----

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

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

Z TRIM HOLDINGS, INC.

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

----

----

----

----

|                            |                          |
|---------------------------------|-------------------------------|
|  Application               | Z      Trim Function          | Benefits |   |
| Cheese      sauce               | Fat      replacer, Emulsifier | Fewer      calories from fat, less separation, yield extension |   |
| Enchilada      sauce            | Extender,      thickener      | Yield      extension, improved texture |   |
| Sour      cream topping         | Binder,      Extender         | Yield      extension |   |
| Taco      filling (ground meat) | Binder,      Extender         | Yield      extension, less oily, less separation |   |
| Tortilla                        | Moisture      control         | Improved      structure, slows staling, reduces breaking |   |
|                            |                          |

----

----

----

----

----

----

ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OFMARKET RISKS

| 1.   | As      of June 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 materialweakness. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | As      of June 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. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| 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 of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

----

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

----

| Z      TRIM HOLDINGS, INC.                                                              |   |                                                                                                                                                               |   |                                                                                                                                                               |
|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE      SHEET                                                                      |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| JUNE 30, 2010                                                                           |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| ASSETS                                                                                  |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   | (Unaudited)                                                                                                                                                        |   |                                                                                                                                                               |
|                                                                                    |   | 6/30/2010                                                                                                                                                          |   | 12/31/2009                                                                                                                                                         |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Current      Assets                                                                     |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Cash      and cash equivalents                                                          |   |  $                    583,495                             |   |  $                    324,784                             |
| Accounts      receivable                                                                |   |                         115,389            |   |                           96,024 |
| Inventory                                                                               |   |                           83,860 |   |                         118,979            |
| Prepaid      expenses and other assets                                                  |   |                         129,861            |   |                           97,802 |
|         Prepaid      Loan  Cost , Net |   |                           72,190 |   |                         368,171            |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Total      current assets                                                               |   |                         984,795            |   |                     1,005,760                                  |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Property      and equipment, net                                                        |   |                     3,205,029                                  |   |                     3,545,344                                  |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Long      Term Assets                                                                   |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Deposit      on Fixed Asset                                                             |   |                         216,398            |   | 0                                                                                                                                                                  |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Other      Assets                                                                       |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Deposits                                                                                |   |                           15,003 |   |                           15,003 |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| Total      other assets                                                                 |   |                           15,003 |   |                           15,003 |
|                                                                                    |   |                                                                                                                                                               |   |                                                                                                                                                               |
| TOTAL      ASSETS                                                                       |   |  $                 4,421,225                                             |   |  $                 4,566,107                                             |

