UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

**FORM 10-KSB**

 

(Mark            One)
|   | [ X ] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES                        EXCHANGE ACT OF 1934 |
|--------|-------|-------------------------------------------------------------------------------------------------------|

**For            the fiscal year ended:**                                          **December 31,            2007**                                                                                  

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

For the            transition period from:                                                                              to:                                                                              

**Commission File No. 000-49901**

**NATURALNANO, INC**.

(Name            of small business issuer in its charter)
| **Nevada**                        |   | **87-0646435**      |
|-----------------------------------|--------|---------------------|
| (State or other jurisdiction      |   | (I.R.S. Employer    |
| of incorporation or organization) |   | Identification No.) |

15            Schoen Place

Second Floor

Pittsford, New York 14534

(Address of principal executive offices)

Issuer’s telephone number (585) 267-4850

Securities registered under Section 12(b) of the Exchange Act:            None

Securities registered under Section 12(g) of the Exchange Act: Common            Stock, $0.001 par value
|   | Check whether issuer is not required to file reports                        pursuant to Section 13 or 15(d) of the Exchange Act. [ | ] |
|--------|------------------------------------------------------------------------------------------------------------------------------------|---|

Check whether the issuer (1) filed all reports required to be filed by            Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter            period that the registrant was required to file such reports), and (2) has been subject            to such filing requirements for the past 90 days. Yes [ X ]  No [ ]

Check if there is no disclosure of delinquent filers in response to Item            405 of Regulation S-B contained in this from, and no disclosure will be contained, to            the best of registrant’s knowledge, in the definitive proxy or information            statements incorporated by reference in Part III of this Form 10-KSB or any amendment            to this Form 10-KSB. [ ]

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

State issuer’s revenues for its most recent fiscal year.            $15,250

State the aggregate market value of the voting and non-voting common            equity held by non-affiliates computed by reference to the closing price of the            registrant’s Common Stock on March 27, 2008 was $3,231,829.

State the number of shares outstanding of each of the            issuer’s classes of common equity, as of the latest practicable date:

**March 31, 2008: Common Stock, $.001 par value – 123,882,740            shares.**
|   | Transitional Small Business Disclosure Format (check one):                        Yes [ | ] No [ X ] |
|--------|-----------------------------------------------------------------------------------------|------------|

 

 

 

 

**INDEX**
|   | **Item 1.**                                                  | **Description of                        Business**                                                                                                                                      | **2**  |   |
|--------|--------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   | **Item 2.**                                                  | **Description of                        Property**                                                                                                                                      | **19** |
|   | **Item 3.**                                                  | **Legal                        Proceedings**                                                                                                                                            | **20** |
|   | **Item 4.**                                                  | **Submission of Matters to a Vote of                        Security Holders**                                                                                                          | **20** |
|   | **Item 5.**                                                  | **Market for Common Equity and Related                        Stockholder Matters**                                                                                                     | **21** |
|   | **Item 6.**                                                  | **Management’s Discussion and                        Analysis or Plan of Operations**                                                                                             | **25** |
|   | **Item 7.**                                                  | **Financial                        Statements**                                                                                                                                         | **33** |
|   | **Item 8.**                                                  | **Changes In and Disagreements with                        Accountants on Accounting and Financial Disclosure**                                                                         | **34** |
|   | **Item 8A.**                                                 | **Controls and                        Procedures**                                                                                                                                      | **35** |
|   | **Item 8B.**                                                 | **Other                        Information**                                                                                                                                            | **36** |
|   | **Item 9.**                                                  | **Directors, Executive Officers,                        Promoters, Control Persons and Corporate Governance; Compliance with                        Section 16(a) of the Exchange Act** | **36** |
|   | **Item 10.**                                                 | **Executive                        Compensation**                                                                                                                                       | **43** |
|   | **Item 11.**                                                 | **Security Ownership of Certain                        Beneficial Owners and Management and Related Stockholder                        Matters**                                        | **46** |
|   | **Item 12.**                                                 | **Certain Relationships and Related                        Transactions, and Director Independence**                                                                                    | **47** |
|   | **Item 13.**                                                 | **Exhibits**                                                                                                                                                                            | **49** |
|   | **Item 14.**                                                 | **Principal Accountant Fees and                        Services**                                                                                                                       | **53** |
|   | **CONSOLIDATED FINANCIAL                        STATEMENTS** | **F-1**                                                                                                                                                                                 |
|        |                                                              |                                                                                                                                                                                         |        |        |  |

 

 

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**PART I**

**CAUTIONARY STATEMENT REGARDING**

**FORWARD-LOOKING STATEMENTS**

 

This            annual report on Form 10-KSB and other reports that we file with the SEC contain            statements that are considered forward-looking statements that involve risks and            uncertainties. These include statements about our expectations, plans, objectives,            assumptions or future events. In some cases, you can identify forward-looking            statements by terminology such as “anticipate,” “estimate,”            “plans,” “potential,” “projects,”            “continuing,” “ongoing,” “expects,”            “management believes,” “we believe,” “we intend”            and similar expressions. All statements addressing operating performance, events or            developments that the Company expects or anticipates will occur in the future,            including statements relating to revenue realization, revenue growth, earnings,            earnings per share, or similar projections, are forward looking statements within the            meaning of the Private Securities Litigation Reform act of 1995 ( the “Reform            Act”). Because they are forward-looking, they should be evaluated in light of            important risk factors that involve estimates, assumptions and uncertainties that could            cause actual results to differ materially from those expressed for the reasons            described in this report. You should not place undue reliance on these forward-looking            statements.

You            should be aware that our actual results could differ materially from those contained in            the forward-looking statements due to a number of factors such as:
|   | **•** | the successful implementation of research and development                        programs;                                                                                                |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | the ability to demonstrate the effectiveness of our                        technology;                                                                                                    |
|   | **•** | the timeline for customer accreditation for product                        formulations;                                                                                                  |
|   | **•** | our ability to enter into strategic partnering and joint                        development agreements;                                                                                   |
|   | **•** | our ability to competitively market our Pleximer and filled                        tube products;                                                                                         |
|   | **•** | the terms and timing of product sales and licensing                        agreements;                                                                                                    |
|   | **•** | the timing and approval of filed and pending patent                        applications;                                                                                                  |
|   | **•** | the ability to raise additional capital to fund our                        operating and research activities until we generate adequate cash flow from                        operations; |
|   | **•** | our ability to attract and retain key personnel                        and;                                                                                                               |
|   | **•** | general market conditions.                                                                                                                                                                |

The            forward-looking statements speak only as of the date on which they are made, and except            to the extent required by federal securities laws, we undertake no obligation to update            any forward-looking statement to reflect events or circumstances after the date on            which the statement is made or to reflect the occurrence of unanticipated events. In            addition, we cannot assess the impact of each factor on our business or the extent to            which any factor, or combination of factors, may cause actual results to differ            materially from those contained in any forward-looking statements.

**NOTE REGARDING MERGER**

Prior to November 29, 2005, we were a “shell company” (as            such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) known as            “Cementitious Materials, Inc.” Pursuant to an Agreement and Plan of Merger,            dated September 26, 2005 (the “Merger Agreement”) by and among the            Company, Cementitious Acquisitions, Inc., a Nevada corporation and wholly owned            subsidiary of the Company (“Merger Sub”), and NaturalNano, Inc., now known            as NaturalNano Research, Inc. (“NN Research”), on November 29, 2005 Merger            Sub was merged with and into NN Research, with NN Research surviving as a wholly owned            subsidiary of the Company (the “Merger”). Immediately following the Merger,            we changed our name to “NaturalNano, Inc.” As a result of the Merger, we            ceased being a shell company. Except where the context indicates otherwise, all            references in this prospectus to “us”, “NaturalNano” or            “the Company” refer, with respect to periods prior to the Merger, to NN            Research and, with respect to periods after the Merger, to the consolidated enterprise            consisting of NaturalNano, Inc. and NN Research.

**NOTE REGARDING STOCK SPLIT**

On            February 8, 2006 we effected a two-for-one stock split. All references in this report            to the number of shares of our common stock and to related per-share prices (including            references to periods prior to the effective date of the stock split) reflect this            stock split.
| **Item 1.** |  

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

 

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**Description of Business**

NaturalNano, Inc. was founded in December 2004 in Rochester, New York to            develop proprietary materials and processes utilizing naturally occurring nanotubes.            These nanotubes have already demonstrated significant value to the $40 billion polymer            composites industry by providing stronger, lighter, less expensive nanocomposites. In            addition, we have patent protection for the use of nanotubes for controlled release and            delivery of active agents useful in many industries from household products to            cosmetics.

**Terminology**

A            summary of the terms used to describe our technologies and related science is presented            below.
| **•** | **Nanotechnology**is research and                        technology development at the atomic, molecular or macromolecular levels,                        in the length scale of approximately 1 - 100 nanometer (nm) range, to                        provide a fundamental understanding of phenomena and materials at the                        nanoscale and to create and use structures, devices and systems that have                        novel properties and functions because of their small and/or intermediate                        size. The novel and differentiating properties and functions are developed                        at a critical length scale of matter typically under 100 nm. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | **Nanoscale**means measurements                        using one-billionth of a meter units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **•** | **Active ingredient loading**refers to the process in which the lumen (inner opening) of                        the halloysite clay is filled with an application specific                        chemical.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **•** | **Application technologies**refer                        to processes, treatments, or other innovations applied to a particular good                        or service for use by an end customer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **•** | **Commercial scale**means amounts                        by weight and/or volume that are suitable for use in goods that are                        intended for sale to, or by, a third party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **•** | **Composite**is an engineered                        material composed of two or more components.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **•** | **Compounder**is a company that                        uses polymer extruders to mix plastic materials, including colorants and                        fillers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **•** | **Concentration**relates to the                        amount of tubular material by weight or volume resident in the halloysite                        sample.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **•** | **Extraction of halloysite nanotubes**is comprised of separating the nanotube components out of a                        mixture of various mineral materials which are impurities from the mining                        of halloysite clay.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **•** | **Elongation**is the percent                        increase in length resulting from a force or stress on a                        material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **•** | **Elution attributes**relate to                        the amount of time required for a given quantity of active ingredient to                        flow from the nanotube.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **•** | **Functionalized HNT**TMis an extracted                        halloysite nanotube that may have one or more of the following treatments:                        classification of size, outer surface treatment, outer surface                        metallization, inner surface coating, inner surface metallization or active                        ingredient loading.                                                                                                                                                                                                                                                                                                                                        |
| **•** | **Halloysite clay**is a clay-like                        mineral occurring in soft, smooth, amorphous masses of a whitish color.                        Halloysite frequently has a unique, tubular quality and is mined throughout                        the world, for various commercial purposes.                                                                                                                                                                                                                                                                                                                                                                                                               |
| **•** | **Halloysite nanotubes (“HNT”)**is a term that defines the materials found in halloysite                        clay that are tube shaped and can be measured in one-billionth of a meter                        units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **•** | **Halloysite nanotube processing technology**means the manipulation of halloysite nanotubes, including                        mechanical and chemical treatments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| **•** | **Hot melt state**is the chemical                        phase in which a material becomes liquid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **•** | **Manufacturing trials**are full                        scale experiments (relative to pilot scale) demonstrating technology prior                        to commercialization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **•** | **Metallization**is the process in                        which the lumen or surface of the halloysite clay is coated with a                        metal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **•** | **Modulus**is the force needed to                        deform a material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **•** | **Nanoclay**is used to define a                        clay material that can be dimensionally measured in one-billionth of a                        meter unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **•** | **Nanotubular material**is used to                        define a material that has a tubular geometric shape that can be                        dimensionally measured in a one-billionth of a meter unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **•** | **Pilot trials**are large scale                        experiments (relative to laboratory scale) demonstrating process technology                        prior to manufacturing trials.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** | **Platy nanoclay**is a nanoclay                        material containing layered two-dimensional sheets held together by an                        intermediary layer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **•** | **Polymers**are often referred to                        as plastics and are large organic molecules formed by combining many                        smaller molecules (monomers) in a regular pattern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **•** | **Polymer extruder**is a machine                        used to mix plastic materials including colorants and fillers (additives)                        such as halloysite in a hot melt state.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

 

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| **•** | **Polymer composite**is a mixture                        of one or more polymers and one or more filler materials, designed to                        improve the strength or other properties of the polymer                        material.                                                                                                                                                                                                                                                                                                              |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | **Scanning electron microscope (SEM)**is an electron microscope that creates images of nanoscale                        features by bombarding the surface sample with a stream of electrons,                        scanning back and forth, and reading the reflected electrons as they bounce                        off the surface.                                                                                                                                                                                                                    |
| **•** | **Spectrometers**are tools that                        reveal the composition of things by measuring the light absorbed or emitted                        by atoms or molecules.                                                                                                                                                                                                                                                                                                                                                                            |
| **•** | **Toll manufacturing**is a                        contractual arrangement with a third-party processing or manufacturing                        business that has existing equipment and personnel for the production of                        materials to customer specifications generally utilizing the technologies                        and materials provided by the customer. These firms operate under                        non-disclosure agreements in order to protect the customers’                        proprietary technology. |
| **•** | **Tubular content material**is                        used to define a material that has been processed and has a high percentage                        of, or is completely comprised of, particles with tubular geometric                        shape.                                                                                                                                                                                                                                                                                                  |
| **•** | **Turn-key**product or material                        can be dropped into an existing manufacturing process without any                        modification prior to use.                                                                                                                                                                                                                                                                                                                                                                                  |

The            nanomaterial we are currently using is halloysite nanotubes (HNTTM), which            is a nanotubule mineral that occurs in nature in many kaolin clay deposits. This            material is actively mined today, both in the USA and internationally and is used by            the paper, cement and ceramics industries, among others. We intend to capitalize on            these deposits, and other original sources, to economically obtain and refine nanotubes            in quantities of thousands of tons per year.

The            Company’s strategy to enable early revenue and long-term growth is focused on two            distinct phases:
|   | (I) | enter the market with unique, differentiated, patented                        composite materials and; |
|--------|-----|--------------------------------------------------------------------------------------------------------|
|   | (II) | grow beyond the composites industry by exploiting the                        breakthrough controlled release functionality by filling our nanotubes with                        active agents that create advantaged, high margin products. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

During 2007, we built an experienced technical leadership team, which            has moved from invention through the development process to a commercial product in            less than a year. Three joint development agreements (JDAs) have been executed and            provided third party validation of our products. NaturalNano released its first            nanocomposite product, Pleximer-NTM, to the market in the fourth quarter of            2007, meeting a key goal for 2007.

**Products**

Our value-added technologies are directed to the production of our            first product, PleximerTM , as well as to a related manufacturing            solution utilizing advances in material science and chemistry to enhance and simplify            current polymer manufacturing processes. Pleximer has been designed to address the            manufacturing process challenges encountered by many polymer and plastics processing            companies in meeting end-user demands for stronger, lighter and lower cost            polymer-based products. Pleximer is a halloysite nanotube polymer concentrate that can            be added directly to a polymer molder or extrusion process. As an example, a 30% HNT            polypropylene Pleximer product could be blended in molding equipment with            pure polypropylene to obtain a final polymer nanocomposite with 5-10%            HNT concentration of polypropylene, which results in increased stiffness and            durability.

Plastics (also referred to as “polymers”) have been used for            years in the production of lightweight components of finished goods across a wide array            of industries. “Plastic composites” are engineered advanced materials that            are produced from two or more raw materials to create a new, improved product.            Commonly, components added to the production of an engineered composite include a fiber            or filler material to add strength to the end product. The advanced materials used            for a plastic composite are produced by combining the polymer and filler components and            melting them in order to bind them together. Polymers are a common component in            composite formulations because of their notable ability to be molded into desired            shapes and structures at a relatively low temperature.

We            believe that our product, Pleximer, will fundamentally change the product performance            characteristics of existing composite formulations, thereby resulting in stronger,            lighter and less expensive end products when compared to composite products currently            available in the market. Our research teams have completed laboratory and pilot-scale            testing that confirms a significant strength improvement and increased            flexibility for molding plastic components when our halloysite-based Pleximer is            used.

 

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Pleximer is formulated using NaturalNano’s proprietary and            patent-pending processes that offer improved performance properties when compared to            conventional fillers. The Pleximer product will be produced in pellet or flake form,            sold in tons and designed to be added directly into a final stage polymer extruder or            molder with better cost and performance characteristics compared to conventional            fillers and other platy nanoclay.

Our            future success with Pleximer will be dependent on our ability to tailor products and            system-solutions in close cooperation with our potential customers. A further success            factor will be our ability to solve our customer’s manufacturing problems            quickly, within their manufacturing environment, and tailored to their market            definitions and constraints. We believe a joint development approach with one or more            customers will offer us opportunities to extend the range of Pleximer to a family of            related products and new application solutions. We expect the first sales of our            Pleximer product in volumes sufficient for incorporation into a customer’s            manufacturing process to occur in the first half of 2008. Our strategy is to nurture            our joint development agreements (“JDA”) into customer relationships with            our development partners as specific applications and accreditation processes develop.            We currently have three JDA partners focused on developing applications where our            products would be ordered for use in products to be manufactured and sold commercially.            We expect the first of these applications to begin in the first half of 2008. A nylon            based Pleximer was developed in our laboratory and quantities were available for sale            in October 2007. While we did have customer orders as of December 31, 2007, we            currently forecast revenues from the sale of commercial volumes of our Pleximer in the            first half of 2008. Development of a polypropylene based Pleximer is complete. Testing            of either nylon or polypropylene Pleximer materials has been conducted in four            applications.

In            addition, a formulation jointly developed with Cascade Engineering was tested in            October in a full-scale end-use application with the intent to accredit the use of our            product for a national manufacturer. No assurance can be given that we will receive            commercial orders for the applications being developed by Cascade Engineering in 2008,            if at all.

Also, we participated in a full-scale production process using a            polypropylene based Pleximer with a national manufacturer using the            manufacturer’s production facility. This full scale production test produced            positive results and we expect further production trials to occur to access            repeatability, after which we anticipate orders of such polypropylene based Pleximer            for use in commercial production by this manufacturer. No assurances can be given that            such production trials will be undertaken, that the results will be repeated, or that            even if they are repeated, orders will be placed for commercial volumes of our Pleximer            in 2008, if at all.

We            have made significant capital investments and will continue to invest in equipment that            allows us to produce trial scale batches of Pleximer for customer attribute            validation and characterization testing. These investments also allow us to produce            manufactured materials for high margin, small volume niche market applications.            Typically, we will utilize third-party toll manufacturers that would manufacture            Pleximer products based on Company specifications or joint development partners in            instances where our customer requires a finished formulation of Pleximer for            incorporation into their manufacturing process.

We            envision that in some customer instances, we will license our technology to allow            our customers to incorporate our know-how and patented processes in the areas of            functionalized nanotubes into their manufacturing process. In instances of            licensing agreements, our customer (a materials compounder or polymer supplier, as an            example) could then directly produce the functionalized materials for each of their            specific applications. Our licensing strategies will focus on segmenting applications            by (i) manufacturing technology used currently by the customer, (ii) the market            addressed by the customer/licensee and (iii) the complexity of the processing            application. We have not entered into any licensing agreements to date and believe that            future agreements will be tailored based upon the customer’s industry segment and            the complexity of the traditional processing alternatives available.

**Pleximer**

NaturalNano’s first family of products will center on our initial            product, Pleximer, which was introduced to the market in the fourth quarter of 2007.            Pleximer is a turnkey halloysite nanotube polymer concentrate material that can be            added directly to a manufacturer’s polymer extruder or molder. Pleximer is            formulated using NaturalNano’s proprietary processes that have been developed            internally by our research and development team, which are the subject of pending            patent applications. The Company believes these pending patent applications offer a            technology that demonstrates improved performance properties compared to current            polymer composite offerings. The Pleximer product is produced in pellet or flake form,            sold in tons and designed to be added directly into a customer’s polymer extruder            or molder resulting in superior cost and performance characteristics compared to            conventional fillers.

Today, most nanocomposites used in the plastics industry are made with            “platy nanoclay” materials that are challenging and expensive to process.            Platy nanoclays, such as montmorillonite, contain layered two-dimensional sheets held            together

 

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by            an intermediary layer. These clay sheets must be exfoliated (chemically separated) to            produce a nanoparticulate filler with uniform dispersion characteristics within a            polymer matrix. Today’s platy nanoclay composite production processes require            multiple processing steps including: surface treatments, incorporation of nanoclay into            the polymer synthesis process, and additional extrusion steps before the final polymer            extruder or molding, in order to achieve the uniform dispersion required for most            polymer composite products. These multiple manufacturing processes lead to complexity,            increased cost and dispersion quality challenges. Even with the manufacturing processes            described above, today’s platy nanoclays are only viable in a limited number of            polymer families due to specialized chemistry and manufacturing requirements. We            believe the up-front capital investment in specialized manufacturing equipment and            quality issues associated with exfoliation are the biggest market barriers to the            growth in the nanoclay market segment today.

NaturalNano’s Pleximer concentrates have been designed to respond            to customer needs by providing advantaged materials that are stronger, lighter and less            expensive. For example, in the transportation industries (automotive, trucking,            aerospace) it is desirable to remove weight in order to achieve better fuel economy in            tandem with the ability to carry more cargo. As another example, Boeing recently            announced that their new 787 jets that will be introduced in 2008 will be made            primarily of polymer composites. Further advances in stronger, lighter, and less            expensive materials are sought out by aerospace and other transportation            industries.

The            following chart displays data obtained from testing performed by our research team in            NaturalNano laboratories. This data demonstrates the improvements in certain material            characteristics when 6% and 11% HNT materials are added to            polypropylene:
|  

**HNT concentration**

**%** | **Modulus**

(strength and stiffness,

1000 pounds/square inch) |  

**% improvement** |  

**Elongation**

**%** |
|--------------------------------------|-----------------------------------------------------------------|---------------------------|-------------------------------|
| 0                                    | 90                                                              | -                         | 320                           |
| 6                                    | 101                                                             | 12%                       | 290                           |
| 11                                   | 144                                                             | 60%                       | 240                           |

This            data illustrates the increased strength and stiffness obtained at 6-11% HNT addition,            as measured by an increase of as much as 60% in the modulus value. The use of only            6-11% of HNTs results in lower levels of component materials and lighter materials,            compared to standard composites which can contain as much as 30-60% of the heavier            filler material. Elongation, a measurement of flexibility and toughness, remains high            (greater than the benchmark of 200%) which is important for durability of the final            product. This is an advantage of our HNT nanocomposites, as traditional composites are            often brittle at the high loading levels. In addition, Pleximer is lower in cost            compared to other nanocomposite materials, due to the significantly reduced processing            costs achieved by the elimination of exfoliation and supplemental extrusion processes,            described above. We have validated this data through measurements made by our JDA            partners.

The            Company believes that the Pleximer family of products will open significant            opportunities for our potential customers, the polymer compounders and molders and            other end-users, to introduce nanocomposite products without significant capital            investment. NaturalNano began manufacturing scale production testing for Pleximer            during the second half of 2007. The Company has incurred cumulative research and            development investment costs of $4.7 million since inception (December 22, 2004) in the            evaluation, design and development of the Pleximer product. Manufacturing scale tests,            product specific attribute design and attribute validation will continue. The Company            anticipates research and development spending for the twelve month period ending            December 31, 2008 will aggregate $1.5 million in support of continuing development and            product commercialization of Pleximer and filled-tubes products.

**Filled tube products**

NaturalNano’s second generation halloysite nanotube            (“HNT”) products will involve filling HNTs with active agents for use in            the polymer composites, health and beauty, household product, and agrichemical            industries. Halloysite nanotubes are unique nanomaterials, since the tube can be filled            with active agents of interest to add a feature or property to a material. The filled            tube product, planned for introduction in 2008, would be a second generation Pleximer            product, which contains a material of interest within the tubes, such as an            antimicrobial compound to provide antimicrobial properties to the resulting polymer            composite material. This would be valuable, for example, in the fabric industry for            athletic wear. We expect to identify a joint development partner to            collaborate with us on the introduction of a filled-tube product in 2008. The            critical milestones for the commercialization of a filled-tube product would            be established with this development partner and would include various product            demonstration and accreditation trials in the first half of 2008 with the expectation            of market release in late 2008. 

 

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The            Company expects to identify joint development partners in focused markets            for filled-tubes product opportunities. For example, HNTs filled with            fragrances using our extended release technology under development, will elute out of            the tube slowly over time. This is of interest for household products such as laundry            detergents, or health and beauty products. The filled tube technology provides            potential for longer lasting treatments, with lower levels of active agents. In            agrichemical applications, the tubes can be filled with pesticides for treatment of            crops, thus providing a longer lasting treatment with lower levels of pesticides and a            smaller environmental footprint.

The            processes for filling the tubes, for applications of interest such as cosmetics and            agricultural, are covered by patents licensed from the U.S. Department of the Navy and            by pending patent applications. The underlying technology for these products and            processes are covered by patent applications pending issuance and certain issued            patents with expiration dates ranging from 2013 to 2018 and described further under the            heading “Intellectual Property.”

**Naturalnano’s Technologies**

In            2007, NaturalNano developed HNT-polymer concentrates, PleximerTM, for use in            polymer nanocomposites. The PleximerTM family of products can be incorporated            directly into traditional extrusion processes to obtain novel nanocomposite materials.            In the fourth quarter of 2007, we introduced our first commercial nylon based product,            Pleximer-NTM. Additional Pleximer products based on polyolefins are developed and            are under evaluation by our joint development partners and customers.

HNTs            are a hollow tubular structure that is about 1 micron in length (1/1000 of a            millimeter) with an average diameter of approximately 100 nanometers. Due to the unique            chemistry and geometry of this material, HNTs may be used in a multitude of            applications.

Halloysite is different from other nanoclays because it eliminates the            need for the expensive, time-consuming exfoliation processing required by other            nanoclay materials. Conventional nanoclays, also known as platy clays, occur as stacks            of two-dimensional sheets held together by an intercalation layer. These sheets must be            separated, or exfoliated, to function as nanoparticulate fillers and be dispersed into            the polymer matrix. Exfoliation is a complex, expensive, multi-step process that is            often incomplete, frequently leaving larger pieces of clay that create weak points in            the resulting composite material. Halloysite nanotubes do not require exfoliation.            Pleximer can provide a reduction in processing cost and improvements in performance and            production rates.

PleximerTM allows manufacturers to use existing processing            equipment without the need for the exfoliation process equipment used with platy clays.            This broadens the potential market for clay-based nanocomposites by enabling more            manufacturing sites to benefit from these materials and extends the use of the            technology into different polymer systems. This unique combination of processing            capability, product performance and price will allow our family of PleximerTM            products to expand and dominate the growing market for nanoclay composites.

The            second generation products will fully utilize the tubular nature of the halloysite            nanotubes, through filling the tubes with active agents for the polymer nanocomposites,            household products, cosmetics, agriculture, and pharmaceutical industries. NaturalNano            has exclusive rights to patents covering usage of HNT and their unique hollow-tube            structure that allows chemicals, additives or other materials to be added to the inside            of the tubes, creating a slow or controlled release of the material. Research and            development of controlled release technology will be conducted through funding from            joint development agreements that the Company intends to enter into with strategic            partners. The combination of development work in our laboratories and collaboration            with one or more strategic partners should allow us to get high margin, filled nanotube            products to market quickly.

NaturalNano plans to explore the possibilities that controlled release            offers in such industries as cosmetics, where it could enhance products such as sun            block to increase the length of protection, extend the life and aromatic properties of            fragrances or improve the effectiveness of anti-aging material. The Company also noted            potential in the diverse agrichemical industry, where NaturalNano plans to explore            applications that enhance the effectiveness and duration of fertilizers and pesticides.            The Company also has prioritized development of applications in the cleaning products,            home goods and packaging industries.

**Strategy**

The            NaturalNano commercialization strategy is to initially focus on the development and            introduction of its halloysite nanotube polymer concentrate, the Pleximer family of            products. This product, currently in the pilot and manufacturing scale testing phase of            development, introduces a lower cost nanoclay alternative to the polymers and            composites market segment. The Company’s researchers believe the unique            characteristics of halloysite clay allow for the development of a

 

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novel process and material compound that will provide the stronger and            lighter characteristics currently available from platy nanoclays, with a low cost            processing structure relative to current nanomaterials such as carbon nanotubes            (synthetic nanotubes formed from carbon) and platy nanoclays. This low cost benefit            results from naturally occurring materials, such as HNTs, that can be run in            today’s manufacturing process; thereby capitalizing on a significant market that            cannot currently run nanocomposites. Market research indicates that the combination of            stronger, lighter and less expensive materials is a high priority for companies            producing products in the growing nanocomposites industry.

The            Company intends to make certain investments, through the purchase or lease of capital            assets and licensing rights, in connection with the research, development and            commercialization of the Pleximer and filled-tube products. The 2008 capital plan            includes investment in testing and characterization equipment associated with: (i) clay            separation processes, (ii) polymer extruder equipment and upgrades, (iii) tube filling            and evaluation tools, (iv) laboratory expansion, and (v) equipment such as a Scanning            Electron Microscope (SEM). Our investment in this specialty engineering equipment is            expected to provide the Company with tools for the characterization of thermal            stability and strength of our nanocomposite formulations. Capital expenditures for 2008            are projected to be $421,000.

We            hold a Partially Exclusive License for the use of numerous patents from the Naval            Research Laboratory (the “NRL”), that, among other things, requires that we            undertake efforts to implement a commercial development plan designed to bring one or            more of the licensed patents to practical application by October 1, 2009. During 2008            and 2009, we expect to incur at least $1,500,000 in research and development and            marketing related costs in connection with this project. In addition, we are obligated            to pay the NRL during 2008 a total of $250,000 toward the $500,000 licensing fee and a            minimum royalty payment of $76,667.

The            critical milestones associated with the commercialization of the Pleximer family of            products include: advanced pilot and manufacturing scale trials, application            definitions and formulation optimization which will occur in combination with the            customer validation and accreditation processes. Advanced pilot trials including            customer evaluation and validation are currently underway for certain Pleximer-based            products in certain applications utilizing polypropylene and nylon polymers. The            Company estimates that product specific testing, in advance of customer acceptance and            order receipt, could take between three and six months from the initial completion            date for product design.

**Market Opportunities**

The            Company believes its technologies can provide benefits across many industry segments.            Specific industries where management believes halloysite nanotubes may enhance products            through controlled and extended release of active ingredients or through other            treatments provided on the surfaces of the tubes include:
| **•** | Polymers, plastics and composites     |
|------------|---------------------------------------|
| **•** | Agricultural products                 |
| **•** | Household products                    |
| **•** | Cosmetics, health and beauty products |

The            potential markets for our technologies are significant and are projected to continue            growing as future developments in material science and customer demands            develop.
|   | **•** | The American Composites Manufacturers Association projected                        in 2004 that composite manufacturers alone generated over $13 billion in                        revenues and impacted over $45 billion in revenues from related composite                        suppliers and manufacturers. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | According to Plasticnews.com, BCC Research estimated the                        North American plastics compounding production in 2006 at 65.7 billion                        pounds and estimates growth to 79.5 billion pounds by 2011. This market                        segment was estimated by Plasticnews.com to be $10.6 billion in                        2006. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | The total estimated North American market for polymers and                        plastics, as presented by the Society of the Plastics Industry (SPI) in                        2004, was approximately $345 billion in shipments. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | The worldwide market for cosmetics and household care                        products, measured by Euromonitor International in 2003, estimated these                        markets at $201 billion and $83 billion, respectively. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | The Freedonia Group, Inc. has estimated the U.S.                        nanomaterials demand in 2003 at $263 million and projects growth in this                        market to $1.36 billion in 2008 and $34 billion by 2020. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Our            commercialization strategy focuses on the development and introduction of a family of            HNT-polymer based concentrates, Pleximer, which began in the fourth quarter of 2007.            This turn-key product introduces a lower cost

 

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alternative into the nanoclay segment of the polymer composites market.            The unique characteristics of halloysite clay allow for the development of novel            compounds that will provide the stronger and lighter characteristics currently            available from nanoclays, while enabling the materials to be run on conventional            processing equipment resulting in lower total fabrication costs.

**Polymer Composites**

NaturalNano’s proprietary process will provide a polymer            nanocomposite product with high strength, lower weight, and low cost; a unique            combination in the nanocomposites market. This capability provides a strong competitive            advantage in the market for clay nanocomposites, and could dramatically expand the            potential market beyond current forecasts.

Composite plastic technologies are widely used in products ranging from            aircraft and automotive, to building materials and sporting goods. Composites provide a            combination of properties not possible with traditional materials such as metal or            plastic. The American Composites Manufacturers Association estimates the global            composite plastic market at $40 billion in annual revenues.

A            polymer nanocomposite is a blend of polymeric and nano-particulate filler materials.            BCC Research estimated the global nanocomposite market at $273 million in 2005, growing            to $4 billion by 2015; an average annual growth rate of over 30%. Clay nanocomposites            are forecast to increase their market share to 47% of all nanocomposite material by            2010.

**Future Key Market Opportunities**

In            addition to the development and commercialization of polymer nanocomposites, which are            the priority for the next 6 months, NaturalNano is in discussions with key partners for            entrance into other markets such as drug delivery ($40 billion total market), household            products and cosmetics ($300 billion total market), and agricultural chemical delivery.            Our second generation products will focus on novel, high value-added products that will            utilize nanotubes filled with active agents for controlled release in various consumer            products. Research and development for the second generation products will be            accelerated in 2008 as we obtain strategic partners to assist in funding the research            and development needed. Our priority for the development of these unique products will            be focused on signing a joint development agreement in 2008. Our extensive patent            library covers all of these areas.

Our            prioritization of the nanocomposite market for our initial product introduction is            based on a total world-wide market in 2005, measured by BCC Research in June 2006,            at approximately $273 million. This market study projects the nanocomposite market will            grow to $741 million by 2010 and identifies the fastest growing component of the            nanocomposite market as the nanoclay segment. We believe our Pleximer product offers            significant product opportunities and advantages to current products within this            segment and have, therefore, prioritized our first product introduction in the            nanocomposite market.

We            believe Pleximer offers a unique solution, in that it is a solution using standard            manufacturing equipment, and provides features that include high product strength,            lower product weight and lower production cost. We believe these improved quality and            cost characteristics will be available as a result of our unique patent pending            processes and technologies. Our manufacturing and lab scale testing and research            indicate that our technology and processing techniques could be applied in numerous            applications that currently cannot utilize platy nanoclay solutions due to processing            and chemical limitations.

