UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





xAnnual Report under
Section 13 or 15(d) of the Securities


Exchange
Act of 1934





For
the fiscal year ended December 31, 2008


or


 ̈Transitional Report
under Section 13 or 15(d) of the


Securities
      Exchange Act of 1934




NATURALNANO,
INC
 Commission
File No. 000-49901





Nevada
            
            87-0646435(State
      of incorporation)
            
            (IRS
      Employer Identification Number)





15
      Schoen Place
              Pittsford,
      New York 14534(Address
      of principal executive office)





(585)
      267-4848(Registrant’s
      telephone number)





Securities
registered under Section 12(b) of the Act:


Title of each classCommon
      Stock (Par Value -
$0.001)




Name of each exchange on
which Registered


None


Securities
registered under to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act


YES  ̈   NO
x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.


YES  ̈   NO
x





INDICATE
BY CHECK MARK WHETHER THE REGISTRANT:





(1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. YES o   
NO  x




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, indefinitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer filer or a smaller reporting
company.




Large
Accelerated Filer  ̈       Accelerated
Filer  ̈    Non-Accelerated
Filer    ̈  Smaller
Reporting Company x




Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Act).Yes  ̈ Nox




The
aggregate market value of the stock held by non-affiliates (61,277,953 shares)
computed by reference to the closing price of such stock ($0.05), as of June 30,
2008 was $3,063,898.





As of
March 31, 2009, there were 67,507,045shares of Common Stock
of NaturalNano, Inc. issued and outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE - NONE




1




NaturalNano,
inc.


Table
of Contents





PART
      IITEM
      1.
                
                BUSINESS
                4ITEM
      2.
                
                PROPERTIES
                16ITEM
      3.
                
                LEGAL
      PROCEEDINGS
                16ITEM
      4.
                
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                16PART
      IIITEM
      5.
                
                MARKET
      FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                18ITEM
      7.
                
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF
      OPERATIONS
                22ITEM
      8.
                
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                28ITEM
      9.
                
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                28ITEM
      9A(T).
                
                CONTROLS
      AND PROCEDURES
                29PART
      IIIITEM
      10.
                
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                31ITEM
      11.
                
                EXECUTIVE
      COMPENSATION
                37ITEM
      12.
                
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                39ITEM
      13.
                
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                40ITEM
      14.
                
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                43ITEM 15.
                
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                45SIGNATURES
                50




2





PART
I


CAUTIONARY
STATEMENT REGARDING


FORWARD-LOOKING
STATEMENTS




This
annual report on Form 10-K 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. Such
forward looking statements include 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. These statements estimates
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.




Our
actual results may differ materially from management’s expectations. The
following discussion should be read in conjunction with our financial statements
included herewith.  This discussion should not be construed to imply
that the results discussed herein will necessarily continue in the future, or
that any conclusion reached herein will necessarily be indicative of actual
operating performance in the future. Such discussion represents only the best
present assessment of our management.




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.




3




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.
  Business
  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 2008 of $5,667,486 and had negative working capital of $4,727,945 and a
stockholders' deficiency of $4,287,389 at December 31, 2008. Since inception the
Company’s growth has been funded through combination of convertible debt from
private investors and from cash advances from its former parent and majority
shareholder Technology Innovations, LLC. 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 Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations, to obtain additional financing and, ultimately, to attain
successful operations.
  During
the third and fourth quarters of 2008, the Company received $390,000 and
$85,000, respectively, in connection with a contingent commitment of $2,500,000
in additional working capital.  The commitment for further capital
advances was contingent on certain operational milestones to be achieved by the
Company.  The Company had not achieved these milestones as of December
31, 2008 and as a result this agreement was terminated.
  On April
3, 2009, we entered into two 8% Senior secured Promissory Notesfor $136,356 and
$34,750. The proceeds from the 2009 Promissory Notes were provided for general
working capital purposes and cannot be used to redeem or make any payment on
account of any securities due to the Lenders. The outstanding principal and all
accrued and unpaid interest is due and payable in full on June30,
2009.
  Due to the strain on the Company’s
liquidity throughout 2008, we have experienced product introduction and
commercialization delays. During the fourth quarter we implemented significant
staff and cost reductions.  As of December 31, 2008, only two
employees were active in the Company; the President and Chief Financial
Officer.  In February 2009, Platinum Long Term Growth IV, LLC, (the
“Series C Holder”), the sole holder of our Series C Convertible Preferred Stock
elected and appointed James Wemett as the Series C Director to the Registrant’s
Board of Directors.  Also in February 2008, the President and Chief
Financial Officer, as well as all other directors resigned from their
positions.  As a result of the resignations, Mr. Wemett became our
sole officer.  To fill the vacancies created by the resignations, Mr.
Wemett, our sole director and officer, appointed Kathleen Browne as Acting Chief
Financial Officer.
  Management is actively assessing the
Company's operating structure with the objective to reduce ongoing expenses,
increasing sources of revenue and is negotiating the terms of additional debt or
equity financing.  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.




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 demonstrated notable value to the multi-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 industries ranging from household products
to cosmetics.




4




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 TM
      is 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.•
            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.




5




The
nanomaterial we are 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
utilize 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 generate 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 controlled release
      functionality by filling our nanotubes with active agents that create
      advantaged, high margin products.




Research
and Development


Our
research and development plans have historically focused on material
characterization, formulation testing and product accreditation for nanoscale
materials and nanoclays, our Pleximer products and filled-tube products. These
efforts have included process and product evaluations and development in the
areas of:




•
            The
      use of halloysite as an additive in composites and
    polymers.





•
            Enhancing
      the extended release properties resident halloysite
  clay.





•
            The
      study and evaluation of halloysite material
    characteristics.





•
            Process
      development and scale-up of HNT treatment
  processes.




For the
twelve months ending December 31, 2008 and 2007 we invested $1.4 million and
$2.0 million, respectively, in support of our research and development programs.
Since inception, December 22, 2004, the Company has invested $6.1 million in
research and development related to the evaluation, design and development of
the Pleximer products, nanomaterial based products and filled-tube
products.




Pleximer
Products




Our technology
development has been directed to the production of our first nanocomposite
product, PleximerTM. Our
team has also been focused on related manufacturing solutions utilizing various
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 to 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 ability to be molded
into desired shapes and structures at a relatively low temperature.




We
believe that Pleximer and similar formulations will 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.




6




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
success with Pleximer is 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. 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 several JDA partners focused
on developing applications where our products would be ordered for use in
products to be manufactured and sold commercially.




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. In certain instances, we may utilize third-party toll
manufacturers to produce Pleximer products in instances where our customer
requires a finished formulation of Pleximer for incorporation into their
manufacturing process.




We
envision that in some 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 believe that future licensing
agreements will be negotiated based upon the customer’s industry segment and the
complexity of the traditional processing alternatives available.




Nanocomposites




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 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 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. 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 in 2007 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
                        
                        
                        
                        -
                        
                        
                        
                        3206
                        
                        
                        101
                        
                        
                        
                        12
                        %
                        
                        
                        29011
                        
                        
                        144
                        
                        
                        
                        60
                        %
                        
                        
                        240




7




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.




Filled Tube
Products




NaturalNano’s
second generation halloysite nanotube (“HNT”) products 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 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. During 2008 we began the evaluation and testing on several
application opportunities relating to filled-tube products in industries
including household, personal care and agrichemicals. Our strategy for the
market introduction of the filled-tube products is the establishment of joint
development agreements with various field-of-use development partners. These JDA
agreements would include various product demonstration, validation and
accreditation trials prior to market commercialization. We intend to prioritize
the selection and evaluation of JDA and commercialization partners in order to
accelerate our entry into the filled-tubes market.




The
Company has certain joint development partners  focused  on
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 2025 and
described further under the heading “Intellectual Property.”




NaturalNano’s
Technologies




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
filled-tube products will focus on the utilization of the tubular nature of the
halloysite nanotubes, by 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. We believe the combination of development work in our
laboratories and collaboration with one or more strategic partners would allow
the Company to focus on the design of high margin, filled nanotube
products.




8




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. These products have introduced 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 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 has made 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. During 2007-2008,
the Company invested $540,000 in capital investment, including capital leases,
for 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.




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 was
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
expire and is subject to certain Company requirements regarding commercial plans
and  investments in marketing and or research and development for the
related product applications.




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, and in certain instances even longer, 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




9




The
potential markets for our technologies are significant and have been projected
to grow 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.


•
            According
      to “World Nanomaterials,” a new study from the Freedonia Group, Inc. world
      demand for nanomaterial is forecast to reach $4.2 billion by
      2011.




One of
our priorities in 2009 and forward is focused on expanding our customer base and
product applications for our Pleximer and filled-tubes products. We believe our
products and technologies provide a lower cost alternative for the nanoclay
segment of the polymer composites market. We believe our patented technology
leverages the unique characteristics of halloysite clay in the development of
novel compounds to provide stronger and lighter end-products currently desired
in multiple commercial industries. These lighter and stronger characteristics
can be achieved using our technology using conventional processing equipment
resulting – thereby resulting in lower fabrication costs. Our JDAs and research
projects completed in recent years indicate growing interest in our
technology.  Our focus is to expand the awareness of our technology,
products and application opportunities through polymer industry forums, trades
shows and via the engineering community. The Company’s executive team is
currently responsible for developing relationships with prospective customers
and future joint research and development partners.




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 has estimated in
prior years that the global composite plastic market could reach $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.




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.




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.




During
2007, the Company was notified that Atlas Mining Company suspended mining
activities at its mining facility which sources halloysite. In consideration of
these actions and due to the related uncertainty of the future delivery of this
inventory, all prepaid inventory related to Atlas Mining Company was marked down
to zero with a corresponding  charge to operational expense in
2007.




10




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.




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. 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 products available for
sale. As of December 31, 2008, $20,209 of costs to purchase, ship, store this
halloysite inventory was reflected on the Company’s balance sheet as a current
asset. The Company expects that such inventory will be utilized in the coming
twelve months.




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 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. 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 that 2009 operating revenues will be
generated from the sale of processed and functionalized HNTs and possibly
products in a polymer-based pellet or flake forms under the product name
“Pleximer.” There also may be opportunities in 2009 for funded development of
applications of interest to our joint development partners. Management
anticipates that future results of manufacturing-scale testing, as they may
occur in the future with joint development partners, will identify instances for
common development that could offer new market offerings to solve strength and
dispersion issues that result from traditional platy nanoclay
formulations




Sales




The
Company’s executive team is currently responsible for developing relationships
with prospective customers and joint research and development partners. During
2009 we may recruit sales employees 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, as our cash flow and
liquidity allows.




11




We
believe that strategic partnerships and joint development agreements (“JDA”) are
an important element of our commercialization strategy. To date, we have entered
into several 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. Our 2008 JDA efforts broadened the range of polymer systems and began
development of filled tube applications. In 2009, we expect to continue to work
with these JDA partners and to seek additional partners as our product knowledge
and applications opportunities develop. 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. Historically each party to the joint development
agreements has been responsible for the cost of the activities initiated by it
own employees and consultants.




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. 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. The nanoclay segment of the
nanocomposite market, which includes halloysite, is expected to grow 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.




12




Employees




As of
December 31, 2008, the Company had two full-time employees; our President and
Chief Financial Officer. Due to the Company’s liquidity position described
above, spending and staff reductions have been significant in the fourth quarter
of 2008 and cost reductions have continued into 2009. In February 2009, Platinum
Long Term Growth IV, LLC, (the “Series C Holder”), the sole holder of our Series
C Convertible Preferred Stock elected and appointed James Wemett as the Series C
Director to the Registrant’s Board of Directors.  Also in February
2008, the President and Chief Financial Officer, as well as all other directors
resigned from their positions.  As a result of the resignations, Mr.
Wemett became our sole officer.  To fill the vacancies created by the
resignations, Mr. Wemett, our sole director and officer, appointed Kathleen
Browne as Acting Chief Financial Officer.




If our liquidity and cash positions
improve, the Company will hire two research staff in 2009 in connection with the
product development and commercialization of our products. We anticipate the aggregate annual cost of
these additional research employees would be $100,000. There are no assurances
that the Company’s liquidity and cash position will improve and allow such
hiring to be initiated. Our evaluation of human resource needs may result in our
use of experienced part-time consultants in various functional areas in lieu of
hiring of full-time employees. All of our employees and consultants are required
to signed confidentiality agreements and non-compete agreements, as
appropriate.




Intellectual
Property




NaturalNano
owns or holds license to 25 issued or pending patents. An overview of the
Company’s issued, pending and licensed patents are summarized
below.




Issued
patents assigned from Technology Innovations, LLC (our former corporate parent)
in the first quarter of 2007:




·
            #7425232  Hydrogen
      storage apparatus comprised of halloysite and mineral microtubules, issued
      on 9/16/08 and expires on 4/15/2024,
and




·
            #7400490  Ultra-capacitors
      comprised of mineral microtubules, issued on 7/15/08 and expires on
      1/25/2025.