----

| Z      TRIM HOLDINGS, INC.                                                                                        |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| BALANCE      SHEET                                                                                                |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| JUNE 30, 2010                                                                                                     |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| LIABILITIES      & CONVERTIBLE, REDEEMABLE PREFERRED STOCK & STOCKHOLDERS' EQUITY      (DEFICIT)          |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   | (Unaudited)                                                                                                                                                                                         |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   | 6/30/2010                                                                                                                                                                                           |                                                                                                                   | 12/31/2009                                                                                                                                                                                          |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Current      Liabilities                                                                                          |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Accounts      payable                                                                                             |                                                                                                                   |  $                    277,894                                                              |                                                                                                                   |  $                    373,841                                                              |
| Dividends      payable                                                                                            |                                                                                                                   |                             5,424                       |                                                                                                                   | 0                                                                                                                                                                                                   |
| Accrued      expenses and other                                                                                   |                                                                                                                   |                         886,737                                             |                                                                                                                   |                         700,830                                             |
| Accrued      Liquidated Damages                                                                                   |                                                                                                                   |                         111,028                                             |                                                                                                                   |                           80,100                                  |
|         Derivative      Liabilities                                       |                                                                                                                   |                     9,178,827                                                                   |                                                                                                                   |                   10,285,578                                                                              |
|         Convertible      Notes Payable, Net                               |                                                                                                                   |                     3,244,689                                                                   |                                                                                                                   |                     4,008,950                                                                   |
| Total      Current Liabilities                                                                                    |                                                                                                                   |                   13,704,599                                                                              |                                                                                                                   |                   15,449,299                                                                              |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Long      Term Liabilities                                                                                        |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|              Convertible      Notes Payable, Net |                                                                                                                   |                         1,066,023                                           |                                                                                                                   | 0                                                                                                                                                                                                   |
| Total      Long Term Liabilities                                                                                  |                                                                                                                   |                       1,066,023                                                       |                                                                                                                   | 0                                                                                                                                                                                                   |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Total      Liabilities                                                                                            |                                                                                                                   |                   14,770,622                                                                              |                                                                                                                   |                   15,449,299                                                                              |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Commitment      & Contingencies                                                                               |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|   Convertible,      Redeemable Preferred Stock                                                          |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|   Preferred      stock, $0.01 par value; 5,000,000 shares authorized;                                   |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|     184,200      shares issued and outstanding                                                |                                                                                                                   | 921,000                                                                                                                                                                                             |                                                                                                                   | 0                                                                                                                                                                                                   |
|    Discount      on Preferred Stock                                                                |                                                                                                                   | (866,556)                                                                                                                                                                                           |                                                                                                                   | 0                                                                                                                                                                                                   |
|     Net      Preferred Stock                                                                  |                                                                                                                   | 54,444                                                                                                                                                                                              |                                                                                                                   | 0                                                                                                                                                                                                   |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Total      Commitment & Contingencies                                                                         |                                                                                                                   | 54,444                                                                                                                                                                                              |                                                                                                                   | 0                                                                                                                                                                                                   |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Stockholders'      Equity (Deficit)                                                                               |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Common      stock, $0.00005 par value; authorized 200,000,000                                                     |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| shares;      issued and outstanding 5,258,144 and                                                                 |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| 2,806,878      shares, June 30, 2010 and December 31, 2009                                                        |                                                                                                                   |                                 263 |                                                                                                                   |                                 140 |
| respectively                                                                                                      |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Additional      paid-in capital                                                                                   |                                                                                                                   |                   79,927,606                                                                              |                                                                                                                   |                   75,119,074                                                                              |
| Accumulated      deficit                                                                                          |                                                                                                                   |                 (90,331,710)                                                                                        |                                                                                                                   |                 (86,002,406)                                                                                        |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| Total      Stockholders' Equity (Deficit)                                                                         |                                                                                                                   |                    (10,403,841)                                                                      |                                                                                                                   |                 (10,883,192)                                                                                        |
|                                                                                                              |                                                                                                                   |                                                                                                                                                                                                |                                                                                                                   |                                                                                                                                                                                                |
| TOTAL      LIABILITIES & CONVERTIBLE REDEEMABLE PREFERRED STOCK &      STOCKHOLDERS' EQUITY (DEFICIT)     |  $                 4,421,225 |                                                                                                                                                                                                |  $                 4,566,107 |