**Raw            Materials and Processing**

Halloysite and the closely related kaolonite are naturally occurring            clays which are actively mined on commercial scale in the United States and throughout            the world for use in the paper, porcelain and concrete industries, among others. The            halloysite nanotubes can be separated from kaolonite using standard processing            equipment and techniques which are currently in use.

During 2007, the Company purchased a supply of 15 tons of halloysite            nanotubes from a mine in New Zealand. A portion of these halloysite nanotubes have been            used to produce Pleximer which is available for sale. As of December 31, 2007, the            $27,149 cost to purchase, ship, store halloysite nanotubes and produce Pleximer being            held in inventory is reflected on the Company’s balance sheet as a current asset.            The Company expects that such inventory will be fully utilized on or before December            31, 2008.

We            believe that halloysite clay does not require any special handling, storage, or            disposal and can be treated like any other clay product.

Our            process begins with raw or minimally processed halloysite material from the mine. The            halloysite would then be separated and treated utilizing our proprietary technologies            and would be surface treated and optimized for the polymer of

 

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interest. This refined and treated material may be shipped to a partner            company or a designated “toll manufacturing” facility in the form of a dry            powder or slurry mixture. Toll manufacturing is a contractual arrangement with a            third-party firm that has existing equipment and personnel for manufacturing materials            to specifications and utilizing technologies and materials provided by NaturalNano. The            use of tolling arrangements would allow the Company to limit our capital investment            requirements and direct manufacturing hiring. Any future tolling arrangements will            include non-compete and non-disclosure agreements. Pleximer would be manufactured from            the HNTs either at a partner company, toll manufacturer, or in-house and would            typically be shipped to the customer in pellet or flake form, although the            customer’s specific requirements will determine the final form of delivery.            NaturalNano can add further value to the refined and classified nanotubes by either            adding material to the surface of the nanotubes or loading the nanotubes with active            materials. The resulting materials can then be shipped to customers for use in their            individual manufacturing processes.

Typically, these materials would be incorporated with other ingredients            to produce the finished product that our customer would sell, for instance providing a            strengthening agent or extended release agent to be added to the partner’s            existing materials or products.

If            requested by a customer, we will evaluate and select suitable toll manufacturers in the            targeted industry segment.

**Customers**

During 2007 we obtained our first revenues for our Pleximer product            through the sales of quantities of Pleximer for testing and certification of Pleximer            in processes and products. The market introductions for Pleximer-based products are            expected to be, primarily, for furniture, transportation, packaging, sporting            equipment, and electronics product applications. The Company believes 2008 operating            revenues will be generated from the sale of processed and functionalized HNTs and            products in a polymer-based pellet or flake under the product name            “Pleximer” and funded development of applications of interest to our joint            development partners. It is most probable that the first delivered tons of Pleximer            will be in conjunction with a joint development partner in the compounding or molding            industry. Management anticipates that future results of manufacturing-scale testing,            with joint development partners, will identify instances for common development that            could offer both parties new market offerings to solve strength and dispersion issues            that result from traditional platy nanoclay formulations. Management believes that the            unique manufacturing solutions generated from Pleximer technologies will also lead to            licensing opportunities in a variety of such customer circumstances.

**Sales**

The            Company’s executive team is currently responsible for developing relationships            with prospective customers and future joint research and development partners. During            2008 we intend to recruit sales, marketing and product development employees and            consultants with chemical, manufacturing and engineering experience to assist with the            design and commercialization of system-solutions to generate product and licensing            revenues for the Company.

We            believe that strategic partnerships and joint development agreements            (“JDA”) will be an important element of our commercialization strategy. To            date, we have entered into three JDAs and are actively evaluating and testing            product applications under these JDAs. During 2007, our JDAs primarily addressed the            development and commercialization of polypropylene and nylon-based Pleximer products.            We anticipate that our JDA efforts in 2008 will broaden the range of polymer systems            and begin development of filled tube applications.

We            will continue pursuing suitable additional JDA partners for additional product            applications. We anticipate that our JDA partners will help us to validate and expand            our technology, develop and optimize extrusion (melt blending) processes, offer insight            into additional application opportunities, as well as assist in the development of            future sales channels.

The            goal of these agreements is to develop and commercialize products of interest to each            of the partners. The JDAs each contain provisions regarding commitments for future            product supply, relative to the products and processes developed, and cross licensing            agreements. While in 2007, each party to the agreements was responsible for the cost of            the activities initiated by it own employees and consultants, we anticipate that, in            2008, the Company will be receiving funding to support its efforts on some of the new            JDA opportunities.

**Competition**

Competitors in the nanotechnology industry include large public firms            where nanotechnology may be a business unit and private firms that may focus solely on            nanomaterials and nanotechnologies.

 

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Many            of our current and prospective competitors are larger and have greater financial            resources, which could create significant competitive advantages for those companies.            Our future success depends on our ability to compete effectively with other            manufacturers of material additives that may have internal development programs. As a            result, we may have difficulty competing with larger, established competitor companies.            Generally, these competitors have:
|   | **•** | substantially greater financial, technical and marketing                        resources; |
|--------|------------|--------------------------------------------------------------------------------------------|
|   | **•** | larger customer bases;                                                                     |
|   | **•** | better name recognition; and                                                               |
|   | **•** | potentially more expansive product offerings.                                              |

Many            of these potential competitors have greater financial resources and are likely to            command a larger market share, which may enable them to establish a stronger            competitive position than we may have, in part through greater marketing opportunities.            If we fail to address competitive developments quickly and effectively, we may not be            able to remain a viable entity.

Larger companies that have nanotechnology business units or divisions            that are working with nanotechnology, such as: Air Products and Chemicals, BASF, Cabot            Corp., Dow, E.I. DuPont de Nemours & Company, General Electric, Hewlett-Packard,            Intel, IBM, Mitsubishi Chemical, Sumitomo Chemical, 3M, and others; have substantial            resources. They have the capability to produce nanomaterials for their own internal use            as well as for sale on the open market. Private firms include: Hyperion Catalysis            International, Inc., Inframat Corporation, Nanogate AG, Nanogram Corporation, and            Qinetiq Nanomaterials Limited. These firms may be considered competitive in the general            field of supplying nanoscale materials for use by firms that NaturalNano may also            consider as prospective customers.

NaturalNano’s Pleximer is a HNT-polymer concentrate designed to            provide stronger, lighter, and less expensive materials for the polymer composite            industry. Competitive products that provide similar mechanical property improvements            include nanomaterial concentrates containing either carbon nanotubes or nanoclay            platelets. As one example Hyperion Catalysis International, Inc. provides concentrates            of carbon nanotubes (CNT) in various polymers. However, the CNT raw materials are very            expensive; typically 1000x the cost of nanoclay materials, so NaturalNano believes that            we will be cost advantaged.

Pleximer will compete most directly with compounding (polymer            melt-blending) companies marketing nanoclay concentrates, or master batches, such as            PolyOne Corporation and NanoCor, Inc. (a wholly owned subsidiary of AMCOL International            Corporation.). However, products of PolyOne and NanoCor are currently limited to platy            clay materials, which as described previously, are typically challenging and expensive            to process. Research in nanocomposites has been ongoing for 5-10 years; however,            limited products exist on the market currently, due to the manufacturing issues            associated with processing the materials. Current solutions are used in specialized,            high margin applications within the transportation, sporting equipment, electronics,            and high-end commercial markets. NaturalNano believes that our lower processing costs            (relative to platy nanoclays) will allow us to maintain higher margins for the next            several years.

Today’s nanoclays are only viable in a limited number of polymer            families due to specialized chemistry and manufacturing requirements. The compatibility            of HNTs with a broader range of polymers will provide an opportunity for NaturalNano to            compete in the polymer composite industry in segments where platy clays cannot            currently be used. NaturalNano intends to develop joint development partnerships with            compounding companies to enter directly into the supply chain and bring the product to            the end user through our partners.

NaturalNano’s second generation products will involve filling HNTs            with active agents for use in the agrichemical industries, health and beauty, and            household products markets. There are very few companies, that we are aware of, that            are working with HNTs for this purpose. NanoDynamics, Inc. is working with HNTs in the            building materials segment for wallboard and paperboard applications. This is not a            target market for NaturalNano, and we believe that the activities in an alternate            industry will help to strengthen the market validation of this material, without            competing directly. The ability to fill tubes is unique to HNTs, and will thereby            generate high margin, value-added product opportunities.

The            nanoclay segment of the nanocomposite market, which includes halloysite, is expected to            grow from $75M today, to $348M in 2010 (according to a study released in June 2006 by            BCC Research). Therefore, we believe there is a large opportunity for growth and market            share for multiple companies, including NaturalNano, in this segment.

**Employees**

As            of December 31, 2007, the Company had eleven full-time employees. Management            anticipates the addition of three research staff in 2008 in connection with the product            development and commercialization of the Pleximer product. We

 

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anticipate the aggregate annual cost of these additional research            employees will be $150,000. Our evaluation of human resource needs often results in our            use of experienced part-time consultants in various functional areas in lieu of the            immediate hiring of full-time employees. We expect to spend approximately $250,000 for            part-time technical consulting services in 2008.

All            of our employees and consultants have signed confidentiality agreements and non-compete            agreements, as appropriate.

**Intellectual Property**

NaturalNano owns or holds license to 27 issued or pending patents. An            overview of the Company’s issued, pending and licensed patents are summarized            below.

Pending patent applications developed internally cover the following            processes and applications:
| **•** | Improved polymeric composite including nano-particle                        filler,      |
|------------------------|------------------------------------------------------------------------------------------|
| **•** | Nanocomposite master batch composition and method of                        manufacture, |
| **•** | Nanocomposite method of manufacture,                                                     |
| **•** | Improved polymeric adhesive including nanoparticle                        filler,        |
| **•** | Improved polymeric coatings including nanoparticle filler,                        and    |
| **•** | Fire and flame retardant polymer composites.                                             |

Pending patent applications assigned from Technology Innovations, LLC,            during the first quarter of 2007, include the following processes and            applications:
| **•** | Halloysite microtubule processes, structures, and                        composites,                    |
|------------------------|---------------------------------------------------------------------------------------------------------|
| **•** | Ultra-capacitors comprised of mineral                        microtubules,                              |
| **•** | Hydrogen storage apparatus comprised of halloysite and                        mineral microtubules, and |
| **•** | Method for stabilizing nanotubular halloysite.                                                          |

Patent licensed from Ambit Corporation under non-exclusive license            agreement:
| **•** | Patent # 6,885,845 for Personal Communication Device                        Connectivity Arrangement, expires on 12/21/2014. |
|------------------------|------------------------------------------------------------------------------------------------------------------------------|

Pending patent applications developed jointly with the Naval Research            Labs under a Cooperative Research and Development Agreement (CRADA) include the            following:
| **•** | Cosmetic skincare applications employing mineral-derived                        tubules for controlled release,   |
|------------------------|-------------------------------------------------------------------------------------------------------------------|
| **•** | Radiation absorptive composite and methods of production,                        and                              |
| **•** | A method for treating agricultural crops using materials                        associated with tubular carriers. |

Issued patents and applications licensed on a partially-exclusive basis            from the Naval Research Laboratories include the following processes and            applications:
| **•** | Patent #5492696 for Controlled Release Microstructures,                        expires on 2/20/2013,                                                                                           |
|------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | Patent #5651976 for Controlled Release of Active Agents                        Using Inorganic tubules, expires on 7/29/2014,                                                             |
| **•** | Patent #5705191 for Sustained Delivery of Active Compounds                        from Tubules with Rational Control, expires on 1/6/2015,                                                |
| **•** | Patent #6013206 for Process for Formulation of High                        Aspect Ratio Lipid microtubules expires on 1/11/2017,                                                          |
| **•** | Patent #6280759 for Method of Controlled Release and                        Controlled Release Microstructures expires on 8/28/2018,                                                           |
| **•** | Patent #6913828 for Production of Hollow Metal                        Microcylinders From Lipids, expires on 7/5/2022,                                                                         |
| **•** | Patent #6936215 for Process for Control of Bilayer Numbers                        Leading to High Efficiency Production of Lipid Microtubules, expires on                        8/30/2022,    |
| **•** | Patent #7125476 for Methods and Devices for                        Microwave-Attenuating Composite Materials, expires on                        10/24/2023,                                    |
| **•** | Patent application No. 11/229,433 entitled “ Nobel                        biodegradable biofouling control coating method of formulation”,                        and              |
| **•** | Patent Application No. 10/863,848 for Waterborne Coating                        Containing Microcylindrical Conductors and Non-Conductive Space Filling                        Latex Polymers. |

 

 

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**Patent Assignment modifying License Agreement with Technology            Innovations, LLC**

During the first quarter of 2007, our corporate parent, Technology            Innovations LLC (“TI”) assigned to us, without cost, all rights,            title, interests in, and improvements to, various issued patents and pending            applications which TI had previously licensed to us.

**License with Naval Research Laboratory**

On            October 3, 2007, we entered into a license agreement with the United States Department            of the Navy as represented by the Naval Research Laboratory (the “NRL”)            (the License Agreement”). Under the License Agreement, the NRL has granted us            exclusive rights to use certain NRL patents in the fields of electromagnetic            shielding/strength enhancement, cosmetic, fragrance, agriculture, ink and paper,            electronics, fabrics and textiles and local drug delivery.

The            License Agreement permits us to use the licensed patents, any patents issuing thereon            and any re-examination, re-issue, continuation or division thereof within the United            States of America until each subject patent expires, subject to certain requirements,            including that we fulfill a commercial deployment plan to bring one or more licensed            inventions to practical application by October 1, 2009, invest at least $1,500,000 in            marketing and/or research and development of practical applications for the patents.            Further, any licensed invention not in use for a practical application after three            years may be licensed by the NRL on a non-exclusive basis, provided that we are given            the first right of refusal to begin practical application of any such licensed            invention.

The            License Agreement provides for a license issue fee of $500,000 to be paid in            installments commencing in October 2007 and continuing through December 31, 2009, and            royalties of 5% of net sales, subject to minimum royalty payments ranging from $76,667            in 2008 to $347,333 in 2012, with a minimum annual royalty of $30,000 for each licensed            field of use thereafter.

The            License Agreement permits us to sublicense the licensed inventions, subject to a            sublicense fee ranging between 10% and 25% of any such sublicense revenue, depending on            the number of such sublicenses in effect.

**License Agreement with Ambit Corporation**

On            December 31, 2005, we entered into a License Agreement with Ambit Corporation (the            “Ambit License”) for the rights to a patented technology in the field of            electronics shielding. On November 13, 2006, the parties signed an amended and            restated license agreement, effective October 1, 2006, modifying the terms of the            original agreement. The amended agreement changes the scope of the license from            exclusive to non-exclusive and changes the original royalty stream to 20% royalty            payments upon the sale of licensed products utilizing the technology or in instances of            sublicense agreements. The amended agreement also includes annual reporting progress            made on product development and various confidentiality elements. This agreement shall            remain in effect until the expiration date of the last to expire related patent that is            covered by the agreement, which is projected to be in fiscal 2014. In consideration for            the rights granted under the original agreement, the Company paid $100,000 in cash and            issued to Ambit 200,000 shares of common stock valued at $1.45 per share in connection            with the original agreement. In connection with the November 13, 2006 amendment,            the purchase price was modified to $306,000 and the 200,000 shares issued to Ambit were            returned to the Company.

**Government Regulation And Environmental Laws**

Our            operations subject us to government regulations relating to air emissions, waste water            disposal and solid waste disposal, building codes with respect to the storage of            flammable gases and liquids and workplace safety requirements of the Occupational            Health and Safety Act.

Our            business involves the use of a broad range of chemicals and potentially            hazardous materials. We may be required to obtain various permits            pursuant to environmental law related to hazardous chemicals and materials, and will            likely be required to obtain others as our operations continue to evolve. Any violation            of environmental laws or regulations, material change in environmental laws or            regulations or their enforcement or failure to properly use, handle, store, release or            dispose of hazardous chemicals and materials could result in restrictions on our            ability to operate our business and could cause us to incur potentially significant            costs for personal injuries, property damage and environmental cleanup and remediation.            We regularly assess our compliance with environmental laws and regulations and            management of environmental matters utilizing a combination of internal staff and            external consultants. We believe we are currently substantially in compliance with            environmental laws, and we have not incurred any material restrictions in our business            operations. It is likely that we will be required to obtain a combination of            federal, state and local permits relating to air emissions and waste water disposal. We            do not believe the cost of obtaining such permits will be material.

 

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All            of our operations are subject to the plant and laboratory safety requirements of            various occupational safety and health laws and regulations.

During the fiscal year ending December 31, 2007, we spent approximately            $30,300 in connection with compliance with federal, state and local environmental laws            related to activities in our laboratory and offices.

Sales internationally of some of the products and services we have            developed or intend to develop, may be subject to the policies and approval of the            U.S. Department of State, Department of Commerce or Department of Defense. Any            international sales may also be subject to U.S. and foreign government regulations and            procurement policies, including regulations relating to import-export control,            investments, exchange controls and repatriation of earnings.

**RISK FACTORS**

**You should carefully consider the following material risk factors as            well as all other information set forth or referred to in this report before purchasing            shares of our common stock. Investing in our common stock involves a high degree of            risk. The Company believes all material risk factors have been presented below. If any            of the following events or outcomes actually occurs, our business operating results and            financial condition would likely suffer. As a result, the trading price of our common            stock could decline, and you may lose all or part of the money you paid to purchase our            common stock.**

**Risks Related to our Business**

***We have a limited operating history, and therefore there is a high            risk of potential business failure unless we can overcome the various obstacles            inherent to a development stage business.***

We            are a development stage company with limited prior business operations. Because of our            limited operating history, you may not have adequate information on which you can base            an evaluation of our business and prospects. Investors should be aware of the            difficulties, delays and expenses normally encountered by an enterprise in its            development stage, many of which are beyond our control, including unanticipated            research and development expenses, employment costs, and administrative expenses. We            cannot assure our investors that our proposed business plans as described herein will            materialize or prove successful, or that we will be able to finalize development of our            products or operate profitably.

***We have incurred substantial operating losses and have had no            material revenues since inception (December 22, 2004) and we may never achieve            profitability.***

From            our inception on December 22, 2004 through December 31, 2007, we have incurred            cumulative losses of $17,397,275. As a result of the start-up nature of our business,            we expect to sustain substantial expenses before generating significant revenues. There            can be no assurance that we will achieve profitability in the immediate future or at            any time.

We            do not expect to generate sufficient revenues in 2008 to be come profitable, during            which time we will engage primarily in research, development and commercialization            efforts for our Pleximer product. Our first revenue from the sale of the Pleximer            product was in the fourth quarter of 2007. We do not anticipate revenues sufficient to            fund our business plan and research programs until 2009 at the earliest.

Our            cash balance on December 31, 2007 was $404,940 and our average cash burn for the year            ended December 31, 2007 was approximately $246,000 per month. As a result the Company            is actively seeking to secure additional working capital through the sale of its equity            or debt securities. There can be no assurances that the Company can sell sufficient            securities to operate its business until December 31, 2008, if at all, and if it fails            to sell such securities we may be forced to curtail operations.

***Our independent auditors have expressed substantial doubt about            our ability to continue as a going concern.***

In            their audit opinion issued in connection with our consolidated balance sheet as of            December 31, 2007 and related consolidated statements of operations,            stockholders’ equity, and cash flows for the year then ended, our auditors have            expressed substantial doubt about our ability to continue as a going concern given our            recurring net losses, negative cash flows from operations, planned spending levels and            the limited amount of funds on our balance sheet.  We have prepared our financial            statements on a going concern basis, which contemplates the realization of assets and            the satisfaction of liabilities and commitments in the normal course of business.             The consolidated financial statements do not include any adjustments that might be            necessary should we be unable to continue in existence.

 

13

 

 

 

***Given our historical financial losses and current financial            condition*** ***we will need            additional financing to execute our 2008 business plan. Our inability to obtain            sufficient additional capital could reduce the value the market currently places on our            common stock.***

From            our inception on December 22, 2004 through December 31, 2007, we have incurred            cumulative losses of $17,397,275. Our cash burn projections indicate that we will have            cash available for our business operations and research and commercialization efforts            only through May 15, 2008. In light of this, the Company intends to seek at least            $5,000,000 of additional funding to be in place by May 15, 2008. We have no current            commitment for such future funding and there can be no assurance that additional            capital will be available on terms acceptable to us, or at all. Selling additional            stock would dilute the equity interests of our stockholders. Further, if we sell stock            at a price lower than the conversion price of the Notes held by the selling            stockholders, the number of shares of our common stock issuable upon conversion of            those Notes will automatically increase, thereby further diluting the equity interests            of our stockholders. If we are unable to secure additional capital, we will be forced            to reduce our investment in development and commercialization efforts, which will            impair our ability to execute our plans and as a result we may fail.

We            used cash of approximately $3,072,000 (including capital investments of $169,000 and            $50,000 in connection with technology licensing agreements) in 2007 and, expect to use            $3,105,000 (including capital investments of $421,000 and $200,000 in licensing            investments) in 2008.

Management projects that the Company will have viable saleable products,            at a level that will generate positive cash flow, by the fourth quarter of 2008.            Investors should be aware of the increased risks, uncertainties, difficulties and            expenses we face as a research and development company and that an investment in our            common stock may become worthless if our business fails.

***Because our products will generally be components of, or additives            to, end products sold to our customer’s end-users, the commercial viability of            our products will be tied to the success of our customers’            products.***

Our            products are not designed for direct use by an end-user and virtually all of our            products will be components of, or additives to, other products. For example, we expect            that our halloysite based product, Pleximer, will be incorporated into or used as            an additive in a wide array of end products, produced by our customers, to enhance            performance and reliability at lower cost. As a result, the market for our products is            dependent on third parties creating or expanding their end-user products that will            ultimately utilize our products. If such end-user products are not developed, or the            market for such improvements to the end-user product diminishes or fails to develop,            the market for our component product would diminish or collapse. This would limit our            ability to generate revenues as envisioned in our business plan.

***If we cannot achieve commercial application of our nanoscale            materials, we may not achieve profitability.***

We            must develop commercial applications for halloysite nanotubes, which we intend to            develop through joint development agreements in specific market segments in identified            potential fields of use. If we fail to establish such collaborative relationships or            if such collaborations are unable to develop sufficiently attractive            commercial uses for our nanoscale materials or to produce these materials at a            competitive cost, we may not achieve profitability.

 

***We may not be able to manage our growth effectively, which could            slow or prevent our ability to achieve profitability.***

The            ability to manage and operate our business as we execute our development and growth            strategy will require effective planning. Significant rapid growth could strain our            internal resources and delay or prevent our efforts to achieve profitability. We expect            that our efforts to grow will place a significant strain on our personnel, management            systems, infrastructure and other resources. Our ability to manage future growth            effectively will also require us to successfully attract, train, motivate, retain and            manage new employees and continue to update and improve our operational, financial and            management controls and procedures. If we do not manage our growth effectively slower            growth is likely to occur and thereby slowing or negating our ability to achieve and            sustain profitability.

***We may not be able to fully protect our proprietary rights and we            may infringe the proprietary rights of others which could result in costly            litigation.***

Our            future success depends on our ability to protect and preserve the proprietary rights            related to our technology and resulting products. We have the rights to twenty-five            issued or pending patents relating to processes and technologies and expect to            continually invest in our intellectual property portfolio through in-house            development and through third party licensing and joint venture research. We cannot            assure you that we will be able to prevent third parties from using our intellectual            property rights and technology without our authorization. The Company intends to pursue            aggressively all

 

14

 

 

efforts to obtain patent protection for our technology. The Company also            relies on trade secrets, common law trademark rights and trademark registrations, as            well as confidentiality and work for hire, development, assignment and license            agreements with employees, consultants, third party developers, licensees and            customers. Our protective measures for these intangible assets afford only limited            protection and may be flawed or inadequate.

Policing unauthorized use of our technology is difficult and some            foreign laws do not provide the same level of protection as U.S. laws. Litigation may            be necessary in the future to enforce our intellectual property rights, to protect our            trade secrets or patents that we may obtain, or to determine the validity and scope of            the proprietary rights of others. Such litigation could result in substantial costs and            diversion of resources and have a material adverse effect on our future operating            results.

In            recent years, there has been significant litigation in the United States involving            patents and other intellectual property rights. In particular, there has been an            increase in the filing of suits alleging infringement of intellectual property rights,            which pressure defendants into entering settlement arrangements quickly to dispose of            such suits, regardless of their merits. Other companies or individuals may allege that            we infringe on their intellectual property rights. Litigation, particularly in the area            of intellectual property rights, is costly and the outcome is inherently uncertain. In            the event of an adverse result, we could be liable for substantial damages and we may            be forced to discontinue our use of the subject matter in question or obtain a license            to use those rights or develop non-infringing alternatives.

***Our strategy of pursuing joint development agreements may not lead            to the commercialization of our technologies, which could have a severe negative impact            on our ability to market our products.***

Leveraging strategic partnerships is a key element of our business plan.            We plan to achieve product commercialization through joint development agreements, as            these relationships will help us to validate and expand our technology and offer            insight into and definition of additional application opportunities and develop future            sales channels. We intend to continue our development of these strategic partnerships            with research teams at leading industry manufacturers and suppliers in order to develop            the manufacturing and marketing efforts that we believe will be required to            commercialize our products. We currently have three joint development agreements. If we            are unable to enter into additional joint development agreements in the future, or if            none of our joint development agreements leads to a strategic alliance, we may be            unable to complete the commercialization of our products as effectively as we currently            envision.

***The industry in which we operate is highly competitive and has            relatively low barriers to entry. Increased competition could result in margin erosion,            which would make profitability even more difficult to achieve and            sustain.***

We            expect that our future product offerings will provide new capabilities and superior            performance compared to existing materials. However, many of our current and            prospective competitors are larger and have greater financial resources, which could            create significant competitive advantages for those companies. Our future success            depends on our ability to compete effectively with other manufacturers of material            additives that may have internal development programs. As a result, we may have            difficulty competing with larger, established competitor companies. Generally, these            competitors have:
| **•** | substantially greater financial, technical and marketing                        resources; |
|------------------------|--------------------------------------------------------------------------------------------|
| **•** | larger customer bases;                                                                     |
| **•** | better name recognition; and                                                               |
| **•** | potentially more expansive product offerings.                                              |

Many            existing and potential competitors have greater financial resources and are likely to            command a larger market share, which may enable them to establish a stronger            competitive position than we may have, in part through greater marketing opportunities.            If we fail to address competitive developments quickly and effectively, we may not be            able to remain a viable entity.

***Future sales and growth potential depend upon the price and            availability of acceptable halloysite materials.***

Our            future sales, and operating margin from such sales, if any, will depend on our ability            to purchase halloysite clay in the quantity, quality and cost required by any such            sales. Our 2008 operating plan will require that we supply approximately 80 tons of            halloysite clay to our prospective customers. As of December 31, 2007, we had an            inventory of approximately 15 tons of halloysite clay. We must obtain additional            quantities of halloysite clay during 2008. No assurances can be given that we can            secure the required halloysite clay, if any, under terms that will be acceptable to            us.

 

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***Our business could be negatively affected by any adverse economic            developments in the advanced materials industry and/or the economy in            general.***

We            depend on the demand for the application of our technology and nanoscale materials and            as such our business is susceptible to downturns in the advanced materials industry and            the economy in general. Any significant downturn in the market or in general economic            conditions would likely result in additional investments in research and marketing and            thereby increase our costs to bring our products to market.

 

***Our future success depends on retaining our existing key employees            and hiring and assimilating new key employees. The loss of key employees or the            inability to attract new key employees could limit our ability to execute our growth            strategy, resulting in lost sales and a slower rate of growth.***

Our            success depends in part on our ability to retain key employees including our executive            officers. Although we have certain employment agreements in effect with our executives,            each executive can terminate his or her agreement generally with 90 days notice. It            would be difficult for us to replace any one of these individuals. In addition, as we            grow we will need to hire additional key personnel. We may not be able to identify and            attract high quality employees or successfully assimilate new employees into our            existing management structure.

***Because we have filled, and intend in the future to fill, certain            of our human resource needs with part-time consultants in lieu of hiring full-time            employees, we may increase risks associated with the protection of our intellectual            property, inhibit our ability to access the best talent, and potentially impair our            ability to monitor the progress of our research and development            projects.***

In            an effort to contain operating costs and conserve our cash resources, we have employed,            from time to time, part-time consultants in lieu of immediately hiring full-time            employees in certain administrative and technical positions, and we intend to continue            this practice. In a number of these instances, the part-time consultant has            transitioned into full-time employment with the Company. The use of part-time            consultants increases the risk of improper and unauthorized access to intellectual            property and confidential technical information, even though we enter into            non-disclosure and technology transfer agreements with all of our            consultants.

The            use of part-time consultants can also limit the range of personnel available to us, as            many well-qualified prospective employees will decline offers of part-time            consultancy.

***We are controlled by a single majority stockholder, and our            minority stockholders will be unable to effect changes in our governance structure or            implement actions that require stockholder approval, such as a sale of the            Company.***

Technology Innovations, LLC beneficially owns a majority of the            outstanding shares of our common stock. Technology Innovations has the ability to            control various corporate decisions, including our direction and policies, the election            of our entire Board of Directors, the content of our charter and bylaws, and the            outcome of any other matter requiring stockholder approval, including a merger,            consolidation, sale of substantially all of our assets or other change of control            transaction. The consent of our minority stockholders will not be required for any of            these decisions.

***There may be conflicts of interest between us and our parent and            majority stockholder.***

Because of the nature of our business and the businesses of other            entities in which Technology Innovations, our parent and majority stockholder, holds,            or may in the future acquire, an ownership interest, the relationship of Technology            Innovations with these other entities may give rise to conflicts of interest with            respect to certain matters affecting us. Potential conflicts may not always be            resolved in a manner that is favorable to us. We believe it is impossible to predict            the precise circumstances under which future potential conflicts may arise and            therefore intend to address potential conflicts on a case-by-case basis. Under Nevada            law, directors have a fiduciary duty to act in good faith and with a view to the best            interests of the corporation. Our Board members who are unaffiliated with Technology            Innovations will make all determinations and decisions relating to Technology            Innovations and other affiliates as they may arise, but because actions by our Board            are subject to reversal by direct or indirect stockholder action, and Technology            Innovations, as the holder of approximately 56.3% of our outstanding common stock as of            December 31, 2007, has effective voting control, decisions by our Board adverse to the            interests of Technology Innovations will be subject, in certain circumstances, to            reversal by Technology Innovations.

 

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**Risks Related to Our Common Stock**

***We have a history of operating losses and expect to report future            losses that may cause our stock price to decline.***

For            the operating period since inception (December 22, 2004) through December 31, 2007, we            have incurred a net cumulative loss of $17,397,275. We expect to continue to incur            losses as we spend additional capital to develop and market our technologies and            establish our infrastructure and organization to support anticipated operations. Our            net loss for the year ending December 31, 2007 was $5,860,640. We cannot be certain            whether we will ever earn a significant amount of revenues or profit, or if we do, that            we will be able to continue earning such revenues or profit. Also, any economic            weakness or global recession may limit our ability to develop and ultimately market our            technologies. Any of these factors could cause our stock price to decline and result in            you losing a portion or all of your investment.

**Our            research and development efforts may not result in commercially viable products which            could result in a decline of our stock price and a loss of your            investment.**

Our            technologies are in the development stage. Further research and development efforts            will be required to develop these technologies to the point where they can be            incorporated into commercially viable or saleable products. We may not succeed in            developing commercially viable products from our technologies. If we are not successful            in developing commercially viable products or if such products become obsolete, our            ability to generate revenues from our technologies will be severely limited. This would            result in the loss of all or part of your investment.

***We will need to raise additional capital. If we are unable to            raise additional capital, our business may fail.***

Because we are a development stage company and have no material            revenues, we need to secure on-going funding. The private placement of 8% Senior            Secured Convertible Notes provided working capital proceeds of $3,250,000 in the first            quarter of 2007, but we believe that such funds will not be sufficient to carry out all            of our plans and to fund our operating losses until we are able to generate enough            revenues to sustain our business at our current cash burn rate. If we are unable to            obtain adequate additional financing, we may not be able to successfully develop and            market our products, our business operations will most likely be discontinued and we            will cease to be a going concern. To secure additional financing, we may need to borrow            money or sell more securities. Under these circumstances, we may be unable to secure            additional financing on favorable terms or at all. Selling additional stock, either            privately or publicly, would dilute the equity interests of our stockholders. If we            borrow money, we will have to pay interest and may also have to agree to restrictions            that limit our operating flexibility. If we are unable to obtain adequate financing, we            may have to curtail business operations which would have a material negative effect on            operating results and most likely result in a lower stock price.

***Our common stock has experienced in the past, and is expected to            experience in the future, significant price and volume volatility, which substantially            increases the risk that you may not be able to sell your shares at or above the price            that you pay for the shares.***

Certain factors, some of which are beyond our control, that may cause            our share price to fluctuate significantly include, but are not limited to, the            following:
| **•** | variations in our quarterly operating results;                                                                                                                                             |
|------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | our ability to complete the research and development of our                        technologies;                                                                                           |
| **•** | the development of a future market for our                        products;                                                                                                                |
| **•** | changes in market valuations of similar                        companies;                                                                                                                  |
| **•** | announcement by us or our competitors of significant                        contracts, acquisitions, strategic partnerships, joint ventures or capital                        commitments; |
| **•** | additions or departures of key personnel; and                                                                                                                                              |
| **•** | fluctuations in stock market price and volume.                                                                                                                                             |

Additionally, in recent years the stock market in general, and the            Over-the-Counter Bulletin Board and technology stocks in particular, have experienced            extreme price and volume fluctuations. In some cases these fluctuations are unrelated            or disproportionate to the operating performance of the underlying company. These            market and industry factors may materially and adversely affect our stock price            regardless of our operating performance. The historical trading of our common stock is            not necessarily an indicator of how it will trade in the future and our trading price            as of the date of this report is not necessarily an indicator of what the trading price            of our common stock might be in the future. In the past, class action litigation has            often been brought against companies following periods of volatility in the market            price of those companies’ common stock. If we become involved in this type of            litigation in the future it could result in substantial costs

 

17

 

 

and            diversion of management attention and resources, which could have a further negative            effect on your investment in our stock.