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 (our former
corporate parent), during the first quarter of 2007, include the following
processes and applications:




•
            Halloysite
      microtubule processes, structures, and composites,•
            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.








13




•
              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 Controlled
      Release Microstructures, expires on
  2/20/2013,
 ·
                Patent #6013206 Process for
      Formulation of High Aspect Ratio Lipid microtubules expires on
      1/11/2017,
 ·
                Patent #6280759 Method of
      Controlled Release and Controlled Release Microstructures expires on
      8/28/2018,
 ·
                Patent #6913828 Production of
      Hollow Metal Microcylinders From Lipids, expires on
      7/5/2022,
 ·
                Patent #6936215 Process for
      Control of Bilayer Numbers Leading to High Efficiency Production of
      Lipid   Microtubules, expires on
      8/30/2022,
 ·
                Patent #7125476 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
      Waterborne Coating Containing Microcylindrical Conductors and
      Non-Conductive Space Filling Latex
  Polymers.





Patent Assignment modifying
License Agreement with Technology Innovations, LLC




During
the first quarter of 2007, our then 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, 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 was
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 allows the Company to 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
License Agreement provides for a license issue fee of $500,000 to be paid in
installments as follows: $50,000 in October 2007, $50,000 in August 2008,
$100,000 in October 2008, $100,000 in December 2008, $100,000 in June 2009, and
$100,000 in December 2009. As of December 31, 2008, the Company had paid
$100,000 under this agreement and was delinquent in $200,000 of payments defined
under the agreement.




The
License Agreement provides for royalties of 5% of net sales, subject to certain
minimum royalty payments. The agreement requires minimum annual royalty
payments, paid in advance, in October of the year prior to the royalty period.
Minimum annual royalties defined under this agreement are as follows: $76,667
for amounts payable in 2007, $144,333 for amounts payable in 2008, $212,000 for
amounts payable in 2009, $279,667 for amounts payable in 2010, $347,333 for
amounts payable in 2012 and $30,000 per year thereafter as defined. As of
December 31, 2008, the Company had paid $76,667 under this agreement. Royalty
payments resulting from this agreement are expensed as incurred.




Prior to
the fourth quarter of 2008, the Company had been amortizing the $500,000 Navy
license issue fee over the 5 year term of the license agreement on a
straight-line basis. During the fourth quarter of 2008, the Company evaluated
the recoverability of the net capitalized license issue fee and determined that
the Company’s probable recovery of the net book value of this asset as compared
to forecasted discounted future cash flows including required minimum royalty
payments was uncertain.  As such, the carrying value of this
capitalized license issue fee was reduced to zero during the fourth quarter of
2008. This asset impairment determination was based on management’s judgments
regarding the Company’s current cash position, the requirements for minimum
annual funding requirements for royalties and the uncertainty regarding the
implementation of research and commercialization programs due to the Company’s
current liquidity position (as discussed in Note 1). In connection with this
evaluation, a fourth quarter impairment loss of $ 375,000 was recorded to the
Statement of Operations thereby fully writing off the net book value of this
intangible asset at December 31, 2008.




14




During
the twelve months ended December 31, 2008 and 2007, $100,000 and $25,000,
respectively, of amortization expense was recognized for this license
agreement.




License Agreement with Ambit
Corporation




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
Company had been amortizing the Ambit license over an estimated useful life of 9
years which would have been completed in 2014. During the fourth quarter of
2008, the Company evaluated the recoverability of the net book value of this
intangible asset and determined that the Company’s probable recovery of the net
book value of this asset as compared to forecasted discounted future cash flows
was uncertain.  As such, the carrying value of this license was
reduced to zero during the fourth quarter of 2008. This asset impairment
determination was based on management’s judgment regarding the Company’s current
cash position, and the uncertainty regarding the implementation of research and
commercialization programs due to the Company’s current liquidity position (as
discussed above.)  In connection with this evaluation, a fourth
quarter impairment loss was recorded of $198,910 to the Statement of Operations
thereby fully writing off the net book value of this intangible asset at
December 31, 2008.




During
the twelve months ended December 31, 2008 and 2007, $33,512 of amortization
expense was recognized prior to the impairment loss.




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




Sales 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.




15




Item
      2.
            Description
      of Property




During
the first quarter of 2009, the business office for the Company was relocated to
and is currently conducted from office space located at 15 Schoen Place in
Pittsford, New York. Our laboratory and research facilities are located in
leased space in Rochester, New York, as described below.




On
December 7, 2007, we entered into an agreement to lease approximately 9,200
square feet at 832 Emerson Street 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 is $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. The company
relocated its business offices to this location coincident with the Schoen Place
lease assignment described below.




Prior to
August 15, 2008 the Company leased business office space at 15 Schoen Place in
Pittsford, New York.  This lease which commenced in March 1,
2007, called for annual rent of $44,000 through February 28, 2009, at which
time the annual rent was scheduled to increase by 5%. In addition to being
responsible for utilities within our leased space, we agreed to pay our
proportionate share of utility charges for common area within the building.On August 21, 2008 the
Company assigned and transferred all the rights and responsibilities under this
lease agreement to Technology Innovations, LLC.




On
February 1, 2006, the Company entered into a two year lease agreement that
included a one year renewal option and expired on January 31,
2009.  This space, representing approximately 3,000 square feet of
laboratory space, had been used in the establishment of our initial research
facility and was located in Rochester, New York.  The annual rent for
each of the initial two years of the agreement was $46,187 and increased to
$47,687 when the Company exercised its option to renew the lease for a final
year. The Company was responsible for its pro rata share of the operating costs
of the facility during the lease period and such costs were assessed annually by
the landlord.  On March 31, 2008, the Company and the landlord agreed
to terminate this lease effective May 31, 2008.




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




On March
24, 2009 the Company received a demand notice from an attorney representing a
group of certain former employees of the Company, including but not limited to
the Company’s former President and Chief Financial Officer, demanding immediate
payment of $331,265 for certain deferred compensation, severance and vacation
benefits. Each of the former employees cited in the demand notice, as well as
other former employees, had executed written agreements during 2008 that allowed
the Company to defer certain of these compensation payments. The Company is
evaluating the components of this demand notice and is working to respond to
this demand. Due to the Company’s current cash and liquidity position discussed
above and the current evaluation of the items in the demand notice, the timing
of future payment of these outstanding amounts in uncertain. The Company has
accrued for earned and unused vacation benefits and deferred payroll costs for
amounts electively deferred by these and other former employees as of December
31, 2008. The Company has retained counsel in connection with this
demand.




We
received a letters and demands for payment in April 2009 from our landlord at
our Emerson Street facility in Rochester, NY and a creditor in connection with a
capital lease for certain equipment used in our operations.  As it
relates to the facility, as of the end of March 2009, we had accrued and unpaid
rent amounting to $12,500.  As it relates to the capital lease, as of
the end of March 2009, there are past due payments aggregating approximately
$30,000.  Discussions with the creditors relating to this matter are
ongoing and we intend to arrange payment plans related to all past due amounts,
as well as future obligations.  All amounts outstanding as of December
31, 2008 have been recorded as a liability in the accompanying financial
statements.




Except as
described above, the Company is 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.




16




Item
      4.
                Submission
      of Matters to a Vote of Security
Holders
  On
October 10, 2008, an information statement was furnished to all holders of
Common Stock of the Company as of September 12, 2008, in connection with the
proposed actions cited below, as 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:


The
amendment and restatement of the Articles of Incorporation to increase the
number of authorized shares of the Company’s common stock, par $0.001 per share,
from 300,000,000 shares to 5,000,000,000 shares.




2.
      The amendment and restatement of the Articles of Incorporation togive
      the board of directors the power and authority, without a shareholder
      vote, to approve and implement forward and reverse splits of our common
      stock upon approval of a majority of the directors.3.
      The approval of the NaturalNano, Inc. 2008 Incentive Stock Plan (the “2008
      Plan”) and the   reservation of 800 million shares of the
      Company’s common stock for issuance under the 2008 Plan.
              
              4.
      The election of six (6) members of the Board of Directors, each to serve
      until the 2009 Annual Meeting of Stockholders or until a successor is
      elected.
              
              5.
      The approval of Freed, Maxick & Battaglia, CPAs, PC. as the Company’s
      independent registered public accounting firm for the fiscal year ending
      December 31. 2008.




The
foregoing actions were approved by the holders of the majority of the Company’s
issued and outstanding common shares on September 23, 2008 and became effective
on October 30, 2008.




On
October 30, 2008, the Company filed a certificate of amendment to its second
Amended and Restated Articles of Incorporation and filed the Amended and
Restated Articles of Incorporation, authorizing for issuance up to 5,000,000,000
shares of common stock and 10,000,000 shares of preferred stock.




17




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, 2007 are presented below. These quotations reflect inter-dealer
prices, without mark-up, mark-down or commission, and may not represent actual
transactions.




Sales
      PricesHigh
                          
                          
                          LowFor
      the year ended December 31, 2007First
      quarter
                          
                          $
                          0.38
                          
                          
                          $
                          0.19Second
      quarter
                          
                          
                          0.32
                          
                          
                          
                          0.20Third
      quarter
                          
                          
                          0.27
                          
                          
                          
                          0.16Fourth
      quarter
                          
                          
                          0.27
                          
                          
                          
                          0.09For
      the year ended December 31, 2008First
      quarter
                          
                          $
                          0.14
                          
                          
                          $
                          0.06Second
      quarter
                          
                          
                          0.07
                          
                          
                          
                          0.05Third
      quarter
                          
                          
                          0.07
                          
                          
                          
                          0.02Fourth
      quarter
                          
                          
                          0.03
                          
                          
                          
                          0.003




The
closing price of the Company’s common stock on April 10, 2009, as reported
on the OTC Bulletin Board, was $0.01 per share. As of March 31, 2009 there were
outstanding 67,007,045 shares of our common stock, which were held by
approximately 200 shareholders of record. The Company has never declared or paid
a cash dividend since inception (December 22, 2004) nor is there any intention
to do so in the near term.


Equity
Compensation Plan Information
  The
following chart sets forth information regarding our equity compensation plans
as of December 31, 2008:
  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
                          22,033,166
                          $0.19
                          802,498,833*Equity
      compensation
                            plans
      not approved by
                            security
      holders
                          162,624,651
                          $0.005
                          noneTotal
                          185,346,983
                          $0.007
                          802,498,833
 * The
shares are issuable under the Company’s 2008, 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.


Equity Compensation Plans
Approved by Security Holders include the Company’s 2005 Incentive Stock
Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the
“2007 Plan”) and the 2008 Incentive Stock Plan (the”2008
Plan”).  Officers, employees, directors and consultants may be granted
options under these plans 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.
These plans also provide for the granting of performance-based and restricted
stock awards.




These
Plans have been approved by the Company’s shareholders and are authorized to
grant awards as follows: the 2005 Plan is authorized to grant up to 14 million
share unit awards, the 2007 Plan is authorized to grant up to 17 million share
unit awards, and the 2008 Plan is authorized to grant up to 800 million unit
share awards.





Equity Compensation Plans
Not Approved by Security Holders as of December 31, 2008 included (a)
240,741 warrants granted in 2007 in connection with consulting services, (b)
162,093,910 warrants granted in connection with March 7, 2007 due diligence
services provided by the lenders agent, (c) 200,000 warrants granted in
connection with a short term borrowing agreement in 2008 and (d) 90,000 stock
options granted in 2006 outside of the 2005 and 2007 Plans.




18
 
  Recent
Sales of Unregistered Securities


I.     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.




II.    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 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.




III.     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.




19




IV.    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. 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.
The
Loan and Security Agreement and the related underlying notes issued in
accordance with the March 7, 2007 agreement had an original conversion price
that was adjusted in accordance with the anti-dilution provisions to a
conversion price of $0.005. This conversion price was triggered as a result of
the issuance of notes on September 29, 2008 thereby resulting in a reset of (a)
the conversion price of the Initial Notes, (b) the exercise price of the
warrants related to the Initial Notes and (c) the number of shares that may be
purchased by such warrants.  The warrants issued in connection with
the March 7, 2007 Loan and Security Agreement were adjusted under the
anti-dilution provisions of the agreement, resulting in a new conversion price
of $0.005 per share. (See item VIII below.)




VOn 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.  The 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.




VI   On June 6,
2008 the Company received $200,000 under a promissory note and issued a 5 year
warrant to purchase 200,000 shares of the Company’s common stock for $0.33 per
common share, the Company valued such warrant at $6,490 as of the repayment date
of the note. During the twelve months ended December 31, 2008, $6,490, was
realized as additional interest expense related to this warrant.




VII  On August
6, 2008 and in consideration for the cancellation of TI’s debt the Company
issued TI a warrant to purchase up to 4.99% of the Company’s common
stock.  Under the warrant TI may purchase up to that number of shares
that would give TI beneficial ownership of not more than 4.99% of the
Company.  If the underlying shares are purchased before the warrant
expires on February 11, 2011, the purchase price shall be computed as $40
million divided by the fully diluted common shares outstanding on the date of
exercise.  On the date that the warrant was issued, TI beneficially
owned 4.05% of the Company through common stock and derivatives convertible into
common stock within 60 days from the issue date held by TI and its affiliates.
The Company had 2,173,714,879 fully diluted common shares, which gave effect to
the conversion of all debt and equity instruments into common stock, per the
terms of the warrant. On the date of issuance, the warrant was for a maximum of
646,377 common shares at a price of $0.0115 per share.