----

| Z      TRIM HOLDINGS, INC.                                 |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
|------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|---------------------------------------------------------------------|
| STATEMENT      OF OPERATIONS                               |   | Three      months ended                                                                                   |   | Six      months ended                                                                                               |   |
|                                                       |   | June      30                                                                                              |   |                                                                                                                |   | June      30                                                        |   |                                                                |
|                                                       |   | 2010                                                                                                      |   | 2009                                                                                                                |   | 2010                                                                |   | 2009                                                                |
| REVENUES:                                                  |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
|   Products                                       |   |  $     201,138                                                              |   |  $     162,960                                                                        |   |  $     381,389                        |   |  $     290,929                        |
|     Total      revenues                |   |         201,138                                                   |   |         162,960                                                             |   |         381,389             |   |         290,929             |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| COST      OF REVENUES:                                     |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
|   Products                                       |   |         580,283                                                   |   |         402,040                                                             |   |      1,123,705                             |   |         752,657             |
|     Total      cost of revenues        |   |         580,283                                                   |   |         402,040                                                             |   |      1,123,705                             |   |         752,657             |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| GROSS      MARGIN                                          |   |       (379,145)                                                             |   |       (239,080)                                                                       |   |       (742,316)                       |   |       (461,728)                       |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| OPERATING      EXPENSES:                                   |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| Selling,      general and administrative                   |   |      2,004,878                                                                   |   |         925,551                                                             |   |      4,263,764                             |   |      2,668,337                             |
| Loss/(Gain)      on asset disposals, net                   |   |           40,359                                        |   |           (2,500)                                                 |   |           40,359  |   |         117,188             |
|     Total      operating expenses      |   |      2,045,237                                                                   |   |         923,051                                                             |   |      4,304,123                             |   |      2,785,525                             |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| OPERATING      LOSS                                        |   |    (2,424,382)                                                                             |   |    (1,162,131)                                                                                       |   |    (5,046,439)                                       |   |    (3,247,253)                                       |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| OTHER      INCOME (EXPENSES):                              |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| Rental      and other income                               |   |                  15  |   |                505                       |   | 55                                                                  |   | 3,606                                                               |
| Interest      income                                       |   |                437             |   |                    7 |   | 1,107                                                               |   | 226                                                                 |
| Interest      expense                                      |   |                  (7) |   |           (3,172)                                                 |   | (7)                                                                 |   | (3,227)                                                             |
| Interest      expense - Note Payable                       |   |       (1,288,534)                                                           |   |       (486,065)                                                                       |   | (2,428,507)                                                         |   | (889,200)                                                           |
| Liquidated      Damages                                    |   | (10,903)                                                                                                  |   | 0                                                                                                                   |   | (30,928)                                                            |   | 0                                                                   |
| Derivative  (loss)      gain                     |   | 142,450                                                                                                   |   | (956,190)                                                                                                           |   | 3,181,049                                                           |   | (1,420,991)                                                         |
| Loss      on Conversion of Note Payable                    |   | 0                                                                                                         |   | 0                                                                                                                   |   | (5,634)                                                             |   | 0                                                                   |
| Settlement      (loss) gain                                |   | 0                                                                                                         |   |       (195,608)                                                                       |   | 0                                                                   |   | (195,608)                                                           |
|     Total      other income (expenses) |   |       (1,156,542)                                                           |   |    (1,640,523)                                                                                       |   |      717,135                               |   |    (2,505,194)                                       |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| LOSS      FROM CONTINUING OPERATIONS                       |   |  $(3,580,924)                                                                                        |   |  $(2,802,654)                                                                                                  |   |  $(4,329,304)                                                  |   |  $(5,752,447)                                                  |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| NET      LOSS                                              |   |  $(3,580,924)                                                                                        |   |  $(2,802,654)                                                                                                  |   |  $(4,329,304)                                                  |   |  $(5,752,447)                                                  |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| Net      Loss per Share from continuing operations         |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
|  -      Basic and Diluted                             |   |  $         (0.98)                                       |   |  $         (1.03)                                                 |   |  $         (1.21) |   |  $         (2.15) |
| Net      Loss per Share - Basic and Diluted                |   |  $         (0.98)                                       |   |  $         (1.03)                                                 |   |  $         (1.21) |   |  $         (2.15) |
|                                                       |   |                                                                                                      |   |                                                                                                                |   |                                                                |   |                                                                |
| Weighted      Average Number of Shares Basic and Diluted   |   |      3,671,752                                                                   |   |      2,732,380                                                                             |   |      3,586,480                             |   |      2,677,269                             |