***Our issuance of common stock at a price below prevailing trading            prices at the time of issuance may cause our stock price to decline.***

As            of December 31, 2007 there were outstanding options to purchase 18,389,000 shares of            our common stock, with exercise prices ranging from $0.05 to $1.44 per share with a            weighted average exercise price of $.20 per share. Our 8% Senior Secured            Convertible Notes are convertible into an additional 15,215,910 shares            of common stock, at an exercise price of $0.22 per share. Also outstanding on December            31, 2007, were warrants for the purchase of 25,546,995 shares of our common stock,            having exercise prices ranging from $0.22 to $0.33 per share with a weighted average            exercise price of $0.27 per share. These options, convertible notes and warrants, as            well as other convertible securities that we may issue in the future, may result in            shares being issued for consideration that is less than the trading price of our common            stock at the time the shares are issued. We may also issue shares in the future at a            discount to the trading price of our common stock. Any such below market issuances, or            the potential for such issuances, could cause our stock price to decline.

***Shares of our common stock may be subject to price illiquidity and            volatility because our shares may continue to be thinly traded and may never become            eligible for trading on Nasdaq or a national securities exchange.***

Although a trading market for our common stock exists, the trading            volume has not been significant and an active trading market for our common stock may            never develop. There currently is no analyst coverage of our business. Because            69,303,189 shares are held by our corporate parent, an additional 1,834,565 outstanding            shares are beneficially owned by our officers, directors and affiliates and a further            274,700 shares are otherwise not freely tradable because they were issued without            registration under the Securities Act of 1933 and may be resold into the market only in            compliance with the provisions of Rule 144, including the notice provisions and volume            limitations of that rule, the number of our shares currently available in the market is            51,468,286. During the period from November 29, 2005 through December 31, 2007, the            average daily trading volume of our common stock was approximately 59,000 shares (or            approximately 0.1% of the shares currently available in the market). The trading volume            of our shares will continue to be limited due to resale restrictions under applicable            securities laws and the fact that approximately 58.8% of our outstanding shares            are held by our officers, directors or our parent and majority stockholder. As a result            of the limited trading market for our common stock and the lack of analyst coverage,            the market price for our shares may continue to fluctuate significantly and will likely            be more volatile than the stock market as a whole. There may be a limited demand for            shares of our common stock due to the reluctance or inability of certain investors to            buy stocks quoted for trading on the OTC Bulletin Board, lack of analyst coverage of            our common stock and limited trading market for our common stock. As a result, even if            prices appear favorable, there may not be sufficient demand to complete a            stockholder’s sell order. Without an active public trading market or broader            public ownership, shares of our common stock are likely to be less liquid than the            stock of public companies with broad public ownership and an active trading market, and            any of our stockholders who attempt to sell their shares in any significant volumes may            not be able to do so at all, or without depressing the publicly quoted bid prices for            our shares.

While we may, at some point, be able to meet the requirements necessary            for our common stock to be listed on the Nasdaq stock market or on another national            securities exchange, we cannot assure you that we will ever achieve such a listing.            Listing on one of the Nasdaq markets or one of the national securities exchanges is            subject to a variety of requirements, including minimum trading price and minimum            public “float” requirements. There are also continuing eligibility            requirements for companies listed on national securities exchanges. If we are unable to            satisfy the initial or continuing eligibility requirements of any such market, then our            stock may not be listed or could be delisted. This could result in a lower trading            price for our common stock and may limit your ability to sell your shares, which could            result in you losing some or all of your investments.

***The so-called “penny stock rule” makes it cumbersome            for brokers and dealers to trade in our common stock, making the market for our common            stock less liquid which could cause the price of our stock to            decline.***

Trading of our common stock on the OTC Bulletin Board is subject to            certain provisions of the Securities Exchange Act of 1934, commonly referred to as the            “penny stock” rule. A penny stock is generally defined to be any equity            security that has a market price less than $5.00 per share, subject to certain            exceptions. Because our common stock has historically traded below $5.00 per share, it            is deemed to be a penny stock, and consequently trading in our stock is subject to            additional sales practice requirements on broker-dealers.

These require a broker-dealer to:

 

 

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| **•** | make a special suitability determination for purchasers of                        our shares;                                                                                                 |
|------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | receive the purchaser’s written consent to the                        transaction prior to the purchase; and                                                                            |
| **•** | deliver to a prospective purchaser of our stock, prior to                        the first transaction, a risk disclosure document relating to the penny                        stock market. |

Consequently, the penny stock rules restrict the ability of            broker-dealers to trade and/or maintain a market in our common stock. Also, prospective            investors may not want to get involved with the additional administrative requirements            which may have a material adverse effect on the trading of our shares.

***The authorization and issuance of preferred stock may prevent or            discourage a change in our management.***

Our            Articles of Incorporation authorize the Board of Directors to issue up to 10,000,000            shares of preferred stock without stockholder approval. Such shares will have terms,            conditions, rights, preferences and designations as the Board may determine at the time            of issuance. The rights of the holders of our common stock will be subject to, and may            be adversely affected by, the rights of the holders of any preferred stock that may be            issued in the future. The issuance of preferred stock, while providing desirable            flexibility in connection with possible acquisitions and other corporate purposes,            could have the effect of discouraging a person from acquiring a majority of our            outstanding common stock.

 

***Certain provisions of Nevada law and of our corporate charter may            inhibit a potential acquisition of our Company, and this could depress our            stock*** ***price.***

Nevada corporate law includes provisions that could delay, defer or            prevent a change in control of our company or our management. These provisions could            discourage information contests and make it more difficult for you and other            stockholders to elect directors and take other corporate actions. As a result, these            provisions could limit the price that investors are willing to pay in the future for            shares of our common stock. For example:
| (i)   | without prior stockholder approval, the Board of Directors                        has the authority to issue one or more classes of preferred stock with                        rights senior to those of common stock and to determine the rights,                        privileges and inference of that preferred stock; |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (ii)  | there is no cumulative voting in the election of directors,                        which would otherwise allow less than a majority of stockholders to elect                        director candidates; and                                                                                                                 |
| (iii) | stockholders cannot call a special meeting of                        stockholders.                                                                                                                                                                                                                                           |

***The issuance to Platinum LTG, Longview and Platinum Advisors of            shares of our common stock upon conversion and exercise of the derivative securities            held by them will result in dilution to our existing stockholders.***

The            issuance of shares of our common stock to Platinum LTG, Longview and Platinum Advisors            will dilute the equity interest of existing stockholders and could have an adverse            effect on the market price of our common stock. The perceived risk of dilution may            cause our stockholders to sell their shares, which would contribute to a decline in the            price of our common stock. The Company estimates that the common stock ownership held            by existing stockholders will decrease by approximately 25%, and the common stock            ownership held by non-affiliates of the Company will decrease by approximately 10%, if            all of the shares of common stock that may be issued upon a conversion of the            derivative securities held by Platinum LTG, Longview and Platinum Advisors are            issued.
| **Item 2.** | **Description of Property** |
|-------------|-----------------------------|

Our            primary business operations are conducted from leased office space located at 15 Schoen            Place in Pittsford, New York. The Schoen Place lease, which commenced in March 1,            2007, calls for annual rent of $44,000 through February 28, 2009, at which time            the annual rent increases by 5%. The lease also imposes annual rent increases of 5% for            years three through five and annual increases of 3% for years six through fifteen. The            lease agreement provides for our use of the office space through April 30, 2022            (subject to our right to terminate under certain conditions, including landlord            re-leasing of the property, after March 1, 2009 with 90 days notice). The landlord            is responsible for all real property taxes for the first 38 months of the term;            thereafter, the landlord will absorb the first 3% of any increases and half of the            remaining 97% will be reimbursed by the Company based on its proportionate share (17%)            of the building usage. In addition to being responsible for utilities within our leased            space, we have agreed to pay our proportionate share of utility charges for common area            within the building.

 

19

 

 

 

We            currently lease approximately 3,000 square feet of laboratory space in Rochester, New            York under an agreement that expired on January 31, 2008 and was renewed through            January 31, 2009, at an annual base rent of $47,687, plus a pro rata share of the            operating expenses.

On            December 7, 2007, we entered into an agreement to lease approximately 9,200 square feet            in Rochester, NY for laboratory space for a period beginning December 17, 2007 and            ending February 28, 2011. From the period starting March 1, 2008 until February 28,            2011 the rent shall be $3,300 per month. We have the option to terminate this lease            agreement at any time after March 1, 2010 with a 60 day notice. We also have the option            of up to six (6) one year renewals of the lease agreement under substantially the same            terms except that the rent shall be $3,400 per month during any such renewal            period.

We            believe our current office and laboratory facilities will be adequate for our            anticipated needs for the next twelve months. We believe that appropriate insurance            coverage is in place and effective for these facilities and related business            needs.
| **Item 3.** | **Legal Proceedings** |
|-------------|-----------------------|

We            are not a party to any material legal proceedings and there are no material legal            proceedings pending with respect to us or our property. We are not aware of any legal            proceedings contemplated by any governmental authorities involving either us or our            property. None of our directors, officers, or affiliates is an adverse party in any            legal proceedings involving us or our subsidiaries.

 
| **Item 4.** | **Submission of Matters to a Vote of Security                        Holders** |
|-------------|--------------------------------------------------------------------------------|

On            November 14, 2007, an information statement was furnished to all holders of Common            Stock of the Company in connection with proposed actions taken by the Company without a            meeting pursuant to the written consent of the holder of a majority of the voting power            of the Company:
|   | 1. | The election of six (6) members of the Board of Directors,                        each to serve until the 2008 Annual Meeting of Stockholders or until a                        successor is elected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 2. | The amendment and restatement of the Articles of                        Incorporation (i) to provide that the terms of rights, options, warrants                        and other securities approved by the Board of Directors may include a                        provision requiring the consent of the holders of a class of the                        Company’s capital stock (or a designated group of such holders) to                        waive or amend such rights and(ii) to increase the number of authorized                        shares of the Company’s common stock, par $0.001 per share, from                        200,000,000 shares to 300,000,000 shares. |
|   | 3. | The approval of the NaturalNano, Inc. Amended and Restated                        2007 Incentive Stock Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

The            foregoing actions were approved by the Company’s majority stockholder on October            29, 2007 and became effective on December 6, 2007.

 

 

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**PART II**
| **Item 5.** | **Market for Common Equity and Related Stockholder                        Matters** |
|-------------|-------------------------------------------------------------------------------------|

The            Company’s common stock is listed on the OTC Bulletin Board under the symbol            NNAN.

The            high and low share prices for the Company’s common stock as reported on the            over-the-counter bulletin board for each quarterly period since January 1,            2006 are presented below. These quotations reflect inter-dealer prices, without            mark-up, mark-down or commission, and may not represent actual transactions.
| For the year ended December 31, 2006 |   | Sales Prices |   |
|-------------------------------------------|--------|--------------|--------|
|                                      |   | High         |   | Low |   |
| First quarter                             |   | $            | 2.50   |   | $ | 1.05 |   |
| Second quarter                            |   |         | 1.90   |   |   | 1.05 |   |
| Third quarter                             |   |         | 1.35   |   |   | 0.49 |   |
| Fourth quarter                            |   |         | 0.95   |   |   | 0.25 |   |
|                                      |   |         |   |   |   |   |   |
| For the year ended December 31, 2007 |   |         |   |   |   |   |   |
|                                      |   |         |   |   |   |   |   |
| First quarter                             |   | $            | 0.38   |   | $ | 0.19 |   |
| Second quarter                            |   |         | 0.32   |   |   | 0.20 |   |
| Third quarter                             |   |         | 0.27   |   |   | 0.16 |   |
| Fourth quarter                            |   |         | 0.27   |   |   | 0.09 |   |

The            closing price of the Company’s common stock on April 7, 2008, as reported on            the OTC Bulletin Board, was $0.065 per share. As of March 31, there were            outstanding 123,882,740 shares of our common stock, which were held by            approximately 207 shareholders of record.

**Equity Compensation Plan Information**

The            following chart sets forth information regarding our equity compensation plans as of            December 31, 2007:
|  

                         

                         

Plan Category |  

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights |  

Weighted average

exercise price of

outstanding options,

warrants and rights | Number of securities

remaining available for

future issuance under equity compensation plans (excluding                        securities reflected in column (a) ) |
|---------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                  | (a)                                                                                                    | (b)                                                                                    | (c)                                                                                                                                                                   |
| Equity compensation

plans approved by

security holders                              |  

18,389,000                                                                                     |  

$0.20                                                                          |  

10,405,000 *                                                                                                                                                  |
| Equity compensation

plans not approved by

security holders                          |  

25,636,995                                                                                     |  

$0.27                                                                          |  

none                                                                                                                                                          |
| Total                                                                                 | 44,025,995                                                                                             | $0.24                                                                                  | 10,405,000                                                                                                                                                            |

*            The shares are issuable under the Company’s 2007 and 2005 incentive stock plans.            Such shares may be issued upon the exercise of stock options or pursuant to restricted            stock awards or restricted stock units which vest based upon Board designation at the            time of grant.

 

21

 

 

 

**Recent Sales of Unregistered Securities**

I.            Prior to the Merger (described below), NN Research issued the following securities            without registration under the Securities Act of 1933, all of which were issued in            private placements not involving a public offering and in reliance on the exemption            from the registration requirements of such Act provided in Section 4(2)            thereof.
| a.     | In connection with its organization, on December 22,                        2004, NN Research issued 10,000,000 shares of its Common Stock to                        Technology Innovations, Inc. for an aggregate purchase price of                        $100,000.                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b.     | On the dates indicated, NN Research granted options under                        its 2004 Stock Option Plan to officers, directors, employees and                        consultants for the purchase of the number of shares of its Common Stock                        (all at an exercise price of $0.10 per share):                                                                                                                                                                                                                                                                                                                                                                                          |
|   | **Date of Grant**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Number of Individuals** |   | **Number of Shares** |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |   |   |
|   | March 1, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | 18 |   |   | 3,725,000 |   |
|   | April 4, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | 1 |   |   | 25,000 |   |
|   | July 1-27, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   | 9 |   |   | 1,080,000 |   |
|   | August 1-3, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 2 |   |   | 120,000 |   |
|   | Total Option Grants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   | 30 |   |   | 4,950,000 |   |
| c.     | On March 31, 2005, NN Research issued to SBI USA, LLC a                        warrant for the purchase of 2,250,000 shares of its Common Stock at a                        purchase price of $0.23 per share. The warrant was issued in connection                        with the performance by SBI USA of consulting services for NN Research. NN                        Research attributed a value of $273,442 to the warrant. In the Merger                        described below, this warrant was exchanged for a warrant to purchase                        4,500,000 shares of our Common Stock; the new warrant expired without being                        exercised on March 31, 2007. |
| d.     | Between June 13, 2005 and September 9, 2005, NN                        Research issued Convertible Promissory Notes having an aggregate face                        amount of $4,156,000 to a total of 59 investors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

II.            On November 29, 2005, pursuant to an Agreement and Plan of Merger, dated as of            September 26, 2005 (the “Merger Agreement”) by and among Cementitious            Materials, Inc., a Nevada corporation, (the “Company”), Cementitious            Acquisitions, Inc., a Nevada corporation and wholly-owned subsidiary of the Company            (“Merger Sub”), and NaturalNano, Inc., a Delaware corporation now known as            NaturalNano Research, Inc. (“NN Research”), Merger Sub was merged with and            into NN Research, with NN Research surviving as a wholly-owned subsidiary of the            Company (the “Merger”). Immediately following the Merger, the Company            changed its name to “NaturalNano, Inc.” Pursuant to the Merger Agreement,            we issued the following securities to former security holders of NN Research, without            registration under the Securities Act of 1933 in reliance on the exemption provided in            Section 4(2) of such Act:
| a. | 89,838,756 shares of our Common Stock to the former                        stockholders of NN Research in exchange for all of the issued and                        outstanding Common Stock of NN Research.                                                                                                              |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b. | 20,939,200 shares of our Common Stock in consideration for                        the conversion of $4,156,000 face amount of outstanding NN Research                        Convertible Promissory Notes which were, by their terms, automatically                        converted at the effectiveness of the Merger.  |
| c. | Options and warrants for the purchase of an aggregate of                        14,400,000 shares of our common stock to the holders of outstanding NN                        Research options and warrants (identified above), in consideration of the                        cancellation of such options and warrants. |

III.            On February 1 and 9, 2006, we issued an aggregate of 314,700 shares of our Common            Stock to three entities in private placement transactions exempt from the registration            requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act.            Specifically, we issued:
| a. | 40,000 shares of Common Stock to High Technology of                        Rochester, Inc., our landlord, in consideration for leasehold improvements                        to our office facilities.                                   |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b. | 74,700 shares of Common Stock to Medienimpuls GmbH as                        payment for consulting services.                                                                                                                            |
| c. | 200,000 shares of Common Stock to Ambit Corporation in                        partial consideration for Ambit’s grant to us of license to certain                        patented technology in the field of electronic shielding. |

IV.            On March 30, 2006, in connection with the agreement by SBI Brightline XIII, LLC to            purchase shares of our Common Stock, we issued to SBI a warrant for the purchase of up            to 3,300,000 shares of our Common Stock. The transaction with

 

22

 

 

SBI            was a private placement not involving a public offering and was exempt from the            registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of            such Act. On July 9, 2006, we cancelled the warrant.

V.            On July 9, 2006, following the cancellation of the warrant that had been issued to            SBI Brightline XIII, LLC on March 30, 2006 and in connection with a new agreement            by SBI to purchase shares of our Common Stock, we issued to SBI a warrant for the            purchase of up to 4,770,000 shares of our Common Stock. The transaction with SBI was a            private placement not involving a public offering and was exempt from the registration            requirements of the Securities Act of 1933 pursuant to Section 4(2) of such            Act.

VI.            On March 7, 2007, pursuant to a Loan and Security Agreement (the “Purchase            Agreement”) with Platinum Partners Long Term Growth IV (“Platinum”),            Longview Special Financing, Inc. (“Longview”) and Platinum Advisors LLC            (the “Agent”), for its own account and as agent for the other investors, we            issued $3,250,000 face amount of 8% Senior Secured Promissory Notes (the            “Notes”) to Platinum and Longview. The holders of the Notes may elect to            convert the Notes at any time into shares of our common stock at a price of $0.22 per            share (subject to certain anti-dilution adjustments). On March 7, 2007 we also            issued to Platinum and Longview two series of warrants, for the purchase at any time on            or before March 7, 2011, of an aggregate of 22,159,092 shares of our common stock.            The first series of warrants (the “Series A Warrants”) covers the purchase            of an aggregate of 11,079,546 shares of our common stock at an exercise price of $0.22            per share. The second series of warrants (the “Series B Warrants”) covers            the purchase of an additional aggregate of 11,079,546 shares of our common stock at an            exercise price of $0.33 per share. Each series of Warrants contain provisions for            anti-dilution adjustments to the exercise prices. In connection with those issuances,            on March 7, 2007, as consideration for due diligence services in connection with            the Purchase Agreement, we paid to the Agent a cash fee of $97,500 and issued to that            firm (i) a Note (identical in form to the Notes issued to the other investors) in the            principal amount of $97,500, (ii) Series A warrants for the purchase of 332,387 shares            of our common stock at $0.22 per share, (iii) Series B Warrants for the purchase of a            total of 1,473,581 shares of our common stock at $0.33 per share, and (iv) a warrant            (the “Series C Warrant”) for the purchase at any time on or before            March 7, 2011 of 1,141,194 shares of our common stock at an exercise price of            $0.22 per share (subject to certain anti-dilution adjustments). The Notes and Warrants            were issued in a private placement not involving a public offering and in reliance on            the exemption from the registration requirements of the Securities Act of 1933 provided            in Section 4(2) thereof and Regulations D and S promulgated thereunder.

VII.            On March 26, 2007, we issued an aggregate of 160,000 shares of common stock to two            entities in transactions exempt from the registration requirements of the Securities            Act of 1933 pursuant to Section 4 (2) of such Act. We issued 100,000 shares to F.M.            Office Express, Inc. and 60,000 shares to Pittsford Flour Mill, LLC in connection with            services performed on our behalf in connection with the relocation and planning for our            new office location. These issuances were made as private placements not involving a            public offering and in reliance on the exemption from the registration requirements of            the Securities Act of 1933 provided in Section 4(2) thereof.

VIII. During the periods indicated, we granted options under our 2005            Incentive Stock Plan to officers, directors, employees and consultants for the purchase            of the number of shares of our Common Stock (at the indicated exercise prices per            share):
| **Option Grants made in the quarter ended:** |   | **Number of Shares** |      | **Exercise Price** |
|----------------------------------------------|--------|----------------------|-----------|--------------------|
|                                         |   |                 |      |               |   |
| June 30, 2006                           |   |                 | 205,000   |               |   | $ 1.30-$1.44 |   |
| September 30, 2006                      |   |                 | 380,000   |               |   | $ 1.06-$1.20 |   |
| December 31, 2006                       |   |                 | 2,115,000 |               |   | $ 0.35-$0.42 |   |
| March 31, 2007                               |   |                 | 2,500,000 |               |   | $ 0.21 |   |
| June 30, 2007                           |   |                 | 50,000    |               |   | $ 0.26 |   |
| September 30, 2007                      |   |                 | 100,000   |               |   | $ 0.24 |   |
|                                         |   |                 | 5,350,000 |               |   |   |   |

The            shares of our Common Stock issuable under our 2005 Incentive Stock Plan have been            registered on Form S-8 (No 333-132607).

IX.            On July 24, 2006 we granted an option to Cathy A. Fleischer, at the time our Chief            Technology Officer, for the purchase of 40,000 shares of Common Stock at an exercise            price of $0.10 per share. This option was not granted under a stockholder-approved plan            and the shares issuable upon exercise of this option have not been registered under the            Securities Act of 1933.

 

23

 

 

 

X.            On December 7, 2006, we granted an option to Sir Harold W. Kroto, a consultant to            the Company and a member of our Scientific Advisory Board, for the purchase of 50,000            shares of Common Stock at an exercise price of $0.10 per share. This option was not            granted under a stockholder-approved plan and the shares issuable upon exercise of this            option have not been registered under the Securities Act of 1933.

XI.            On March 2, 2007, we granted an option under our Amended and            Restated2007 Incentive Stock Plan to Cathy A. Fleischer, our            President, for the purchase of 1,200,000 shares of Common Stock at an exercise price of            $0.25 per share. These options were granted without registration under the Securities            Act of 1933 in reliance upon the exemption from the registration requirements of such            Act provided by Section 4(2) thereof inasmuch as they were issued pursuant to a            compensatory plan in transactions not involving a public offering. The shares of our            Common Stock issuable under our Amended and Restated2007            Incentive Stock Plan have been registered on Form S-8 under the Securities Act of 1933,            filed on December 19, 2007.

XII.            In August 2007 we granted options under our Amended and            Restated2007 Incentive Stock Plan to Kent A. Tapper, our Chief            Financial Officer, and a total of 14 other employees and consultants to the Company for            the purchase of an aggregate of 5,045,000 shares of Common Stock at exercise prices            ranging from $0.175 to $0.18 per share. These options were granted without registration            under the Securities Act of 1933 in reliance upon the exemption from the registration            requirements of such Act provided by Section 4(2) thereof inasmuch as they were issued            pursuant to a compensatory plan in transactions not involving a public offering. The            shares issuable under our Amended and Restated2007 Incentive            Stock Plan have been registered on Form S-8 under the Securities Act of            1933.

**Limitation on Liability and Indemnification of Directors and            Officers**

Our            articles of incorporation provide that no director or officer shall have any liability            to the Company if he or she acted in good faith and with the same degree of care and            skill as a prudent person in similar circumstances.

Our            articles of incorporation and bylaws provide that we will indemnify our directors and            officers and may indemnify our employees or agents to the fullest extent permitted by            law against liabilities and expenses incurred in connection with litigation in which            they may be involved because of their offices. However, nothing in our articles of            incorporation or bylaws protects or indemnifies a director, officer, employee or agent            against any liability to which he would otherwise be subject by reason of willful            misfeasance, bad faith, gross negligence or reckless disregard of the duties involved            in the conduct of his or her office. To the extent that a director has been successful            in defense of any proceeding, the Nevada Revised Business Corporations Act provides            that he or she shall be indemnified against reasonable expenses incurred in connection            with the proceeding.
| **Item 6.** |  

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

 

24

 

 

 

**Management’s Discussion and Analysis or Plan of            Operations**

**Plan of operations for the period from December 31, 2007 through            December 31, 2008**

**Milestones Anticipated for the Twelve Month Period Ending December            31, 2008**
|   | **•** | Establishment of joint development agreements that will                        identify and develop additional applications for Pleximer and commercialize                        Pleximer and filled tube application products. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | Complete customer formulation and optimization trials                        demonstrating Pleximer’s advantages in multiple application                        models.                                                    |
|   | **•** | Complete manufacturing scale accreditation of multiple                        Pleximer based products.                                                                                                                           |
|   | **•** | Achieve and grow revenue through sales of Pleximer                        product.                                                                                                                                               |
|   | **•** | Continue validation testing in support of advanced property                        enhancements to broaden our customers’ base within the polymer                        composite industry.                               |
|   | **•** | File additional patents to expand our proprietary position                        on specialty applications and materials.                                                                                                       |

 

**Research and Development and Capital Expenditures for the Twelve            Month Period ending December 31, 2008**

Our            research and development plans for the next twelve months include material            characterization, formulation testing and product accreditation for our Pleximer and            filled-tube products. These efforts will focus in the areas of:
|   | **•** | Use of halloysite as an additive in composites and                        polymers. |
|--------|------------|-------------------------------------------------------------------------------------|
|   | **•** | Extended release properties. |
|--------|------------|------------------------------|
|   | **•** | Halloysite material characteristics. |
|--------|------------|--------------------------------------|
|   | **•** | Process development and scale-up of HNT treatment                        processes. |
|--------|------------|-------------------------------------------------------------------------------------|

For            the twelve months ending December 31, 2008 we forecast spending $1,500,000 in support            of our research and development programs and an additional $421,000 for investments in            capital assets in the research and development area and approximately $200,000 in            licensing fees.

The            cash requirements for our research and development programs for the twelve months            ending December 31, 2008 are summarized below.
|  

                         

**Cash Requirements for Research and                        Development**                 |   | **For the twelve**

**months ending**

**December 31, 2008** |              |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------------|
|                                                                                                                              |   |                                                         |              |
| Research and development team, including salaries, benefits                        and travel for staff and full-time consultants |   |  

$                                                    |  

1,000,000 |   |
| Professional and technical consultants and                        advisors                                                        |   |                                                         | 160,000           |   |
| Laboratory testing, materials, supplies, safety and                        other                                                  |   |                                                         | 270,000           |   |
| Facility leases                                                                                                                   |   |                                                         | 70,000            |   |
|                                                                                                                              |   |                                                         |              |   |
| Research and product development expenditures                                                                                     |   | $                                                            | 1,500,000         |   |

Total research and development spending for the twelve month period            ending December 31, 2008 reflects increases in capital expenditures compared to prior            periods. Our cash spending for research and development projects, for the twelve months            ended December 31, 2007, aggregated approximately $1.4 million, with capital            investments of approximately $169,000. The planned increase in capital equipment            spending reflects management’s commitment to product characterization,            development of new application areas and investment in establishing reliable sources of            halloysite in anticipation of new product sales and introductions. Research and            development expenditures for the twelve month period ending December 31, 2008 will be            focused on: testing and validation costs associated with customer accreditation and            product development for our polymer based Pleximer products currently underway with our            joint development partners. The Company is seeking additional joint development            partners in order to expand our current product and industry applications and as these            develop; our research efforts will grow in response to these additional product and            market opportunities. Product design and attribute validation for each joint            development agreement can include: numerous lab, pilot and manufacturing scale tests in            support of customer application and significant joint collaborative consulting efforts            to refine and introduce process and product enhancements. During 2007, each party to            these joint development agreements has agreed to pay all expenses associated with the            activities of its employees and consultants in support of efforts to

 

25

 

 

commercialize the products identified. During 2008, we anticipate that            our new joint development agreements will include funded research which will be used to            offset our overall research and development costs

Investments in capital assets in support of our research and development            efforts is forecast to aggregate $421,000 in the twelve month period ending December            31, 2008. These investments will be evaluated internally before purchase as to the            Company’s intention to buy or lease the relevant equipment based on the            conditions and financing costs at that time. The investments anticipated in this            capital expenditure forecast include investments for: (i) commercial scale surface            treatment processes, (ii) polymer extruder upgrades, (iii) tube filling            characterization and evaluation tools, (iv) laboratory expansion, (v) precipitation            testing, and (vi) enhancements and upgrades to various microscopic measuring            equipment.

**General and Administrative Expenses**

The            cash requirements for general and administrative efforts for the twelve month period            ending December 31, 2008 (including interest) are projected to be            approximately $1,270,000. The cash needs projected for our general and            administrative expenses for the twelve months ending December 31, 2008, are composed of            (i) salaries, benefits and travel of $603,000, (ii) professional services of            $136,000, (iii) office rental and facility costs of $55,000, (iv) investor            relations and marketing of $78,000, (v) interest of $270,000 and (vi) all            other costs of $128,000. Actual cash spending for general and administrative            expenses incurred during the twelve months ended December 31, 2007 was $1.3 million.            The planned reduction reflects reduced spending on marketing and public relations costs            compared to actual spending incurred in the first half of 2007.

**Employees**

As            of December 31, 2007 we employed a total of eleven full time employees. During the            twelve months ending December 31, 2008, we anticipate adding an additional five            full-time positions, primarily technicians, scientists and engineers to our research            and product development team, as demand for our product developments increases and as            our operating cash position allows. The cost of these incremental positions included in            our forecast for 2008 is $310,000, representing salaries and benefits.

**Financing Activities**

During the first quarter of 2007, the Company completed a private            placement of $3,347,500 in the form of 8% Senior Secured Convertible Notes which, net            of $97,500 cash fees paid at closing, provided working capital proceeds of $3,250,000,            that enabled the Company to continue as a viable business through the end of            2007.

The            Company will need additional funding to execute the 2008 business plan and otherwise            continue its operations. In light of this, management intends to seek additional            sources of cash to be in place and available in the second quarter of 2008. Our 2008            business plan anticipates the receipt of net proceeds from a future undefined funding            source in the amount of $5 million. We have no commitment for this future capital need            and cannot be assured that additional capital will be available on terms acceptable to            us, or at all. If we fail to secure additional capital, we will be forced to curtail or            discontinue our operations and cease to be a going concern.

 

26

 

 

 

**Cash Requirements and Liquidity**

Our            cash balance as of December 31, 2007 and projected cash outflows for the twelve-month            period through December 31, 2008 are presented below.
| **Cash on hand at December 31, 2007**                                                                                                                                                                           |              |     | $      | 404,940    |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|----------|--------|------------|--------|
| Projected cash requirements for the twelve-month period                        ending December 31, 2008 :                                                                                                       |              |     |   |       |   |
| Research and product development expenses                                                                                                                                                                       |   (1,500,000 | )        |   |       |   |
| Capital expenditures for research and development                                                                                                                                                               |   (421,000   | )        |   |       |   |
| Collaborative research & licensing agreements                                                                                                                                                               | (200,000          | )   |   |       |   |
| General and administrative expenses including:

administrative salaries and benefits, office, rent,                        legal

expenses, accounting, investor relations and                        marketing | (1,000,000        | )        |   |       |   |
| Interest on convertible debt                                                                                                                                                                                    | (270,000          | )        |   |       |   |
| Total estimated cash needs for the twelve month period                        ending December 31, 2008                                                                                                          |              |     |   | (3,391,000 | )      |
| Projected gross margin on forecast product sales of $2.0                        million                                                                                                                         |              |     |   | 1,000,000  |   |
| Anticipated financing required by 5/15/08, net of financing                        costs                                                                                                                        |              |     |   | 5,000,000  |   |
| **Estimated cash balance on December 31,                        2008**                                                                                                                                          |              |     | **$**  | 2,609,000  |   |

The            cash on hand as of December 31, 2007, along with measures we have taken to curtail cash            use, is projected to be adequate to fund our current operations through May 15, 2008.            Our average monthly cash usage for operating and investing activities has averaged            $256,000 per month during 2007.

The            Company estimates that it will need to raise additional capital of approximately $5            million by May 15, 2008 to accomplish its business objectives and otherwise continue            its operations and will actively evaluate all funding options including additional            offerings of its securities to private and institutional investors and other credit            facilities as they become available. We have no commitment for such future capital and            cannot be assured that additional capital will be available on terms acceptable to us,            or at all. If we fail to secure additional capital, we will be forced to curtail or            discontinue our operations and cease to be a going concern.

The            Company’s operating plan for the twelve months ending December 31, 2008 assumes a            gross margin of $1 million on estimated sales of $2 million. If we are unable to            achieve such sales, or unable to do so at the assumed margin, we will likely require            further financing to compensate for the shortfall.

Our            current forecasts indicate that the Company will generate positive cash flow from            operations in 2009 as a result of anticipated sales forecasts for our Pleximer and            filled tubes products. Based on these forecasts, and assuming that the Company is able            to fund its operations for 2008, the Company expects to have adequate cash flow from            operations to fund the full repayment of the 8% Senior Secured Convertible Notes when            they become due and payable on March 7, 2009.

 

27

 

 

 

**Management’s Discussion and Analysis**

**General**

During the year ended December 31, 2007 we were, and for 2008 we            continue to be, a development stage company. Our primary mission is to develop and            exploit technologies in the area of advanced materials science, with a special emphasis            on additives to polymers and other industrial and consumer products, taking advantage            of technological advances we have developed in-house and licensed from third parties.            These technologies include a specific focus on nanoscale materials using modifications            to tubular and spherical materials found in clay. Our strategy is to develop patentable            processes and technologies related to these nanoscale materials and to develop products            in the polymers and plastics industries as well as the composites, cosmetics, household            products and agrichemical industries. Our near-term goal is to commercialize our core            technology and application processes utilizing nanotubes.

**Critical Accounting Policies and Estimates**

Our            consolidated financial statements are prepared in accordance with accounting principles            generally accepted in the United States of America. The preparation of these            consolidated financial statements requires us to make assumptions that affect the            reported amounts of assets, liabilities, revenue, costs and expenses, and related            disclosures. Our actual results may differ from these estimates.