VIII   On
September 29, 2008 the Investors agreed to exchange detachable warrants (to
purchase 1,218,750,060 shares of common stock of the Company for $0.005 per
share related to the March 7, 2007 convertible notes payable) for 5,000,000
shares of preferred stock.




On
October 7, 2008, the Company filed a Certificate of Designation of Rights,
Preferences, Designations, Qualifications and Limitations of the Series C
Preferred Stock (the “Series C Designation”) with the Secretary of State of the
State of Nevada, and prepared a preferred stock certificate for delivery to
Platinum Long Term Growth IV, LLC, evidencing 4,250,000 shares of Series C
Convertible Preferred Stock of the Company (“Series C”).




On
October 7, 2008, the Company also filed a Certificate of Designation of Rights,
Preferences, Designations, Qualifications and Limitations of the Series B
Preferred Stock (the “Series B Designation”) with the Secretary of State of the
State of Nevada, and prepared a preferred stock certificate for delivery to
Longview Special Funding, Inc., evidencing 750,000 shares of Series B
Convertible Preferred Stock of the Company (“Series B”).  The Series B
and Series C have an aggregate liquidation preference of $10,000 and participate
in any dividends or distributions to the common shareholders on an as converted
basis.




20




Each
share of the Series B Convertible Preferred Stock, and each share of Series C
Convertible Preferred Stock is convertible into 160 shares of the Company’s
common stock and votes on an as-converted basis (with each share having 160
votes).  However, the Series B Designation limits the holder’s right
to convert its Series B Convertible Preferred Stock, and the aggregate voting
power attributable to its Series B Convertible Preferred Stock, to no more than
4.99% of the votes attributable to the total outstanding common
shares.  Accordingly, the votes attributable to the Series B
Convertible Preferred constitutes 4.99% of the aggregate votes attributable to
the Company’s outstanding shares (on an as converted basis) and the votes
attributable to the Series C Convertible Preferred Stock, therefore, represent
approximately 86.74% of the aggregate votes attributable to the Company’s
outstanding shares (on an as converted basis), and the votes Series B
Convertible Preferred and the Series C Convertible Preferred, voting together
represent approximately 91.73% of the aggregate votes attributable to the
Company’s outstanding shares (on an as converted basis).


IX   On
September 29, 2008, the Company entered into a new Loan and Security Agreement
(the “New Notes”), by and among Platinum and Longview allowing for borrowing of
up to $2,500,000. During the year ended December 31, 2008, the Company received
an aggregate of $475,000 and in turn issued 8% senior secured promissory notes
due January 31, 2010 to the Lenders.  The Loan Agreement provides for
additional advances, subject to performance milestones being achieved by the
Company that could total an additional $2,025,000. These milestones had not been
achieved as of December 31, 2008 and as a result this agreement was terminated.
The New Notes are convertible into common stock of the Company, with a
conversion price of $0.005 that bear interest at the rate of 8% per annum, with
interest payable quarterly, in arrears, in freely traded stock or in cash at
election of the Company.  All unpaid interest and principal will be
due and payable at maturity on January 31, 2010 and no payments of interest are
required prior to January 31, 2009.




XOn
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.




XI   On
December 7, 2006, we granted an option to Sir Harold W. Kroto, a consultant
to the Company and at that time 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.




XII  On September 26, 2008, the
Company entered into a consulting agreement with Technology Innovations LLC
whereby TI agreed to provide certain advisory services until September 26,
2010.  In exchange for such services, the Company agreed to issue
TI common stock valued at an aggregate of $66,000 based upon the trailing 20 day
volume weighted average price (the “VWAP”) on the date of issue. To the extent
that the VWAP on the date, or an effective Form S-8 registering shares issued to
TI, is less than the VWAP on the date such shares were issued the Company agreed
to pay TI such difference in cash. As of December 31, 2008, TI was issued
300,000 shares of common stock valued at $11,700.




21




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
      7.
            Management’s
      Discussion and Analysis





Note
Regarding Forward-Looking Statements




This annual report on Form 10-K 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. Such forward looking statements include 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. These statements estimates 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.




Our
actual results may differ materially from management’s expectations. The
following discussion and analysis should be read in conjunction with our
financial statements included herewith.  This discussion should not be
construed to imply that the results discussed herein will necessarily continue
in the future, or that any conclusion reached herein will necessarily be
indicative of actual operating performance in the future. Such discussion
represents only the best present assessment of our management.




22




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.




General




During
the year ended December 31, 2008 we were, and for 2009 we expect we will
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.




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 2008 of $5,667,486 and had a cash balance of $1,148 and negative
working capital of $4,727,945 and a stockholders' deficiency of $4,287,389 at
December 31, 2008. The Company does not currently have sufficient funds to pay
its expenses for the next twelve months. Since inception the Company’s growth
has been funded through combination of convertible debt from private investors
and from cash advances from its former parent and majority shareholder
Technology Innovations, LLC. 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 Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations, to obtain
additional financing and, ultimately, to attain successful
operations.




During
the third and fourth quarters of 2008, the Company received $390,000 and
$85,000, respectively, in connection with a contingent commitment of $2,500,000
in additional working capital.  The commitment for further capital
advances was contingent on certain operational milestones to be achieved by the
Company.  The Company had not achieved these milestones as of December
31, 2008 and as a result this agreement was terminated.




On April
3, 2009, we entered into two 8% Senior secured Promissory Notesfor $136,356 and
$34,750. The proceeds from the 2009 Promissory Notes were provided for general
working capital purposes and cannot be used to redeem or make any payment on
account of any securities due to the Lenders. The outstanding principal and all
accrued and unpaid interest is due and payable in full on June30,
2009.




Due to
the strain on the Company’s liquidity throughout 2008, we have experienced
product introduction and commercialization delays. During the fourth quarter we
implemented significant staff and cost reductions.  As of December 31,
2008, only two employees were active in the Company; the President and Chief
Financial Officer.  In February 2009, Platinum Long Term Growth IV,
LLC, (the “Series C Holder”), the sole holder of our Series C Convertible
Preferred Stock elected and appointed James Wemett as the Series C Director to
the Registrant’s Board of Directors.  Also in February 2008, the
President and Chief Financial Officer, as well as all other directors resigned
from their positions.  As a result of the resignations, Mr. Wemett
became our sole officer.  To fill the vacancies created by the
resignations, Mr. Wemett, our sole director and officer, appointed Kathleen
Browne as Acting Chief Financial Officer.




Management
is actively assessing the Company's operating structure with the objective to
reduce ongoing expenses, increasing sources of revenue and is negotiating the
terms of additional debt or equity financing.  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.




23




Comparison of Liquidity and
Capital Resources


for the years ended December
31, 2008 and 2007




Operating
activities




Net cash
used in operating activities in the years ended December 31, 2008 and 2007 were
$545,926 and $2,855,381, respectively. The net loss generated in 2008 was
$193,154 less than the prior period but non-cash items (depreciation,
amortization, stock option vesting, warrant expense and stock issued for
services) were $1,324,315 greater in 2008 than the prior period in 2007. The
increase in non-cash items reflects the increase in stock grants in satisfaction
of interest and services as well as the impairment loss of $573,909 recognized
for intangible license and patent assets during 2008.




For the
twelve months ended December 31, 2008 and 2007 the company recognized non-cash
expenses of $1,827,049 and $1,644,263, respectively, for amortization of debt
discount and deferred financing costs incurred in connection with the 8% senior
secured convertible debt. The amortization of the remaining $1,196,306 of debt
discount and deferred financing costs will continue as non-cash expenses through
January 2010.




The
decrease in the net loss for the year ended December 31, 2008 reflects reduced
spending in the fourth quarter of 2008. As described above, the Company is
actively seeking opportunities to reduce expenses and improve its liquidity
position. We expect that all spending categories will be reduced in the 2009,
although we will continue to invest in product and commercialization efforts as
our cash position and liquidity allow. The $882,987 increase in accounts
payable, payroll and other accrued expenses in the year ended December 31, 2008
reflects these cash flow and liquidity challenges.




Investing
activities




Net cash
used in investing activities in the years ended December 31, 2008 and 2007 was
$248,093 and $216,137, respectively. Our capital investments during 2008 and
2007 were primarily related to our research and development efforts. Leasehold
improvements of $117,170 were made in 2008 in connection with the relocation of
our laboratory facility. During 2008, we also invested $10,614 under a capital
lease agreement relating to an improved feeder system for our twin screw
extruder equipment. This capital lease has a term of twenty-four months and
includes 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 $66,255 outstanding as of
December 31, 2008 in connection with various lease agreements.




Total
purchases of capital investments in 2008 reflected $196,158 for research and
development and $2,126 for general and administrative activities. Additionally
in 2008, the Company acquired laboratory equipment under lease agreements in the
amount of $24,766. 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, 2008 and 2007
was $390,227 and $3,336,820, respectively. The cash flows from financing
activities in 2008 reflect the receipt of $475,000 in proceeds from convertible
notes issued in the third and fourth quarters of 2008 and the capitalization of
$20,000 in related deferred financing costs. The 2007 cash flow from financing
activities reflects the $3,250,000 proceeds from the 8% convertible debt issued
in March 2007, described in Note 2.




During
2008, we received  cash advances of $107,200 from affiliated entities for
shared services agreements and repaid $96,531 on related party payables during
the year. This change in net payables outstanding between affiliates of $10,669
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.




On August
1, 2008, in connection with, and as a condition to the financing provided by
Platinum and Longview, TI agreed (a) to sell its common share holdings in the
Company at the direction of the Company for the sum of $1,000, and (b) agreed to
cancel and forgive all principal, interest, fees and expenses accrued under the
outstanding TI line of credit. On September 26, 2008, the Company paid TI $1,000
and redeemed the 69,303,189 shares of common stock held by TI.




24




During
the year ended December 31, 2008 and 2007, we made capital lease payments of
$74,442 and $38,040, respectively.




During
the first quarter of 2007, we received $300,000 in advances in accordance with
the TI line of credit agreement. No additional borrowings were available under
this line of credit agreement that expired on March 31, 2007. The $900,000 in
principal outstanding on this line of credit agreement and all accrued and
unpaid interest of $129,062 was cancelled in connection with a warrant issued to
TI (see Note 3.)




As of
December 31, 2008 and 2007, we had an accrued liability for $82,489 for
registration rights obligations which are due to the holders of the 8% senior
convertible notes but have not been paid. 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. 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 several participants in our incentive stock option plan exercised their
options and provided $34,000 in cash inflows. No stock option exercises occurred
in 2008.





Comparison of Statement of
Operations


For the years ended December
31, 2008 and 2007




Revenue
and Gross Profit




During
the twelve months ended December 31, 2008 and 2007, the Company recorded
$271,844 and $15,250, respectively in revenue for samples, products and funded
development. The increase in revenue in 2008 of $256,594 over 2007 resulted from
an increase in orders and shipments of sample products of Pleximer product and
halloysite processing, and from funded development with a JDA partner. The cost
of goods sold during for the year ended December 31, 2008 reflects $88,556
related to these revenues.




Operating
Expenses




Total
research and development expenses for 2008 decreased by $632,207 from $2,026,743
incurred for the year ended December 31, 2007 to $1,394,536 for the year ended
December 31, 2008. This decrease was primarily attributable to the reduction in
spending in labor and consulting related services during 2008.  During
2007, the Company had significant investments in research and development
related to the validation of product performance characteristics related to the
Pleximer product introduced during the fourth quarter of 2007. Employee stock
compensation expense was lower in 2008 compared to 2007 based on option grants
made in prior years and have been expensed in accordance with the original
vesting of these grants. The increase in depreciation expense in 2008 reflects
capital investments in research and development asset of $223,050 made in 2008.
During 2008, certain research and development expenses were classified as cost
of products produced and shipped to customers during the year then
ended.




For
      the year ended
                
                
                VarianceDecember
      31,
                
                
                increaseResearch
      and Development
                
                2008
                
                
                2007
                
                
                (decrease)Salaries
      & Benefits
                
                $
                555,336
                
                
                $
                815,491
                
                
                $
                (260,155
                )Stock
      option compensation
                
                
                354,508
                
                
                
                539,126
                
                
                
                (184,618
                )Patent
      costs
                
                
                154,421
                
                
                
                43,557
                
                
                
                110,864Depreciation
                
                
                149,089
                
                
                
                67,777
                
                
                
                81,312Consulting
      services
                
                
                97,272
                
                
                
                255,974
                
                
                
                (158,702
                )Equipment
      Costs
                
                
                9,379
                
                
                
                43,315
                
                
                
                (33,936
                )All
      other
                
                
                150,551
                
                
                
                261,503
                
                
                
                (110,952
                )Allocation
      to cost of goods
                
                
                (
      76,020
                )
                
                
                -
                
                
                
                (76,020
                )$
                1,394,536
                
                
                $
                2,026,743
                
                
                $
                (632,207
                )




Management
is actively assessing the Company's operating structure for the purpose of
reducing ongoing expenses across all categories of expense. We will continue to
invest in research and development programs and product development in 2009 as
our cash position and liquidity allows. No assurance can be given that future
investment or debt financing will develop thereby resulting in improved cash
inflow or liquidity for the Company.