----

| Z      TRIM HOLDINGS, INC.                                                                                             |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| STATEMENT      OF CASH FLOWS                                                                                           |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                                   | (Unaudited)                                                                                                                                                                                        |   | (Unaudited)                                                                                                                                                             |
| FOR      THE SIX MONTHS ENDED JUNE 30                                                                                  | 2010                                                                                                                                                                                               |   | 2009                                                                                                                                                                    |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Net      loss                                                                                                          |                   (4,329,304)                                                                            |   |                   (5,752,447)                                                 |
| Adjustments      to reconcile loss from continuing operations to                                                       |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| net      cash used in operating activities:                                                                            |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Depreciation                                                                                                           | 390,710                                                                                                                                                                                            |   | 520,096                                                                                                                                                                 |
| Loss      on asset disposal                                                                                            | 40,359                                                                                                                                                                                             |   | 117,188                                                                                                                                                                 |
| Change      in  Derivative Liability, net of bifurcation                                                     | (3,181,048)                                                                                                                                                                                        |   | 1,420,991                                                                                                                                                               |
| Stock      based compensation                                                                                          | 1,796,635                                                                                                                                                                                          |   | 554,591                                                                                                                                                                 |
| Stock      based compensation - warrants                                                                               | 0                                                                                                                                                                                                  |   | 378,667                                                                                                                                                                 |
| Shares      issued for director fees                                                                                   | 234,000                                                                                                                                                                                            |   | 46,200                                                                                                                                                                  |
| Shares      and Warrants issued for debt                                                                               | 0                                                                                                                                                                                                  |   | 195,608                                                                                                                                                                 |
| Shares      issued for Services                                                                                        | 490,000                                                                                                                                                                                            |   | 0                                                                                                                                                                       |
| Interest      Charge on BCF                                                                                            | 1,754,672                                                                                                                                                                                          |   | 460,048                                                                                                                                                                 |
| Loan      Cost Amortization                                                                                            | 295,981                                                                                                                                                                                            |   | 244,111                                                                                                                                                                 |
| Loss      on conversion of NP                                                                                          | 5,634                                                                                                                                                                                              |   | 0                                                                                                                                                                       |
| Changes      in operating assets and liabilities                                                                       |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Accounts      receivable                                                                                               | (19,365)                                                                                                                                                                                           |   | 136,262                                                                                                                                                                 |
| Inventory                                                                                                              | 35,119                                                                                                                                                                                             |   | 24,360                                                                                                                                                                  |
| Prepaid      expenses and other assets                                                                                 | (32,059)                                                                                                                                                                                           |   | (44,082)                                                                                                                                                                |
| Increase/(Decrease)      in:                                                                                           |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Accounts      payable and accrued expenses                                                                             | 320,562                                                                                                                                                                                            |   | 901,550                                                                                                                                                                 |
| Accrued      Liquidated Damages                                                                                        | 30,928                                                                                                                                                                                             |   | 0                                                                                                                                                                       |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH      USED FOR OPERATING ACTIVITIES                                                                                |                   (2,167,176)                                                                            |   |                      (796,857)                                 |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                              |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Purchase      of Fixed Assets                                                                                          |                      (380,952)                                                            |   |                      (313,205)                                 |
| Proceeds      from asset disposals                                                                                     |                          73,800                                       |   |                          92,500            |
| CASH      USED FOR INVESTING ACTIVITIES                                                                                |                      (307,152)                                                            |   |                      (220,705)                                 |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH      FLOWS FROM FINANCING ACTIVITES                                                                               |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Borrowing      on debt                                                                                                 |                     1,796,000                                                                  |   |                        464,500                       |
| Proceeds      from sale of preferred stock                                                                             |                        921,000                                                  |   | 0                                                                                                                                                                       |
| Proceeds      from sale of common stock                                                                                |                          16,039                                       |   |                            4,365 |
| CASH      PROVIDED BY FINANCING ACTIVITIES                                                                             |                     2,733,039                                                                  |   |                        464,500                       |
| NET      (DECREASE)INCREASE IN CASH                                                                                    |                        258,711                                                  |   |                      (553,062)                                 |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH      AT BEGINNING OF YEAR                                                                                         |                        324,784                                                  |   |                        592,696                       |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| CASH      AT THE QUARTER  ENDED June 30                                                                      |                        583,495                                                  |   |                          39,634            |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Supplemental      Disclosures of Cash Flow Information:                                                                |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|                                                                                                                   |                                                                                                                                                                                               |   |                                                                                                                                                                    |
| Issuance      of common stock for issuance of stock                                                                    |                                                                                                                                                                                               |   |                                                                                                                                                                    |
|         Cash      less exercise of warrants                                    |                                 10 |   |                                                                                                                                                                    |
|         Note      Payable conversion                                           |                     1,700,603                                                                  |   |                                                                                                                                                                    |
|         Discount      on convertible debentures                                |                     1,796,000                                                                  |   |                        989,500                       |
|         Discount      on preferred stock                                       |                        888,749                                                  |   |                                                                                                                                                                    |
|         Amortization      on preferred stock                                   |                          22,193                                       |   |                                                                                                                                                                    |
|         Change      in derivative liability due to exercise of warrants        |                        367,780                                                  |   |                                                                                                                                                                    |
|         Change      in derivative liability due to conversion of NP            |                        231,216                                                  |   |                                                                                                                                                                    |
|         Dividends      Payable                                                 |                            5,424                            |   |                                                                                                                                                                    |
|         Transfer      from Deposit on Fixed Assets to Construction in Progress |                                                                                                                                                                                               |   |                        240,000                       |
|         Cummulative      Effect - Adoption of derivative value                 |                                                                                                                                                                                               |   |                     2,219,530                                       |
|         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 woulduse |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                             |                                                                          |   |                                                                          |
|----------------------------------|-------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
|                             | 6/30/2010                                                                     |   | 12/31/2009                                                                    |
| Raw      materials               | $28,931                                                                       |   |  $      23,773                             |
| Packaging                        |             3,558 |   |             1,010 |
| Work-in-process                  |             6,272 |   |             7,437 |
| Finished      goods              |          40,879                  |   |          80,299                  |
| Other      Inventory             |             4,220 |   |             6,461 |
|   Total      inventory |  $      83,860                             |   |  $    118,979                                        |
|                             |                                                                          |   |                                                                          |