We            believe, that of the significant accounting policies described in the notes to our            consolidated financial statements, the following policies involve a greater degree of            judgment and complexity and accordingly; these policies are the most critical to aid in            fully understanding and evaluating our consolidated financial condition and results of            operations.

*Revenue Recognition*

We            have earned nominal operating revenue since our inception (December 22, 2004). This            revenue was generated from the delivery of Pleximer and sample products specifically            formulated for customer applications in various industries in connection with product            development evaluations and as such are considered operating revenue for financial            reporting purposes. We earn and recognize such revenue when the shipment of the sample            products has occurred and when no further performance obligation exists.

*Intangible Assets*

Licenses are initially measured and recorded based on their cost at the            date of their acquisition. We evaluate the recoverability of identifiable intangibles            whenever events or changes in circumstances indicate that an intangible asset’s            carrying value may not be recoverable. Such circumstances could include, but are not            limited to, a significant decrease in fair value of the asset or a significant adverse            change in the extent or manner in which an asset is used. The evaluation of potential            asset impairment requires significant judgments about future cash flows over the life            of the asset under evaluation and actual future results may differ from assumed and            estimated amounts.

*Deferred Taxes*

Deferred tax assets and liabilities are recognized for future tax            consequences attributable to differences between the financial statement carrying            amounts of existing assets and liabilities and their respective tax bases. Deferred tax            assets and liabilities are measured using enacted rates expected to apply when the            differences are expected to be realized. A valuation allowance is recognized if it is            anticipated that some or all of the deferred tax asset may not be realized.

*Share-based compensation*

On            January 1, 2006, we adopted the stock option expensing rules of Statement of Financial            Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” using the            fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based            Compensation” for stock options already granted. We utilized the modified            prospective approach of adoption under SFAS No. 123R. Results for prior periods have            not been restated. We previously accounted for our employee stock option plan under            Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to            Employees.” Accordingly, no stock-based employee compensation cost was reflected            in the statement of operations in reporting periods prior to the first quarter of 2006,            as all options granted had an exercise price equal to the market value of the            underlying common stock on the date of grant. For the years ended December 31, 2007 and            2006, we recorded stock-based compensation costs of $912,006 and $2,970,959,            respectively in accordance with SFAS No. 123(R). The estimated fair value of stock            options granted in 2007 and 2006 were calculated using the Black-Scholes model. This            model requires the

 

28

 

 

use            of input assumptions. These assumptions include expected volatility, expected life,            expected dividend rate, and expected risk-free rate of return.

As            of December 31, 2007, unvested compensation cost for all stock options granted to            employees and consultants was $1.1 million. Future expenses will be recognized through            2010 for these options in accordance with the underlying vesting conditions of each            grant.

**Liquidity and Capital Resources**

As            of December 31, 2007, we had a cash balance of $404,940 and working capital deficit of            $385,951, which reflects the receipt in the first quarter of 2007 of net proceeds of            $3,132,500 from the 8% Senior Secured Convertible Notes, as further described in Note 7            to the financial statements, and the receipt of $300,000 of advances under the TI line            of credit. The total advances outstanding under the TI line of credit have been            reclassified as long term in accordance with the March 7, 2007 “Standstill            Agreement” in which TI agreed to not demand payment for any obligations under            this agreement as long as the Convertible Notes were outstanding, except under defined            circumstances. Since inception on December 22, 2004, our growth has been funded through            a combination of convertible debt from private investors and cash advances from            Technology Innovations, LLC.

We            will need additional funding to execute the 2008 business plan and continue as a going            concern through December 31, 2008. In light of this, management intends to seek            additional sources of cash to be in place and available by May 15, 2008. Our 2008            business plan anticipates the receipt of net proceeds from a future undefined funding            source in the amount of $5 million. We have no commitment for this future capital need            and cannot be assured that additional capital will be available on terms acceptable to            us, or at all. If we fail to secure additional capital, we will be forced to curtail or            discontinue our operations and cease to be a going concern.

**Comparison of Statement of Operations**

**For the years ended December 31, 2007 and 2006**

***Operating Expenses***

Total research and development expenses for the year ended December 31,            2007 was $2,026,743 as compared to $2,034,426 for the year ended December 31, 2006. The            decrease in spending on research and development was primarily due to (1) spending            for consulting services used to develop Pleximer; (2) depreciation of purchased            equipment; (3) salaries and benefits due to increasing employees from 6 to 9;            (4) decrease in costs associated with the filing of patents and (5) decrease            in stock option compensation expense realized due to vesting of grants during the            period, as follows:
|                      |   | **For the year ended** |      | **Variance**  |   |
|---------------------------|--------|------------------------|-----------|---------------|--------|
|                      |   | **December 31,**       |      | **favorable** |   |
|                      |   | **2007**               |      | **2006**      |   | **(unfavorable)** |   |
| Consulting services       |   | $                      | 255,974   |          | $      | 192,779 |   | $ | (63,195 | ) |
| Depreciation              |   |                   | 67,777    |          |   | 17,256 |   |   | (50,521 | ) |
| Salaries & Benefits   |   |                   | 815,491   |          |   | 415,372 |   |   | (400,119 | ) |
| Patent costs              |   |                   | 43,557    |          |   | 179,873 |   |   | 136,316 |   |
| Stock option compensation |   |                   | 539,126   |          |   | 1,038,631 |   |   | 499,505 |   |
| All other                 |   |                   | 304,818   |          |   | 190,515 |   |   | (114,303 | ) |
|                      |   | $                      | 2,026,743 |          | $      | 2,034,426 |   | $ | 7,683 |   |

We            expect that we will continue to invest in research and development and that our            investment may increase during 2008 as we develop commercial applications for Pleximer            and other potential applications for Halloysite. No assurance can be given that such            spending for research and development will result in increased revenue from the sale of            Pleximer or any other application of Halloysite.

Total general and administrative expenses for the year ended December            31, 2007 was $1,708,918 as compared to $4,078,776 for the year ended December 31, 2006.            The decrease in spending on general and administrative was primarily due to            (1) stock option compensation expense realized due to vesting of grants during the            period and approximately $210,000 related to the forfeiture of options which had been            previously expensed in accordance with SFAS No. 123(R); (2) a reduction in            spending for investor and public relations services which were higher in 2006 due to            the Merger

 

29

 

 

completed in December of 2005 as discussed above under “Note            Regarding Merger” (3) an R&D tax rebate for which we qualified; and            (4) salaries and benefits due to decreasing employees from 7 to 4, as            follows:
|                          |   | **For the year ended** |      | **Variance**  |   |
|-------------------------------|--------|------------------------|-----------|---------------|--------|
|                          |   | **December 31,**       |      | **favorable** |   |
|                          |   | **2007**               |      | **2006**      |   | **(unfavorable)** |   |
| Stock option compensation     |   | $                      | 372,880   |          | $      | 1,932,328 |   | $ | 1,559,448 |   |
| Investor and public relations |   |                   | 131,492   |          |   | 569,314 |   |   | 437,822 |   |
| Corporate Tax                 |   |                   | (100,161  | )             |   | 7,725 |   |   | 107,886 |   |
| Salary & Benefits         |   |                   | 409,764   |          |   | 516,861 |   |   | 107,097 |   |
| All other                     |   |                   | 894,943   |          |   | 1,052,548 |   |   | 157,605 |   |
|                          |   | $                      | 1,708,918 |          | $      | 4,078,776 |   | $ | 2,369,858 |   |

We            expect that spending for general and administrative will be relatively constant in            2008, we will need to invest in marketing and sales, investor relations and will likely            incur additional professional fees related to financing activities required if we            succeed in obtaining the additional working capital needed to fund our            operations.

During 2007, the Company was notified that Atlas Mining Company            suspended mining activities at its mining facility which sources halloysite. In            February 2008, the Company initiated legal proceedings against Atlas Mining Company and            is seeking to recover up to $250,000 which had been prepaid to Atlas Mining Company.            Due to this uncertainty, $249,650 of prepaid inventory related to Atlas Mining Company            has been written off by the Company, and shown as an operational expense.

***Other Income (expense)***

Other expense for the year ended December 31, 2007 was $1,890,579 as            compared to $2,764,715 for the year ended December 31, 2006. The table below presents            the components of other expense:
|                           |   | **For the years ended** |       |
|--------------------------------|--------|-------------------------|------------|
|                           |   | **December 31,**        |       |
|                           |   | **2007**                |       | **2006** |   |
| Interest (expense) income, net |   | $                       | (1,890,579 | ) | $ | 5,821 |   |
| Gain (loss) on warrant         |   |                    | —    |   |   | 236,250 |   |
| Financing fees                 |   |                    | —    |   |   | (3,006,786 | ) |
|                           |   | $                       | (1,890,579 | ) | $ | (2,764,715 | ) |

Interest is earned on cash balances held at certain financial            institutions and we pay interest as part of our capital equipment leases arrangements;            interest accrued for the 8% convertible note payable to TI, a related party, as            described in Note 7 to the financial statements; and interest, debt accretion,            amortization of deferred financing cost and adjustments to the registration rights            liability related to the 8% senior secured convertible notes described in Note 7 to the            financial statements. Interest expense and interest income were as follows:
|                            |   | **For the year ended** |       | **Variance**  |   |
|---------------------------------|--------|------------------------|------------|---------------|--------|
|                            |   | **December 31,**       |       | **favorable** |   |
|                            |   | **2007**               |       | **2006**      |   | **(unfavorable)** |   |
| Interest earned on cash         |   | $                      | 61,629     |          | $      | 22,566 |   | $ | 39,063 |   |
| Interest paid on capital leases |   |                   | (4,786     | )             |   | — |   |   | (4,786 | ) |
| Interest to TI note             |   |                   | (70,838    | )             |   | (16,745 | ) |   | (54,093 | ) |
| Interest to 8% senior notes     |   |                   | (220,193   | )             |   | — |   |   | (220,193 | ) |
| Amortization of debt discount   |   |                   | (1,330,073 | )             |   | — |   |   | (1,330,073 | ) |
| Registration rights obligation  |   |                   | (12,128    | )             |   | — |   |   | (12,128 | ) |
| Amortization of financing costs |   |                   | (314,190   | )             |   | — |   |   | (314,190 | ) |
|                            |   | $                      | (1,890,579 | )             | $      | 5,821 |   | $ | (1,896,400 | ) |

 

 

30

 

 

 

On            January 28, 2005, NaturalNano was granted a two-year warrant to purchase up to 750,000            shares of Atlas Mining Inc. common stock at $.40 per share. This warrant was sold in            the third quarter of 2006 generating net proceeds of $506,250 and a realized gain of            $236,250 during the nine months ended September 30, 2006. There is no corresponding            amount in 2007.

Financing fees include warrant expenses related to a stock purchase            agreement with SBI Brightline XIII LLC (“SBI”) as described in Note 7 to            the financial statements.  

The            balance due to TI as of December 31, 2007 was $900,000 as compared to $600,000 as of            December 31, 2006. We and TI agreed that no payments would be made to TI in connection            with this line of credit agreement as long as any of the 8% senior convertible notes            were outstanding.

**Comparison of Liquidity and Capital**

**for the years ended December 31, 2007 and 2006**

*Operating activities*

Net            cash used in operating activities in the years ended December 31, 2007 and 2006 were            $2,855,381 and $2,740,292, respectively. The net loss generated in 2007 was $3,002,277            less than the prior period and non-cash items (depreciation, amortization, stock option            vesting, warrant expense and stock issued for services) were $4,911,387 less than the            prior period in 2006.

Non-cash expenses totaling $1,644,263 for amortization of debt discount            and deferred financing costs were incurred during the year ended December 31, 2007 in            connection with the 8% senior secured convertible debt. The amortization of the            remaining $2,462,355 of debt discount and deferred financing costs will continue as            non-cash expenses through March 2009.

The            decrease in the net loss for the year ended December 31, 2007 reflects reduced spending            in the areas of marketing, communication, conferences and seminars in the first quarter            of 2007, as compared to the comparable period in 2006, offset by increased investment            in headcount and supplies in our research laboratory and staff. The decrease in            accounts payable, payroll and other accrued expenses in the year ended December 31,            2007 reflects growth in our business activity and settlement of liabilities upon            receipt of the convertible debt proceeds since March 2007.

*Investing activities*

Net            cash (used in) provided by investing activities in the years ended December 31, 2007            and 2006 was $(216,137) and $350,726, respectively. Our capital investments during 2007            were related to our research and development efforts. These investments included: a            Thermo NCS analyzer, an air compressor, a bench top tester, an industrial fluidized            bath, an injection molding press and centrifugal mixing equipment for the laboratory.            Capital investments in 2007 reflected $165,765 for research and development and $3,308            for general and administrative activities.

The            growth in the research and development capital assets reflects the four capital lease            agreements entered into in 2007 in connection with expansion of the Rochester            laboratory. These equipment leases reflect the capitalization of $218,586 relating to            the lease of a DMA/TGA, an air mill and twin screw extruder equipment. The leases are            for twenty-four months and include a $1 purchase option at the end of the term. Our            intent is to purchase the equipment at that time. As a result, the leased equipment is            being depreciated over the expected life (five years) of the equipment rather than the            term of the lease. We had capital lease obligations of $115,930 as of December 31, 2007            in connection with these agreements.

During the first quarter of 2007, we issued 160,000 shares of common            stock as payment for leasehold improvements in connection with our office            relocation.

*Financing Activities*

Net            cash provided from financing activities in the years ended December 31, 2007 and 2006            was $3,336,820 and $810,839, respectively. The cash flows during 2007 primarily            reflects the net proceeds received in connection with the 8% senior secured convertible            notes on March 7, 2007.

During the first quarter of 2007, we also received $300,000 in advances            in accordance with the TI line of credit agreement. No additional borrowings are            available under this line of credit agreement that expired on March 31, 2007. On March            7, 2007 in connection with the Loan and Security Agreement with Platinum, Longview and            Platinum Investors, TI agreed that, as long as any notes were outstanding under this            Agreement, TI would not demand repayment on the 2006 line of credit,

 

31

 

 

except as specifically permitted under the Loan and Security Agreement            and in light of this, the borrowing has been reclassified to long term.

During 2007, we recieved net cash advances from affiliated entities for            shared services agreements, of $14,999 and received advances of $169,539 during 2006.            This change in net payables outstanding between affiliates reflects the sharing of            certain networking and consultant services provided among these affiliate entities. Our            disinterested board members review all shared service agreements for arms-length            terms.

During the year ended December 31, 2007, we made capital lease payments            of $38,040. There were no capital leases outstanding in 2006.

During the year ended December 31, 2007, we paid $63,539 in registration            rights liquidated obligations to the holders of the 8% senior convertible notes. The            registration statement for the shares of common stock issuable upon conversion of the            8% senior convertible notes became effective on December 14, 2007. As of December 31,            2007, we accrued $82,489 of registration rights liquidated obligations which are due to            the holders of the 8% senior convertible notes but have not been paid.

We            incurred cash expenses of $160,600 for fees and professional services in connection            with the issuance in March 2007 of the 8% senior secured convertible debt.

During 2007 and 2006, several participants in our incentive stock option            plan exercised their options and provided $34,000 and $41,300, respectively in cash            inflows.

 

32

 

 

 

**Note Regarding Forward-Looking Statements**

This            annual report contains forward-looking statements that involve risks and uncertainties.            These include statements about our expectations, plans, objectives, assumptions or            future events. In some cases, you can identify forward-looking statements by            terminology such as “anticipate,” “estimate,”            “plans,” “potential,” “projects,”            “continuing,” “ongoing,” “expects,”            “management believes,” “we believe,” “we intend”            and similar expressions. These statements involve estimates, assumptions and            uncertainties that could cause actual results to differ materially from those expressed            for the reasons described in this report. You should not place undue reliance on these            forward-looking statements.

You            should be aware that our actual results could differ materially from those contained in            the forward-looking statements due to a number of factors such as:
| **•** | the successful implementation of research and development                        programs;                                                                                                      |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | the ability to demonstrate the effectiveness of our                        technology;                                                                                                          |
| **•** | the timeline for customer accreditation for product                        formulations;                                                                                                        |
| **•** | our ability to enter into strategic partnering and joint                        development agreements;                                                                                         |
| **•** | our ability to competitively market our Pleximer and filled                        tube products;                                                                                               |
| **•** | the terms and timing of product sales and licensing                        agreements;                                                                                                          |
| **•** | the timing and approval of filed and pending patents                        applications;                                                                                                       |
| **•** | the ability to raise additional capital to fund our                        operating and research activities until we generate adequate  cash                        flow from operations; |
| **•** | our ability to attract and retain key personnel                        and;                                                                                                                     |
| **•** | general market conditions.                                                                                                                                                                      |

The            forward-looking statements speak only as of the date on which they are made, and except            to the extent required by federal securities laws, we undertake no obligation to update            any forward-looking statement to reflect events or circumstances after the date on            which the statement is made or to reflect the occurrence of unanticipated events. In            addition, we cannot assess the impact of each factor on our business or the extent to            which any factor, or combination of factors, may cause actual results to differ            materially from those contained in any forward-looking statements.
| **Item 7.** | **Financial Statements** |
|-------------|--------------------------|

Our            consolidated financial statements, together with the reports thereon by our independent            registered public accounting firms, begin on page F-1 of this Form 10-KSB.

 
| **Item 8.** |  

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

 

33

 

 

 

**Changes In and Disagreements with Accountants on Accounting and            Financial Disclosure**

On            January 4, 2008, NaturalNano, Inc. (the “Company”) was notified that            certain partners of Goldstein Golub Kessler LLP (GGK), became partners of McGladrey            & Pullen, LLP in a limited asset purchase agreement and that GGK resigned as            independent registered public accounting firm for the Company. On January 4, 2008,            McGladrey & Pullen, LLP was appointed as the Company’s new independent            registered public accounting firm.

The            audit reports of GGK on the consolidated financial statements of NaturalNano, Inc. and            subsidiary as of and for the year ended December 31, 2006 did not contain an adverse            opinion or a disclaimer of opinion, and were not qualified or modified as to            uncertainty, audit scope or accounting principles.

The            decision to engage McGladrey & Pullen, LLP was approved by the audit committee of            the board of directors.

During the Company’s two most recent fiscal years ended December            31, 2006 and through January 4, 2008, the Company did not consult with McGladrey &            Pullen, LLP on (i) the application of accounting principles to a specified transaction,            either completed or proposed, or the type of audit opinion that may be rendered on the            Company’s financial statements, and McGladrey & Pullen, LLP did not provide            either a written report or oral advice to the Company that McGladrey & Pullen, LLP            concluded was an important factor considered by the Company in reaching a decision as            to any accounting, auditing, or financial reporting issue; or (ii) the subject of any            disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related            instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v)            of Regulation S-K.

In            connection with the audits of the Company's consolidated financial statements for the            fiscal year ended December 31, 2006 and through the date of this Annual Report, there            were: (i) no disagreements between the Company and GGK on any matters of accounting            principles or practices, financial statement disclosure, or auditing scope or            procedures, which disagreements, if not resolved to the satisfaction of GGK, would have            caused GGK to make reference to the subject matter of the disagreement in their reports            on the Company's financial statements for such years, and (ii) no reportable events            within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

 

34

 

 

 
|   | **Item 8A.** | **Controls and Procedures** |
|--------|--------------|-----------------------------|

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL            REPORTING

Management of NaturalNano, Inc. (the "Company") is responsible for            establishing and maintaining an adequate system of internal control over financial            reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities            Exchange Act of 1934, as amended ("Exchange Act"). The Company's internal control over            financial reporting is designed to provide reasonable assurance to our management and            Board of Directors regarding the reliability of financial reporting and the            reliability, preparation and fair presentation of published financial statements. Our            internal control over financial reporting is supported by a program of appropriate            reviews by management, written policies and guidelines, careful selection and training            of qualified personnel, and a written Code of Ethics adopted by our Company's Board of            Directors, applicable to all Company Directors and all officers and employees of our            Company.

Because of its inherent limitations, internal control over financial            reporting may not prevent or detect misstatements and even when determined to be            effective, can only provide reasonable assurance with respect to financial statement            preparation and presentation. Also, projections of any evaluation of effectiveness to            future periods are subject to the risk that controls may become inadequate because of            changes in conditions, or that the degree of compliance with the policies or procedures            may deteriorate.

The            Audit Committee of our Company's Board of Directors meets with the independent public            accountants and management periodically to discuss internal control over financial            reporting and auditing and financial reporting matters. The Audit Committee reviews            with the independent public accountants the scope and results of the audit effort. The            Audit Committee also meets periodically with the independent public accountants without            management present to ensure that the independent public accountants have free access            to the Audit Committee. The Audit Committee's Report can be found in the Definitive            Proxy Statement to be issued in connection with the Company's 2008 Annual Meeting of            Stockholders.

Management, with the participation of our Chief Executive Officer and            Chief Financial Officer, assessed the effectiveness of the Company's internal control            over financial reporting as of December 31, 2007. In making this assessment, management            used the criteria set forth by the Committee of Sponsoring Organizations of the            Treadway Commission (COSO) in Internal Control -- Integrated Framework. Based on            management’s assessment, we believe that the Company maintained effective            internal control over financial reporting as of December 31, 2007.

This            report does not include an attestation report of the Company’s registered public            accounting firm regarding internal control over financial reporting, pursuant to            temporary rules of the Securities and Exchange Commission that permit the Company to            provide only management’s report in this annual report.

 

35

 

 

 

Disclosure Controls and Procedures and Internal Control Over Financial            Reporting:

Disclosure controls and procedures are designed with the objective of            ensuring that information required to be disclosed in the Company's reports filed under            the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as this            report, is recorded, processed, summarized and reported within the time periods            specified in the Securities and Exchange Commission's rules and forms. Disclosure            controls and procedures are also designed with the objective of ensuring that such            information is accumulated and communicated to the Company's management, including the            Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow            timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures:

As            of the end of the period covered by this report, the Company carried out an evaluation,            under the supervision and with the participation of the Company's Chief Executive            Officer and Chief Financial Officer, of the effectiveness of disclosure controls and            procedures as defined in Rules l3a-15(e) and l5d-15(e) of the Exchange Act. Based on            such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have            concluded that as of the end of the period covered by this report, the Company's            disclosure controls and procedures were effective at meeting their            objectives.

Changes in Internal Controls:

There were no changes in the Company's internal controls over financial            reporting that occurred during the Company's most recently completed fiscal quarter            that materially affected, or are reasonably likely to materially affect, the Company's            internal control over financial reporting.
| **Item 8B.** | **Other Information** |
|--------------|-----------------------|

N/A

 

**PART III**
| **Item 9.** | **Directors, Executive Officers, Promoters, Control Persons                        and Corporate Governance; Compliance with Section 16(a) of the Exchange                        Act** |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Our            directors and executive officers are:
| **Name**           |   | **Age** |   | **Position**                                                                       |   | **Date of First Election to****the Board *** |
|--------------------|--------|---------|--------|------------------------------------------------------------------------------------|--------|----------------------------------------------|
| Gary W. Beall      |   | 57      |   | Director                                                                           |   | 6/7/07                                       |
| John F. Lanzafame  |   | 40      |   | Director                                                                           |   | 12/22/04                                     |
| Sharell Mikesell   |   | 64      |   | Director                                                                           |   | 4/21/06                                      |
| Klaus E.T. Siebert |   | 61      |   | Director                                                                           |   | 7/23/07                                      |
| James Wemett       |   | 59      |   | Director                                                                           |   | 7/23/07                                      |
| Cathy A. Fleischer |   | 47      |   | President, Chief Technology Officer, and                        Director |   | 11/2/06                                      |
| Kent A. Tapper     |   | 51      |   | Chief Financial Officer, Treasurer and Secretary                                   |   | n/a                                          |

*All            Board members are elected to serve until the Company’s next annual meeting of            stockholders.

**Gary W. Beall, Ph.D.**is currently a            Professor of Chemistry at Texas State University at San Marcos and Director of The            Center for Nanophase Research. Dr. Beall has more than 20 years experience in            research, development, processing, and commercialization of products utilizing advanced            nanomaterials. After receiving his BS in Chemistry from Tarleton State University in            1972 and his PhD in Physical Chemistry from Baylor University in 1975, he worked at Oak            Ridge National Laboratory, Radian Corp., Weston, Inc., United Catalysts, Inc., founded            Technical Minerals, Inc., and Amcol Intl. inc. before co-founding and becoming Vice            President of Nanocor, Inc. in 1995. He moved to academia in 1999 at Missouri Baptist            College before accepting his current post at Texas State University in 2001. In 2000,            Dr. Beall contributed to and co-edited the first book on polymer/nanoclay            composites, which is now in its third printing. Dr. Beall is on the editorial            board of the Journal of Applied Clay Science, Nanoexpress, and Nanotech Briefs. He has            published more than 90 papers and holds 42 U.S. patents with three pending, of which 27            deal with nanotechnology. He is a member of the American Chemical Society.            Dr. Beall was elected to the Company’s Board of Directors in June            2007.

**John Lanzafame**has served as Chief            Executive Officer, Chief Operating Officer and Vice President of Business Development            of Biophan Technologies, Inc. since April 2006 and currently leads operations and            business development for

 

36

 

 

Biophan. Mr. Lanzafame joined Biophan in September 2004. Until            early 2004, Mr. Lanzafame was employed by STS Biopolymers, Inc., a privately held            medical device company that marketed high performance polymer-based coatings for the            medical device industry, including drug eluting surfaces for devices such as coronary            stents and indwelling catheters. Mr. Lanzafame held a variety of positions with            STS Biopolymers, including positions in research, product development, and sales and            marketing, ultimately leading to his assuming the position of President of STS            Biopolymers beginning in 2003. In 2004, Mr. Lanzafame left STS Biopolymers            following sale of the company to Angiotech Pharmaceuticals. Mr. Lanzafame has            fifteen years experience in the medical device industry, with a background that            includes a bachelor’s degree in chemical engineering and a master’s degree            in industrial engineering. Mr. Lanzafame has been a Director of the Company            since its inception in 2004.

**Sharell L. Mikesell , Ph.D.**was            elected to the Company’s Board of Directors in April 2006.            Dr. Mikesell has served as Co-Chair of the Center for Multifunctional Polymer            Nanomaterials & Devices, Ohio’s first state funded multi-university center            for nanotechnology, since July 2005. In March 2001, he became the first Executive            Director of the Ohio Polymer Strategy Council and continues to serve in that role.            Dr. Mikesell has 30 years of corporate leadership experience in global research            & development and business operations. His background includes experience with            polymer and material technologies in diverse positions with major companies including            General Electric, Owens-Corning, and Advanced Elastomer Systems, L.P., an Exxon-Mobil            subsidiary. Dr. Mikesell’s responsibilities included the global technical            leadership for product, process, and applications development as well as applied            research and technical support to manufacturing and customers worldwide.            Dr. Mikesell has served on several corporate boards and advisory councils            including: Corporate representative to the Industrial Research Institute; Advancement            Council for the College of Polymer Science and Engineering at the University of Akron;            Research Advisory Council of NorTech; Advisory Board of the Ohio Business Development            Coalition; Scientific Advisory Board of UTEK Corporation; Board of Asahi Fiberglass in            Japan, as an advisor to the Center of Photochemistry at Bowling Green State University;            Advisor to the Chemical Engineering Department at the University of West Virginia;            Board of Trustees for the Ohio Polymer Enterprise Development, Inc.; PolymerOhio, Inc.;            the Edison Polymer Innovation Corporation; and the Olivet Nazarene University            Foundation. A native of Ohio, Dr. Mikesell received a Bachelor of Arts in            Chemistry from Olivet Nazarene University, Kankakee, Illinois and a Master of Science            from the Ohio State University, Columbus. Dr. Mikesell received a Ph.D. Degree in            Polymer Science from the University of Akron, Ohio.

**Klaus E.T. Siebert**was elected to the            Company’s Board of Directors in July 2007. He has been a practicing CPA for over            30 years, and has extensive experience with early-stage and developmental businesses.            Since 1998, Mr. Siebert has been Chief Executive Officer of FBC Technologies,            Inc., which since 2004 has been a wholly-owned subsidiary of EC Power, Inc. Since 2004            he has served on the Board of Directors of EC Power, Inc.; he also serves as a director            of several private companies. Since 1986, Mr. Siebert has maintained an accounting            practice serving privately-owned businesses and highly compensated executives of public            firms. He was employed by Price Waterhouse from 1974 until 1980, by the RT French            Company from 1980 to 1983, as Director of Taxes, and Ernst & Whinney            from 1983 to 1986 as a senior tax manager.

**James Wemett**was elected to the            Company’s Board of Directors in July 2007. He is an experienced entrepreneur and            consultant, involved in the formation and growth of numerous private and public            companies. Since 2002, Mr. Wemett has been an independent consultant to Victorian            Times, Inc. and ROC Central, Inc., both of which are privately owned firms. In 1975            Mr. Wemett started ROC Communications, Inc., a retail distributor of electronics            products, which was sold in 2001. Mr. Wemett has been a member of our parent and            majority stockholder, Technology Innovations, LLC, since its inception in 1999, and has            served on the board of OncoVista, LLC, a privately owned oncology company, since June            2007. Mr. Wemett has been an active fundraiser for Camp Good Days, a non-profit            summer camp for children with cancer.

**Cathy A. Fleischer ,            Ph.D.*****,***became the            President and a Director of NaturalNano, Inc. in November 2006, after joining as            Chief Technology Officer in July 2006. The focus of her work since joining            NaturalNano has been on the commercialization of the Company’s technology and the            expansion of its intellectual property portfolio. Dr. Fleischer is a highly            recognized scientist and manager with extensive experience leading diverse technical            organizations and teams to deliver in research, business and manufacturing. During the            last five years, Fleischer led organizations that delivered highly innovative products            and over 200 patents. Dr. Fleischer holds eleven patents individually and has            numerous publications in the fields of polymer materials science, composites, adhesion            and surface science. During the period from February 1992 to June 2006,            Dr. Fleischer held a variety of leadership positions at Eastman Kodak, including            that of Research & Development Director in Polarizer Films from January 2006            to June 2006; Program Manager in Light Management Solutions from July 2004 to            December 2005; Commercialization leader for Optical Display Film polymer from            February 2004 to December 2004; Research Manager in Advanced Flexible            Substrates Lab from December 2000 to July 2004; and, Research Associate in            Manufacturing Research from February 1992 to December 2000. In recent            leadership roles, she was responsible for the research, vision and strategy of joint            development projects with international

 

37

 

 

corporations including project leadership and patent portfolio            development as well as developing technology roadmaps and business cases for new            products. From March 1984 to May 1990, Dr. Fleischer served as Senior            Development Engineer at Rogers Corporation, a specialty polymers and high-technology            company based in Connecticut. Dr. Fleischer received a doctorate degree in Polymer            Science from the University of Connecticut and a master’s degree in Chemical            Engineering from Massachusetts Institute of Technology. Her undergraduate degree in            Bioengineering/Material Science was received at the University of            Pennsylvania.

**Kent A. Tapper**became our Chief Financial            Officer on August 31, 2007. From January 2006 to August 2007, Mr. Tapper was Vice            President, Finance, Sarbanes-Oxley and SEC Compliance for CareGuide, Inc. He served as            CareGuide, Inc.’s Chief Financial Officer from April 2000 to January 2006 and            Chief Information Officer and Vice President, Systems Engineering since July 1995. From            1992 to 1995, Mr. Tapper served as Product Manager, Audio Response and Call Center            Platforms for Northern Telecom, Inc. From 1983 to 1992, Mr. Tapper held Product            Manager, Systems Engineering Manager and various engineering management positions with            Northern Telecom.

**The            Board and Committees of the Board**

The            standing committees of the Board are the Audit Committee and the Compensation            Committee. The Board does not currently have a nominating committee and has not            established specific procedures for selecting candidates for director. However,            directors are currently nominated by a majority vote of the Board. There is also no            established procedure for shareholder communications with members of the Board or the            Board as a whole. However, shareholders may communicate with the investor relations            department of the Company and such communications are either responded to immediately            or are referred to the president or chief financial officer of the Company for a            response.

**Audit Committee**The Audit Committee is            currently composed only of Mr. Siebert. The responsibilities of the Audit            Committee are more fully set forth in the Audit Committee Charter which the Board            adopted in December 2005. The Audit Committee Charter has been posted on our            website at*www.naturalnano.com*. The Audit            Committee reviews with the independent accountants the results of the audit engagement,            approves professional services provided by the accountants including the scope of            non-audit services, if any, and reviews the adequacy of our internal accounting            controls. The Board has determined that Mr. Siebert qualifies, by reason of his            business experience and training, as an audit committee financial expert.

**Compensation Committee**The Compensation            Committee is composed of Messrs. Beall and Lanzafame. The responsibilities of the            Compensation Committee are more fully set forth in the Compensation Committee Charter            which the Board adopted in December 2005. The Compensation Committee Charter has            been posted on our website at*www.naturalnano.com*.

**Potential Conflicts of Interest**

One            of the members of our Board of Directors, James Wemett is an equity holder of            Technology Innovations, LLC, which owns 56.3% of our outstanding common stock.            Technology Innovations is a significant equity holder of Biomed Solutions            LLC, a company engaged in the business of identifying and acquiring for exploitation            technologies in the biomedical field. John Lanzafame, another member of our Board,            is an executive officer of Biophan Technologies, Inc., a company with whose            wholly-owned subsidiary, Nanolution, LLC; we have a joint research and development            agreement for the development of drug delivery and medical applications utilizing            nanotechnology discoveries.

Because of the nature of our business and the business of these other            entities, the relationships of these directors with these other entities may give            rise to conflicts of interest with respect to certain matters affecting us. Potential            conflicts may not be resolved in a manner that is favorable to us. We believe it is not            possible to predict the precise circumstances under which future potential conflicts            may arise and therefore intend to address potential conflicts on a case-by-case basis.            Under Nevada law, directors have a fiduciary duty to act in good faith and with a view            to the best interests of the corporation.

Our            disinterested directors will make all determinations and decisions relating to issues            involving Technology Innovations, LLC and other affiliates that have been described            above, without the vote of Mr. Wemett (in matters involving Technology            Innovations) or Mr. Lanzafame (in matters involving Biophan Technologies, Inc.).            In addition, our Board continually acts to ensure that all directors act at all            times in accordance with their fiduciary duties to the Company. To the best of our            knowledge, no other person or entity affiliated with any of our directors, executive            officers or 10% stockholders holds any beneficial interest in NaturalNano,            Inc.