25






Total
general and administrative expenses for the year ended December 31, 2008 was
$1,571,895 as compared to $1,708,918 for the year ended December 31, 2007.
During 2008, the Company received $501,000 for QETC Facilities, Operations and
Training tax rebates from the State of New York relating to the 2006 and 2007
operating periods. The Company recorded these tax rebates as a reduction to
general and administrative expenses upon receipt in 2008. Salaries, benefits and
stock compensation costs increased in 2008 over the prior year due to an
increase in headcount reflecting the addition of two professionals during the
year. Certain expenses in the amount of $175,621 incurred for Legal Fees in 2008
were satisfied by the issuance of the Company’s common stock (see Note
7).




Amortization
expense is associated with the Navy patents and the Ambit license prior to the
asset impairment charge taken in the fourth quarter of 2008.This amortization is
included in general and administrative based on limited revenue generating
activities being conducted during 2008 and 2007 related to these intangible
assets.  The increase in amortization is due to the addition of these
assets late in 2007, resulting in 2008 being the first full year of
amortization.




For
      the year ended
            
            
            VarianceDecember
      31,
            
            
            increaseGeneral and
      Administrative
            
            2008
            
            
            2007
            
            
            (unfavorable)Salary
      & Benefits
            
            $
            572,682
            
            
            $
            409,764
            
            
            $
            162,918Stock
      option compensation
            
            
            485,956
            
            
            
            372,880
            
            
            
            113,076Legal
      and Professional Fees
            
            
            415,939
            
            
            
            411,921
            
            
            
            4,018Amortization
      of intangible assets
            
            
            133,152
            
            
            
            58,152
            
            
            
            75,000Shareholder,
      Board and Other expenses
            
            
            455,239
            
            
            
            556,362
            
            
            
            (101,123
            )State
      Tax Fees and Rebates (net)
            
            
            (
      491,073
            )
            
            
            (
      100,161
            )
            
            
            (390,912
            )$
            1,571,895
            
            
            $
            1,708,918
            
            
            $
            (137,023
            )




Management
is actively assessing the Company's operating structure for the purpose of
reducing ongoing expenses across all categories of expense. We expect that
spending for general and administrative will be reduced significantly in 2009,
although investments in marketing and sales will be a priority if the Company’s
cash and liquidity position improves. No assurance can be given that future
investment or debt financing will develop thereby resulting in improved cash
inflow or liquidity for the Company.




During
the fourth quarter of 2008, the Company recorded a loss on impairment on certain
intangible assets.  The patent license costs related to the Navy
license ($375,000) and the Ambit license agreement ($198,910) were written off
in full due to various factors, as discussed in Note 4.  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
was written off as a charge to operations in 2007.




Other
Income (expense)




Other
expense for the year ended December 31, 2008 was $2,310,434 as compared to
$1,890,579 for the year ended December 31, 2007. Other expense consists
primarily of interest expense and other debt related financing and amortization
expenses considered components of interest expense for financial reporting
..




Interest
was earned on cash balances held at certain financial institutions during 2008
and 2007.  The decrease in interest income earned in 2008 reflects the
decline in cash on-hand during the current year. As described in Note 2 to the
financial statements; interest expense includes the amortization of the debt
discount, the interest on the 8% senior notes, the amortization of financing
costs and the registration rights obligation all relate to the Initial and New
Notes issuances in March 7, 2007 and September 29, 2008.  Interest on
capital lease obligations reflect a full year of interest expense in 2008 and a
partial year in 2007.




26




On August
1, 2008 in connection of a new financing agreement, TI agreed to cancel and
forgive all principal, interest, fees and expenses accrued pursuant it Line of
Credit Agreement with the Company (see Note 3) thereby resulting in a reduction
in interest expense on this line in 2008 compared to 2007.




For
      the year ended
              
              
              VarianceDecember
      31,
              
              
              increaseOther
      Income (expense)
              
              2008
              
              
              2007
              
              
              (decrease)Amortization
      of debt discount
              
              $
              (1,492,532
              )
              
              $
              (1,330,073
              )
              
              $
              (162,459
              )Interest
      on  8% senior notes
              
              
              (422,987
              )
              
              
              (220,193
              )
              
              
              (202,794
              )Amortization
      of financing costs
              
              
              (334,517
              )
              
              
              (314,190
              )
              
              
              (20,327
              )Interest
      to TI Line of Credit
              
              
              (42,018
              )
              
              
              (70,838
              )
              
              
              28,820Interest
      on capital leases
              
              
              (15,292
              )
              
              
              (4,786
              )
              
              
              (10,506
              )Registration
      rights obligation
              
              
              —
              
              
              
              (12,128
              )
              
              
              12,128Interest
      on financed receivables
              
              
              (6,490
              )
              
              
              —
              
              
              
              (
      6,490
              )Interest
      earned on cash
              
              
              3,403
              
              
              
              61,629
              
              
              
              (58,226
              )$
              (2,310,433
              )
              
              $
              (1,890,579
              )
              
              $
              (419,854
              )




Inflation




Although our operations are influenced by general
economic conditions, we do not believe that inflation had a material effect on
our results of operations during 2008 or 2007.




Off-Balance Sheet
Arrangements




We do not have any off-balance sheet arrangements
that have, or are reasonably likely to have, an effect on our financial
condition, financial statements, revenues or expenses.




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




The
Company has earned nominal operating revenue since inception (December 22,
2004). This revenue was generated from funded development and the delivery of
Pleximer and sample products specifically formulated for customer applications
and as such has been reported as operating revenue for financial reporting
purposes. The Company earns and recognizes such revenue to the extent such
development activities are completed or 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 and amortized over its useful life. The Company evaluates the
recoverability of it capitalized patent and licensed intangibles when necessary
to determine if the probable recovery of the net book value of the assets, as
compared to discounted future cash flows, was uncertain.  The carrying
value of these capitalized patent and license agreements was evaluated and
reduced to zero during the fourth quarter of 2008. The evaluation of asset
impairment was based on management’s judgments regarding the Company’s current
cash position, the requirements for minimum annual funding requirements for
royalties and the uncertainty regarding the implementation of research and
commercialization programs in 2009 due to the Company’s current liquidity
position (as discussed above.) Actual future results may differ from
management’s assumptions and estimations.




Deferred
Taxes




Deferred
tax assets and liabilities are determined based on temporary differences between
income and expenses reported for financial reporting and tax
reporting.  Statement of Financial Accounting Standards (“SFAS”) No.
109, “Accounting for Income Taxes” (“SFAS 109”) requires that a valuation
allowance be established when management determines that it is more likely than
not that all or a portion of a deferred tax asset will not be
realized.  The Company evaluates the realizability of its net deferred
tax assets on an annual basis and any additional valuation
allowances are provided or released, as necessary.  Since the Company
has had cumulative losses in recent years, the accounting guidance suggests that
we should not look to future earnings to support the realizability of the net
deferred tax asset.  As a result, as of the years ended December 31,
2008 and 2007, the Company has recorded a valuation allowance to reduce its
gross deferred tax assets to zero in accordance with SFAS 109. In addition, as
of December 31, 2008 the Company has recorded a deferred tax liability of
$150,189, which consists of the tax effect of the difference in the basis
between GAAP and tax purposes for the beneficial conversion feature in
connection with the Notes entered into during 2008 with the offset recorded
through Additional Paid in Capital as an offset to the beneficial conversion
feature.  This deferred tax liability will decrease with a
corresponding increase to Additional Paid in Capital as the beneficial
conversion feature is amortized over the term of the Notes.  See
Footnote 6 for further analysis.




27




The
Company believes that the accounting estimates related to deferred tax valuation
allowances are “critical accounting estimates” because: (1) the need for
valuation allowance is highly susceptible to change from period to period due to
changes in deferred tax asset and deferred tax liability balances, (2) the need
for valuation allowance is susceptible to actual operating results and (3)
changes in the tax valuation allowance can have a material impact on the tax
provisions/benefit in the consolidated statements of operations and on deferred
income taxes in the consolidated balance sheets




Share-based
compensation


The
Company accounts for stock option awards granted under the Plans in accordance
with Statement of Financial Accounting Standard  No. 123 (revised
2004), “Share-Based Payment”, (“SFAS 124(R)”). Under SFAS 123R, compensation
expense related to stock-based payments are recorded over the requisite service
period based on the grant date fair value of the awards. The Company uses the
Black-Scholes option pricing model for determining the estimated fair value for
stock-based awards. The Black-Scholes model requires the use of assumptions
which determines the fair value of stock-based awards, including the option’s
expected term and the price volatility of the underlying stock.
  The
Company’s policy for equity instruments issued to consultants and vendors in
exchange for goods and services follows the provisions of EITF 96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18,
“Accounting Recognition for Certain Transactions Involving Equity Instruments
Granted to Other Than Employees.” The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at which
the commitment for performance by the consultant or vendor is reached or (ii)
the date at which the consultant or vendor’s performance is complete. In the
case of equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.


Item
      8.
            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-K.




Item
      9.
              Changes
      In and Disagreements with Accountants on Accounting and Financial
      DisclosureOn April 24, 2008, we engaged Freed, Maxick & Battaglia,
      CPAs, PC as our new independent registered public accounting firm. On
      April 25, 2008, the Company dismissed McGladrey & Pullen, LLP
      (“M&P”) as its independent registered public accounting firm for the
      Company.The
      audit report of M&P on the consolidated financial statements of
      NaturalNano, Inc. and subsidiary as of and for the year ended December 31,
      2007 did not contain an adverse opinion or a disclaimer of opinion, and
      was not qualified or modified as to uncertainty, audit scope or accounting
      principles, except that an explanatory paragraph was included in M&P’s
      report dated April 8, 2008 regarding the uncertainty of our ability to
      continue as a going concern as referenced to Note 1 of our financial
      statements for the year ended December 31,
2007.





The
      decision to engage Freed Maxick & Battaglia, CPAs, PC was approved by
      the audit committee of the board of
directors.




28




During
      the Company’s fiscal years ended December 31, 2007 and 2006 and through
      April 24, 2008, the Company did not consult with Freed Maxick &
      Battaglia, CPAs, PC 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
      Freed Maxick & Battaglia, CPAs, PC did not provide either a written
      report or oral advice to the Company that Freed Maxick & Battaglia,
      CPAs, PC 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 audit of the Company's consolidated financial
      statements for the fiscal year ended December 31, 2007 and through the
      date of this Current Report, there were: (i) no disagreements between the
      Company and M&P 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 M&P, would have
      caused M&P to make reference to the subject matter of the disagreement
      in its report on the Company's financial statements for such year, and
      (ii) no reportable events within the meaning set forth in Item
      304(a)(1)(v) of Regulation
S-K.




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 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.




Item
      9A
      (T)     Controls and
Procedures




Evaluation of Disclosure Controls and
Procedures




Management
is responsible for establishing and maintaining effective disclosure controls
and procedures. As of December 31, 2008, our Chief Executive Officer and Chief
Financial Officer participated with our management in evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)). Our disclosure controls and procedures are designed to
ensure that information required to be disclosed in the Securities and Exchange
Commission (“SEC”) reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time period specified by the SEC’s
rules and forms and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure. In light of the
discussion of material weaknesses set forth below, these officers have concluded
that our disclosure controls and procedures were not effective as of December
31, 2008. To address the material weaknesses described below, we performed
additional analyses and other post-closing procedures to ensure our consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP). Accordingly,
management believes that the financial statements included in this Annual Report
on Form 10-K fairly present, in all material respects, our financial condition,
result of operations and cash flows for the periods presented.




