        |                            | $1.50            |                            |      10,356,465                                              |   | $1.46  |
| Exercised                        |   |            (73,077) |                            | $0.22            |                            |              (4,365) |   | $1.00  |
| Cashless                         |   |          (258,357)            |                            | $0.23            |                            | (57,051)                                                                              |   | $0.09  |
| Expired and Cancelled            |   |          (350,000)            |                            | $1.10            |                            | (1,697,037)                                                                           |   | $4.55  |
|                             |   |      13,526,447                                   |                            |             |                            |        9,682,380                                   |   |   |
|                             |   |                                                                       |                            |             |                            |                                                                                  |   |   |
| Outstanding, end of period       |   |      13,526,447                                   |                            | $1.62            |                            |        9,682,380                                   |   | $1.61  |
|                             |   |                                                                       |                            |             |                            |                                                                                  |   |   |
|                             |   |                                                                       |                            |             |                            |                                                                                  |   |   |
| Exercisable at end of period     |   |      13,526,447                                   |                            | $1.62            |                            |        9,594,880                                   |   | $1.61  |
|                             |   |                                                                       |                            |             |                            |                                                                                  |   |   |

----

| Year Ended  | Rentals                                                                                                                                                             |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   2011 |                     63,000                                      |
|   2012 |                            - |
|   2013 |                            - |
|   2014 |                            - |
|   2015 |                            - |
|        |                                                                                                                                                                |
|        |  $                 63,000                                                 |

----