 

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**Compensation of the Board**

Directors who are also our employees do not receive additional            compensation for serving on the Board or its committees. Non-employee directors, for            their services as directors, are paid an annual fee of $8,000. Mr. Siebert            receives an additional $5,000 annually for serving as the Chairman of the Audit            Committee. Otherwise, no additional compensation is paid to any director for serving as            a member of any committee of the Board. In addition, non-employee directors receive an            automatic annual option grant of 50,000 common stock options as provided under the            Company’s 2005 Incentive Stock Plan. All directors are reimbursed for their            reasonable expenses incurred in attending all board meetings. We maintain directors and            officers liability insurance.

The            following table shows compensation for the fiscal year ended December 31, 2007 to            our directors who are not also named executive officers:

DIRECTOR COMPENSATION (1)

 
| **Name**           |   | **Fees Earned or Paid in Cash ($)** |   | **Option Awards ($)(2)** |   | **Total ($)** |   |
|--------------------|--------|-------------------------------------|--------|--------------------------|--------|---------------|--------|
| Beall, Gary(3)     |   | $                                   | 4,000  |                     | $      | 4,843         | (4)    | $ | 8,843 |   |
| Katz, Steve(5)     |   |                                | 9,750  |                     |   | 22,825        | (6)    |   | 32,575 |   |
| Lanzafame, John    |   |                                | 10,000 |                     |   | 61,936        | (7)    |   | 71,936 |   |
| Mikesell, Sharell  |   |                                | 10,000 |                     |   | 22,825        | (8)    |   | 32,825 |   |
| Seibert, Klaus(9)  |   |                                | 3,250  |                     |   | 4,402         | (10)   |   | 7,652 |   |
| Weiner, Michael(5) |   |                                | 6,000  |                     |   | 61,936        | (11)   |   | 67,936 |   |
| Wemett, James(9)   |   |                                | 2,000  |                     |   | 4,402         | (12)   |   | 6,402 |   |

(1)            Certain columnar information required by Item 402(f)(2) of Regulation S-B has been            omitted for categories where there was no compensation awarded to, or paid to, the            named directors during the fiscal year ended December 31, 2007.

(2)            The reported amounts reflect the dollar amounts recognized for financial statement            reporting purposes for the fiscal year ended December 31, 2007, in accordance with FAS            123R, of awards pursuant to our 2005 Stock Incentive Plan and 2007 Stock Incentive Plan            and may include amounts from awards granted both in and prior to the fiscal year ended            December 31, 2007. As required, the amounts shown exclude the impact of any forfeitures            related to service-based vesting conditions. The actual amount realized by the director            will likely vary based on a number of factors, including the Company’s            performance, stock price fluctuations and applicable vesting.

(3)  Elected to the Board June 7, 2007.

(4)            An option to purchase 50,000 shares at an exercise price of $0.26 per share was granted            to Dr. Beall on June 6, 2007. This option will become fully vested and            exercisable on the first anniversary of the date of grant and has a termination date of            June 6, 2017.

(5)            Resigned on July 20, 2007.

(6)            At December 31, 2007, Mr. Katz held options for the purchase of an aggregate            of 250,000 shares, all of which options were exercisable.

(7)            At December 31, 2007, Mr. Lanzafame held options for the purchase of an            aggregate of 450,000 shares, all of which options were exercisable.

(8)            At December 31, 2007, Dr. Mikesell held options for the purchase of an            aggregate of 100,000 shares, all of which options were exercisable.

(9)  Elected to the Board July 23, 2007.

(10)            An option to purchase 50,000 shares at an exercise price of $0.21 per share was granted            to Mr. Seibert on July 23, 2007. This option will become fully vested and            exercisable on the first anniversary of the date of grant and has a termination date of            July 23, 2017.

(11)            At December 31, 2007, Mr. Weiner held options for the purchase of an            aggregate of 183,333 shares, all of which were exercisable.

 

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(12)            An option to purchase 50,000 shares at an exercise price of $0.21 per share was granted            to Mr. Wemett on July 23, 2007. This option will become fully vested and            exercisable on the first anniversary of the date of grant and has a termination date of            July 23, 2017.

**Code of Ethics**

The            Company has adopted a Code of Ethics for Senior Executive and Financial Officers that            is applicable to our principal executive officer and principal financial officer and            can be viewed on our website*www.naturalnano.com*.

**Limitation on Liability and Indemnification of Directors and            Officers**

Our            articles of incorporation provide that no director or officer shall have any liability            to the Company if he or she acted in good faith and with the same degree of care and            skill as a prudent person in similar circumstances.

Our            articles of incorporation and bylaws provide that we will indemnify our directors and            officers and may indemnify our employees or agents to the fullest extent permitted by            law against liabilities and expenses incurred in connection with litigation in which            they may be involved because of their offices. However, nothing in our articles of            incorporation or bylaws protects or indemnifies a director, officer, employee or agent            against any liability to which he would otherwise be subject by reason of willful            misfeasance, bad faith, gross negligence or reckless disregard of the duties involved            in the conduct of his or her office. To the extent that a director has been successful            in defense of any proceeding, the Nevada Revised Business Corporations Act provides            that he or she shall be indemnified against reasonable expenses incurred in connection            with the proceeding.

**Scientific Advisory Board**

The            Company’s Scientific Advisory Board (the “SAB”) is a significant            source of technical and scientific expertise and is an integral part of the            Company’s technology development and product commercialization team. The advisory            board’s purpose is to inform and guide our management on relevant nanotechnology            research, development, validation and evaluation in the global marketplace. The            advisory board includes experts in a broad range of scientific disciplines including            materials science, nanocomposites, plastics and polymers, cosmetics, pharmaceutical,            and other related nanotechnologies. These industry experts have agreed to act as a            forum for the exchange of ideas on an ad-hoc basis through conference calls and on-site            meetings and at relevant industry conferences. The agreement with each member of this            board includes confidentiality and non-disclosure covenants as well as technology            assignment relevant to the subject matter of the agreement.

The            members of our Scientific Advisory Board serve without fixed cash compensation but are            each entitled to receive 30,000 stock options upon their appointment to this advisory            board that are subject to vesting as follows: 10,000 options vesting in            December of the year of grant and 20,000 options vesting in December of the            year following the date of grant, provided that the option holder remains on the            Scientific Advisory Board through these vesting dates. The option exercise price for            these grants will be equal to the closing market price of the Company’s stock on            the date of grant and generally have ten year terms.

Typically SAB members attend three or four advisory board meetings per            year. Each of these meetings has been for one to two days of shared evaluation of            Company results and opportunities, as well as individual meetings with our technical            team. Five of these SAB advisors, Messrs. Arthur, Corkery, Giannelis, Hickman and            Kroto, provide additional consulting services in their respective areas of expertise as            requested by the Company and are compensated for such services at their customary            rates. The Company made the following payments to the SAB members (or their affiliates)            for consulting services during the year ended December 31, 2007: Mr. Arthur:            $63,000; Dr. Corkery: $40,000; Dr. Giannelis: $27,000; Mr. Hickman:            $64,000; and Dr. Kroto: $9,000.

The            members of the NaturalNano Scientific Advisory Board are:

**David J. Arthur, Chasm Technologies**

Mr. Arthur has more than twenty five years experience            commercializing products utilizing advanced materials, working at Rogers Corporation,            AT Cross Company, TPI Composites, Helix Technology Corporation and Eikos, Inc. He is            the co-founder of Chasm Technologies, Inc. a consulting firm that specializes in            helping start-up companies commercialize nanotechnology. He is also CEO of SouthWest            NanoTechnologies, Inc., a manufacturer of single wall carbon nanotubes. Mr. Arthur            has a BS in chemical engineering from Tufts University, a MS in chemical engineering            from the University of Connecticut, and an MBA from Northeastern University. He is            founding member of American Institute of Chemical

 

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Engineers, Materials Research Society, Society for the Advancement of            Material and Process Engineering, and Society for Information Display. Mr. Arthur            is an inventor on more than twenty five patents.

**Robert Corkery, Ph.D., YKI, Ytkemiska Institute AB-Institute for            Surface Chemistry, Stockholm**

Dr. Corkery is globally recognized as a key physical chemistry and            materials science problem solver. He has been granted patents in nanozeolite chemical            technology and porous materials technology with four patents pending in materials            science technology. Dr. Corkery is the Area Manager for Nanostructured Materials            at the YKI, Institute for Surface Chemistry in Stockholm, Sweden, one of the leading            surface chemistry institutes in the world. Dr. Corkery’s research is aimed            at technical understanding and breakthrough, new materials discovery and industrial            innovation in the areas of nano- and bio-nanotechnologies. He was formerly a research            scientist with The Procter & Gamble Company and was leader of the company’s            corporate colloid laboratory and was responsible for developing nanostructure,            biomembrane and complex fluid technologies. Dr. Corkery received his Bachelor of            Science degree in Geology and Geophysics from the Australian National University as            well as his Ph.D. in Physical and Materials Science where he was devoted entirely to            nanotech and included extensive experimental and theoretical work on nanostructured            clays, including halloysite. Dr. Corkery carried out postdoctoral research at the            Australian National University as well as at the University of Lund in            Sweden.

**Emmanuel P. Giannelis, Ph.D., Professor of Engineering and            Director of Material Science and Engineering at Cornell University**

Dr. Giannelis is internationally recognized as a pioneer and one of            the leading experts in polymer nanocomposites. He is the Walter R. Reed Professor of            Engineering and Director of Materials Science and Engineering at Cornell University. He            is also a member of the Fields of Chemistry and Chemical Biology and Chemical and            Biomolecular Engineering at Cornell. His research interests range from synthesis of new            nanostructured materials to characterization and property evaluation and include            polymer nanocomposites, nanocomposite electrolytes, nanobiohybrids and nanofluids.            Dr. Giannelis has served on the editorial boards of*Chemistry of Materials*and*Macromolecules*and currently serves on the            editorial boards of*Polymer*and*Small*. He is the            author or co-author of over 135 papers and 9 patents and is listed as one of the top 25            cited authors on Nanotechnology and a Highly-Cited Author in Materials Science by            Thompson Scientific (formerly Thompson ISI), an information provider to researchers and            scholars. He received a Bachelor of Science degree in Chemistry from the University of            Athens, Greece and a PhD in Inorganic Chemistry from Michigan State            University.

 

**John Hickman, President and CEO of Plastech Consulting,            Inc.**

John            Hickman is founder, president and chief executive officer of Ohio-based Plastech            Consulting, Inc. (PCI). Founded in 1988, PCI is a full service productivity-based            engineering firm providing state-of-the-art solutions to the challenges of            today’s plastic products. Mr. Hickman has over 34 years in the polymer            industry in management, engineering and consultation. He has held key engineering and            management positions with Weatherchem Corporation, Scott & Fetzer, Carlisle and ITT            before founding PCI. Mr. Hickman has over 30 trade secrets and four polymer            component patents currently in practice, with several pending. He has been involved in            multiple turn-around situations, mostly involving polymer-based companies. One such            company under his management, Weatherchem Corporation, was recognized by Case Western            Reserve University’s Weatherhead School of Management as being one of the 100            fastest growing companies in northeast Ohio. Mr. Hickman has significant hands-on            experience with nanocomposites, productivity programs, product design/development,            concurrent engineering, team building. Labor partnerships, engineering value            assessments, market analysis, management evaluations and advanced manufacturing and            total business evaluations. Mr. Hickman has a background in chemical engineering            from Ohio State University and an MBA from Case Western Reserve University, with            management courses beyond the Master’s program. A significant portion of            Mr. Hickman’s experience in the polymer industry was obtained on the            manufacturing floor, directing a problem-solving environment. In addition,            Mr. Hickman completed several assignments as an executive advisor to students in            the nationally recognized MBA program at Case Western Reserve University and served as            the Co-Chairman of the Technology Committee on the PolymerOhio, Inc. board; on which he            is currently a trustee. Mr. Hickman participates on various boards of directors            for privately held companies and teaches several plastics-related courses for the Akron            Polymer Training Center as well as other clients. The Akron Section of the Society of            Plastics Engineers inducted Mr. Hickman into the plastics Hall of Honor located at            the University of Akron.

**Raymond Kurzweil, Kurzweil Technologies, Inc.**

Dr. Kurzweil has been described as “the restless            genius” by the*Wall Street Journal*and “the ultimate thinking machine” by*Forbes.*In addition,*Inc.*magazine ranked him #8 among            entrepreneurs in the United States calling him the “rightful heir to Thomas            Edison,” and PBS included Dr. Kurzweil as one of 16 “revolutionaries            who made America.” Dr. Kurzweil is the recipient of the $500,000            MIT-Lemelson Prize, the world’s largest prize for innovation. In 1999, he            received the National

 

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Medal of Technology, the United States’ highest honor in            technology. In 2002, he was inducted into the National Inventor’s Hall of Fame            established by the US Patent Office. As one of the leading inventors of our time,            Dr. Kurzweil has worked in such areas as music synthesis, speech and character            recognition, reading technology, virtual reality and cybernetic art. He was the            principal developer of the first omni-font optical character recognition, the first            print-to-speech reading machine for the blind, the first CCD flat-bed scanner, the            first text-to-speech synthesizer, the first music synthesizer capable of recreating the            grand piano and other orchestral instruments, and the first commercially marketed            large-vocabulary speech recognition.

**Sir Harold W. Kroto, Nobel Laureate and Francis Eppes Professor            for the Department of Chemistry and Biochemistry at Florida State            University**

Dr. Kroto received the 1996 Nobel Prize for Chemistry, along with            colleagues Richard Smalley and Robert Curl, Jr. for the discovery of a new form of            carbon, C60, considered one of the most important cornerstones in the development of            Nanoscience. Much of today’s nanotechnology research and commercialization            focuses on the tubes and wires derived from these spherical carbon molecules, named            “buckyballs.” His co-discovery of fullerenes represented a revolution in            material science and helped usher in the Nanotechnology age. In 2004, Dr. Kroto            was named the Francis Eppes Professor for the Department of Chemistry and Biochemistry            at Florida State University. Prior to this, Dr. Kroto taught at the University of            Sussex in England for 37 years. In 2001, he won the Royal Society’s prestigious            Michael Farady Award, given annually to a scientist who has done the most to further            public communication of science, engineering, or technology in the United Kingdom.            Dr. Kroto has contributed major research in spectroscopy, liquid-phase            interactions, and quantum chemistry.

**Duncan Moore, Professor of Optical Engineering and Business            Administration at University of Rochester**

Dr. Moore is a Professor of Optical Engineering and Business            Administration at the University of Rochester. From 1997 to 2001, Dr. Moore served            as Associate Director for technology in the White House Office of Science and            Technology Policy for the Clinton Administration. He also served as Science and            Technology advisor to Senator John D. Rockefeller IV. Dr. Moore is the Rudolf and            Hilda Kingslake Professor of Business and Administration and Entrepreneurship at the            Simon Graduate School of Business. He is currently working on several advanced projects            including the James Webb Space Telescope, which will be the replacement for the Hubble            telescope. From 2002 until 2004, Dr. Moore served as President and Chief Executive            Officer of the Infotonics Technology Center, Inc. an industry, academia and            governmental partnership fostering cutting-edge research prototyping of new technology            and economic development in Upstate New York State. Dr. Moore founded            Rochester-based Gradient Lens Corp., which makes and sells industry boroscopes. Other            major areas of Dr. Moore’s research include computer-aided design for            manufacturing methods, the manufacture of optical systems, medical optics and optics            for minimally invasive surgery, and optical instrumentation. He serves on the Board of            Trustees of the Rochester museum and Science Center. Dr. Moore earned a doctorate            and master degree in Optics from the University of Rochester. His undergraduate degree            was received from the University of Maine in Physics. Dr. Moore was elected to the            National Academy of Engineering in 1998.

**Compliance with Section 16(a) of the Act**

Section 16(a) of the Securities Exchange Act of 1934, as amended (the            “Exchange Act”) requires our executive officers and directors and persons            who own more than ten percent of our common stock to file reports of ownership and            changes in ownership with the SEC. Such executive officers, directors and greater than            ten percent stockholders are also required by SEC rules to furnish us with copies of            all Section 16(a) forms they file. Based on information supplied to the Company and            filings made with the SEC, during the fiscal year ended December 31, 2007, the            following Section 16(a) filings were made late by our directors            and officers:
| Reporting Person   |   | Form   |   | Transaction Date |   | Filing Date |
|--------------------|--------|--------|--------|------------------|--------|-------------|
| Cathy A. Fleischer |   | Form 4 |   | 3/07/07          |   | 3/12/07     |
| Kathleen Brown     |   | Form 4 |   | 8/17/07          |   | 10/03/07    |
| Kathleen Brown     |   | Form 4 |   | 11/05/07         |   | 11/15/07    |

 

 

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| **Item 10.** | **Executive Compensation** |
|--------------|----------------------------|

**Summary Compensation Table**

The            table set forth below summarizes the compensation earned by our named            executive officers in 2007 and 2006 *.
| **Name**                           |   | **Year** |   | **Salary** |    | **Bonus(a)** |   | **Option Awards (b)** |   | **All Other Compensation (c)** |    | **Securities Underlying Options (#)** |   | **Total ($)** |   |
|------------------------------------|--------|----------|--------|------------|---------|--------------|--------|-----------------------|--------|--------------------------------|---------|---------------------------------------|--------|---------------|--------|
| Cathy Fleischer, President and CTO |   | 2007     |   | $          | 180,000 |         | $      | 10,000                |   | $                              | 250,320 |                                  | $      | 8,539         |   | 1,200,000 |   | $ | 448,859 |   |
|                               | **     | 2006     |   |       | 53,100  |         |   | —               |   |                           | 466,759 |                                  |   | —       |   | 1,140,000 |   |   | 519,859 |   |
| Kathleen Browne, CFO               | **     | 2007     |   |       | 114,934 |         |   | —               |   |                           | 23,330  |                                  |   | 97,334        |   | 200,000 |   |   | 235,598 |   |
|                               |   | 2006     |   |       | 135,000 |         |   | 20,000                |   |                           | — |                                  |   | 80,000        |   | — |   |   | 235,000 |   |
| Kent Tapper, CFO                   | **     | 2007     |   |       | 43,077  |         |   | —               |   |                           | 90,574  |                                  |   | —       |   | 750,000 |   |   | 133,651 |   |
|                                    |        |          |        |            |         |              |        |                       |        |                                |         |                                       |        |               |        |  |  |  |  |  |  |

 
| *  | Certain columnar information required by Item 402(a) (2) of                        Regulation SB has been omitted for categories where there has been no                        compensation awarded to, or paid to, the named executive officers required                        to be reported in the table during the periods presented.                                                                     |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | Reflects employment for a partial year. Ms. Fleisher joined                        the Company as CTO in July of 2006 with base annual salary of $120,000;                        Ms. Browne resigned in August 2007 at which time her base annual                        salary was $135,000 and Mr. Tapper joined the Company in August 2007 with                        base annual salary of $140,000. |

(a)            Cash bonuses were awarded Ms. Fleischer and Ms. Browne upon determination by the            Board’s Compensation Committee that they had achieved certain performance            objectives set out as the criteria for bonus awards in their respective employment            agreements. Ms Fleischer’s bonus was paid upon the execution of the            Company’s first Joint Development Agreement. Ms. Browne’s bonus was paid            upon completion of (i) the Company’s common stock being listed on the OTCBB, (ii)            the Company’s common stock traded at an average price above $1.00 per share for a            period of more than 30 days and (iii) the Company demonstrated progress in achieving            the following milestones of its operating plan: (a) completion of the merger with            Cementitious Materials, Inc. in December 2005 and (b) initial filing of a registration            statement on Form SB-2 completed in April 2006.

(b)            The amounts in the column “Options Award” reflect the dollar amount            recognized for financial statement reporting purposes in accordance with FAS 123R, for            option awards granted pursuant to, and outside of, the NaturalNano Incentive            Compensation Plans. Assumptions used in the calculation of these amounts are included            in Note 8 “Incentive Compensation Plan” to the Company’s consolidated            financial statements for the year ended December 31, 2007.

(c)            The amounts in the column “All Other Compensation” reflect the following            items:
|   | **•** | During 2007, Ms. Browne realized $44,000 of income from                        the purchase of 300,000 shares of the Company’s Common Stock pursuant                        to the 2005 Incentive Stock Plan and performed financial services for our                        principal stockholder, Technology Innovations, LLC, as well as certain                        of its affiliates. Ms. Browne earned cash remuneration of $36,000 and                        non-cash remuneration of $17,334 directly from these entities in connection                        with such services. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | During 2006, Ms. Browne performed financial services                        for our principal stockholder, Technology Innovations, LLC, and                        certain of its affiliates. Ms. Browne earned cash remuneration of                        $54,000 and non-cash remuneration of $26,000 directly from these entities                        in connection with such services.                                                                                                                                                                                                       |
|   | **•** | Dr. Fleischer was paid $8,539 retro-actively to the period                        beginning November 2, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

**Stock Options**

On            September 23, 2005, the Board of Directors adopted the NaturalNano, Inc. 2005            Stock Incentive Plan (the “2005 Plan.”) The 2005 Plan provides for            incentive and non-qualified stock options to employees, the grant of non-qualified            options to selected consultants and to directors and advisory board members. The 2005            Plan is administered by the Compensation Committee of the Board of Directors and            authorizes the grant of 14,000,000 shares. The Compensation Committee determines the            employees and consultants who participate under the Plan, the terms and conditions of            options, the option price, the vesting schedule of options and other terms and            conditions of the options granted pursuant thereto. As

 

43

 

 

of            December 31, 2007 the Company had options for 12,144,000 shares of common stock            outstanding under the 2005 Plan; certain of these options were not subject to the Plan            as further discussed, below.

 

On            October 29, 2007, the Board of Directors adopted the NaturalNano, Inc. Amended and            Restated 2007 Stock Incentive Plan (the “2007 Plan.”) The 2007 Plan            provides for incentive and non-qualified stock options to employees, the grant of            non-qualified options to selected consultants and to directors and advisory board            members. The 2007 Plan is administered by the Compensation Committee of the Board of            Directors and authorizes the grant of 17,000,000 shares. The Compensation Committee            determines the employees and consultants who participate under the Plan, the terms and            conditions of options, the option price, the vesting schedule of options and other            terms and conditions of the options granted pursuant thereto. As of December 31,            2007 the Company had options for 6,245,000 shares of common stock outstanding under the            2007 Plan; certain of these options were not subject to the Plan as further discussed,            below.

In            addition to options granted under the 2005 Plan and 2007 Plan, the Company has made            grants, to one executive officer and one member of our Scientific Advisory Board, of an            aggregate of 90,000 common stock options, outside of these plans. These grants include            vesting criteria commencing from the grant date, an exercise price of $0.10 per share            and expiration dates varying from five to ten years from the date of grant. These            options were granted outside the plan primarily because their exercise price was less            than the market price of our common stock on the date of grant and the plan does not            permit the grant of options at below-market prices. The Company does not anticipate            granting options outside of its plans in the future.

 

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**Outstanding Equity Awards At            December** **31,            2007**

The            following table summarizes information concerning outstanding equity awards held by the            named executive officers at December 31, 2007.
|               |   | **Stock Option Awards**   |   |
|--------------------|--------|---------------------------|--------|
|               |   | **Securities underlying** |   | **Securities underlying** |   | **Option** |   | **Option** |   |
|               |   | **unexercised options**   |   | **unexercised options** |   | **Exercise** |   | **Expiration Date** |   |
| **Name**           |   | **(#)Exercisable**        |   | **(#)Unexercisable** |   | **Price($)** |   |   |   |
| Cathy A. Fleischer |   | 300,000                   |   | 900,000 |   | $ | 0.25 |   | 3/1/2017 |   |   |
|               |   | 13,333                    |   | 26,667 |   |   | 0.10 |   | 7/24/2016 |   |   |
|               |   | 33,333                    |   | 66,667 |   |   | 1.06 |   | 7/24/2016 |   |   |
|               |   | 666,667                   |   | 333,333 |   |   | 0.42 |   | 11/16/2016 |   |   |
|               |   |                      |   |   |   |   |   |   |   |   |   |
| Kathleen A. Browne |   | 200,000                   |   | — |   | $ | 0.175 |   | 2/29/2008 |   |   |
|               |   | 100,000                   |   | — |   |   | 0.05 |   | 3/1/2015 |   |   |
|               |   | 200,000                   |   | — |   |   | 0.05 |   | 7/1/2015 |   |   |
|               |   |                      |   |   |   |   |   |   |   |   |   |
| Kent Tapper        |   | —                   |   | 750,000 |   | $ | 0.175 |   | 8/31/2012 |   |   |
|                    |        |                           |        |  |  |  |  |  |  |  |  |  |

**Employment Agreements**

We            have employment agreements with each of Cathy A. Fleischer, President and Chief            Technology Officer, and Kent A. Tapper, Chief Financial Officer, Secretary and            Treasurer.

Dr. Fleischer’s Employment Agreement, which was entered into            in connection with her appointment in July 2006 as our Senior Research Scientist,            provides for a base annual salary of $120,000. Dr. Fleischer’s current base            salary as President and CTO is $180,000.

Pursuant to her Employment Agreement, Dr. Fleischer received two            stock options. The first option allows her to purchase up to 100,000 shares of our            common stock at an exercise price equal to the fair market value of the shares on the            date of her employment; this option grant was made under the NaturalNano, Inc. 2005            Incentive Stock Option Plan. The second option, which is not governed by a            stockholder-approved plan, entitles Dr. Fleischer to purchase up to an additional            40,000 shares of our common stock at an exercise price of $0.10 per share, which was            in-the-money by an aggregate of $38,400 on the date of grant as the result of such            options having an exercise price below the market price of our common stock on the date            of grant. Both of these options vest annually over three years commencing on the first            anniversary of Dr. Fleischer’s employment and continuing each year            thereafter until the entire grant has vested. Any unvested portion of the options            expire upon termination of Dr. Fleischer’s employment for any reason.

Dr. Fleischer’s Employment Agreement is terminable by either            party upon 90 days’ written notice or by us for cause or upon            Dr. Fleischer’s death or disability. As a condition of her employment,            Dr. Fleischer also signed our standard Confidential Information, Invention and            Non-Competition Agreement.

Under his Employment Agreement, Mr. Tapper will receive a base            salary of $140,000 per year, which will be increased to $155,000 per year upon the            closing of a financing transaction that provides gross proceeds to us of at least $5            million. Mr. Tapper’s base salary is subject to annual review and            adjustment. The Employment Agreement also provides that Mr. Tapper will be            eligible for bonuses in our discretion; we have not established any specific criteria            upon which we would make a decision to make a bonus payment to Mr. Tapper. In            connection with his employment, we have granted to Mr. Tapper an option under our            Amended and Restated 2007 Incentive Stock Plan to purchase up to 750,000 shares of our            Common Stock at a price per share equal to the closing price on August 31, 2007, which            option vests in three equal annual installments beginning on the first anniversary of            the grant. The Employment Agreement provides that Mr. Tapper may be eligible for            future stock option grants on the same basis as similarly situated            employees.

Mr. Tapper’s Employment Agreement has an initial term of one            year and renews automatically for additional terms of one year each. The Employment            Agreement may be terminated by either party. If the Employment Agreement is terminated            by us without cause or by Mr. Tapper for “Good Reason” (as such term is            defined in the Employment Agreement), and conditioned upon Mr. Tapper’s            execution at that time of a Separation Agreement and Release in form acceptable to us,            we

 

45

 

 

will            continue to pay Mr. Tapper his then-effective base salary for six months and will            pay him a pro rated portion of any bonus he would have earned had he remained employed;            if he timely elects and remains eligible for continued health care coverage under            COBRA, we will continue to pay that portion of the COBRA premiums that we had been            paying prior to the date his employment terminated for so long as he receives severance            payments or until he is eligible for coverage under another employer’s plan,            whichever period is shorter.

Both            Employment Agreements contain other conventional terms covering such matters as            vacation time and reimbursement of expenses.

Employees of the Company, from time to time spend a portion of their            time on the business affairs of Technology Innovations, LLC and its affiliates. In such            situations, the individual is paid directly by the affiliate receiving the service or            NaturalNano receives, as reimbursement, a percentage of their salary and benefits. The            services provided by these individuals include consultations in the followings areas:            finance, marketing and business strategy, and technology application. Our Board of            Directors reviews these arrangements on an annual basis and our disinterested directors            monitor the relevant circumstances that could result in conflicts of interest between            the Company and the related affiliate.
| **Item 11.** | **Security Ownership of Certain Beneficial Owners and                        Management and Related Stockholder Matters** |
|--------------|---------------------------------------------------------------------------------------------------------------------------|

The            following table sets forth certain information as of March 31, 2008 with respect to            beneficial ownership of our common stock by each stockholder known by us to be the            beneficial owner of more than 5% of our common stock and by each of our directors and            executive officers and by all of the directors and executive officers as a group.            Unless otherwise indicated, the address of each of the persons below is c/o            NaturalNano, Inc., 15 Schoen Place Pittsford, New York 14534. Unless otherwise            indicated in the footnotes, shares are owned of record and beneficially by the            person.

For            purposes of the following table, a person is deemed to be the beneficial owner of any            shares of common stock (a) over which the person has or shares, directly or indirectly,            voting or investment power, or (b) of which the person has a right to acquire            beneficial ownership at any time within 60 days after March 31, 2008. “Voting            power” is the power to vote or direct the voting of shares and “investment            power” includes the power to dispose or direct the disposition of            shares.
| **Name and Address**

**of Beneficial Owner**                                         |   | **Number of Shares**

**Beneficially Owned** (1)  |       | **Percent of**

**Class** (2)  |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|------------|------------------------------------------|--------|
| *Directors and Executive Officers*:                                                   |   |                                                   |       |                                |   |
| Gary W. Beall                                                                         |   |                                                        | 0     |                                     |   | * |   |
| John F. Lanzafame(3)                                                                  |   |                                                        | 550,000    |                                     |   | * |   |
| Sharell L. Mikesell(3)                                                                |   |                                                        | 100,000    |                                     |   | * |   |
| Klaus E. T. Siebert                                                                   |   |                                                        | 0          |                                     |   | * |   |
| James Wemett (4)                                                                 |   |                                                        | 518,710    |                                     |   | * |   |
| Cathy A. Fleischer(3)                                                                 |   |                                                        | 2,243,333  |                                     |   | 1.8 | % |
| Kent A. Tapper)                                                                       |   |                                                        | 660,000    |                                     |   | * |   |
| All Directors and Executive Officers as a group (7                        persons)(3) |   |                                                        | 4,072,043  |                                     |   | 3.2 | % |
|                                                                                  |   |                                                        |       |                                     |   |   |   |
| *Other 5% Beneficial Owners*:                                                         |   |                                                        |       |                                     |   |   |   |
|                                                                                  |   |                                                        |       |                                     |   |   |   |
| Technology Innovations, LLC(3)

15 Schoen Place                                       |   |                                                        |       |                                     |   |   |   |
| Pittsford, NY 14534                                                                   |   |                                                        | 70,303,189 |                                     |   | 56.3 | % |
|   | *   Less than 1% |
|--------|-----------------------|
| 1) | Except as set forth below, the persons named in the table                        have sole voting and investment power with respect to all shares shown as                        beneficially owned by them.                                                                                                                                                                                                                                                                                                                                                                                                                |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2) | Applicable percentage of ownership is based on 123,882,740                        shares outstanding together with applicable options for such stockholder.                        Shares subject to options currently exercisable or exercisable within 60                        days are included in the number of shares beneficially owned and are deemed                        outstanding for purposes of computing the percentage ownership of the                        person holding such options, but are not deemed outstanding for computing                        the percentage of any other stockholder. |

 

 

46

 

 

 

 
| 3) | Includes shares that may be acquired upon exercise of stock                        options which are exercisable on or prior to May 31, 2008. The                        shares so issuable include: Ms. Fleischer - 2,243,333 shares;                        Mr. Lanzafame - 450,000 shares; Mr. Mikesell - 100,000 shares;                        Technology Innovations, LLC - 1,000,000 shares; and all Directors and                        Officers as a group - 3,453,333 shares. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4) | These shares are held by Nancy Gage Wemett,                        Mr. Wemett’s wife. Mr. Wemett disclaims beneficial                        ownership of the shares held by his wife.                                                                                                                                                                                                                                                                                                                      |
| **Item 12.** | **Certain Relationships and Related Transactions, and                        Director Independence** |
|--------------|------------------------------------------------------------------------------------------------------|

**Certain Relationships and Related Transactions**

Technology Innovations, LLC (“TI”) is our parent and            majority stockholder with a beneficial ownership of approximately 56.3%            of our outstanding common stock as of March 31, 2008. TI is a New York limited            liability company established in 1999 to develop intellectual property            assets. TI founded NN Research on December 22, 2004, with an            initial cash contribution of $100,000 for all the outstanding shares of common            stock.

On            July 1, 2005, the Company granted to TI an option to purchase 1,000,000 shares of            common stock at an exercise price of $0.05 per share. This exercise price reflects            the estimated fair market value of these options on the date of grant as determined by            the Company’s Board of Directors. This option has a ten-year term and as            such expires on July 1, 2015.

On            July 20, 2007, in connection with the resignation of Michael L. Weiner from our Board            of Directors, we entered into an Observation Rights Agreement with TI, Mr. Weiner            and Ross B. Kenzie, a former member of our Board of Directors. Messrs. Weiner and            Kenzie are the Managers of TI. In the Observation Rights Agreement, we agreed that, for            so long as TI owns not less than 25% of the shares of our common stock held by it on            July 20, 2007, we will permit two representatives designated by TI (who will initially            be Messrs. Weiner and Kenzie) to attend all meetings of our Board of Directors in            a nonvoting observer capacity and, in this respect, we will give such representatives            copies of all notices, minutes, consents, and other materials that we provide to our            directors at the same time and in the same manner as provided to such directors. The            Observation Rights Agreement permits us to withhold any information from the            representatives of TI and to exclude such representatives from any meeting or portion            thereof if access to such information or attendance at such meeting could adversely            affect the attorney-client privilege between us and our legal counsel or result in            disclosure of trade secrets or a conflict of interest, or if TI or one of its            designated representatives becomes a competitor of our Company. The Observation Rights            Agreement includes covenants by TI and Messrs. Weiner and Kenzie to keep            confidential and not to disclose, divulge or use for any purpose, other than to monitor            TI’s investment in our Company, and otherwise to act in a fiduciary manner with            respect to, any confidential information obtained from us.