29




Management’s
Annual Report on Internal Control Over Financial Reporting




A
company’s internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f) and 15d-15(f) is a process designed by, or
under the supervision of, a public company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles (“GAAP”) including those policies and procedures
that: (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of
the company, (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures are being made only in accordance with
authorizations of management and directors of the company, and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has assessed the effectiveness of
our internal control over financial reporting as of December 31, 2008. In making
this assessment, our management used the criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




A
material weakness is a control deficiency, or combination of control
deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis. In connection with management’s assessment of our
internal control over financial reporting described above, management has
identified the following material weaknesses in the Company’s internal control
over financial reporting as of December 31, 2008:




We did
not maintain a sufficient complement of qualified accounting personnel and
controls associated with segregation of duties were
ineffective.  During the fourth quarter of 2008 and the first quarter
of 2009 we experienced resignations in the positions of controller, Chief
Financial Officer, and Chief Executive Officer.  These roles were
filled in the first quarter of 2009 by individuals that have limited knowledge
about the 2008 activities of the company and have limited current knowledge
related to US GAAP and SEC reporting requirements.  These individuals
were responsible for the financial reporting function for the year ended
December 31, 2008.  Further, nearly all aspects of our December 31,
2008 financial reporting process, including but not limited to access to the
underlying accounting records and systems, the ability to post and record
journal entries and responsibility for the preparation of the financial
statements were performed without adequate oversight and review by a second
individual.  This creates certain incompatible duties and a lack of
review over the financial reporting process that would likely fail to detect
errors in spreadsheets, calculations, or assumptions used to compile the
financial statements and related disclosures as filed with the
SEC.  As a result of these circumstances, we determined that our
controls over the preparation, review and monitoring of the financial statements
were ineffective to provide reasonable assurance that the financial records and
related disclosures complied with accounting principles generally accepted in
the United States. These factors resulted in the identification of adjustments
to our December 31, 2008 consolidated financial statements and related
disclosures during the audit conducted by our independent registered public
accounting firm.




As a
result of resignation during the first quarter of 2009, the Company currently
has only one member on its Board of Directors.  This Board member is also
the Company’s Chief Executive Officer and President and reports directly to the
Company’s majority shareholder and debt holder. The Company does not have an
independent audit committee since the resignation of the Audit Committee
Chairman in December 2008.




As a
result of the material weaknesses described above, our management concluded that
as of December 31, 2008, we did not maintain effective internal control over
financial reporting based on the criteria established in Internal Control—Integrated
Frameworkissued by the COSO.




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




30




Plan
for Remediation of Material Weaknesses




In
response to the identified material weaknesses, management, with oversight from
the Company’s board member, plans to continually monitor the overall control
environment and to remedy the identified material weakness by consulting
with third party accounting firms with the appropriate level of expertise to
determine the proper application of GAAP for complex and non-routine
transactions.




Notwithstanding
the material weaknesses discussed above, management believes that the financial
statements included in this report present fairly, in all material respects, our
financial position, results of operations, and cash flows for the periods
presented in accordance with U.S. generally accepted accounting
principles.




Changes in
Internal Control over Financial Reporting




As
discussed in the material weaknesses noted above, during the fourth quarter of
2008 and the first quarter of 2009 we experienced resignations in the positions
of controller, Chief Financial Officer, and Chief Executive
Officer.  These roles were filled in the first quarter of 2009 by
individuals that have limited knowledge about the 2008 activities of the company
and have limited current knowledge related to US GAAP and SEC reporting
requirements.  These individuals were responsible for the financial
reporting function for the year ended December 31, 2008.  It is
uncertain at this time what improvements will be available to the Company based
on the limited resources available to the Company as further described in the
Liquidity section of this report.  There were no other changes made to
our internal controls over financial reporting (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act) during the fourth
quarter of 2008 that materially affected, or was reasonably likely to materially
affect, our internal control over financial reporting.





PART
III




Item
      10.
            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
      Election to
                    the
      Board *James
      Wemett
                  
                  60
                  
                  President
      and Director
                  
                  2/16/09Kathleen
      A. Browne
                  
                  53
                  
                  Chief
      Financial Officer
                  
                  n/a




James WemettOn February 19,
2009 Mr. Wemettbecame our President and
the sole member of our Board of directors when Platinum Long Term Growth IV,
LLC, (the “Series C Holder”), the sole holder of the Series C Convertible
Preferred Stock, of NaturalNano, Inc., a Nevada corporation (the “Registrant”),
elected and appointed Mr. Wemett as the Series C Director to the Registrant’s
Board of Directors. The election was made pursuant to Section 7 of the
Certificate of Designation of Rights, Preferences, Designations, Qualifications
and Limitations of the Series C Preferred Stock of the Registrant. Mr. Wemett
will serve at the discretion of the Series C Holder, until his successor is duly
appointed and qualified.Mr. Wemettis an experienced
entrepreneur and consultant, and has been involved in the formation and growth
of numerous private and public companies. From July 2007 until November 2008,
Mr. Wemett was a member of the Board of Directors of the Registrant. In 1975 Mr.
Wemett started ROC Communications, Inc., a retail distributor of electronics
products, which was sold in 2001. Mr. Wemett has been a Director of Technology
Innovations, LLC, since its inception in 1999, and has served on the board of
OncoVista, LLC, (OVIT) a publicly traded 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.




Kathleen A. Browne Ms. Browne
became our Acting Chief Financial Officer on February 19, 2009. Ms. Browne is an
experienced senior financial executive with a background in public accounting,
manufacturing and business service industries, SEC reporting and SOX compliance.
Ms. Browne previously served as the CFO of NaturalNano from 2005 to 2007, as the
Chief Accountant at Paychex from 2001 to 2004, as the Vice-President of Finance
and Corporate Controller of W. R. Grace from 1996 to 2000. Ms. Browne is a
certified public accountant with thirteen years of audit experience with the
firm of PricewaterhouseCoopers.




31




The
Board and Committees of the Board




The
Company does not currently have an Audit Committee, Compensation Committee or a
Nominating committee and has not established specific procedures for selecting
candidates for director. However, in the past directors were 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 requests for communication are either responded to by the
president or chief financial officer of the Company for a response.




Potential
Conflicts of Interest


On March
7, 2007, we entered into a Loan and Security Agreement (the “Purchase
Agreement”) for $3,347,500 (the “Initial Notes”) 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 represented an aggregate of
15,215,910 common shares issuable upon the conversion of the principal amount of
the notes at the original fixed conversion price of $0.22 per share at the time
of the agreement.
  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 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.
  On
September 29, 2008, the Company entered into a $475,000 Loan and Security
Agreement, by and among Platinum Advisors LLC, as agent for the investors.
Pursuant to this Loan Agreement, on October 31, 2008, the Company made and
delivered to Platinum Long Term Growth IV, LLC (“Platinum”) and to Longview
Special Financing Inc. (“Longview” and together with Platinum, collectively, the
“Lenders”) an 8% Senior Secured Promissory Note Due January 31, 2010. The Notes
are convertible into NNAN common stock, with a conversion price of $0.005 that
will bear interest at the rate of 8% per annum, with interest payable monthly,
in arrears, in freely traded stock or in cash at the election of NNAN. All
unpaid interest (and principal) will be due and payable at maturity, on January
31, 2010 and no payments of interest are required prior to January 31, 2009. The
Notes are secured on a pari-passu basis with the Company’s existing indebtedness
to the Lenders (the “Existing Debt”) and
(i) senior to all other current and future indebtedness of the Company, (ii)
secured by all of the assets of the Company and each of its subsidiaries and
(iii) unconditionally guaranteed by all subsidiaries of the
Company.
  The Loan
and Security Agreement and the related underlying notes issued in accordance
with the March 7, 2007 agreement had the original conversion price of $.022 (as
cited in the March 7, 2007 agreement) adjusted to a conversion price of $0.005.
This conversion price was triggered as a result of the notes issued on September
29, 2008 thereby resulting in a reset of (a) the conversion price of the Initial
Notes, (b) the exercise price of the warrants related to the Initial Notes and
(c) the number of shares that may be purchased by such warrants. The warrants
issued in connection with the March 7, 2007 Loan and Security Agreement were
adjusted under the anti-dilution provisions of the agreement, resulting in a new
exercise price of $.005 per share. On September 29, 2008, the Lenders also
agreed to cancel warrants to purchase 1,218,950,060 shares of common stock at
$.005 per share in exchange for 5,000,000 shares of preferred
stock.
 On
October 6, 2008, the Company, filed a Certificate of Designation Of Rights,
Preferences, Designations, Qualifications and Limitations of the Series C
Preferred Stock with the Secretary of State of the State of Nevada, and prepared
a preferred stock certificate for delivery to Platinum Long Term Growth IV, LLC,
evidencing 4,250,000 shares of Series C Convertible Preferred Stock of the
Company. On October 6, 2008, the Company also filed a Certificate of Designation
Of Rights, Preferences, Designations, Qualifications and Limitations of the
Series B Preferred Stock with the Secretary of State of the State of Nevada, and
prepared a preferred stock certificate for delivery to Longview Special Funding,
Inc., evidencing 750,000 shares of Series B Convertible Preferred Stock of the
Company.
  Each
share of the Series B Convertible Preferred Stock, and each share of Series C
Convertible Preferred Stock is convertible into 160 shares of the Company’s
common stock and votes on as as-converted (with each share having 160 votes).
However, the Series B Designation limits the holder’s right to convert its
Series B Convertible Preferred Stock, and the aggregate voting power
attributable to its Series B Convertible Preferred Stock, to no more than 4.99%
of the votes attributable to the total outstanding common shares. Accordingly,
the votes attributable to the Series B Convertible Preferred constitutes 4.99%
of the aggregate votes attributable to the Company’s outstanding shares (on an
as converted basis) and the votes attributable to the Series C Convertible
Preferred Stock, therefore, represent approximately 86.74% of the aggregate
votes attributable to the Company’s outstanding shares (on an as converted
basis), and the votes Series B Convertible Preferred and the Series C
Convertible Preferred, voting together represent approximately 91.73% of the
aggregate votes attributable to the Company’s outstanding shares (on an as
converted basis).
  On April
3, 2009, we entered into two 8% Senior secured Promissory Notesfor $136,356 and
$34,750, respectively with Platinum Long Term Growth IV, LLC, and Longview
Special Financing, Inc.. The 2009 Promissory Notes are secured by, among other
things, (i) the continuing security interest in certain assets of the Company
pursuant to the terms of the Initial Notes (see Note 2) dated March 7, 2007,
(ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent
Security Agreement, dated as of March 6, 2007.
  The
proceeds from the 2009 Promissory Notes are available for general working
capital purposes and cannot be used to redeem or make any payment on account of
any securities due to the Lenders. The outstanding principal and all accrued and
unpaid interest is due and payable in full on June 30, 2009 (the maturity date
of the notes.) The 2009 Promissory Notes bear interest, in arrears, at a rate of
8% per annum payable in cash on June 30, 2009. In the event of a default (as
defined in the agreement), interest will be charged at 16% during the period of
the default and until such default has been cured.
  The 2009
Promissory Notes contains a provision for a mandatory principal prepayment upon
the Company’s receipt of any funds from any source including the receipt of any
payment from the State of New York or any other sources. The outstanding
principal is payable in full at the earlier of the maturity date (June 30, 2009)
or earlier as defined by the mandatory prepayment provision, as described above.
The Company incurred fees and expense of $3,685 in the first quarter of 2009 in
securing these notes.


32




Our
current Board member, James Wemett was appointed by the Series C Convertible
Preferred Stockholder and is an equity holder of Technology Innovations,
LLC, which previously owned 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. See Note 3 to the financial statements for
a description of the Company’s transactions and relationships with
TI.


Because
of the nature of our business and the business of these other entities, the
relationships of our sole board member 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.


33




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 each member receives 30,000 stock options upon their appointment and
annually thereafter. The vesting periods for these option grants varied from 1-2
years over the period of service and requires that the option holder remain on
the Scientific Advisory Board through the vesting dates. The option exercise
price for these grants was equal to the closing market price of the Company’s
stock on the date of grant and generally has 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. Mr.
Hickman provided additional consulting services the Company in the amount of
$4,825 in 2008. 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
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.




34




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 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.




35




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, 2008,
the following Section 16(a) filings were made late by our former majority
shareholder:




Reporting
      Person
              
              Form
              
              Transaction
      Date
              
              Filing
      DateTechnology Innovations LLC
              
              Form
      4
              
              February
      19, 2008
              
              August
      7, 2008Technology
      Innovations LLC
              
              Form
      4
              
              August
      1, 2008
              
              August
      7, 2008




36




Item 11.
            Executive
      Compensation




Summary
Compensation Table




The table
set forth below summarizes the compensation earned by our named
executive officers in 2008, 2007 and 2006 *.




SUMMARY
      COMPENSATION TABLEName
      and principal position
                                      
                                      Year
                                      
                                      Salary
      ($)
                                      Bonus
      ($)
                                      Stock
      Awards ($)
                                      Option
      Awards ($)
                                      Non-Equity
      Incentive Plan Compensation ($)
                                      Nonqualified
      Deferred Compensation Earnings ($)
                                      All
      Other Compensation ($)
                                      Total
      ($)(a)
                                      
                                      (b)
                                      
                                      
                                      (c)Cathy
      Fleischer, President and CTO
                                      
                                      2008
                                      **
                                      180,000
                                      0
                                      0
                                      306,531
                                      0
                                      0
                                      0
                                      $486,5312007
                                      
                                      180,000
                                      10,000
                                      0
                                      250,320
                                      0
                                      0
                                      8539
                                      448,859Kent
      Tapper, CFO
                                      
                                      2008
                                      **
                                      140,000
                                      0
                                      0
                                      98,884
                                      0
                                      0
                                      0
                                      $238,884*
                                      2007
                                      
                                      43,077
                                      0
                                      0
                                      90,574
                                      0
                                      0
                                      0
                                      133,651


*
      Reflects employment for a partial year.Mr.
      Tapper joined the Company in August 2007 with a base salary of
      $140,000.**
      During 2008 Ms. Fleischer and Mr. Tapper elected to defer compensation of
      $84,462 and $66,692 respectively, due to the Company's liquidity
      position.These
      amounts are reflected in in the balance sheet under Accrued Payroll at
      December 31, 2008.