|                                             |   | 6/30/2010    |   | 12/31/2009   |
|--------------------------------------------------|--------|--------------|--------|--------------|
| Production,      engineering and other equipment |   | $5,448,056   |   | $5,651,279   |
| Leasehold      improvements                      |   | 2,831,209    |   | 2,822,834    |
| Office      equipment and furniture              |   | 577,226      |   | 577,226      |
| Computer      equipment and related software     |   | 140,245      |   | 140,246      |
| Construction      in process - Equipment         |   | 147,251      |   | 72,177       |
| Construction      in process - Leasehold Impr    |   | 51,084       |   | 0            |
|                                             |   | $9,195,071   |   | $9,263,762   |
| Accumulated      depreciation                    |   | ($5,990,042) |   | ($5,718,418) |
| Property      and equipment, net                 |   | $3,205,029   |   | $3,545,344   |

| Depreciation      expense was $190,663 and $266,946 for the three months ended June 30, 2010      and June 30, 2009 respectively.  Depreciation expense was      $390,710 and $520,095 for the six months ended June 30, 2010 and June 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. The Company      recognized a loss with respect to such equipment of $119,688.  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                    | 6/30/2010                                                                                              |   | 12/31/2009                                                                                               |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|
| Accrued      legal                      |  $               1,678 |   |  $                - |
| Accrued      payroll and taxes          |                 14,196 |   |              4,787                      |
| Accrued      Interest                   |               735,680            |   |          575,357                                            |
| Accrued      expenses and other         |               135,183            |   |          120,686                                            |
| Total      accrued expenses & other |  $           886,737                       |   |  $      700,830                                                       |
|                                    |                                                                                                   |   |                                                                                                     |

----

----

|                                                           |   | June      30, 2010                                                                                                                                                     | December      31, 2009 |
|----------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
| Common      stock warrants                                     |   | 5,247,162                                                                                                                                                              |                   |   | 5,387,788 |
| Embedded      conversion features –part of note discount |   |  3,931,665                                                                                                                                                        |                   |   | 4,897,790 |
|                                                           |   |                                                                                                                                                                   |                   |   |   |
| Total                                                          |   | $                          9,178,827 |                   | $10,285,578 |

|                                                                                     |   | June      30, 2010 |   |
|------------------------------------------------------------------------------------------|--------|--------------------|--------|
| Beginning      Balance                                                                   |   | 10,285,577         |   |
| Bifurcated      Amount                                                                   |   | 2,684,749          |   |
|  Change      in Derivative Liability                                                |   | (3,181,048)        |   |
| Change      in Derivative Liability due to conversion of Note Payables and      Warrants |   | (610,451)          |   |
| Total                                                                                    |   | $      9,178,827   |   |