On April 27, 2005 Technology Innovations granted to us an            exclusive, field of use limited license (the “License Agreement”) to make,            use and sell the products developed under several patent applications and provisional            patents owned by Technology Innovations, LLC that will expire at various future dates.            On March 2, 2007, TI assigned to us all rights, title, interests in, and            improvements to, the applications of various issued patents and pending applications            previously subject to the License Agreement. This assignment relinquishes TI’s            rights, under the License Agreement, and eliminates future license fees and            royalty payments. There was no consideration paid to TI for this assignment.

On            June 28, 2006, we entered into a Line of Credit agreement with TI pursuant to            which TI committed to make advances in an aggregate amount of $1 million. Under the            Line of Credit Agreement, advances were allowed in such amounts and at such times upon            15 days’ notice except that no more than $300,000 could be advanced in any 30-day            period. Amounts borrowed bear interest at the rate of 8% per annum. The Agreement            contains conventional terms, including provisions relating to events of default.            Amounts borrowed under this agreement are to be used for general working capital needs.            As of December 31, 2006 and February 14, 2007, $600,000 and $900,000,            respectively, had been advanced under the Line of Credit Agreement. The Line of Credit            Agreement expired on March 31, 2007 without any further advances being made. Although            we did not formally apply for financing from any institutional lenders or other third            parties, our management and members of our Board of Directors informally surveyed            prospective third party lenders and concluded that we would not be likely to            obtain a loan from them. The TI line of credit was established on terms we            believed to be competitive with comparable transactions involving unaffiliated parties            and was approved by the independent members of our Board of Directors. The repayment            obligation under the Line of Credit Agreement and the Note were originally scheduled to            expire on March 31, 2007, at which time TI would be able to demand repayment upon            15 days notice. In connection with the March 7, 2007 issuance of the 8% Senior            Secured Convertible Notes (the “Notes”) to the selling            stockholders, TI agreed not to demand repayment as long as any amounts were            outstanding on the Notes. The 2006 line of credit agreement was established on terms we            believe to be competitive with comparable transactions involving unaffiliated parties            and was

 

47

 

 

approved by the disinterested members of our Board of Directors. See            Note 7, “Stockholders’ Equity and Convertible Bridge Notes” for            additional description of the terms and conditions of the issuance of these            Notes.

On            December 29, 2004 the Company entered into a Line of Credit Agreement and a            Promissory Note with TI that allowed for borrowings of up to $500,000 for working            capital purposes and included an interest rate of 8% per annum. This agreement expired            and all outstanding advances were repaid as of December 31, 2005.

On            May 25, 2005, the Company entered into a Joint Research Agreement with Nanolution, LLC,            a wholly owned subsidiary of Biophan. Biophan is related to the Company because it is            an affiliate of one of the Company’s directors. This agreement covers the            exchange of ideas in support of a new drug delivery capability. The term of this            agreement shall continue until the desired technology becomes commercially viable or            until mutually terminated by both parties. All medical uses and inventions that arise            as a result of this agreement will be owned by Nanolution, LLC and all purification            processes for raw halloysite and non-medical applications will be owned by the Company.            The Company is not actively pursuing any research or development activities in            collaboration with Nanolution or Biophan.

**Director Independence**

Although we are not subject to the rules or requirement of the American            Stock Exchange (“AMEX”), we have, generally speaking, looked to those rules            for guidance as to which members of our Board qualify as “independent            directors.” Under these rules, an “independent director” is a person,            other than an officer or employee of the Company or any parent or subsidiary, who has            been affirmatively determined by our Board of Directors not to have a material            relationship with us that would interfere with the exercise of independent judgment. As            determined by AMEX, the following persons would not be deemed independent:
|   | a) | a director who is, or during the past three years was,                        employed by the Company or by any parent or subsidiary of the Company,                        other than prior employment as an interim Chairman or CEO;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | b) | a director who accepts or has an immediate family member who                        accepts any payments from the Company or any parent or subsidiary of the                        Company in excess of $100,000 during the current or any of the past three                        fiscal years, other than compensation for board service, compensation paid                        to an immediate family member who is a non-executive employee,                        non-discretionary compensation, certain requirement payments and a limited                        number of other specified types of payments;                                                                                                          |
|   | c) | a director who is an immediate family member of an                        individual who is, or has been in any of the past three years, employed by                        the Company or any parent or subsidiary of the Company as an executive                        officer;                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | d) | a director who is, or has an immediate family member who is,                        a partner in, or a controlling shareholder or an executive officer of, any                        organization to which the Company made, or from which the Company received,                        payments (other than those arising solely from investments in the                        Company’s securities or payments under non-discretionary charitable                        contribution matching programs) that exceed 5% of the organization’s                        consolidated gross revenues for that year, or $200,000, whichever is more,                        in any of the most recent three fiscal years; |
|   | e) | a director who is, or has an immediate family member who is,                        employed as an executive officer or any other entity where at any time                        during the most recent three fiscal years any of the Company’s                        executive officers serve on that entity’s compensation committee;                        and                                                                                                                                                                                                                                                                                                                                                     |
|   | f) | a director who is, or has an immediate family member who is,                        a current partner of the Company’s outside auditor, or was a partner                        or employee of the Company’s outside auditor who worked on the                        Company’s audit at any time during any of the past three                        years.                                                                                                                                                                                                                                                                                                                                                       |

Our            Board has determined that each of Messrs. Beall, Lanzafame, Mikesell and Siebert            is an “independent director.”
| **Item 13.** |  

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

 

48

 

 

 

**Exhibits**
| Exhibit No. | Description                                                                                                                                                                                                                                                                                                                                                                     |   | Location |   |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
|        |                                                                                                                                                                                                                                                                                                                                                                            |   |     |   |
| 2.1         | Agreement and Plan of Merger among NaturalNano, Inc.,                        Cementitious Materials, Inc. and Cementitious Acquisitions, Inc.                                                                                                                                                                                                                                   |   | (1)      |   |
|        |                                                                                                                                                                                                                                                                                                                                                                            |   |     |   |
| 3.1         | Second Amended and Restated Articles of                        Incorporation                                                                                                                                                                                                                                                                                                    |   | (2)      |   |
| 3.2         | By-laws                                                                                                                                                                                                                                                                                                                                                                         |   | (3)      |   |
|        |                                                                                                                                                                                                                                                                                                                                                                            |   |     |   |
| 4.1         | NaturalNano, Inc. Amended and Restated 2007 Incentive Stock                        Plan #                                                                                                                                                                                                                                                                                       |   | (45)     |   |
| 4.2         | NaturalNano, Inc. 2005 Incentive Stock Plan #                                                                                                                                                                                                                                                                                                                                   |   | (4)      |   |
| 4.3         | Form of Non-Qualified Stock Option Agreement #                                                                                                                                                                                                                                                                                                                                  |   | (5)      |   |
| 4.4         | Non-Qualified Stock Option Agreement dated July 24,                        2006 between NaturalNano, Inc. and Cathy A. Fleischer #                                                                                                                                                                                                                                         |   | (6)      |   |
| 4.5         | Non-Qualified Stock Option Agreement dated December 7,                        2006 between NaturalNano, Inc. and Sir Harold Kroto #                                                                                                                                                                                                                                        |   | (7)      |   |
| 4.6         | Registration Rights Agreement dated as of December 22,                        2004 between NaturalNano, Inc. and Technology Innovations, LLC                                                                                                                                                                                                                               |   | (8)      |   |
| 4.7         | Form of Subscription Agreement for the Purchase of                        Convertible Notes of NaturalNano, Inc.                                                                                                                                                                                                                                                                |   | (9)      |   |
| 4.8         | Loan and Security Agreement, dated March 7, 2007, by                        and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors                        LLC, as Agent, and the Investors named therein                                                                                                                                               |   | (10)     |   |
| 4.9         | Registration Rights Agreement, dated March 7, 2007, by                        and among NaturalNano, Inc., and the Investors named therein                                                                                                                                                                                                                                 |   | (11)     |   |
| 4.10        | Observation Rights Agreement dated July 20, 2007 among                        NaturalNano, Inc., Technology Innovations, LLC, Michael L. Weiner and Ross                        B. Kenzie                                                                                                                                                                                       |   | (12)     |
| 4.11        | Warrant for 4,770,000 shares of Common Stock issued to SBI                        Brightline XIII                                                                                                                                                                                                                                                                               |   | (13)     |
| 4.12        | Warrant for 4,500,000 shares of Common Stock issued to SBI                        USA, LLC                                                                                                                                                                                                                                                                                      |   | (14)     |
| 4.13        | Form of 8% Senior Secured Promissory Notes due March 7,                        2009 issued pursuant to the Loan and Security Agreement, dated                        March 7, 2007, by and among NaturalNano, Inc., NaturalNano Research,                        Inc., Platinum Advisors LLC, as Agent, and the Investors named                        therein        |   | (15)     |
| 4.14        | Form of Series A Common Stock Purchase Warrants issued                        pursuant to the Loan and Security Agreement, dated March 7, 2007, by                        and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors                        LLC, as Agent, and the Investors named therein                                                 |   | (16)     |
| 4.15        | Form of Series B Common Stock Purchase Warrants issued                        pursuant to the Loan and Security Agreement, dated March 7, 2007, by                        and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors                        LLC, as Agent, and the Investors named therein                                                 |   | (17)     |
| 4.16        | Form of Series C Common Stock Purchase Warrants issued to                        Platinum Advisors LLC pursuant to the Loan and Security Agreement, dated                        March 7, 2007, by and among NaturalNano, Inc., NaturalNano Research,                        Inc., Platinum Advisors LLC, as Agent, and the Investors named                        therein |   | (18)     |
|        |                                                                                                                                                                                                                                                                                                                                                                            |   |     |
| 10.1        | Lease Agreement – Schoen Place                                                                                                                                                                                                                                                                                                                                            |   | (19)     |
| 10.2        | Amendment No. 1 to Lease between Schoen Place LLC and                        NaturalNano, Inc.                                                                                                                                                                                                                                                                                  |   | (20)     |
| 10.3        | Exclusive License Agreement between Technology Innovations,                        LLC and NaturalNano, Inc. effective as of January 24, 2006                                                                                                                                                                                                                              |   | (21)     |   |
| 10.4        | Joint Research Agreement between Nanolution, LLC and                        NaturalNano Inc. dated as of May 25, 2005                                                                                                                                                                                                                                                           |   | (22)     |   |
| 10.5        | Patent Assignments dated March 2, 2007 and                        March 5, 2007 by and between Technology Innovations, LLC and                        NaturalNano Research, Inc.                                                                                                                                                                                      |   | (23)     |   |
| 10.6        | Amended and Restated License Agreement between Ambit                        Corporation and NaturalNano, Inc., effective as of October 1,                        2006                                                                                                                                                                                                      |   | (24)     |   |
| 10.7        | Nonexclusive License between NaturalNano and U.S. Department                        of the Navy at Naval Research Laboratory                                                                                                                                                                                                                                                    |   | (25)     |   |
| 10.8        | Employment Agreement with Cathy A. Fleischer, Ph.D.                        #                                                                                                                                                                                                                                                                                                    |   | (26)     |   |
| 10.9        | Employment Letter of Michael D. Riedlinger and Amendment No.                        1 thereto #                                                                                                                                                                                                                                                                                 |   | (27)     |   |
|             |                                                                                                                                                                                                                                                                                                                                                                                 |        |          |        |  |  |

 

 

49

 

 

 

 
| 10.10  | Separation Agreement and Mutual Release dated as of                        October 31, 2006 between NaturalNano, Inc. and Michael D. Riedlinger                        #                                |   | (28)   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.11  | Employment Letter of Kathleen A. Browne and Amendment No. 1                        thereto #                                                                                                                 |   | (29)   |
| 10.12  | Employment Letter of Sarah Cooper #                                                                                                                                                                          |   | (30)   |
| 10.13  | Stock Purchase Agreement dated March 30, 2006 between                        NaturalNano, Inc. and SBI Brightline XIII, LLC                                                                             |   | (31)   |
| 10.14  | Termination Agreement dated July 9, 2006 between SBI                        Brightline XIII, LLC and NaturalNano, Inc.                                                                                  |   | (32)   |
| 10.15  | Stock Purchase Agreement dated July 9, 2006 between                        NaturalNano, Inc. and SBI Brightline XIII, LLC                                                                               |   | (33)   |
| 10.16  | Line of Credit Agreement dated as of December 29, 2004                        between NaturalNano, Inc. and Technology Innovations, LLC                                                                 |   | (34)   |
| 10.17  | Line of Credit Agreement dated as of June 28, 2006                        between NaturalNano, Inc. and Technology Innovations, LLC                                                                     |   | (35)   |
| 10.18  | Promissory Note dated June 28, 2006 to the order of                        Technology Innovations, LLC                                                                                                  |   | (36)   |
| 10.19  | Letter from Technology Innovations, LLC to Platinum Advisors                        LLC, as Agent, and the Investors named therein                                                                           |   | (37)   |
| 10.20  | Pledge Agreement, dated March 7, 2007, by and among                        NaturalNano, Inc., Platinum Advisors LLC, as Agent, and the Investors named                        therein                   |   | (38)   |
| 10.21  | Patent Security Agreement, dated March 7, 2007, by and                        among NaturalNano Research, Inc., Platinum Advisors LLC, as Agent, and the                        Investors named therein |   | (39)   |
| 10.22  | Warrant Purchase Agreement dated August 9, 2006 between                        NaturalNano, Inc. and Crestview Capital Master, LLC                                                                      |   | (40)   |
| 10.23  | Joint Development Agreement dated April 23, 2007 between                        Nylon Corporation of America and NaturalNano, Inc.                                                                           |   | (46)   |
| 10.24  | Joint Development Agreement dated April 24, 2007 between                        Cascade Engineering, Inc. and NaturalNano, Inc.                                                                              |   | (46)   |
| 10.25  | Joint Development Agreement dated July 18, 2007 between                        Pactiv Corporation and NaturalNano, Inc.                                                                                      |   | (46)   |
| 10.26  | Employment Agreement with Kent A. Tapper #                                                                                                                                                                   |   | (41)   |
| 10.27  | Partially Exclusive License between NaturalNano, Inc. and                        United States Department of the Navy at Naval Research Laboratory, dated                        October 3, 2007.            |   | (42)   |
|   |                                                                                                                                                                                                         |   |   |
| 14.1   | Code of Ethics for CEO and Senior Financial                        Officer                                                                                                                                   |   | (43)   |
|   |                                                                                                                                                                                                         |   |   |
| 21.1   | Subsidiaries                                                                                                                                                                                                 |   | (44)   |
|   |                                                                                                                                                                                                         |   |   |
| 23.1   | Consent of Goldstein Golub Kessler LLP, independent                        registered public accounting firm                                                                                                 |   | **     |
| 23.2   | Consent of McGladrey & Pullen, LLP, independent                        registered public accounting firm                                                                                                 |   | **     |
|   |                                                                                                                                                                                                         |   |   |
| 31.1   | Certification of principal executive officer pursuant to                        section 302 of the Sarbanes-Oxley Act of 2002                                                                                |   | **     |
| 31.2   | Certification of principal accounting officer pursuant to                        section 302 of the Sarbanes-Oxley Act of 2002                                                                               |   | **     |
|   |                                                                                                                                                                                                         |   |   |

 

 

50

 

 

 

 
| 32.1 | Certification of principal executive officer pursuant to                        section 906 of the Sarbanes-Oxley Act of 2002  |   | ** |
|------|--------------------------------------------------------------------------------------------------------------------------------|--------|----|
| 32.2 | Certification of principal accounting officer pursuant to                        section 906 of the Sarbanes-Oxley Act of 2002 |   | ** |

 
| *      | Previously filed                                                                                                                                                                                |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **     | Filed herewith                                                                                                                                                                                  |
|   |                                                                                                                                                                                            |
| #      | May be deemed a compensatory plan or arrangement                                                                                                                                                |
|   |                                                                                                                                                                                            |
| 1.     | Incorporated by reference to Exhibit 2.1 to Current Report                        on Form 8-K filed September 30, 2005                                                                          |
| 2.     | Incorporated by reference to Exhibit 3.1 to Current Report                        on Form 8-K filed December 6, 2007.                                                                           |
| 3.     | Incorporated by reference to Exhibit 3.2 to Form 10-SB filed                        July 3, 2002                                                                                           |
| 4.     | Incorporated by reference to Appendix C to Information                        Statement on Schedule 14C filed November 8, 2005                                                                  |
| 5.     | Incorporated by reference to Exhibit 4.2 to Current Report                        on Form 8-K filed December 5, 2005                                                                            |
| 6.     | Incorporated by reference to Exhibit 4.1 to Current Report                        on Form 8-K filed July 28, 2006                                                                               |
| 7.     | Incorporated by reference to Exhibit 4.5 to Annual Report on                        Form 10-KSB for the year ended December 31, 2006                                                            |
| 8.     | Incorporated by reference to Exhibit 4.3 to Current Report                        on Form 8-K filed December 5, 2005                                                                            |
| 9.     | Incorporated by reference to Exhibit 4.4 to Current Report                        on Form 8-K filed December 5, 2005                                                                            |
| 10.    | Incorporated by reference to Exhibit 4.1 to Current Report                        on Form 8-K filed March 8, 2007                                                                               |
| 11.    | Incorporated by reference to Exhibit 4.6 to Current Report                        on Form 8-K filed March 8, 2007                                                                               |
| 12.    | Incorporated by reference to Exhibit 10.1 to Current Report                        on Form 8-K filed July 26, 2007                                                                              |
| 13.    | Incorporated by reference to Exhibit 4.1 to Current Report                        on Form 8-K filed July 10, 2006                                                                               |
| 14.    | Incorporated by reference to Exhibit 4.6 to Registration                        Statement on Form SB-2 (No. 333-135667) filed July 10, 2006                                                     |
| 15.    | Incorporated by reference to Exhibit 4.2 to Current Report                        on Form 8-K filed March 8, 2007                                                                               |
| 16.    | Incorporated by reference to Exhibit 4.3 to Current Report                        on Form 8-K filed March 8, 2007                                                                               |
| 17.    | Incorporated by reference to Exhibit 4.4 to Current Report                        on Form 8-K filed March 8, 2007                                                                               |
| 18.    | Incorporated by reference to Exhibit 4.5 to Current Report                        on Form 8-K filed March 8, 2007                                                                               |
| 19.    | Incorporated by reference to Exhibit 10.2 to Quarterly                        Report on Form 10-QSB for the period ended September 30, 2006                                                     |
| 20.    | Incorporated by reference to Exhibit 10.1 to Current Report                        on Form 8-K filed March 7, 2007                                                                              |
| 21.    | Incorporated by reference to Exhibit 10.1 to Quarterly                        Report (amended) on Form 10-QSB/A for the period ended March 31, 2006,                        filed June 26, 2006 |
| 22.    | Incorporated by reference to Exhibit 10.4 to Registration                        Statement on Form SB-2 (No. 333-135667) filed July 10, 2006                                                    |
| 23.    | Incorporated by reference to Exhibit 10.3 to Current Report                        on Form 8-K filed March 8, 2007                                                                              |
| 24.    | Incorporated by reference to Exhibit 10.1 to Quarterly                        Report on Form 10-QSB for the period ended September 30, 2006                                                     |
| 25.    | Incorporated by reference to Exhibit 10.7 to Annual Report                        on Form 10-KSB for the year ended December 31, 2006                                                           |
| 26.    | Incorporated by reference to Exhibit 10.1 to Current Report                        on Form 8-K filed July 28, 2006                                                                              |
| 27.    | Incorporated by reference to Exhibit 10.2 to Registration                        Statement on Form SB-2 (No. 333-135667) filed July 10, 2006                                                    |
| 28.    | Incorporated by reference to Exhibit 10.1 to Current Report                        on Form 8-K filed November 2, 2006                                                                           |

 

 

51

 

 

 

 
| 29. | Incorporated by reference to Exhibit 10.5 to Registration                        Statement on Form SB-2 (No. 333-135667) filed July 10, 2006    |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------|
| 30. | Incorporated by reference to Exhibit 10.6 to Registration                        Statement on Form SB-2 (No. 333-135667) filed July 10, 2006    |
| 31. | Incorporated by reference to Exhibit 4.1 to Current Report                        on Form 8-K filed March 31, 2006                              |
| 32. | Incorporated by reference to Exhibit 10.1 to Current Report                        on Form 8-K filed July 10, 2006                              |
| 33. | Incorporated by reference to Exhibit 10.2 to Current Report                        on Form 8-K filed July 10, 2006                              |
| 34. | Incorporated by reference to Exhibit 10.7 to Registration                        Statement on Form SB-2 (No. 333-135667) filed July 10, 2006    |
| 35. | Incorporated by reference to Exhibit 10.1 to Current Report                        on Form 8-K filed July 3, 2006                               |
| 36. | Incorporated by reference to Exhibit 10.2 to Current Report                        on Form 8-K filed July 3, 2006                               |
| 37. | Incorporated by reference to Exhibit 10.5 to Current Report                        on Form 8-K filed March 8, 2007                              |
| 38. | Incorporated by reference to Exhibit10.1 to Current Report                        on Form 8-K filed March 8, 2007                               |
| 39. | Incorporated by reference to Exhibit 10.2 to Current Report                        on Form 8-K filed March 8, 2007                              |
| 40. | Incorporated by reference to Exhibit 10.1 to Current Report                        on Form 8-K filed August 14, 2006                            |
| 41  | Incorporated by reference to Exhibit 10.1 to Current Report                        on form 8-K filed September 4, 2007                          |
| 42. | Incorporated by reference to Exhibit 10.1 to Current Report                        on form 8-K filed October 9, 2007                            |
| 43. | Incorporated by reference to Exhibit 14.1 to Annual Report                        on Form 10-KSB for the fiscal year ended December 31, 2005    |
| 44. | Incorporated by reference to Exhibit 21.1 to Annual Report                        on Form 10-KSB for the fiscal year ended December 31, 2005    |
| 45. | Incorporated by reference to Exhibit 4.1 to Registration                        Statement on Form SB-2 (No. 333-142688) filed December 12, 2007 |
| 46. | Incorporated by reference to Exhibit 4.1 to Registration                        Statement on Form SB-2 (No. 333-142688) filed October 3, 2007   |

 
|   | **Item 14.** |
|--------|--------------|

 

52

 

 

 

**Principal Accountant Fees and Services**

As we            have previously discussed, in October 2007, certain partners of Goldstein Golub Kessler            LLP (“GGK”) became partners of McGladrey & Pullen, LLP            (“M&P”).  As a consequence, GGK resigned as our auditors January            4, 2008 and M&P was appointed as our new independent registered public accounting            firm for the year ending December 31, 2007.  

GGK had            a continuing relationship with RSM McGladrey, Inc. (‘‘RSM’’),            from which it leased auditing staff who were full time, permanent employees of RSM and            through which its partners provided non-audit services. GGK has no full time employees            and, therefore, none of the audit services performed were provided by permanent            full-time employees of GGK. GGK manages and supervises the audit and audit staff, and            is exclusively responsible for the opinion rendered in connection with its            examination.

The            aggregate fees billed or expected to be billed by M&P and GGK for services            performed for the years ended December 31, 2007 and 2006 are as            follows: 
|                                                                          |   | **2007** |    | **2006** |   |
|-------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Audit Fees – McGladrey & Pullen, LLP                                |   | $        | 80,000  |     | $      | — |   |
| Audit Fees – Goldstein Golub Kessler LLP                                |   |     | 59,800  |     |   | 239,300 |   |
| Audit Related Fees – Goldstein Golub Kessler                        LLP |   |     | 46,500  |     |   | 15,900 |   |
| Tax Fees                                                                      |   |     | — |     |   | — |   |
| All Other Fees                                                                |   |     | — |     |   | — |   |

AUDIT FEES

The            aggregate audit fees for the years ended December 31, 2007 and 2006 were primarily            related to the audit of the Company's annual financial statements and review of those            financial statements included in the Company's quarterly reports on Form            10-QSB.

AUDIT RELATED FEES

Audit related fees for the years ended December 31, 2007 and 2006 were            primarily incurred in connection with the Company's equity offerings and fees in            connection with correspondence with the SEC.

TAX            FEES

The            Company did not engage M&P, GGK or RSM to provide tax compliance, tax advice or tax            planning services during the last two fiscal years.

ALL            OTHER FEES

The            Company did not engage M&P, GGK or RSM to provide any other services during the            last two fiscal years other than reported above.

Pre-Approval Policies and Procedures

In            accordance with its charter, the Audit Committee is required to approve all audit and            non-audit services provided by the independent auditors and shall not engage the            independent auditors to perform the specific non-audit services prescribed by law or            regulation.

 

53

 

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the            registrant has duly caused this report to be signed on its behalf by the undersigned            thereunto duly authorized.

 
| Signature              |   | Title                                      |   | Date          |
|------------------------|--------|--------------------------------------------|--------|---------------|
|                   |   |                                       |   |          |
|                   |   |                                       |   |          |
| /s/Cathy A. Fleischer  |   | President and Director                     |   | April 9, 2008 |
| Cathy A. Fleischer     |   | (Principal Executive Officer)              |   |          |
|                   |   |                                       |   |          |
|                   |   |                                       |   |          |
| /s/Kent A. Tapper      |   | Chief Financial Officer, Secretary and     |   | April 9, 2008 |
| Kent A. Tapper         |   | Treasurer (Principal Financial Officer and |   |          |
|                   |   | Principal Accounting Officer)              |   |          |
|                   |   |                                       |   |          |
| /s/Gary W. Beall       |   | Director                                   |   | April 9, 2008 |
| Gary W. Beall          |   |                                       |   |          |
|                   |   |                                       |   |          |
|                   |   |                                       |   |          |
| /s/John Lanzafame      |   | Director                                   |   | April 9, 2008 |
| John Lanzafame         |   |                                       |   |          |
|                   |   |                                       |   |          |
|                        |   | Director                                   |   | April 9, 2008 |
| Sharell L. Mikesell    |   |                                       |   |          |
|                   |   |                                       |   |          |
|                   |   |                                       |   |          |
| /s/Klaus E. T. Siebert |   | Director                                   |   | April 9, 2008 |
| Klaus E. T. Siebert    |   |                                       |   |          |
|                   |   |                                       |   |          |
|                   |   |                                       |   |          |
| /s/James Wemett        |   | Director                                   |   | April 9, 2008 |
| James Wemett           |   |                                       |   |          |
|                   |   |                                       |   |          |

 

 

54

 

 

 

**NATURALNANO, INC.**

(A            Development Stage Company)

**CONSOLIDATED FINANCIAL STATEMENTS**

December 31, 2007
| **Report of independent registered public accounting firm                        – McGladrey & Pullen, LLP** | F-2 |
|------------------------------------------------------------------------------------------------------------------------|-----|
| **Report of independent registered public accounting firm                        – Goldstein Golub Kessler LLP** | F-3 |
| **Consolidated balance sheet**                                                                                         | F-4 |
| **Consolidated statement of operations**                                                                               | F-5 |
| **Consolidated statement of stockholders’                        (deficiency) equity**                           | F-6 |
| **Consolidated statement of cash flows**                                                                               | F-7 |
| **Notes to consolidated financial statements**                                                                         | F-9 |

 

 

F-1

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

To the            Board of Directors and Stockholders of

NaturalNano, Inc.

 

We            have audited the accompanying consolidated balance sheet of NaturalNano, Inc. and            Subsidiary (a development stage company) as of December 31, 2007, and the related            consolidated statements of operations, stockholders' deficiency/equity and cash flows            for the year then ended and the 2007 amounts included in the cumulative columns in the            statements of operations and cash flows. These financial statements are the            responsibility of the Company's management. Our responsibility is to express an opinion            on these financial statements based on our audit.

 

We            conducted our audit in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audit to obtain reasonable assurance about whether the financial statements are free of            material misstatement. An audit includes examining, on a test basis, evidence            supporting the amounts and disclosures in the financial statements. An audit also            includes assessing the accounting principles used and significant estimates made by            management, as well as evaluating the overall financial statement presentation. We            believe that our audit provides a reasonable basis for our opinion.

 

In            our opinion, the consolidated financial statements referred to above present fairly, in            all material respects, the financial position of NaturalNano, Inc. as of December 31,            2007 and the results of its operations and its cash flows for the year then ended and            the amounts included in the cumulative columns in the statements of operations and cash            flows for the year then ended in conformity with U.S. generally accepted accounting            principles.

 

The            accompanying financial statements have been prepared assuming that the Company will            continue as a going concern. As discussed in Note 1 to the financial statements, the            Company has suffered recurring losses from operations, a working capital deficiency and            has a stockholders’ deficiency. This raises substantial doubt about the            Company’s ability to continue as a going concern. Management’s plans in            regard to these matters are also described in Note 1. The financial statements do not            include any adjustments that might result from the outcome of this            uncertainty.

 

We            were not engaged to examine management’s assertion about the effectiveness of            NaturalNano, Inc.’s internal control over financial reporting as of December 31,            2007 included in the accompanying Management’s Report on Internal Control Over            Financial Reporting and, accordingly, we do not express an opinion thereon.

 

**McGLADREY & PULLEN, LLP**

New            York, New York

 

April            8, 2008

 

F-2

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

To the            Board of Directors and Stockholders of

NaturalNano, Inc.

 

We            have audited the accompanying consolidated balance sheet of NaturalNano, Inc. and            Subsidiary (a development stage company) as of December 31, 2006, and the related            consolidated statements of operations, stockholders’ deficiency/equity and cash            flows for the year then ended and the cumulative amounts from December 22, 2004            (inception) to December 31, 2006. These financial statements are the responsibility of            the Company's management. Our responsibility is to express an opinion on these            financial statements based on our audits.

 

We            conducted our audits in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audit to obtain reasonable assurance about whether the financial statements are free of            material misstatement. An audit includes examining, on a test basis, evidence            supporting the amounts and disclosures in the financial statements. An audit also            includes assessing the accounting principles used and significant estimates made by            management, as well as evaluating the overall financial statement presentation. We            believe that our audits provide a reasonable basis for our opinion.

 

In            our opinion, the consolidated financial statements referred to above present fairly, in            all material respects, the financial position of NaturalNano, Inc. as of December 31,            2006 and the results of its operations and its cash flows for the year then ended and            the cumulative amounts from December 22, 2004 (inception) to December 31, 2006 in            conformity with United States generally accepted accounting principles.

 

As            discussed in Note 1 to the consolidated financial statements, effective January 1,            2006, the Company adopted the fair value method of accounting for stock-based            compensation as required by Statement of Financial Accounting Standards No. 123(R),            Share-Based Payment.