(a) Cash
bonus was awarded to Ms. Fleischer upon determination by the Board’s
Compensation Committee that she had achieved certain performance objectives set
out as the criteria for bonus awards in her employment agreement. Ms Fleischer’s
bonus was paid upon the execution of the Company’s first Joint Development
Agreement.




(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” refers to a payment of $8,539 to
Dr. Fleischer 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 Board of Directors and
authorizes the grant of 14,000,000 shares. The Board of Directors 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.




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 Board of Directors and
authorizes the grant of 17,000,000 shares. The Board of Directors 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.




On
September 23, 2008, the stockholders of the Company approved the NaturalNano,
Inc. 2008 Incentive Stock Plan (the “2008 Plan”) pursuant to a written consent
of the then majority stockholder.  This action was taken by the
Company without a stockholders meeting pursuant to the written consent of the
holder of a majority of the voting power of the Company on September 23, 2008.
The 2008 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 2008 Plan is administered by the Board
of Directors and authorizes the grant of 800 million shares of the Company’s
common stock.




In addition to options granted under
the 2005 Plan, and 2007 Plan as indicated above, the Company has made grants, to
the former President and to a member of our Scientific Advisory Board, for an
aggregate of 90,000 common stock options, outside of 2005 and 2007 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.




37






Outstanding Equity
Awards at December 31,
2008




The
following table summarizes information concerning outstanding equity awards held
by the named executive officers at December 31, 2008.




Stock Option AwardsName
                                                                      
                                                                      
                                                                      Securities underlyingunexercised options(#)
      Exercisable
                                                                      
                                                                      
                                                                      
                                                                      Securities underlyingunexercised options(#) Unexercisable
                                                                      
                                                                      
                                                                      
                                                                      OptionExercisePrice($)
                                                                      
                                                                      OptionExpiration DateFleischer,
      Cathy
                                                                      
                                                                      
                                                                      66,666
                                                                      
                                                                      
                                                                      
                                                                      33,334
                                                                      
                                                                      
                                                                      $
                                                                      1.06
                                                                      
                                                                      07/24/201626,666
                                                                      
                                                                      
                                                                      
                                                                      13,334
                                                                      
                                                                      
                                                                      $
                                                                      0.10
                                                                      
                                                                      07/24/20161,000,000
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      0.42
                                                                      
                                                                      11/16/2016960,000
                                                                      
                                                                      
                                                                      
                                                                      240,000
                                                                      
                                                                      
                                                                      $
                                                                      0.25
                                                                      
                                                                      03/01/2017870,000
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      0.10
                                                                      
                                                                      02/08/2013450,000
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      0.05
                                                                      
                                                                      07/01/2013Tapper,
      Kent A
                                                                      
                                                                      
                                                                      250,000
                                                                      
                                                                      
                                                                      
                                                                      500,000
                                                                      
                                                                      
                                                                      $
                                                                      0.18
                                                                      
                                                                      08/31/2012660,000
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      0.10
                                                                      
                                                                      02/08/2013350,000
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      0.05
                                                                      
                                                                      07/01/2013




Employment
Agreements




The
Company has no formal written or oral employment agreements with the current
President - James Wemett and the Acting Chief Financial Officer – Kathleen
Browne. These officers joined the Company in the February 2009 and have agreed
to provide services to the Company under informal employment agreements.
Management can not currently project when such agreement will be
formalized.




Prior to
their resignations in the first quarter of 2009, the Company had employment
agreements with Cathy A. Fleischer, President and Chief Technology Officer, and
Kent A. Tapper, Chief Financial Officer, Secretary and Treasurer. Both of these
Employment Agreements contained the terms covering such matters as vacation time
and reimbursement of expenses.




Cathy Fleischer
Dr. Fleischer’s Employment Agreement, which was entered into in connection
with her appointment in July 2006 as the Company’s Senior Research Scientist,
provided for a base annual salary of $120,000. Dr. Fleischer’s 2008 base
salary as President and CTO was $180,000.




Pursuant
to her Employment Agreement, Dr. Fleischer received two stock options. The
first option allowed her to purchase up to 100,000 shares of the Company’s
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, entitled 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 vested 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. The unvested portion of these options expired upon termination of Dr.
Fleischer’s employment in the first quarter of 2009.




Kent Tapper Under Mr.
Tapper’s Employment Agreement, he received a base salary of $140,000 per year,
and included an agreement to increase this base to $155,000 per year upon the
closing of a financing transaction that provided gross proceeds to the Company
of at least $5 million. Mr. Tapper’s base salary was subject to annual
review and adjustment. The Employment Agreement also provided that
Mr. Tapper would be eligible for bonuses at the Company’s discretion; no
specific criteria was defined for such bonuses in this employment agreement In
connection with his employment, Mr. Tapper was granted an option under the
Amended and Restated 2007 Incentive Stock Plan to purchase up to 750,000 shares
of the Company’s Common Stock at a price per share equal to the closing price on
August 31, 2007.  This option grant included a vesting provision
defined in three equal annual installments beginning on the first anniversary of
the grant. The Employment Agreement provided that Mr. Tapper may be
eligible for future stock option grants on the same basis as similarly situated
employees. Mr. Tapper’s Employment Agreement had an initial term of one
year and renewed automatically for additional terms of one year each. The
Employment Agreement allowed for termination by either party. If the Employment
Agreement is terminated by the Company 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 the Company, the Company would continue to pay
Mr. Tapper his then-effective base salary for six months and would 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, the Company would continue to pay that portion of the COBRA
premiums that had been paid by the Company prior to the date
of  termination for so long receives severance payments were
continuing or until Mr. Tapper was eligible for coverage under another
employer’s plan, whichever period is shorter.




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 earns 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 Plans. 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 earned for the fiscal year ended
December 31, 2008 for our directors who are not also named executive
officers:
  DIRECTOR
COMPENSATION (1)
  Name
                
                Fees Earned orPaid in Cash ($)
                
                
                Option Awards($)
      (2)
                
                
                Total
      ($)Beall,
      Gary (3)
                
                $
                8,000
                
                
                $
                4,865
                (4)
                
                $
                12,865Lanzafame,
      John (5)
                
                $
                8,000
                
                
                $
                3,171
                (6)
                
                $
                11,171Mikesell,
      Sharell (7)
                
                $
                8,000
                
                
                $
                3,171
                (6)
                
                $
                11,171Seibert,
      Klaus (8)
                
                $
                13,000
                
                
                $
                6,910
                (4)
                
                $
                19,910Wemett,
      James (9)
                
                $
                8,000
                
                
                $
                6,910
                (4)
                
                $
                14,910
  (1)
Certain columnar information required by Item 402(f)(2) of Regulation S-K 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,
2008.
  (2) The
reported amounts reflect the dollar amounts recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2008, in accordance
with FAS 123R, of awards pursuant to our 2005 and 2007 Stock Incentive Plans and
may include amounts from awards granted both in and prior to the fiscal year
ended December 31, 2008. 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) 
Resigned on February 17, 2009. At December 31, 2008, Dr. Beal held options
for the purchase of an aggregate of 100,000 shares, all of these options were
exercisable.
  (4) An
option to purchase 50,000 shares at an exercise price of $0.05 per share was
granted to these board members on July 1, 2008. All of these option grants
were fully vested and exercisable on the date of grant and have termination
dates of July 1, 2018.
  (5)
Resigned on February 18, 2009. At December 31, 2008, Mr. Lanzafame
held options for the purchase of an aggregate of 550,000 shares, all of these
options were exercisable.
  (6) An
option to purchase 100,000 shares at an exercise price of $0.05 per share was
granted to these board members on July 1, 2008. Of these option
grants, 50,000 were fully vested and exercisable on the date of grant and
50,000 vest after 1 year. The options have termination dates of
July 1, 2018.
  (7)
Resigned November 30, 2008. As of December 31, 2008, Dr. Mikesell held
options for the purchase of an aggregate of 200,000 shares, all of these options
were exercisable.
  (8)
Resigned on January 7, 2009. At December 31, 2008, Mr. Siebert held options
for the purchase of an aggregate of 100,000 shares, all of these options were
exercisable.
  (9) Resigned from the board in November
2008 and reappointed in February 2009. At December 31, 2008 Mr. Wemett held
options for the purchase of an aggregate of 100,000 shares, all of which were
exercisable.


38




Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




The
following table sets forth certain information as of March 31, 2009 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,
2009. “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:James Wemett(3) (4)
      (5)
                      
                      
                      1,618,710
                      
                      
                      
                      2.4
                      %Kathleen A.
      Browne
                      
                      
                      432,800
                      
                      
                      
                      *All Directors and Executive
      Officers as a group (2 persons) (3)
      (4) (5)
                      
                      
                      2,051,510
                      
                      
                      
                      3.0
                      %Other
      5% Beneficial Owners:Platinum Long
      Term Growth IV (6)
                      
                      
                      1,309,900,000
                      
                      
                      
                      95.1
                      %





*
        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 67,007,045 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.3)
                          Includes
      shares that may be acquired upon exercise of stock options which are
      exercisable on or prior to May 31, 2009 as follows: Mr. Wemett – 100,000
      shares; Ms. Browne - 400,000 shares.4)
                          Includes
      518,700 shares held by Nancy Gage Wemett, Mr. Wemett’s wife.
      Mr. Wemett disclaims beneficial ownership of the shares held by his
      wife.5)
                          Includes
      1,000,000 options held by Technology Innovations, LLC of which Mr. Wemett
      is a member. Mr. Wemett disclaims beneficial ownership of these options
      except of the extent of his beneficial ownership of his membership
      interest in Technology Innovation, LLC.6)
                          Platinum
      Long Term Growth IV is a Delaware limited liability company managed by
      Mark Nordlicht and is loacated at 152 West 57th
      Street, New York, New
York.




39




Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence




Certain
Relationships and Related Transactions
  Platinum
Partners Long Term Growth IV and Longview Special Financing, Inc. and Platinum
Advisors LLC
  On March
7, 2007, we entered into a Loan and Security Agreement (the “Purchase
Agreement”) for $3,347,500 (the “Initial Notes”) 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 represented an aggregate of
15,215,910 common shares issuable upon the conversion of the principal amount of
the notes at the original fixed conversion price of $0.22 per share at the time
of the agreement.
  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 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.
  On
September 29, 2008, the Company entered into a $475,000 Loan and Security
Agreement, by and among Platinum Advisors LLC, as agent for the investors.
Pursuant to this Loan Agreement, on October 31, 2008, the Company made and
delivered to Platinum Long Term Growth IV, LLC (“Platinum”) and to Longview
Special Financing Inc. (“Longview” and together with Platinum, collectively, the
“Lenders”) an 8% Senior Secured Promissory Note Due January 31, 2010. The Notes
are convertible into NNAN common stock, with a conversion price of $0.005 that
will bear interest at the rate of 8% per annum, with interest payable monthly,
in arrears, in freely traded stock or in cash at the election of NNAN. All
unpaid interest (and principal) will be due and payable at maturity, on January
31, 2010 and no payments of interest are required prior to January 31, 2009. The
Notes are secured on a pari-passu basis with the Company’s existing indebtedness
to the Lenders (the “Existing Debt”) and
(i) senior to all other current and future indebtedness of the Company, (ii)
secured by all of the assets of the Company and each of its subsidiaries and
(iii) unconditionally guaranteed by all subsidiaries of the
Company.
  The Loan
and Security Agreement and the related underlying notes issued in accordance
with the March 7, 2007 agreement had the original conversion price of $.022 (as
cited in the March 7, 2007 agreement) adjusted to a conversion price of $0.005.
This conversion price was triggered as a result of the notes issued on September
29, 2008 thereby resulting in a reset of (a) the conversion price of the Initial
Notes, (b) the exercise price of the warrants related to the Initial Notes and
(c) the number of shares that may be purchased by such warrants.  The
warrants issued in connection with the March 7, 2007 Loan and Security Agreement
were adjusted under the anti-dilution provisions of the agreement, resulting in
a new exercise price of $.005 per share.  On September 29, 2008, the
Lenders also agreed to cancel warrants to purchase 1,218,950,060 shares of
common stock at $.005 per share in exchange for 5,000,000 shares of preferred
stock.
 