|                                  |   | 6/30/2010                               |     |   | 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                               |   |      3,504,500 | $2.45    |   |      1,320,000                                                                                   |  $           0.45                      |
| Exercised                             |   | 0                                       | $0.00    |   |                     - |  $               - |
| Expired      and Cancelled            |   |    (1,376,732)           | $0.76    |   |       (346,011)                                                                             |  $         31.24                                 |
| Outstanding      at end of period     |   |      3,532,830 | $2.40    |   |      1,405,062                                                                                   |  $           2.56                      |
|                                  |   |                                    |     |   |                                                                                                                      |                                                                                               |
| Exercisable      at end of period     |   |      2,769,830 | $2.08    |   |      1,405,062                                                                                   |  $           0.66                      |

|                                                |                                                                                                                                                  |
|-----------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                | 6/30/2010                                                                                                                                             |
| Weighted      average fair value per option granted |  $                       2.40 |
| Risk-free      interest rate                        | 88.00%                                                                                                                                                |
| Expected      dividend yield                        | 0.00%                                                                                                                                                 |
| Expected      lives                                 |  1      - 2.5                                                                                                                                    |
| Expected      volatility                            | 186.41%                                                                                                                                               |
|                                                |                                                                                                                                                  |

|                  |   |                                                                                                         |   | Weighted                                                                                      |   |                                                              |   |                                                                                                         |
|-----------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                         |   | Average                                                                                       |   | Weighted                                                          |   |                                                                                                         |
| Range      of         |   |                                                                                                         |   | Remaining                                                                                     |   | Average                                                           |   |                                                                                                         |
| Exercise              |   | Options                                                                                                      |   | Contractual                                                                                   |   | Exercise                                                          |   | Options                                                                                                      |
| Prices                |   | Outstanding                                                                                                  |   | Life                                                                                          |   | Price                                                             |   | Exercisable                                                                                                  |
| $0.01-$1.50           |   |             3,133,500                            |   |                6.3 |   |  $       1.49             |   |             2,475,500                            |
| $1.51-$3.00           |   |                325,000            |   |                4.8 |   |  $       1.58             |   |                220,000            |
| $3.01      & over |   |                  74,330 |   |                0.5 |   |  $     35.13                        |   |                  74,330 |
|                  |   |             3,532,830                            |   |                4.9 |   |    $       1.93 |   |             2,769,830                            |

|                                  |   | Year  Ended                                                      |                                 |                  |                                 | Year  Ended                                                                 |   |   |
|---------------------------------------|--------|----------------------------------------------------------------------------|--------------------------------------|-----------------------|--------------------------------------|---------------------------------------------------------------------------------------|--------|--------|
|                                  |   | 6/30/2010                                                                  |                                 |                  |                                 | 6/30/2009                                                                             |   |   |
|                                  |   | Number      of Shares                                                      | Weighted      Average Exercise Price | Number      of Shares | Weighted      Average Exercise Price |
| Outstanding      at beginning of year |   |        9,682,380                        |                                 | $1.61                 |                                 |           943,804                   |   | $5.86  |
| Granted                               |   |        4,075,500                        |                                 | $1.50                 |                                 |        1,924,250                                   |   | $1.43  |
| Exercised                             |   |            (73,077) |                                 | $0.22                 |                                 |              (4,365) |   | $1.00  |
| Cashless                              |   |          (253,149)            |                                 | $0.24                 |                                 | 0                                                                                     |   | $0.00  |
| Expired      and Cancelled            |   |          (350,000)            |                                 | $1.10                 |                                 | 0                                                                                     |   | $0.00  |
|                                  |   |      13,081,655                                   |                                 |                  |                                 |        2,863,689                                   |   | $2.89  |
|                                  |   |                                                                       |                                 |                  |                                 |                                                                                  |   |   |
| Outstanding,      end of period       |   |      13,081,655                                   |                                 | $1.62                 |                                 |        2,863,689                                   |   | $2.89  |
|                                  |   |                                                                       |                                 |                  |                                 |                                                                                  |   |   |
|                                  |   |                                                                       |                                 |                  |                                 |                                                                                  |   |   |
| Exercisable      at end of period     |   |      13,081,655                                   |                                 | $1.62                 |                                 |        8,010,733                                   |   | $2.80  |
|                                  |   |                                                                       |                                 |                  |                                 |                                                                                  |   |   |

----

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