 

**GOLDSTEIN GOLUB KESSLER LLP**

New            York, New York

 

March            29, 2007

 

F-3

 

**NaturalNano, Inc.**

(A            Development Stage Company)

 

 

**CONSOLIDATED BALANCE SHEET**

 

 
|                                                                                                                                                                          |   | **December 31,** |        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                                                          |   | **2007**         |        | **2006** |   |
| **Assets**                                                                                                                                                                    |   |             |        |   |   |   |   |
| Current assets:                                                                                                                                                               |   |             |        |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                     |   | $                | 404,940     |   | $ | 139,638 |   |
| Halloysite and Pleximer inventory                                                                                                                                             |   |             | 27,149      |   |   | 15,000 |   |
| Other current assets                                                                                                                                                          |   |             | 195,443     |   |   | 49,197 |   |
| Total current assets                                                                                                                                                          |   |             | 627,532     |   |   | 203,835 |   |
| Non-current assets:                                                                                                                                                           |   |             |        |   |   |   |   |
| Prepaid halloysite materials                                                                                                                                                  |   |             | —     |   |   | 234,650 |   |
| Deferred financing costs, net                                                                                                                                                 |   |             | 444,928     |   |   | — |   |
| Licenses, net of amortization                                                                                                                                                 |   |             | 707,061     |   |   | 265,212 |   |
| Property and equipment, net                                                                                                                                                   |   |             | 454,445     |   |   | 159,239 |   |
| Total non-current assets                                                                                                                                                      |   |             | 1,606,434   |   |   | 659,101 |   |
| Total Assets                                                                                                                                                                  |   | $                | 2,233,966   |   | $ | 862,936 |   |
|                                                                                                                                                                          |   |             |        |   |   |   |   |
| **Liabilities and Stockholders' Deficiency**                                                                                                                                  |   |             |        |   |   |   |   |
|                                                                                                                                                                          |   |             |        |   |   |   |   |
| **Liabilities**                                                                                                                                                               |   |             |        |   |   |   |   |
| Current liabilities:                                                                                                                                                          |   |             |        |   |   |   |   |
| Related party note payable                                                                                                                                                    |   | $                | —     |   | $ | 600,000 |   |
| Accounts payable                                                                                                                                                              |   |             | 345,479     |   |   | 241,478 |   |
| Accrued payroll                                                                                                                                                               |   |             | 58,801      |   |   | 85,550 |   |
| Accrued expenses                                                                                                                                                              |   |             | 143,522     |   |   | 88,621 |   |
| Capital lease obligations-current                                                                                                                                             |   |             | 76,986      |   |   | — |   |
| Patent license obligation-current                                                                                                                                             |   |             | 250,000     |   |   | — |   |
| Registration rights liability                                                                                                                                                 |   |             | 82,489      |   |   | — |   |
| Due to related parties                                                                                                                                                        |   |             | 56,206      |   |   | 128,791 |   |
| Total current liabilities                                                                                                                                                     |   |             | 1,013,483   |   |   | 1,144,440 |   |
| Non-current liabilities:                                                                                                                                                      |   |             |        |   |   |   |   |
| Related party note payable                                                                                                                                                    |   |             | 987,584     |   |   | — |   |
| 8% Senior secured convertible notes, net of $2,017,427                        discount                                                                                        |   |             | 1,330,073   |   |   | — |   |
| Patent license obligation, less current portion                                                                                                                               |   |             | 200,000     |   |   | — |   |
| Capital lease obligations, less current portion                                                                                                                               |   |             | 38,945      |   |   | — |   |
| Other long term liabilities                                                                                                                                                   |   |             | 31,034      |   |   | 28,000 |   |
| Total Liabilities                                                                                                                                                             |   |             | 3,601,119   |   |   | 1,172,440 |   |
| **Stockholders’ Deficiency**                                                                                                                                            |   |             |        |   |   |   |   |
| Preferred Stock - $.001 par value, 10 million shares                        authorized, none issued                                                                           |   |             |        |   |   |   |   |
| Common stock - $.001 par value, 300 million shares                        authorized, issued and outstanding 122,880,740 and 121,700,740,                        respectively |   |             | 122,881     |   |   | 121,701 |   |
| Additional paid in capital                                                                                                                                                    |   |             | 15,907,241  |   |   | 11,105,430 |   |
| Deficit accumulated in the development stage                                                                                                                                  |   |             | (17,397,275 | ) |   | (11,536,635 | ) |
| Total stockholders' deficiency                                                                                                                                                |   |             | (1,367,153  | ) |   | (309,504 | ) |
| Total liabilities and stockholders' deficiency                                                                                                                                |   | $                | 2,233,966   |   | $ | 862,936 |   |

 

See            notes to consolidated financial statements

 

 

F-4

 

**NaturalNano, Inc.**

(A            Development Stage Company)

 

 

**CONSOLIDATED STATEMENT OF OPERATIONS**

 

 

 

 
|                                      |   |                    |        |                  |   | **From inception:** |   |
|-------------------------------------------|--------|-------------------------|-------------|-----------------------|--------|---------------------|--------|
|                                      |   | **For the years ended** |        | **December 22, 2004** |   |
|                                      |   | **December 31,**        |        | **to December 31,**   |   |
|                                      |   | **2007**                |        | **2006**              |   | **2007**            |   |
| Income:                                   |   |                    |        |                  |   |                |   |   |   |   |
| Revenue                                   |   | $                       | 15,250      |                  | $      | 15,000              |   | $ | 30,750 |   |
|                                      |   |                    |        |                  |   |                |   |   |   |   |
| Operating expenses:                       |   |                    |        |                  |   |                |   |   |   |   |
| Research and development (a)              |   |                    | 2,026,743   |                  |   | 2,034,426           |   |   | 4,726,453 |   |
| General and administrative (a)            |   |                    | 1,708,918   |                  |   | 4,078,776           |   |   | 7,807,321 |   |
| Write down of prepaid inventory           |   |                    | 249,650     |                  |   | —             |   |   | 249,650 |   |
|                                      |   |                    | 3,985,311   |                  |   | 6,113,202           |   |   | 12,783,424 |   |
|                                      |   |                    |        |                  |   |                |   |   |   |   |
| Loss from Operations                      |   |                    | (3,970,061  | )                     |   | (6,098,202          | )      |   | (12,752,674 | ) |
|                                      |   |                    |        |                  |   |                |   |   |   |   |
| Other income (expense):                   |   |                    |        |                  |   |                |   |   |   |   |
| Interest (expense) income, net            |   |                    | (1,890,579  | )                     |   | 5,821               |   |   | (1,870,623 | ) |
| Income from cooperative research project  |   |                    | —     |                  |   | —             |   |   | 180,000 |   |
| Gain on warrant                           |   |                    | —     |                  |   | 236,250             |   |   | 326,250 |   |
| Financing fees                            |   |                    | —     |                  |   | (3,006,786          | )      |   | (3,280,228 | ) |
|                                      |   |                    | (1,890,579  | )                     |   | (2,764,715          | )      |   | (4,644,601 | ) |
| Net loss                                  |   | $                       | (5,860,640  | )                     | $      | (8,862,917          | )      | $ | (17,397,275 | ) |
|                                      |   |                    |        |                  |   |                |   |   |   |   |
| Loss per common share - basic and diluted |   | $                       | (0.05       | )                     | $      | (0.07               | )      |   |   |   |
|                                      |   |                    |        |                  |   |                |   |   |   |   |
| Weighted average shares outstanding       |   |                    | 122,065,645 |                  |   | 121,572,369         |   |   |   |   |
|                                           |        |                         |             |                       |        |                     |        |  |  |  |  |
| (a) | Stock based compensation expense included in the Statement                        of Operations for the years ended December 31, 2007 and 2006, respectively,                        are as follows: |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | Research and development expense of $539,126 and                        $1,038,631. |
|--------|------------|-------------------------------------------------------------------------------------|
|   | **•** | General and administrative expense of $372,880 and                        $1,932,328. |
|--------|------------|---------------------------------------------------------------------------------------|

 

See            notes to consolidated financial statements

 

F-5

 

**NaturalNano, Inc.**

(A            Development Stage Company)

 

 

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIENCY)            EQUITY**

 

 
|                                                                                                                         |   |             |   |        |    |               |   | **Deficit**     |   |                    |        |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|-------------|---------|--------------------|--------|-----------------|--------|-------------------------|-------------|
|                                                                                                                         |   |             |   |        |    | **Additional**     |   | **Accumulated** |   | **Stockholders’** |        |
|                                                                                                                         |   | **Common Stock** |   | **Paid-in** |    | **in Development** |   | **Equity**      |   |
|                                                                                                                         |   | **Shares**       |   | **Amount**  |    | **Capital**        |   | **Stage**       |   | **(Deficiency)**        |        |
| **December 22, 2004 (inception)**                                                                                            |   |             |   |        |    |               |   |            |   |                    |        |   |   |   |   |
| 20,000,000 shares issued for cash @ $.005 per                        share                                                   |   | 20,000,000       |   | $           | 20,000  |               | $      | 80,000          |   | $                       | —     |   | $ | 100,000 |   |
| Net loss from inception to 12/31/04                                                                                          |   |             |   |        |    |               |   |            |   |                    | (7,336      | ) |   | (7,336 | ) |
| **Balance at December 31, 2004**                                                                                             |   | 20,000,000       |   | $           | 20,000  |               | $      | 80,000          |   | $                       | (7,336      | ) | $ | 92,664 |   |
| Warrant issued for 4,500,000 shares of common stock for                        services                                      |   |             |   |        |    |               |   | 273,442         |   |                    |        |   |   | 273,442 |   |
| Share based compensation expense                                                                                             |   |             |   |        |    |               |   | 270,082         |   |                    |        |   |   | 270,082 |   |
| Shares issued pursuant to convertible bridge notes on                        11/29/05                                        |   | 20,939,200       |   |        | 20,939  |               |   | 4,135,061       |   |                    |        |   |   | 4,156,000 |   |
| Recapitalization on 11/29/05                                                                                                 |   | 79,820,840       |   |        | 79,821  |               |   | (79,821         | )      |                    |        |   |   | — |   |
| Net loss for the year ended 12/31/05                                                                                         |   |             |   |        |    |               |   |            |   |                    | (2,666,382  | ) |   | (2,666,382 | ) |
| **Balance at December 31, 2005**                                                                                             |   | 120,760,040      |   | $           | 120,760 |               | $      | 4,678,764       |   | $                       | (2,673,718  | ) | $ | 2,125,806 |   |
| Grant of common stock in exchange for license @ $1.45 per                        share on February 1, 2006                   |   | 200,000          |   |        | 200     |               |   | 289,800         |   |                    |        |   |   | 290,000 |   |
| Grant of common stock as settlement of liability @ $1.45 per                        share on February 1, 2006                |   | 60,600           |   |        | 61      |               |   | 87,809          |   |                    |        |   |   | 87,870 |   |
| Grant of common stock as settlement of liability @ $1.52 per                        share on February 9, 2006                |   | 54,100           |   |        | 54      |               |   | 82,178          |   |                    |        |   |   | 82,232 |   |
| Common stock returned and cancelled @ $0.42 per                        share                                                 |   | (200,000         | )      |        | (200    | )                  |   | (83,800         | )      |                    |        |   |   | (84,000 | ) |
| Share based compensation expense                                                                                             |   |             |   |        |    |               |   | 2,970,959       |   |                    |        |   |   | 2,970,959 |   |
| Warrants issued:                                                                                                             |   |             |   |        |    |               |   |            |   |                    |        |   |   |   |   |
| 4,770,000 shares at exercise prices from $0.75 to $1.30 per                        share                                     |   |             |   |        |    |               |   | 3,006,786       |   |                    |        |   |   | 3,006,786 |   |
| 200,000 shares at $0.28 per share                                                                                            |   |             |   |        |    |               |   | 32,460          |   |                    |        |   |   | 32,460 |   |
| Exercise of stock options @ $.05 per share                                                                                   |   | 826,000          |   |        | 826     |               |   | 40,474          |   |                    |        |   |   | 41,300 |   |
| Net loss for the year ended 12/31/06                                                                                         |   |             |   |        |    |               |   |            |   |                    | (8,862,917  | ) |   | (8,862,917 | ) |
| **Balance at December 31, 2006**                                                                                             |   | 121,700,740      |   | $           | 121,701 |               | $      | 11,105,430      |   | $                       | (11,536,635 | ) | $ | (309,504 | ) |
| Value of warrants issued in conjunction with debt                                                                            |   |             |   |        |    |               |   | 3,213,600       |   |                    |        |   |   | 3,213,600 |   |
| Fair value of warrants issued to purchase:                                                                                   |   |             |   |        |    |               |   |            |   |                    |        |   |   |   |   |
| 2,947,162 shares with an exercise price of $0.22 price per                        share in partial payment of offering costs |   |             |   |        |    |               |   | 501,018         |   |                    |        |   |   | 501,018 |   |
| 240,741 shares at $0.26 per share for services                                                                               |   |             |   |        |    |               |   | 50,767          |   |                    |        |   |   | 50,767 |   |
| Share based compensation expense                                                                                             |   |             |   |        |    |               |   | 912,006         |   |                    |        |   |   | 912,006 |   |
| Grant of common stock for services @:                                                                                        |   |             |   |        |    |               |   |            |   |                    |        |   |   |   |   |
| $0.36 per share on March 26, 2007                                                                                            |   | 160,000          |   |        | 160     |               |   | 57,440          |   |                    |        |   |   | 57,600 |   |
| $0.10 per share on November 2, 2007                                                                                          |   | 340,000          |   |        | 340     |               |   | 33,660          |   |                    |        |   |   | 34,000 |   |
| Exercise of stock options @ $.05 per share                                                                                   |   | 680,000          |   |        | 680     |               |   | 33,320          |   |                    |        |   |   | 34,000 |   |
| Net loss for the year ended 12/31/07                                                                                         |   |             |   |        |    |               |   |            |   |                    | (5,860,640  | ) |   | (5,860,640 | ) |
| **Balance at December 31, 2007**                                                                                             |   | 122,880,740      |   | $           | 122,881 |               | $      | 15,907,241      |   | $                       | (17,397,275 | ) | $ | (1,367,153 | ) |

 

See            notes to consolidated financial statements

 

F-6

 

**NaturalNano, Inc.**

(A            Development Stage Company)

 

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 

 
|                                                                                      |   | **Years ended**  |       | **From inception December 22, 2004** |   |
|-------------------------------------------------------------------------------------------|--------|------------------|------------|--------------------------------------|--------|
|                                                                                      |   | **December 31,** |       | **through**                          |   |
|                                                                                      |   | **2007**         |       | **2006**                             |   | **December 31,2007** |   |
| **Cash flows from operating activities:**                                                 |   |             |       |                                 |   |   |   |   |   |   |
| Net loss                                                                                  |   | $                | (5,860,640 | )                                    | $      | (8,862,917 | ) | $ | (17,397,275 | ) |
| Adjustments to reconcile net loss to net cash                                             |   |             |       |                                 |   |   |   |   |   |   |
| used in operating activities:                                                             |   |             |       |                                 |   |   |   |   |   |   |
| Depreciation and amortization                                                             |   |             | 141,570    |                                 |   | 71,825 |   |   | 218,143 |   |
| Amortization of discount on convertible notes                                             |   |             | 1,330,073  |                                 |   | — |   |   | 1,330,073 |   |
| Amortization of deferred financing costs                                                  |   |             | 314,190    |                                 |   | — |   |   | 314,190 |   |
| Share based compensation expense                                                          |   |             | 912,006    |                                 |   | 2,970,959 |   |   | 4,153,047 |   |
| Issuance of warrants for services                                                         |   |             | 50,767     |                                 |   | 3,039,246 |   |   | 3,363,455 |   |
| Issuance of stock for services                                                            |   |             | 34,000     |                                 |   | — |   |   | 34,000 |   |
| Change in value of registration rights obligation                                         |   |             | 12,128     |                                 |   | — |   |   | 12,128 |   |
| Receipt of and gain on Atlas Mining warrant                                               |   |             | —    |                                 |   | (236,250 | ) |   | (506,250 | ) |
| Gain on disposal of asset                                                                 |   |             | (917       | )                                    |   | — |   |   | (917 | ) |
| Deferred rent                                                                             |   |             | 9,034      |                                 |   | — |   |   | 9,034 |   |
| Changes in operating assets and liabilities:                                              |   |             |       |                                 |   |   |   |   |   |   |
| Increase in inventory                                                                     |   |             | (27,149    | )                                    |   | — |   |   | (27,149 | ) |
| Increase in other current assets                                                          |   |             | (146,246   | )                                    |   | (14,493 | ) |   | (195,443 | ) |
| Decrease in prepaid halloysite materials                                                  |   |             | 249,650    |                                 |   | — |   |   | — |   |
| Increase in accounts payable, accrued payroll and accrued                        expenses |   |             | 132,153    |                                 |   | 291,838 |   |   | 717,904 |   |
| Decrease in other liability                                                               |   |             | (6,000     | )                                    |   | (500 | ) |   | 22,000 |   |
| **Net cash used in operating activities**                                                 |   | $                | (2,855,381 | )                                    | $      | (2,740,292 | ) | $ | (7,953,060 | ) |
| **Cash flows from investing activities:**                                                 |   |             |       |                                 |   |   |   |   |   |   |
| Purchase of property and equipment                                                        |   | $                | (169,074   | )                                    | $      | (155,524 | ) | $ | (364,098 | ) |
| Proceeds from sale of property and equipment                                              |   |             | 2,937      |                                 |   | — |   |   | 2,937 |   |
| Purchase of license                                                                       |   |             | (50,000    | )                                    |   | — |   |   | (150,000 | ) |
| Proceeds from sale of Atlas Mining warrant                                                |   |             | —    |                                 |   | 506,250 |   |   | 506,250 |   |
| **Net cash (used in) provided by investing                        activities**            |   | $                | (216,137   | )                                    | $      | 350,726 |   | $ | (4,911 | ) |
| **Cash flows from financing activities:**                                                 |   |             |       |                                 |   |   |   |   |   |   |
| Proceeds from convertible notes                                                           |   | $                | 3,250,000  |                                 | $      | — |   | $ | 7,406,000 |   |
| Advances on related party line of credit                                                  |   |             | 300,000    |                                 |   | 600,000 |   |   | 900,000 |   |
| Advances from related parties                                                             |   |             | 429,984    |                                 |   | 324,590 |   |   | 1,196,361 |   |
| Repayment of amounts due to related parties                                               |   |             | (414,985   | )                                    |   | (155,051 | ) |   | (1,052,571 | ) |
| Repayment of capital lease obligations                                                    |   |             | (38,040    | )                                    |   | — |   |   | (38,040 | ) |
| Payment of registration rights obligation                                                 |   |             | (63,539    | )                                    |   | — |   |   | (63,539 | ) |
| Deferred financing costs                                                                  |   |             | (160,600   | )                                    |   | — |   |   | (160,600 | ) |
| Issuance of common stock                                                                  |   |             | —    |                                 |   | — |   |   | 100,000 |   |
| Proceeds from exercise of stock options                                                   |   |             | 34,000     |                                 |   | 41,300 |   |   | 75,300 |   |
| **Net cash provided by financing activities**                                             |   | $                | 3,336,820  |                                 | $      | 810,839 |   | $ | 8,362,911 |   |
| Increase (decrease) in cash and cash equivalents                                          |   |             | 265,302    |                                 |   | (1,578,727 | ) |   | 404,940 |   |
| **Cash and cash equivalents at beginning of                        period**               |   |             | 139,638    |                                 |   | 1,718,365 |   |   | — |   |
| **Cash and cash equivalents at end of period**                                            |   | $                | 404,940    |                                 | $      | 139,638 |   | $ | 404,940 |   |

 

 

F-7

 

**NaturalNano, Inc.**

(A            Development Stage Company)

 

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

***(continued)***

 

 
|                                                                                                          |   | **Years ended**  |      | **From inception December 22, 2004** |   |
|---------------------------------------------------------------------------------------------------------------|--------|------------------|-----------|--------------------------------------|--------|
|                                                                                                          |   | **December 31,** |      | **through**                          |   |
|                                                                                                          |   | **2007**         |      | **2006**                             |   | **December 31,2007** |   |
| **Supplemental disclosure of cash flow                        information:**                                  |   |             |      |                                 |   |   |   |   |   |   |
| Cash paid for interest during the period                                                                      |   | $                | 134,967   |                                 |   |   |   | $ | 134,967 |   |
|                                                                                                          |   |             |      |                                 |   |   |   |   |   |   |
| **Schedule of non-cash investing and financing                        activities:**                           |   |             |      |                                 |   |   |   |   |   |   |
| Issuance of warrants in partial payment of financing                        costs                             |   | $                | 501,018   |                                 |   |   |   | $ | 501,018 |   |
| Note issued in consideration of deferred financing                        costs                               |   | $                | 97,500    |                                 |   |   |   | $ | 97,500 |   |
| Allocation of proceeds from discount on notes payable and                        warrants grants              |   | $                | 3,213,600 |                                 |   |   |   | $ | 3,213,600 |   |
| Registration rights liability                                                                                 |   | $                | 82,489    |                                 |   |   |   | $ | 82,489 |   |
| Capital lease obligations                                                                                     |   | $                | 153,971   |                                 |   |   |   | $ | 153,971 |   |
| Common stock issued for:                                                                                      |   |             |      |                                 |   |   |   |   |   |   |
| Convertible notes                                                                                             |   |             |      |                                 |   |   |   | $ | 4,156,000 |   |
| Services                                                                                                      |   | $                | 57,600    |                                 |   |   |   | $ | 57,600 |   |
| Accrual for purchase of Navy License                                                                          |   | $                | 450,000   |                                 |   |   |   | $ | 450,000 |   |
| Settlement of liabilities for services in common                        stock                                 |   |             |      |                                 | $      | 170,102 |   | $ | 170,102 |   |
| Acquisition of license settled through issuance of common                        stock (net of $100,000 cash) |   |             |      |                                 | $      | 290,000 |   | $ | 290,000 |   |
| Common stock returned and cancelled in connection with                        license agreement               |   |             |      |                                 | $      | (84,000 | ) | $ | (84,000 | ) |

 

See            notes to consolidated financial statements

 

F-8

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 

 

 
| **1.** | **PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING                        POLICIES** |
|--------|--------------------------------------------------------------------------------------------|

**Basis of Consolidation**

The            consolidated financial statements include the accounts of NaturalNano, Inc.            (“NaturalNano”), a Nevada corporation, and its wholly owned subsidiary            NaturalNano Research, Inc. (“NN Research”), a Delaware corporation. All            significant inter-company accounts and transactions have been eliminated in            consolidation.

**Description of the Business**

NaturalNano (the “Company”), located in Pittsford, New York,            is a development stage company engaged in the discovery, refinement and            commercialization of naturally occurring nanoscale materials. The Company’s            current activities are directed toward research, development, production and marketing            of its proprietary technologies relating to the treatment and separation of nanotubes            from halloysite clay and the development of related commercial applications            for:
|   | **•** | material additives for polymers, plastics and                        composites, |
|--------|------------|----------------------------------------------------------------------------------|
|   | **•** | health and beauty and household products, and                                    |
|   | **•** | agrichemical products.                                                           |

NaturalNano is domiciled in the state of Nevada as a result of the            merger with Cementitious Materials, Inc., (“CMI”), which was completed on            November 29, 2005.

**Cash Equivalents**

Cash            equivalents consist of money market securities with a maturity of three months or less            when purchased. Cash equivalents are stated at cost plus accrued interest, which            approximates market value.

**Concentration of Credit Risk**

The            Company maintains cash in bank deposit accounts which, at times, exceed federally            insured limits. The Company has not experienced any losses on these            accounts.

**Liquidity**

Going Concern – The accompanying consolidated financial statements            have been prepared on a going concern basis, which contemplates the realization of            assets and the satisfaction of liabilities in the normal course of business. As shown            in the accompanying consolidated financial statements, the Company incurred a net loss            for 2007 of $5,860,640 and had negative working capital of $385,951 and a stockholders'            deficiency of $1,367,153 at December 31, 2007. These factors, among others, may            indicate that the Company will be unable to continue as a going concern for a            reasonable period of time.

The            consolidated financial statements do not include any adjustments relating to the            recoverability of assets and classification of liabilities that might be necessary            should the Company be unable to continue as a going concern. The Company's continuation            as a going concern is dependant upon its ability to generate sufficient cash flow to            meet its obligations, to obtain additional financing and, ultimately, to attain            successful operations.

In            addition, management is currently assessing the Company's operating structure for the            purpose of reducing ongoing expenses, increasing sources of revenue and is negotiating            the terms of additional debt or equity financing. In addition, recent successes in            product testing for Pleximer and filled-tube applications are being leveraged in            attempt to increase revenues from sales.

The            Company will continually evaluate funding options including additional offerings of its            securities to private and institutional investors and other credit facilities as they            become available. There can be no assurance as to the availability or terms upon which            such financing alternatives might be available.

**Revenue Recognition**

The            Company has earned nominal operating revenue since inception (December 22, 2004). This            revenue was generated from the delivery of Pleximer and sample products specifically            formulated for customer applications in various industries in connection with product            development evaluations and as such is considered operating revenue for financial            reporting

 

F-9

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 

purposes. The Company earns and recognizes such revenue when the            shipment of the sample products has occurred and when no further performance obligation            exists.

**Inventory**

Inventory is stated at the lower of cost or market vlaue. When            halloysite nanotubes or Pleximer held in inventory are used, the carrying value of any            such inventory used (i) for research and development is expensed in the period that it            is used for the development of proprietary applications and processes and (ii) cost of            goods sold will be charged as customer shipments are made.

**Research and Development**

Research and development costs are expensed in the period the            expenditures are incurred. Capital assets acquired in support of research and            development are capitalized and depreciated over their estimated useful life and            related depreciation expense is included in research and development            expense.

 

**Intangible Assets**

Licenses are initially measured and recorded based on their cost at the            date of their acquisition and amortized over its useful life. The Company evaluates the            recoverability of identifiable intangibles whenever events or changes in circumstances            indicate that an intangible asset’s carrying value may not be recoverable. Such            circumstances could include, but are not limited to, a significant decrease in fair            value of the asset or a significant adverse change in the extent or manner in which an            asset is used. The evaluation of potential asset impairment requires significant            judgments about future cash flows over the life of the asset under evaluation and            actual future results may differ from assumed and estimated amounts.

**Property and Equipment**

Property and equipment, at cost, consists of the following:
|                                      |   | 2007   |     | 2006   |   | Useful Life |   |
|-------------------------------------------|--------|--------|----------|--------|--------|-------------|--------|
|                                      |   |   |     |   |   |        |   |
| Lab equipment                             |   | $      | 458,617  |   | $      | 140,206     |   |   | 5 years |   |
| Leasehold improvements                    |   |   | 57,600   |   |   | -           |   |   | 15 years |   |
| Furniture and office equipment            |   |   | 34,053   |   |   | 34,053      |   |   | 5 years |   |
| Computers and software                    |   |   | 18,065   |   |   | 20,765      |   |   | 3 years |   |
|                                      |   |   | 568,335  |   |   | 195,024     |   |   |   |   |
| Accumulated depreciation and amortization |   |   | (113,890 | )      |   | (35,785     | )      |   |   |   |
| Net property and equipment                |   | $      | 454,445  |   | $      | 159,239     |   |   |   |   |

Depreciation of property and equipment is provided on a straight-line            basis over the estimated useful lives of the related assets. Amortization of leasehold            improvements is provided for by the straight-line method over the term of the lease.            Costs of internally developed intellectual property rights with indeterminate lives are            expensed as incurred.

**Deferred Taxes**

Deferred tax assets and liabilities are recognized for future tax            consequences attributable to differences between the financial statement carrying            amounts of existing assets and liabilities and their respective tax bases. Deferred tax            assets and liabilities are measured using enacted rates expected to apply when the            differences are expected to be realized. A valuation allowance is recognized if it is            anticipated that some or all of the deferred tax asset may not be realized.

In            June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB            Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an            interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48            clarifies the accounting for uncertainty in income taxes recognized in a            company’s financial statements in accordance with SFAS No. 109, “Accounting            for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement            attribute for the financial statement recognition and measurement of a tax position            taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years            beginning after December 15, 2006. The adoption of FIN 48 did not have a material            effect on the Company’s consolidated financial position or results of operations            as the Company has no unrecognized tax benefits and has not incurred any interest or            penalties in any of its tax jurisdictions. The Company has open tax years beginning            in

 

F-10

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 

calendar year 2004 through 2006. None of the Company’s tax returns            have been examined by federal or state jurisdictions during these periods.

**Loss Per Share**

Basic loss per common share is computed by dividing net loss by the            weighted-average number of shares of common stock outstanding during the period.            Diluted loss per common share gives effect to dilutive options and warrants outstanding            during the period. Shares to be issued upon the exercise of the outstanding options and            warrants are not included in the computation of diluted loss per share as their effect            is anti-dilutive. There were 44,025,995 and 19,934,000 shares underlying outstanding            options and warrants which have been excluded from the calculation at December 31, 2007            and 2006, respectively.

**Estimates**

The            preparation of financial statements in conformity with generally accepted accounting            principles requires the use of estimates by management. Actual results could differ            from these estimates.

**Stock Options**

The            Company has the 2005 Incentive Stock Plan which provides for the granting of up to            14,000,000 nonqualified or incentive stock options and the Amended and Restated 2007            Incentive Stock Plan which provides for the granting of up to 17,000,000 nonqualified            or incentive stock options (collectively, the “Plan”). The Plan provides            for issuance of share-based awards to officers, key employees, non-employee directors            and consultants. The terms and vesting schedules for share-based awards vary by type of            grant and the employment status of the grantee. Generally, option awards vest based            upon time-based conditions and are granted at exercise prices based on the closing            market price of the Company’s stock on the date of grant.

On            January 1, 2006, the Company adopted the stock option expensing rules of Statement of            Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,”            using the fair value recognition provisions of FAS No. 123, “Accounting for            Stock-Based Compensation” for stock options already granted. The Company utilized            the modified prospective approach of adoption under SFAS No. 123R which resulted in the            recognition of $912,006 and $2,970,959 of compensation cost for the years ended            December 31, 2007 and 2006, respectively. Results for prior periods have not been            restated.

The            fair value of each stock option grant has been determined using the Black-Scholes model            and adjusted for the likelihood of forfeiture. The Black-Scholes method was developed            for use in estimating the fair value of traded options, which have no vesting            restrictions and are fully transferable. The assumed forfeiture rate is based upon            historical experience and is evaluated quarterly. Such option valuation methods require            various subjective assumptions including the expected stock price volatility. No income            tax benefits were recognized due to the Company’s net operating loss carryforward            position.

**Stock Split**

On            January 27, 2006, the Company pursuant to a resolution of its Board of Directors acting            under Section 78.207 of the Nevada General Corporation law filed a Certificate of            Change to its Restated Articles of Incorporation to increase the number of authorized            shares of our common stock, par value $0.001 per share, from 100 million shares to 200            million shares. This correspondingly increased the number of issued and outstanding            shares of its common shares held by each stockholder of record as of February 8, 2006,            the effective date of the Certificate of Change. The $0.001 par value was not changed            as a result of this action. In conjunction with this resolution, the board authorized a            two-for-one stock split of common stock effected in the form of a stock dividend to            holders of record on February 8, 2006. Accordingly, all references to numbers of shares            and to per share information in the consolidated financial statements have been            adjusted to reflect the stock split on a retroactive basis.

 

**Recent Accounting Pronouncements**

Management does not believe that any recently issued, but not yet            effective, accounting standards if currently adopted would have a material effect on            the accompanying financial statements.

 

F-11

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 
| **2.** | **RELATED PARTY RESEARCH AGREEMENT** |
|--------|--------------------------------------|

On            May 25, 2005, the Company entered into a joint research agreement with Nanolution, LLC,            a wholly owned subsidiary of Biophan Technologies, Inc. (“BTI”). BTI is            related to the Company because an affiliate of BTI is a director of the Company. This            agreement covers the exchange of ideas in support of a new drug delivery capability.            The term of this agreement shall continue until the desired technology becomes            commercially viable or until mutually terminated by both parties. All medical uses and            inventions that arise as a result of this agreement will be owned by Nanolution, LLC            and all purification processes for raw halloysite and non-medical applications will be            owned by the Company.
| **3.** | **AGREEMENTS WITH TECHNOLOGY INNOVATIONS,                        LLC** |
|--------|------------------------------------------------------------------------|

Technology Innovations, LLC (“TI”) is our principal            stockholder with a beneficial ownership of 56.3% of our outstanding common stock as of            December 31, 2007. TI is a New York limited liability corporation established in 1999            to develop intellectual property assets. A director on of our Board of Directors            represents the interests of TI and has an 11.29% ownership of TI. TI founded            NaturalNano, Inc., a Delaware corporation on December 22, 2004, with an initial cash            contribution of $100,000 for all the then outstanding shares of common            stock.

On            July 1, 2005, the Company granted 1 million stock options to TI with an exercise price            of $0.05 per share. This exercise price reflects the estimated fair market value of            these options on the date of grant as determined by the Company’s Board of            Directors. This option grant has a ten-year term and as such expires on July 1, 2015.            Under the vesting schedule, the options were fully vested as of December 31,            2007.

In            connection with the 8% senior secured convertible debt more fully described in Note 7,            on March 2 and 5, 2007, NaturalNano Research, Inc. (“NN Research”) entered            into Patent Assignment agreements (the “Patent Assignments”) with TI,            pursuant to which TI assigned to NN Research all of its rights, title and interest in            certain issued patents and pending patent applications, with respect to which TI had            previously granted NN Research licenses. No value was assigned to these patents. TI            also agreed, in a letter to Platinum Advisors LLC (the “Agent”) and the            other investors dated March 7, 2007 (the “Lock-Up Letter”), that for a            period of two years from the date of the Lock-Up Letter it will not (except as            permitted under the Lock-Up Letter in certain limited circumstances) sell, transfer or            otherwise dispose of any shares of our common stock or any securities convertible into            or exchangeable or exercisable for shares of our common stock. TI further agreed, in a            letter to the Agent and the other investors dated March 7, 2007 (the “Standstill            Letter”), that it would not demand repayment by us or NN Research of any            obligations for money borrowed except as defined in the Purchase Agreement.

On            June 28, 2006, we entered into a Line of Credit agreement with TI pursuant to which TI            committed to make advances in an aggregate amount of $1 million. Under the Line of            Credit Agreement, advances were allowed in such amounts and at such times upon 15 days            notice except that no more than $300,000 could be advanced in any 30-day period.            Amounts borrowed bear interest at the rate of 8% per annum. The Agreement contains            conventional terms, including provisions relating to events of default. Amounts            borrowed under this agreement are to be used for general working capital needs. As of            December 31, 2007 and 2006, $900,000 and $600,000, respectively, had been advanced            under the Line of Credit Agreement. The TI line of credit was established on terms we            believed to be competitive with comparable transactions involving unaffiliated parties            and was approved by the independent members of our Board of Directors. Based on the            borrowing rates currently available to the Company for loans with similar terms and            average maturities, the fair value of the debt approximates the carrying amount. The            repayment obligation under the Line of Credit Agreement and the Note were originally            scheduled to expire on March 31, 2007, at which time TI would be able to demand            repayment upon 15 days notice. In connection with the March 7, 2007 issuance of the 8%            Senior Secured Convertible Notes (the “Notes”), TI agreed not to demand            repayment as long as any amounts were outstanding on the Notes. See Note 7 for            additional description of the terms and conditions of the issuance of these            Notes.

 

F-12

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 
| **4.** | **PATENT LICENSE AGREEMENTS** |
|--------|-------------------------------|

**Navy License Agreement**

On            October 3, 2007, the Company entered into a license agreement with the United States            Department of the Navy as represented by the Naval Research Laboratory            (“NRL”) (the “License Agreement”). Under the License Agreement,            the Company has been granted rights to certain patents for use in the electromagnetic            shielding/strength enhancement, cosmetic, fragrance, agriculture, ink and paper,            electronics, fabrics and textiles and local drug delivery fields.

The            License Agreement provides a license to the Company for the licensed patents, any            patents issuing thereon and any re-examination, re-issue, continuation or division            thereof within the United States of America until each subject patent expires, subject            to the Company’s requirements to fulfill a commercial deployment plan to bring            one or more licensed inventions to practical application by October 1, 2009, invest at            least $1.5 million in marketing and or research and development of practical            applications for the patents and such other limitations discussed therein. Further, any            licensed invention not in use for a practical application after 3 years may be licensed            by the NRL on a non-exclusive basis provided that the Company is given the first right            of refusal to begin practical application of any such licensed invention.

The            License Agreement provides for a license issue fee of $500,000 to be fully paid by            December 31, 2009 and royalties of 5% of net sales, subject to certain minimum royalty            payments.

The            License Agreement provides that the Company may sublicense the licensed inventions            provided that the royalty for such sublicense shall be between 10% and 25% of any such            sublicense revenue, depending on the number of such sublicenses in effect.

The            $500,000 license issue fee will be amortized over the 5 year term of the license            agreement on a straight-line basis. As of December 31, 2007, the Company had paid            $50,000 of the license issue fee and amortized $25,000 of the license issue fee. As of            December 31, 2007, there net value of the Navy License was $475,000. Future royalty            payments resulting from this agreement will be expensed as incurred.

**Ambit License Agreement**

On            December 31, 2005, the Company entered into an exclusive licensing agreement for the            rights to a patented technology in the field of electronics shielding. On November 13,            2006, the parties signed an amended and restated non-exclusive license agreement,            effective October 1, 2006, modifying the terms of the original agreement. The amended            license agreement calls for 20% royalty payments upon our sale of licensed products            utilizing the technology or in instances of sublicense agreements and eliminates the            original requirement calling for minimum royalty payments. The amended agreement            includes annual reporting of progress made on product development and various            confidentiality elements. This agreement shall remain in effect until the expiration            date of the last-to-expire related patent that is cited in the agreement, which is            currently projected to be in fiscal year 2014.