 On
October 6, 2008, the Company, filed a Certificate of Designation Of Rights,
Preferences, Designations, Qualifications and Limitations of the Series C
Preferred Stock with the Secretary of State of the State of Nevada, and prepared
a preferred stock certificate for delivery to Platinum Long Term Growth IV, LLC,
evidencing 4,250,000 shares of Series C Convertible Preferred Stock of the
Company. On October 6, 2008, the Company also filed a Certificate of Designation
Of Rights, Preferences, Designations, Qualifications and Limitations of the
Series B Preferred Stock with the Secretary of State of the State of Nevada, and
prepared a preferred stock certificate for delivery to Longview Special Funding,
Inc., evidencing 750,000 shares of Series B Convertible Preferred Stock of the
Company.
  Each
share of the Series B Convertible Preferred Stock, and each share of Series C
Convertible Preferred Stock is convertible into 160 shares of the Company’s
common stock and votes on as as-converted (with each share having 160 votes).
However, the Series B Designation limits the holder’s right to convert its
Series B Convertible Preferred Stock, and the aggregate voting power
attributable to its Series B Convertible Preferred Stock, to no more than 4.99%
of the votes attributable to the total outstanding common shares. Accordingly,
the votes attributable to the Series B Convertible Preferred constitutes 4.99%
of the aggregate votes attributable to the Company’s outstanding shares (on an
as converted basis) and the votes attributable to the Series C Convertible
Preferred Stock, therefore, represent approximately 86.74% of the aggregate
votes attributable to the Company’s outstanding shares (on an as converted
basis), and the votes Series B Convertible Preferred and the Series C
Convertible Preferred, voting together represent approximately 91.73% of the
aggregate votes attributable to the Company’s outstanding shares (on an as
converted basis).
  On April
3, 2009, we entered into two 8% Senior secured Promissory Notesfor $136,356 and
$34,750, respectively with Platinum Long Term Growth IV, LLC, and Longview
Special Financing, Inc.. The 2009 Promissory Notes are secured by, among other
things, (i) the continuing security interest in certain assets of the Company
pursuant to the terms of the Initial Notes (see Note 2) dated March 7, 2007,
(ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent
Security Agreement, dated as of March 6, 2007.
  40
 The
proceeds from the 2009 Promissory Notes are available for general working
capital purposes and cannot be used to redeem or make any payment on account of
any securities due to the Lenders. The outstanding principal and all accrued and
unpaid interest is due and payable in full on June 30, 2009 (the maturity date
of the notes.) The 2009 Promissory Notes bear interest, in arrears, at a rate of
8% per annum payable in cash on June 30, 2009. In the event of a default (as
defined in the agreement), interest will be charged at 16% during the period of
the default and until such default has been cured.
  The 2009
Promissory Notes contains a provision for a mandatory principal prepayment upon
the Company’s receipt of any funds from any source including the receipt of any
payment from the State of New York or any other sources. The outstanding
principal is payable in full at the earlier of the maturity date (June 30, 2009)
or earlier as defined by the mandatory prepayment provision, as described above.
The Company incurred fees and expense of $3,685 in the first quarter of 2009 in
securing these notes.
  Technology
Innovations LLC
  Prior to
September 26, 2008, TI was 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. TI founded NaturalNano, Inc., a Delaware corporation on
December 22, 2004, with an initial cash contribution of $100,000 for all of the
then outstanding shares of common stock.
  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
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 a License Agreement with the Company. This
assignment relinquished 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. In
connection with the March 7, 2007 issuance of the Notes, TI agreed not to demand
repayment as long as any amounts were outstanding on the Notes. As of December
31, 2007, $900,000 in principal and $87,584 in interest had been advanced under
this agreement and was included in Related party note payable in the balance
sheet. On August 1, 2008, in connection with, and as a condition to the
financing provided by Platinum and Longview, TI agreed (a) to sell its common
share holdings in the Company at the direction of the Company for the sum of
$1,000, and (b) agreed to cancel and forgive all principal, interest, fees and
expenses accrued and due pursuant the Line of Credit agreement. On September 26,
2008, the Company paid TI $1,000 and redeemed the 69,303,189 shares of common
stock held by TI.
  Also on
August 1, 2008 the $900,000 principal outstanding to TI, along with $129,600 of
accrued and unpaid interest, was satisfied in exchange for a warrant.
Additionally, TI, and an affiliate of TI, Biomed, Inc. forgave approximately
$66,000 of outstanding current account payable.
  41
  In
connection with the satisfaction of the Line of Credit Agreement, the Company
issued TI on August 6, 2008 a warrant to purchase up to 4.99% of the Company’s
common stock.  Under the warrant TI may purchase up to that number of
shares that would give TI beneficial ownership of not more than 4.99% of the
Company.  The price to be paid for the shares, if purchased on or
before February 13, 2009 would have been computed as $25 million divided by the
fully diluted common stock outstanding on the date of exercise. If the purchase
occurs after February 13, 2009 and before the warrant expires on February 11,
2011, the purchase price shall be computed as $40 million divided by the fully
diluted common shares outstanding on the date of exercise.  Based on
the terms of the warrant conversion agreement TI has the right to purchase up to
82,707,293 shares at an exercise price of $0.0149 per share as of December 31,
2008.
  On
September 26, 2008, TI and the Company entered into a consulting agreement under
which TI agreed to provide certain advisory services until September 26,2009.  In
exchange for such services, the Company is to issue to TI common stock valued at
an aggregate of $66,000 based upon the trailing 20 day volume weighted average
price (the “VWAP”) on the date of issue. To the extent that the VWAP on the
date, or an effective Form S-8 registering shares issued to TI, is less than the
VWAP on the date such shares were issued the Company agreed to pay TI such
difference in cash. As of December 31, 2008, TI was issued 300,000 shares of
common stock valued at $11,700 under the Company’s 2007 Incentive Stock Plan and
$54,700 is included as an accrued expense related to the obligation to issue
remaining shares.
  On June
6, 2008 the Company received $200,000 under a promissory note from a related
party that is a partner in TI.  The note did not bear any interest and
was repaid on July 17, 2008.  The note had an attached 5 year warrant
to purchase 200,000 shares of the Company’s common stock for $0.33 per common
share. The Company valued such warrant at $6,490 at the date of issuance and
such amount has been recorded as additional interest related to this
note.
  Our
current Board member, James Wemett is an equity holder of Technology
Innovations, LLC, which previously owned 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. See Note 3 to the
financial statements for a description of the Company’s transactions and
relationships with TI.
  On August
21, 2008 the lease for the Company’s business offices was assigned to Technology
Innovations, LLC, releasing the Company from the related obligations for that
agreement.


42




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 Company’s audit at any time
      during any of the past three years.
              
              As
      of December 31, 2008 our Board has determined that each of
      Messrs. Beall, Lanzafame, Mikesell and Siebert is an “independent
      director.” As of the date of this filing, there is only one director, who
      is not independent.




Item
      14.
              Principal
      Accountant Fees and
Services





On April
24, 2008, we engaged Freed Maxick & Battaglia, CPAs, PC as our new
independent registered public accounting firm.




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
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.




43




The
aggregate fees billed or expected to be billed by for services performed for the
years ended December 31, 2008 and 2007 are as follows:




2008
              
              
              2007Audit
      Fees – Freed Maxick & Battaglia CPAs, PC
              
              $
              94,850
              
              
              
              -Audit
      Fees – McGladrey & Pullen, LLP
              
              
              -
              
              
              $
              80,000Audit
      Fees – Goldstein Golub Kessler LLP
              
              
              
              
              
              $
              59,800Audit
      Related Fees – Goldstein Golub Kessler LLP
              
              
              -
              
              
              
              46,500Tax
      Fees
              
              $
              3,250
              
              
              
              -All
      Other Fees
              
              
              -
              
              
              
              -




AUDIT
FEES




The
aggregate audit fees for the years ended December 31, 2008 and 2007 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 Forms 10Q and 10-QSB.




AUDIT
RELATED FEES




Audit
related fees for the years ended December 31, 2007 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.




44




Item
      15.




Exhibit No.
                              
                              Description
                              
                              Location2.1
                              
                              Agreement
      and Plan of Merger among NaturalNano, Inc., Cementitious Materials, Inc.
      and Cementitious Acquisitions, Inc.
                              
                              (1)3.1
                              
                              Third
      Amended and Restated Articles of Incorporation
                              
                              **3.2
                              
                              By-laws
                              
                              **4.1
                              
                              NaturalNano,
      Inc. Amended and Restated 2007 Incentive Stock Plan #
                              
                              (46)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)4.17
                  
                  Certificate
      Of Designation Of Rights, Preferences, Designations, Qualifications And
      Limitations Of The Series B Preferred Stock, a copy of which is filed
      herewith.
                  
                  (2.1)4.18
                  
                  Certificate
      Of Designation Of Rights, Preferences, Designations, Qualifications And
      Limitations Of The Series C Preferred Stock, a copy of which is filed
      herewith.
                  
                  (2.2)


4.19
                  
                  NaturalNano,
      Inc. 2008 Incentive Stock Plan #
                  
                  **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)




45




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)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.
                  
                  (47)10.24
                  
                  Joint
      Development Agreement dated April 24, 2007 between Cascade Engineering,
      Inc. and NaturalNano, Inc.
                  
                  (47)10.25
                  
                  Joint
      Development Agreement dated July 18, 2007 between Pactiv Corporation and
      NaturalNano, Inc.
                  
                  (47)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)10.28
                  
                  Lease
      Agreement between Cottrone Development Co., Inc. and NaturalNano, Inc.
      dated December 7, 2007.
                  
                  (43)10.29
                  
                  Promissory
      Note dated June 6, 2008 to the order of Ross B. Kenzie
                  
                  **10.30
                  
                  Warrant
      purchase agreement dated June 6, 2008 between NaturalNano, Inc. and Ross
      B. Kenzie
                  
                  **10.31
                  
                  8%
      Senior Secured Promissory Note Due March 6, 2009, in the principal amount
      of $150,000, payable to the order of Platinum Long Term Growth IV,
      LLC.
                  
                  (48)10.32
                  
                  8%
      Senior Secured Promissory Note Due March 6, 2009, in the principal amount
      of $20,000, payable to the order of Longview Special Financing
      Inc.
                  
                  (49)10.33
                  
                  Agreement
      with Technology Innovations, LLC, dated August 1, 2008.
                  
                  (50)




46




10.34
                      
                      Agreement
      with Technology Innovations, LLC, dated August 1, 2008.
                      
                      (51)10.35
                      
                      Loan
      and Security Agreement, dated September 29, 2008, by and among investors
      listed on Schedule 1 thereto, and Platinum Advisors LLC, as agent for the
      investors.
                      
                      (2.3)10.36
                      
                      8%
      Senior Secured Promissory Note Due January 31, 2010, made to Platinum Long
      Term Growth IV, LLC on September 29, 2008, in the amount of
      $190,000.
                      
                      (2.4)10.37
                      
                      8%
      Senior Secured Promissory Note Due January 31, 2010, made to Longview
      Special Financing Inc. on September 29, 2008, in the amount of
      $30,000.
                      
                      (2.5)10.38
                      
                      Form
      of Forbearance Agreement, dated September 29, 2008.
                      
                      (2.6)10.39
                      
                      Joint
      Development and Supply Agreement, dated October 20, 2008.
                      
                      (52)10.40
                      
                      8%
      Senior Secured Promissory Note Due January 31, 2010, made to Platinum Long
      Term Growth IV, LLC on October 31, 2008, in the amount of
      $59,500.
                      
                      (53)10.41
                      
                      8%
      Senior Secured Promissory Note Due January 31, 2010, made to Longview
      Special Financing Inc. on October 31, 2008, in the amount of
      $25,500.
                      
                      (54)10.42
                      
                      8%
      Senior Secured Promissory Note dated as of February 25, 2009 in the
      original principal amount of $144,125.98 issued by NaturalNano, Inc. and
      NaturalNano Research, Inc. to Platinum Long Term Growth IV,
      LLC
                      
                      **10.43
                      
                      Letter
      Agreement dated April 8, 2009 with Longview Special Finance Inc. regarding
      their forbearance with respect to the $500,000 8% Senior Secured
      Promissory Note due March 6, 2009, the $20,000 8% Senior Secured
      Promissory Note due March 6, 2009, the $30,000 Senior Secured Promissory
      Note due January 31, 2010, and the $25,500 Senior Secured Promissory Note
      due January 31, 2010
                      
                      **10.44
                      
                      Letter
      Agreement dated April 8, 2009 with Platinum Advisors LLC regarding their
      forbearance with respect to the $97,500 8% Senior Secured Promissory Note
      due March 6, 2009, to Platinum Advisors LLC.
                      