In            consideration for the rights granted to NaturalNano under the original agreement, the            Company paid $100,000 in cash and issued 200,000 shares of common stock valued at $1.45            per share. In connection with the amendment, the purchase price was modified and as a            result the 200,000 shares issued to Ambit under the original agreement were returned to            the Company.

The            license was recorded as a non-current asset and is amortized on a straight line basis            over an estimated useful life of nine years ending in fiscal year 2014. Amortization            expense of $33,152 and $40,788 was recognized for this license agreement in 2007 and            2006, respectively, and $33,152 will be recognized annually for each year through 2014.            As of December 31, 2007 and 2006, there net value of the Ambit License was $232,061 and            $265,212, respectively. Future royalty payments resulting from this agreement will be            expensed as incurred.

 

F-13

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 
| **5.** | **INVENTORY AND TRANSACTIONS WITH ATLAS MINING                        COMPANY** |
|--------|---------------------------------------------------------------------------------|

On            December 29, 2004, the Company contracted with Atlas Mining Company (OTC BB: ALMI) in            Utah for the purchase of 500 tons of processed halloysite nanotubes. The Company paid            $250,000 to a designated distributor of Atlas Mining with an additional $100,000            payable when commercial shipments in excess of $250,000 are achieved. As additional            consideration, NaturalNano will pay 10% of the resale cash proceeds received from            unaffiliated third parties in instances where the purchase price is in excess of $700            per ton up to a maximum of $2,000 per ton.

During 2007, the Company was notified that Atlas Mining Company            suspended mining activities at its mining facility which sources halloysite. As            described in Note 10, the Company has initiated legal proceedings against Atlas Mining            Company and is seeking to recover up to $250,000 which had been prepaid to Atlas Mining            Company. Due to this uncertainty, all prepaid inventory related to Atlas Mining Company            has been marked down to zero by the Company, and shown as an operational            expense.

During 2007, the Company purchased a supply of 15 tons of halloysite            nanotubes from a mine in New Zealand. A portion of these halloysite nanotubes have been            used to produce Pleximer which is available for sale. As of December 31, 2007, the            $27,149 cost to purchase, ship, store halloysite nanotubes and produce Pleximer being            held in inventory is reflected on the Company’s balance sheet as a current asset.            The Company expects that such inventory will be fully utilized on or before September            30, 2008.

When            halloysite nanotubes or Pleximer held in inventory are used, the carrying value of any            such inventory used (i) for research and development is expensed in the period that it            is used for the development of proprietary applications and processes and (ii) cost of            goods sold will be charged as customer shipments are made.

The            Company believes it has identified various sources of halloysite that are considered            suitable as alternate suppliers of this raw material, and as such, is not solely            dependent upon Atlas Mining Company nor the mine in New Zealand for delivery of            halloysite materials.

On            January 28, 2005, NaturalNano was issued a two-year warrant for the right to acquire            750,000 shares of Atlas Mining common stock at $.40 per share. The Company accounted            for this warrant as a free-standing derivative and, accordingly, had recorded the            warrant as an asset, at its fair market value and recognized Other income of $180,000            upon receipt. On August 9, 2006, the Company entered into a Warrant Purchase Agreement            with a third party to sell the Atlas Mining warrant for $562,500 less fees of $56,250.            The Company received the net proceeds of $506,250 as a result of this agreement on            August 22, 2006.

 

F-14

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 
| **6.** | **INCOME TAXES** |
|--------|------------------|

As            of December 31, 2007, the Company had a net operating loss carryforward, for federal            income tax purposes, of approximately $9.3 million which expires from 2024 to 2027. The            deferred tax asset was comprised of the following:
|                                                                                |   | December 31, 2007 |       | December 31, 2006 |   |
|-------------------------------------------------------------------------------------|--------|-------------------|------------|-------------------|--------|
| Net operating loss carryforwards                                                    |   | $                 | 3,394,155  |              | $      | 2,080,470 |   |
| Future tax deductions for stock options and warrants                        granted |   |              | 2,110,105  |              |   | 2,205,810 |   |
| Other temporary differences                                                         |   |              | 34,545     |              |   | 20,285 |   |
|                                                                                |   |              | 5,538,805  |              |   | 4,306,565 |   |
| Valuation allowance                                                                 |   |              | (5,538,805 | )                 |   | (4,306,565 | ) |
| Net deferred tax asset                                                              |   | $                 | -          |              | $      | - |   |

In            recognition of the uncertainty regarding the ultimate amount of income tax benefits to            be derived, the Company has recorded a full valuation allowance for the deferred tax            assets measured as of December 31, 2007 and 2006.

 
| **7.** | **STOCKHOLDERS’ EQUITY AND CONVERTIBLE BRIDGE                        NOTES** |
|--------|------------------------------------------------------------------------------------|

**November 29, 2005 Merger with CMI**

On            November 29, 2005, the Company completed a recapitalization as a result of the reverse            merger with Cementitious Materials, Inc. (a public shell company). Under the merger            agreement, the Company merged into a newly formed subsidiary of Cementitious with            NaturalNano, Inc. being the surviving entity. The components of the recapitalization            are presented below.
|                                        |   |  

Common Shares |                |  

Common Stock |   | Additional Paid in Capital |      | Accumulated Deficit |             | Stock-holders Equity |   |
|---------------------------------------------|--------|-----------------------|---------------------|----------------------|--------|----------------------------|-----------|---------------------|------------------|----------------------|--------|
|                                        |   |                  |                |                 |   |                       |      |                |             |                 |   |
| CMI equity November 29, 2005                |   |                  | 9,982,084           |                 | $      | 9,982                      |      | $                   | 357,483          |                 |   | ($367,465 | ) | $ | - |   |
| Issuance of new shares to NN stockholders   |   |                  |  

89,838,756  |                 |   |  

89,839             |      |                |  

10,161   |                 |   |   |   |  

                          |  

100,000 |   |
| Cancellation of NN shares November 29, 2005 |   |                  |  

(20,000,000 |  

)            |   |  

(20,000            |  

) |                |  

(80,000  |  

)            |   |   |   |   |  

(100,000 |  

) |
| Elimination of CMI accumulated deficit      |   |                  |                |                 |   |                       |      |                |  

(367,465 |  

)            |   |  

367,465 |   |   |   |   |
| November 29, 2005 Recapitalization          |   |                  | 79,820,840          |                 | $      | 79,821                     |      |                | ($79,821         | )                    | $      | - |   | $ | - |   |

In            connection with the merger, TI, the Company’s principal stockholder, exchanged            each of its outstanding shares for 4.492 shares of Cementitious stock for an aggregate            of 89,838,756 shares. Each of the Company’s previously outstanding options and            warrants were cancelled and replaced with the same number of options and warrants of            Cementitious with rights to acquire common stock at economic and contractual terms            consistent with the rights as defined in the original NaturalNano option and warrant            agreements. The original options were not modified to accelerate vesting or extend the            term of the new options.

**8%            Senior Secured Convertible Notes and related Warrants**

On            March 7, 2007, we entered into a Loan and Security Agreement (the “Purchase            Agreement”) for $3,347,500 consisting of $3,250,000 8% senior secured convertible            notes and a note for $97,500 as partial consideration of due diligence fees with            Platinum Partners Long Term Growth IV (“Platinum”), Longview Special            Financing, Inc. (“Longview”) and Platinum Advisors LLC (the            “Agent”). The shares underlying these notes represent an aggregate of            15,215,910 common shares issuable upon the conversion of the principal amount of the            notes at the fixed conversion price of $0.22 per share.

On            March 7, 2007, the Company issued a series of warrants, to Platinum, Longview and            Platinum Advisors, for the purchase of an aggregate of 25,106,254 shares of our common            stock at any time on or before March 7, 2011. The first series of warrants (the            “Series A Warrants”) covers the purchase of an aggregate of 11,411,933            shares of the Company’s common

 

F-15

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 

stock at an exercise price of $0.22 per share. The second series of            warrants (the “Series B Warrants”) covers the purchase of an additional            aggregate of 12,553,127 shares of the Company’s common stock at an exercise price            of $0.33 per share. The third series of warrants (the Series C Warrants”) covers            the purchase of 1,141,194 shares of the Company’s common stock with an exercise            price of $0.22 per share. If the closing price of the Company’s common stock on            the principal market or exchange on which our stock is traded (currently the            Over-the-Counter Bulletin Board) is at least $0.75 for twenty consecutive trading days,            the Company can compel exercise of the Series A Warrants. Each series of warrants            contain anti-dilution protection that will automatically adjust the exercise price of            such series of Warrants should the Company issue equity or equity-linked securities at            a price per common share below the exercise price of such series to the price at which            the Company issued such equity or equity-linked securities (with certain specified            exceptions including option grants made in accordance with our existing benefit plans).            None of these warrants had been exercised as of December 31, 2007. Neither these            warrants nor the common stock issuable upon exercise of the warrants, have been            registered under the Securities Act of 1933.

**Loan and Security Agreement with Platinum Partners Long Term            Growth IV and Longview Special Financing, Inc.**

Pursuant to the Purchase Agreement, the Company issued $3,250,000 face            amount of 8% Senior Secured Promissory Notes (the “Notes”) to Platinum and            Longview. The holders of the Notes may elect to convert the Notes at any time into            shares of the Company’s common stock at a price of $0.22 per share (the            “Conversion Price”). The Notes contain anti-dilution protection that will            automatically adjust the Conversion Price should the Company issue equity or            equity-linked securities (with certain specified exceptions including option grants            made in accordance with the Company’s existing benefit plans) at a price per            common share below the Conversion Price to the price at which the Company issued such            equity or equity-linked securities. Interest on the outstanding principal amount under            the Notes is payable quarterly at a rate of 8% per annum, payable at the            Company’s option in cash or in shares of its common stock registered for resale            under the Securities Act of 1933 (the “Securities Act”). If the Company            elects to make an interest payment in common stock, the number of shares issuable will            be based upon 85% of the 20-day trailing volume weighted average price per share as            reported on Bloomberg LP (the “VWAP”). Principal on the Notes is due and            payable on March 7, 2009. If the closing price of the Company’s common stock on            the principal market or exchange on which its stock is traded (currently, the            Over-the-Counter Bulletin Board) is at least $1.00 for twenty consecutive trading days,            it can compel conversion of the Notes at the Conversion Price.

The            Company’s obligations under the Notes are secured by first priority security            interests in substantially all of the Company’s assets and substantially all of            the assets of its wholly-owned subsidiary, NaturalNano Research, Inc. (“NN            Research”). In connection with the grant of these security interests, on March 7,            2007, the Company entered into a Pledge Agreement (the “Pledge Agreement”)            with the Agent and the other investors, pursuant to which it granted to the investors            and the Agent a security interest in all of the outstanding shares of the common stock            of NN Research. In connection with the grant of these security interests, on March 7,            2007, NN Research entered into the Patent Security Agreement (the “Patent            Security Agreement”) with the Agent and the other investors, pursuant to which NN            Research granted to the investors and the Agent a security interest in all of NN            Research’s patent interests.

**Warrant Agreements with Platinum Partners Long Term Growth IV and            Longview Special Financing, Inc.**

As            further consideration, on March 7, 2007 the Company issued to Platinum and Longview two            series of warrants, for the purchase at any time on or before March 7, 2011, of an            aggregate of 22,159,092 shares of the Company’s common stock. The first series of            warrants (the “Series A Warrants”) covers the purchase of an aggregate of            11,079,546 shares of the Company’s common stock at an exercise price of $0.22 per            share. The second series of warrants (the “Series B Warrants”) covers the            purchase of an additional aggregate of 11,079,546 shares of the Company’s common            stock at an exercise price of $0.33 per share. If the closing price of the            Company’s common stock on the principal market or exchange on which its stock is            traded (currently the Over-the-Counter Bulletin Board) is at least $0.75 for twenty            consecutive trading days, the Company can compel exercise of the Series A Warrants.            Each series of Warrants contain anti-dilution protection that will automatically adjust            the exercise price of such series of Warrants should the Company issue equity or            equity-linked securities at a price per common share below the exercise price of such            series to the price at which it issued such equity or equity-linked            securities.

The            fair value of the warrants was determined using the Black-Scholes model and was            measured on March 7, 2007 at $3,767,046. Because the net proceeds of the related Notes            was $3,213,600, the Company recorded a discount on such Notes in the amount of            $3,213,600 for the fair value of these warrants. This discount is being amortized on a            straight line basis over twenty four months, the term of the Notes. During the year            ended December 31, 2007, the Company recorded

 

F-16

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 

$1,330,073 in amortization expense relating to the discount on the            convertible notes. This amortization is included in interest expense in the            accompanying Statement of Operations.

The            Black-Scholes valuation model was used to derive the fair value of the related warrants            on the date of grant, issued in connection with these Notes. An expected volatility            assumption of 112% has been based on the volatility of the Company’s stock price            utilizing a look-back basis and the risk-free interest rate of 4.5% has been derived            from the U.S. treasury yield. The market price of the Company’s common stock on            March 7, 2007 was $0.23 per share. The expiration date used in the valuation model            aligns with the warrant life of four years. The dividend yield was assumed to be            zero.

**Due Diligence Fees and Related Agreements with Platinum Advisors,            LLC (the “Agent”)**

On            March 7, 2007, as consideration for due diligence services in connection with the            Purchase Agreement, the Company paid to the Agent a cash fee of $97,500 and issued to            that firm (i) a Note (identical in form to the Notes issued to the other investors) in            the principal amount of $97,500, (ii) Series A Warrants for the purchase of 332,387            shares of the Company’s common stock at $0.22 per share, (iii) Series B Warrants            for the purchase of 1,473,581 shares of the Company’s common stock at $0.33 per            share, and (iv) a warrant (the “Series C Warrant”) for the purchase at any            time on or before March 7, 2011 of 1,141,194 shares of the Company’s common stock            at an exercise price of $0.22 per share. The fair market value of the warrants granted            in connection with the due diligence services described above has been determined            utilizing the Black-Scholes model as of the date of the Purchase Agreement. Total            compensation paid to Platinum Advisors LLC as agent was $696,018 comprised of: $97,500            in cash, a Note in the amount of $97,500 and warrants with a fair market value of            $501,018 on the date of issuance which is included in deferred financing costs and            being amortized on a straight line basis over the term of the notes.

A            charge to Additional Paid-in Capital in the amount of $501,018 reflects the            Black-Scholes fair value of the warrants granted to the Agent in connection with these            due diligence services. Total deferred financing costs incurred in connection with this            transaction were $759,118. These costs are being amortized on a straight line basis            over the term of the notes and resulted in amortization expense of $314,190 in the year            ended December 31, 2007.

If            the Platinum and Longview warrants (described above) are exercised in full, we will be            obligated to pay Platinum Advisors an additional due diligence fee of            $365,625.

**Registration Rights Agreement**

In            December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2 “Accounting            for Registration Payment Arrangements”. This FSP addresses an issuer’s            accounting for registration payment arrangements and specifies that the contingent            obligation to make future payments or otherwise transfer consideration under a            registration payment arrangement should be separately recognized and measured in            accordance with SFAS No. 5. The guidance in this FSP amends FASB Statements 133 and 150            and FASB Interpretation No. 45 to include scope exceptions for registration payment            arrangements. This FSP further clarifies that a financial instrument subject to a            registration payment arrangement should be accounted for without regard to the            contingent obligation to transfer consideration pursuant to the registration payment            arrangement. This guidance is effective for financial statements issued for fiscal            years beginning after December 15, 2006. The Company adopted this FSP in the first            quarter of 2007 in connection with the issuance of the 8% Senior Secured Convertible            Notes and related warrants as described above.

On            March 7, 2007, the Company entered into a Registration Rights Agreement with the Agent            and the other investors, pursuant to which the Company agreed to prepare and file            within 60 days of the March 7, 2007 agreement, a registration statement for resale            under the Securities Act of 1933, the common stock issuable upon the exercise of the            Warrants, in payment of interest on, or upon conversion of, the Notes. The Company            further agreed to use its best efforts to cause the Registration Statement to be            declared effective 120 days following the March 7, 2007 agreement date, or within 150            days if the Company receives a comment letter from the SEC, and to maintain such            Registration Statement for the two year period following this date. This agreement            allows for liquidated damages based on a daily amount of 0.0333% of the principal            amount of the notes relating to the common stock issuable upon conversion of the Notes            included in the Registration Statement. The Company recorded a total of $146,028 as of            December 17, 2007, the date the registration statement was declared effective. As of            December 31, 2007, $63,539 of this obligation was paid in cash and $82,489 has been            recorded as an accrued liability. The lender has the option to settle the liquidated            damages in common stock valued at the average price for the five days prior to the end            of a payment period. Because the estimated liability recorded on March 7, 2007 was            $133,900, the Company recognized an additional $12,128 of non-operating expense during            the year ended December 31, 2007 related to this obligation.

 

F-17

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 

**Common Stock Issuances**

On            November 3, 2007 we issued 340,000 shares of our common stock as part of a 700,000            share obligation to Sichenzia Ross Friedman and Ference in settlement of a liability            accrued for legal services to be received by the Company between October 2007 and            February 2008. The remaining 360,000 shares were issued on January 2, 2008. The common            stock issued and received in connection with this transaction has been valued at            $34,000 based on the market price of the Company’s common stock as of December            31, 2007 and will be revalued and charged to operations, when the required performance            by the attorney is complete.

On            February 1 and 9, 2006 we issued an aggregate of 314,700 shares of our common stock to            three entities in settlement of liabilities accrued for services and assets received by            the Company during 2005. On February 1 and 9, 2006 we issued an aggregate of: (i)            40,000 shares to High Technology of Rochester, Inc., our previous landlord, in            consideration for certain leasehold improvements and rent concessions to our office            facilities, (ii) 74,700 shares to Medienimpuls GmbH as payment for consulting services,            and (iii) 200,000 shares to Ambit Corporation in connection with the license of certain            patented technology in the field of electronic shielding. The 200,000 shares to Ambit            Corporation were returned to the Company during the fourth quarter of 2006 in            connection with the November 13, 2006 amended license agreement. The value of the            common stock issued and received in connection with these transactions has been valued            based on the market price of the Company’s common stock on the date of these            issuances and receipts.

**Warrant Grants**

As            of December 31, 2007, there were common stock warrants outstanding to purchase an            aggregate 25,546,995 shares of common stock pursuant to the warrant grants described            below.

On            April 23, 2007, the Company granted 240,741warrants to Katan Associates with an            exercise price of $0.26 per share in connection with a consulting services agreement.            This warrant was fully vested on the date of grant and expires on April 23, 2012. The            value of the services received in connection with this agreement, have been measured            utilizing the Black-Scholes model as of the date of the warrant grant. The assumptions            used in this valuation included: (i) risk-free interest rate of 4.6%, (ii) weighted            average expected term of five years; (iii) weighted average expected stock volatility            112% and (iv) expected dividends of zero. This valuation resulted in a charge of            $50,767 included in the Statement of Operations.

On            March 7, 2007, as more fully described above, the Company granted warrants to purchase            as aggregate of 25,106,254 shares of the Company’s common stock at prices ranging            from $0.22 to $0.33 per share in connection with the 8% senior secured convertible            notes. None of the warrants have been exercised as of December 31, 2007. Neither these            warrants, nor the common stock issuable upon exercise of these warrants, have been            registered under the Securities Act of 1933.

On            December 27, 2006, the Company granted 200,000 warrants to PR Financial Marketing, LLC            (“PRM”) with an exercise price of $0.28 per share in connection with a            consulting services agreement. This warrant was fully vested on the date of grant and            expires on December 27, 2008. The value of the services received in connection with            this agreement, have been measured utilizing the Black-Scholes model as of the date of            the warrant grant. The assumptions used in this valuation included: (i) risk-free            interest rate of 4.7%, (ii) weighted average expected term of two years; (iii) weighted            average expected stock volatility 109% and (iv) expected dividends of zero. This            valuation resulted in a fourth quarter 2006 charge of $32,460 included in the Statement            of Operations.

On            July 9, 2006, the Company issued a warrant to purchase 4,770,000 shares of common stock            at exercise prices ranging from $0.75 to $1.30 per share (with a weighted average            exercise price of $1.01 per share) to SBI Brightline XIII, LLC. This warrant was fully            vested on the date of grant and may not be exercised if and to the extent that,            immediately following such exercise the holder thereof would beneficially own 5% or            more of the Company’s common stock. The warrant may be exercised in cash or by            cashless exercise in lieu of cash. The warrant was valued, using the Black-Scholes            model, as of the date of grant. The assumptions used in this valuation included: (i)            risk-free interest rate of 5.1%, (ii) weighted average expected term of 2.7 years,            (iii) weighted average expected stock volatility 90% and (iv) expected dividends of            zero. This valuation resulted in a third quarter 2006 charge of $3,006,786 included in            the caption “Financing fees” in the accompanying Statement of Operations.            None of these warrants had been exercised as of December 31, 2007. On December 31,            2007, SBI Brightline XIII, LLC and the Company agreed to terminate this            warrant.

During the first quarter of 2005, the Company received $225,000 in            financial consulting services from SBI USA, LLC for which payment was satisfied through            the issuance of 4,500,000 common stock warrants. These warrants have an exercise price            of $0.115 per share, were fully vested as of the March 31, 2005 issuance date and had            an original expiration date of

 

F-18

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 

March 31, 2006. On December 19, 2005, the Board of Directors extended            the expiration date of this instrument to March 31, 2007. As a result, the Company            recorded $48,442 as an incremental cost for these services reflecting the estimated            fair value associated with the term extension, as calculated using the Black-Scholes            valuation method. The assumptions used in this valuation were as follows: (i) risk-free            interest rate of 4.49%, (ii) expiration date of the warrant of March 31, 2007, (iii)            expected volatility of 113.2%, and (iv) expected dividends of zero. The consulting            expenses relating to these warrants were provided during the first quarter of 2005 and            were included in Financing fees in the Statement of Operations. None of these warrants            had been exercised before they expired on March 31, 2007.
|  **8.** | **INCENTIVE STOCK PLAN** |
|--------------|--------------------------|

Under the NaturalNano 2005 Incentive Stock Plan and the Amended and            Restated 2007 Incentive Stock Plan, officers, key-employees, non-employee directors and            consultants may be granted options to purchase the Company’s common stock at fair            market value as of the date of grant. Options become exercisable over varying vesting            periods commencing from the date of grant and have terms of five to ten years. The plan            also provides for the granting of performance-based and restricted stock awards. The            shares of Common Stock underlying the plans are reserved by the Company from its            authorized, but not issued Common Stock. Such shares of Common Stock are issued by the            Company upon exercise by any option holder pursuant to any grant of such            shares.

A            summary of the status of NaturalNano’s incentive stock plans is presented            below:
|                               |   | **2007**   |   |   | **2006** |                             |
|------------------------------------|--------|------------|--------|--------|----------|----------------------------------|
|                               |   | Shares     |   |   |     | Weighted Average

Exercise Price |   |   | WeightedAverageRemainingLife-years |   |   | Shares |   |   |   | Weighted Average

Exercise Price |   | WeightedAverageRemainingLife-years |   |
|                               |   |       |   |   |     |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of year   |   | 10,374,000 |   |   | $        | 0.19                             |   |   | 8.67 |   |   | 9,810,000 |   |   | $ | 0.05 |   | 9.34 |   |
| Granted during the year            |   | 8,895,000  |   |   | $        | 0.21                             |   |   | 6.42 |   |   | 2,700,000 |   |   | $ | 0.59 |   | 9.59 |   |
| Exercised                          |   | (680,000   | )      |   | $        | 0.05                             |   |   |   |   |   | (826,000 | ) |   | $ | 0.05 |   |   |   |
| Cancelled or forfeited             |   | (200,000   | )      |   | $        | 0.05                             |   |   |   |   |   | (1,310,000 | ) |   | $ | 0.09 |   |   |   |
| Options outstanding at end of year |   | 18,389,000 |   |   | $        | 0.20                             |   |   | 7.37 |   |   | 10,374,000 |   |   | $ | 0.19 |   | 8.67 |   |
|                               |   |       |   |   |     |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at end of year |   | 10,932,751 |   |   | $        | 0.18                             |   |   | 7.62 |   |   | 8,105,666 |   |   | $ | 0.11 |   | 8.48 |   |
|                               |   |       |   |   |     |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares issued as restricted grants |   | 340,000    |   |   |     |                             |   |   |   |   |   | - |   |   |   |   |   |   |   |
|                               |   |       |   |   |     |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available for future grant         |   | 10,405,000 |   |   |     |                             |   |   |   |   |   | 2,800,000 |   |   |   |   |   |   |   |

 
|                                                             |   | **Options Outstanding**       |       | **Options Exercisable**         |   |
|------------------------------------------------------------------|--------|-------------------------------|------------|---------------------------------|--------|
|  

                         

Range of Exercise Prices |   | Shares Outstanding 12/31/2007 |       | Weighted Average Exercise Price |   | Weighted Average Remaining Life- Years |   |  

Shares Exercisable 12/31/2007 |   | Weighted Average Exercise Price |   |
|                                                             |   |                          |       |                            |   |   |   |   |   |   |   |
| $0.05                                                            |   |                          | 6,844,000  |                            | $      | 0.05 |   |   | 8.11 |   |   | 6,844,000 |   | $ | 0.05 |   |
| $0.18 - $0.42                                                    |   |                          | 11,010,000 |                            | $      | 0.25 |   |   | 6.86 |   |   | 3,637,085 |   | $ | 0.29 |   |
| $1.06 - $1.44                                                    |   |                          | 535,000    |                            | $      | 1.22 |   |   | 8.51 |   |   | 451,666 |   | $ | 1.24 |   |
|                                                             |   |                          | 18,389,000 |                            | $      | 0.20 |   |   | 7.37 |   |   | 10,932,751 |   | $ | 0.18 |   |

As            of December 31, 2007, the aggregate intrinsic value of the 6,844,000 in-the-money stock            options outstanding and exercisable was $342,200. During 2007, options for 680,000            common shares were exercised at $0.05 per share, generating $34,000 in proceeds to the            Company and had an aggregate intrinsic value at the dates of exercise of            $118,000.

 

F-19

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 
| **Non-vested stock option activity**        |   | Non-vested

Shares |       | Weighted Average Grant Price Fair Value |   |
|---------------------------------------------|--------|--------------------|------------|-----------------------------------------|--------|
|                                        |   |               |       |                                    |   |
| Non-vested outstanding at December 31, 2006 |   |               | 2,268,334  |                                    | $      | 0.37 |   |
| Granted during the year                     |   |               | 8,895,000  |                                    | $      | 0.18 |   |
| Vested                                      |   |               | (3,507,085 | )                                       | $      | 0.26 |   |
| Cancelled or forfeited                      |   |               | (200,000   | )                                       | $      | 0.05 |   |
| Non-vested outstanding at December 31, 2007 |   |               | 7,456,249  |                                    | $      | 0.21 |   |

The            fair value of stock options granted to consultants (including the options granted to            Technology Innovations, LLC) has been recorded as an expense of $297,357 for the year            ended December 31, 2007, and reflects changes in fair market value and new grants of            2,695,000 options to purchase the Company’s common stock since the prior            reporting period, calculated using the Black-Scholes valuation method discounted by an            expected forfeiture rate of approximately 17% based on historical forfeitures. The            Black-Scholes model utilizes the undiscounted quoted market price of the            Company’s common stock and considers assumptions related to exercise price,            expected volatility, risk-free interest rate, and the weighted average expected term of            the stock option grants. Expected volatility assumptions utilized in the model were            based on volatility of the Company’s stock price, the risk-free rate is derived            from the U.S. treasury yield and the Company used a weighted average expected            term.
| Black-Scholes Valuation Assumptions:       |   | **12/31/07** |     | **12/31/06** |   |
|--------------------------------------------|--------|--------------|----------|--------------|--------|
|                                       |   |         |     |         |   |
| Risk-free interest rate                    |   |         | 3.1-5.0  | %            |   | 4.6% to 5.2 | % |
| Expected life in years                     |   |         | 4-9.7    |         |   | 5 to 10 |   |
| Weighted average expected stock volatility |   |         | 107%-114 | %            |   | 88% -118 | % |
| Expected dividends                         |   |         | zero     |         |   | zero |   |

As            of December 31, 2007, unvested compensation cost for stock options previously issued to            employees was approximately $1 million and will be recognized in future years through            2010. The unvested cost of stock options previously issued to consultants was            approximately $128,000 as of December 31, 2007 and will be revalued quarterly and            charged to operations as the vesting occurs, during the periods through 2008, which is            when the required performance by the consultants is complete.

In            addition to options granted under the NaturalNano, Inc. 2005 Incentive Stock Plan and            the Amended and Restated 2007 Incentive Stock Plan, the Company has made certain option            grants, for an aggregate of 90,000 common stock options, outside of these plans. These            grants include vesting criteria commencing from the grant date, an exercise price of            $0.10 per share and expiration dates varying from five to ten years from the date of            grant. The cost of the fair value of these stock options has been determined utilizing            the Black-Scholes model as described above.

 

F-20

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 
| **9.** | **COMMITMENTS AND LEASE OBLIGATIONS** |
|--------|---------------------------------------|

The            Company leases office and laboratory space as well as certain research and development            equipment under the terms of various operating leases. Certain of the equipment leases            contain purchase options at prices representing the fair market value of the related            equipment at the expiration of the term of the lease.

On            February 1, 2006, the Company entered into a two year lease agreement that included a            one year renewal option that expires on January 31, 2009. This space, representing            approximately 3,000 square feet of laboratory space, has been used in establishing our            research facility and is located in Rochester, New York. The annual rent for each of            the initial two years of the agreement is $46,187 and increased to $47,687 when the            Company exercised its option to renew the lease for a final year. The Company is also            responsible for a pro rata allocation of the operating costs of this facility, to be            assessed annually by the landlord.   The Company utilizes approximately 4% of the            total facility. On March 31, 2008, the Company and the landlord agreed to termination            of this lease as of May 31, 2008.

On            September 19, 2006, the Company entered into a lease agreement that commenced on March            1, 2007 for approximately 2,250 square feet for office space. This lease expires on            April 30, 2022 subject to our right to terminate at any time after March 1, 2009 upon            90 days notice. For lease years commencing March 1, 2007 and 2008, we will pay an            annual base rent of $44,000. For each year commencing on March 1, 2009 and continuing            through April 30, 2011, the base rent will increase by 5% over the previous            year’s rent. For each year beginning March 1, 2009 and continuing through April            30, 2017, the base rent will increase by 3% over the previous year’s rent. The            landlord is responsible for all real property taxes for the first 38 months of the            term; thereafter, the landlord will absorb the first 3% of any increases and half of            the remaining 97% will be reimbursed by the Company based on our proportionate share            (17%) of the building usage. In addition to being responsible for utilities within our            leased space, we have agreed to pay our proportionate share of utility charges for            common areas within the building. This facility lease provides for scheduled increases            in base rent and as such, rent expense will be charged ratably over the term of the            lease resulting in deferred rent payable, which will represent cumulative rent expense            charged to operations from inception of the lease in excess of required lease            payments.

On            December 7, 2007, we entered into an agreement to lease approximately 9,200 square feet            in Rochester, NY for laboratory space for a period beginning December 17, 2007 and            ending February 28, 2011. From the period starting March 1, 2008 until February 28,            2011 the rent shall be $3,300 per month. We have the option to terminate this lease            agreement at any time after March 1, 2010 with a 60 day notice. We also have the option            to up to six (6) one year renewals of the lease agreement under substantially the same            terms except that the rent shall be $3,400 per month during any such renewal            period.

Total rent expense for the years ended December 31, 2007 and 2006 was            $91,911 and $79,728 respectively.

As            more fully described in Note 4, the Company has entered into patent license agreements            with the United States Department of the Navy and Ambit, which obligate it to pay            license fees and certain minimum royalty payments until at least October            2011.

Presented below are the minimum future payments under these license and            lease agreements:

 
| **For the period ending December 31:** |   | **Capital Equipment (1)** |    | **Patent License** |   | **Equipment** |   | **Office and lab space** |    | **Total** |   |
|----------------------------------------|--------|---------------------------|---------|--------------------|--------|---------------|--------|--------------------------|---------|-----------|--------|
|                                   |   |                      |    |               |   |          |   |                     |    |      |   |   |   |   |   |   |
| 2008                                   |   | $                         | 86,646  |               | $      | 453,000       |   | $                        | 9,298   |      | $      | 124,687 |   | $ | 686,519 |   |
| 2009                                   |   |                      | 43,820  |               |   | 412,000       |   |                     | 1,550   |      |   | 85,433 |   |   | 556,862 |   |
| 2010                                   |   |                      | — |               |   | 279,667       |   |                     | — |      |   | 87,725 |   |   | 368,564 |   |
| 2011                                   |   |                      | — |               |   | 347,333       |   |                     | — |      |   | 56,323 |   |   | 403,656 |   |
| 2012                                   |   |                      | — |               |   | —       |   |                     | — |      |   | 51,214 |   |   | 51,214 |   |
| Thereafter                             |   |                      | — |               |   | —       |   |                     | — |      |   | 547,094 |   |   | 547,094 |   |
| Total contractual cash obligations     |   | $                         | 130,466 |               | $      | 1,492,000     |   | $                        | 10,848  |      | $      | 952,477 |   | $ | 2,613,908 |   |

(1)            Capital equipment includes $14,534 of interest related to the remaining principal            amount of $115,932.

 

F-21

 

**NaturalNano, Inc.**

(A            Development Stage Company)

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31, 2007**

 

 
| **10.** | **SUBSEQUENT EVENT** |
|---------|----------------------|

**Atlas Mining Company**

In            December 2007, the board of directors determined the Company should make its best            efforts to recover the $250,000 it had pre-paid Atlas Mining Company for halloysite. On            January 28, 2008, after attempts to contact Atlas Mining Company management failed, the            Company formally notified Atlas Mining Company that it believes Atlas Mining Company            was in breach of its contract with the Company for the supply of halloysite, for which            the Company had prepaid $250,000 for future deliveries. The Company has filed a claim            against Atlas Mining Company and is seeking to recover the $250,000 it had previously            paid and now believes it may never receive material from Atlas Mining Company. In            addition, on February 4, 2008, the Company notified Atlas Mining Company’s            distribution partner, NanoDynamics, Inc., that it may be liable for the            $250,000.

 

 

F-22