                      **10.45
                      
                      Letter
      Agreement dated April 8, 2009 with Platinum Long Term Growth IV, LLC
      regarding their forbearance with respect to $2,750,000 8% Senior Secured
      Promissory Note due March 6, 2009, the $150,000 8% Senior Secured
      Promissory Note due March 6, 2009, the $190,000 Senior Secured Promissory
      Note due January 31, 2010, the $59,500 Senior Secured Promissory Note due
      January 31, 2010, and the $14,941.34 8% Senior Secured Promissory Note,
      issued on or about February 20, 2009
                      
                      **14.1
                      
                      Code
      of Ethics for CEO and Senior Financial Officer
                      
                      (44)21.1
                      
                      Subsidiaries
                      
                      (45)23.1
                      
                      Consent
      of Freed Maxick & Battaglia CPAs, PC
                      
                      **23.2
                      
                      Consent
      of McGladrey & Pullen, LLP
                      
                      **23.3
                      
                      Consent
      of Goldstein Golub Kessler LLP
                      
                      **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
                      
                      **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 arrangement1.
            Incorporated
      by reference to Exhibit 2.1 to Current Report on Form 8-K filed September
      30, 20052.1
            Incorporated
      by reference to Exhibit4.1 to Current Report on Form 8-K filed October 3,
      2008.2.2
            Incorporated
      by reference to Exhibit4.2 to Current Report on Form 8-K filed October 3,
      2008.2.3
            Incorporated
      by reference to Exhibit10.1 to Current Report on Form 8-K filed October 3,
      2008.




47




2.4
            Incorporated
      by reference to Exhibit10.2 to Current Report on Form 8-K filed October 3,
      2008.2.5
            Incorporated
      by reference to Exhibit10.3 to Current Report on Form 8-K filed October 3,
      2008.2.6
            Incorporated
      by reference to Exhibit10.4 to Current Report on Form 8-K filed October 3,
      2008.4.
            Incorporated
      by reference to Appendix C to Information Statement on Schedule 14C filed
      November 8, 20055.
            Incorporated
      by reference to Exhibit 4.2 to Current Report on Form 8-K filed December
      5, 20056.
            Incorporated
      by reference to Exhibit 4.1 to Current Report on Form 8-K filed July 28,
      20067.
            Incorporated
      by reference to Exhibit 4.5 to Annual Report on Form 10-KSB for the year
      ended December 31, 20068.
            Incorporated
      by reference to Exhibit 4.3 to Current Report on Form 8-K filed December
      5, 20059.
            Incorporated
      by reference to Exhibit 4.4 to Current Report on Form 8-K filed December
      5, 200510.
            Incorporated
      by reference to Exhibit 4.1 to Current Report on Form 8-K filed March 8,
      200711.
            Incorporated
      by reference to Exhibit 4.6 to Current Report on Form 8-K filed March 8,
      200712.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 26,
      200713.
            Incorporated
      by reference to Exhibit 4.1 to Current Report on Form 8-K filed July 10,
      200614.
            Incorporated
      by reference to Exhibit 4.6 to Registration Statement on Form SB-2 (No.
      333-135667) filed July 10, 200615.
            Incorporated
      by reference to Exhibit 4.2 to Current Report on Form 8-K filed March 8,
      200716.
            Incorporated
      by reference to Exhibit 4.3 to Current Report on Form 8-K filed March 8,
      200717.
            Incorporated
      by reference to Exhibit 4.4 to Current Report on Form 8-K filed March 8,
      200718.
            Incorporated
      by reference to Exhibit 4.5 to Current Report on Form 8-K filed March 8,
      200719.
            Incorporated
      by reference to Exhibit 10.2 to Quarterly Report on Form 10-QSB for the
      period ended September 30, 200620.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 7,
      200721.
            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,
      200622.
            Incorporated
      by reference to Exhibit 10.4 to Registration Statement on Form SB-2 (No.
      333-135667) filed July 10, 200623.
            Incorporated
      by reference to Exhibit 10.3 to Current Report on Form 8-K filed March 8,
      200724.
            Incorporated
      by reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for the
      period ended September 30, 200625.
            Incorporated
      by reference to Exhibit 10.7 to Annual Report on Form 10-KSB for the year
      ended December 31, 200626.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 28,
      200627.
            Incorporated
      by reference to Exhibit 10.2 to Registration Statement on Form SB-2 (No.
      333-135667) filed July 10, 200628.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed November
      2, 200629.
            Incorporated
      by reference to Exhibit 10.5 to Registration Statement on Form SB-2 (No.
      333-135667) filed July 10, 200630.
            Incorporated
      by reference to Exhibit 10.6 to Registration Statement on Form SB-2 (No.
      333-135667) filed July 10, 200631.
            Incorporated
      by reference to Exhibit 4.1 to Current Report on Form 8-K filed March 31,
      200632.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 10,
      200633.
            Incorporated
      by reference to Exhibit 10.2 to Current Report on Form 8-K filed July 10,
      200634.
            Incorporated
      by reference to Exhibit 10.7 to Registration Statement on Form SB-2 (No.
      333-135667) filed July 10, 200635.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 3,
      200636.
            Incorporated
      by reference to Exhibit 10.2 to Current Report on Form 8-K filed July 3,
      200637.
            Incorporated
      by reference to Exhibit 10.5 to Current Report on Form 8-K filed March 8,
      200738.
            Incorporated
      by reference to Exhibit10.1 to Current Report on Form 8-K filed March 8,
      2007




48




39.
            Incorporated
      by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 8,
      200740.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed August
      14, 200641
            Incorporated
      by reference to Exhibit 10.1 to Current Report on form 8-K filed September
      4, 200742.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on form 8-K filed October
      9, 200743.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on form 8-K filed December
      7, 200744.
            Incorporated
      by reference to Exhibit 14.1 to Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 200545.
            Incorporated
      by reference to Exhibit 21.1 to Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 200546.
            Incorporated
      by reference to Exhibit 4.1 to Registration Statement on Form SB-2 (No.
      333-142688) filed December  12, 200747.
            Incorporated
      by reference to Exhibit 4.1 to Registration Statement on Form SB-2 (No.
      333-142688) filed October 3, 200748.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on form 8-K filed August 7,
      200849.
            Incorporated
      by reference to Exhibit 10.2 to Current Report on form 8-K filed August 7,
      200850.
            Incorporated
      by reference to Exhibit 10.3 to Current Report on form 8-K filed August 7,
      200851.
            Incorporated
      by reference to Exhibit 10.4 to Current Report on form 8-K filed August 7,
      200852.
            Incorporated
      by reference to Exhibit 10.1 to Current Report on form 8-K filed October
      24, 200853.
            Incorporated
      by reference to Exhibit 10.2 to Current Report on form 8-K filed November
      6, 200854.
            Incorporated
      by reference to Exhibit 10.3 to Current Report on form 8-K filed November
      6, 2008




49
 
  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/James
      Wemett
            
            President
      and Director
            
            April
      15, 2009James
      Wemett
            
            (Principal
      Executive Officer)/s/Kathleen
      A. Browne
            
            Chief
      Financial Officer
            
            April
      15, 2009Kathleen
      A. Browne
            
            (Principal
      Accounting Officer)




50




NATURALNANO,
INC.


(A
Development Stage Company)




CONSOLIDATED FINANCIAL STATEMENTS




December
31, 2008




Report
      of independent registered public accounting firm – Freed, Maxick &
      Battaglia CPAs, PC
            F-2Report
      of independent registered public accounting firm – McGladrey & Pullen,
      LLP
            F-3Report
      of independent registered public accounting firm – GOLDSTEIN GOLUB KESSLER
      LLP
            F-4Consolidated
      balance sheet
            F-5Consolidated
      statement of operations
            F-6Consolidated
      statement of stockholders’ (deficiency) equity
            F-7Consolidated
      statement of cash flows
            F-8Notes
      to consolidated financial statements
            F-10




F-1




Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders


NaturalNano,
Inc





We have
audited the consolidated balance sheet of NaturalNano, Inc. and Subsidiaries (a
development stage company) as of December 31, 2008, and the related consolidated
statements of operations, stockholders’ equity (deficiency), and cash flows for
year then ended, and the period from inception (December 22, 2004) through
December 31, 2008. 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. The financial statements for the period
from inception (December 22, 2004) to December 31, 2007 were audited by other
auditors and our opinion, insofar as it relates to cumulative amounts included
for such prior periods, is based solely on the report of such other
auditors.





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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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. and
Subsidiaries as of December 31, 2008, and the results of its operations and its
cash flows for the year then ended and for the period included in the cumulative
development stage period from January 1, 2008 through December 31, 2008 and the
cumulative period from inception (December 22, 2004) through December 31,
2008 in conformity with United States generally accepted accounting
principles.





The
accompanying consolidated 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 is a development stage enterprise that has
suffered recurring losses from operations, has negative working capital, a
stockholders’ deficiency, and will be dependent on obtaining future financing.
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.





/s/
Freed, Maxick & Battaglia, CPAs, PC.





Buffalo,
New York


April 15,
2009




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, 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.








McGLADREY
& PULLEN, LLP


New York,
New York




April 8,
2008




F-3




REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
 
 To the Board of Directors and
Stockholders of
 NaturalNano, Inc.
 
 We have audited the accompanying
consolidated statement of stockholders' (deficiency) equity of NaturalNano, Inc.
and Subsidiary (a development stage company) for the period from December 22,
2004 (inception) to December 31, 2005 and the year ended December 31, 2006, and
the amounts in the cumulative columns in the consolidated statements of
operations and cash flows for the period 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 stockholders' (deficiency) equity of NaturalNano, Inc. for the period from
December 22, 2004 (inception) to December 31, 2005 and the year ended December
31, 2006, and the results of its operations and its cash flows for the
cumulative period from December 22, 2004 (inception) to December 31, 2006 in
conformity with United States generally accepted accounting
principles.
 
 
 /s/ Goldstein Golub Kessler
LLP
 
 GOLDSTEIN GOLUB KESSLER
LLP
 New York, New York
 
 March 29, 2007





F-4




NaturalNano,
Inc.


(A
Development Stage Company)


CONSOLIDATED BALANCE
SHEETS




December
31,2008
                    
                    
                    2007AssetsCurrent
      assets:Cash and
      cash equivalents
                    
                    $
                    1,148
                    
                    
                    $
                    404,940Halloysite
      and Pleximer inventory
                    
                    
                    20,209
                    
                    
                    
                    27,149Other
      current assets
                    
                    
                    184,992
                    
                    
                    
                    195,443Total current
      assets
                    
                    
                    206,349
                    
                    
                    
                    627,532Deferred
      financing costs, net
                    
                    
                    196,411
                    
                    
                    
                    444,928Property
      and equipment, net
                    
                    
                    443,103
                    
                    
                    
                    454,445License,
      net of amortization
                    
                    
                    -
                    
                    
                    
                    707,061Total non-current
      assets
                    
                    
                    639,514
                    
                    
                    
                    1,606,434Total
Assets
                    
                    $
                    845,863
                    
                    
                    $
                    2,233,966Liabilities and Stockholders'
      DeficiencyLiabilitiesCurrent
      liabilities:Accounts
      payable
                    
                    $
                    641,288
                    
                    
                    $
                    345,479Accrued
      payroll
                    
                    
                    480,453
                    
                    
                    
                    58,801Accrued
      expenses
                    
                    
                    309,048
                    
                    
                    
                    143,522Capital
      lease obligations-current
                    
                    
                    62,536
                    
                    
                    
                    76,986Patent
      license obligation-current
                    
                    
                    400,000
                    
                    
                    
                    250,000Deferred
      revenue
                    
                    
                    80,000
                    
                    
                    
                    -Registration
      rights liability
                    
                    
                    82,489
                    
                    
                    
                    82,489Due to
      related parties
                    
                    
                    66,875
                    
                    
                    
                    56,2068% Senior
      secured convertible notes, net of
      $999,895  discount
                    
                    
                    2,811,605
                    
                    
                    
                    -Total current
      liabilities
                    
                    
                    4,934,294
                    
                    
                    
                    1,013,483Related
      party note payable
                    
                    
                    -
                    
                    
                    
                    987,5848% Senior
      secured convertible notes, net of $2,017,427
    discount
                    
                    
                    -
                    
                    
                    
                    1,330,073Patent
      lease obligation, less current portion
                    
                    
                    -
                    
                    
                    
                    200,000Capital
      lease obligation, less current portion
                    
                    
                    3,719
                    
                    
                    
                    38,945Deferred
      tax liability
                    
                    
                    150,189
                    
                    
                    
                    -Other long
      term liabilities
                    
                    
                    45,050
                    
                    
                    
                    31,034Total
      Liabilities
                    
                    
                    5,133,252
                    
                    
                    
                    3,601,119Commitments and
      contingencies  ( See Note 9)Stockholders’ Equity
      (Deficiency)Preferred
      Stock - $.001 par value, 10 million shares
    authorizedSeries B -
      issued and outstanding 750,000 with an aggregate liquidation preference of
      $1,500 in 2008
                    
                    
                    750
                    
                    
                    
                    -Series C -
      issued and outstanding 4,250,000 with an aggregate liquidation preference
      value of $8,500 in 2008
                    
                    
                    4,250
                    
                    
                    
                    -Common
      Stock - $.001 par value 5 billion authorized, issued and outstanding
      67,007,045 and 122,880,740, respectively
                    
                    
                    67,007
                    
                    
                    
                    122,881Additional
      paid in capital
                    
                    
                    18,705,365
                    
                    
                    
                    15,907,241Deficit accumulated in development
      stage
                    
                    
                    (23,064,761
                    )
                    
                    
                    (17,397,275
                    )Total stockholders'
      deficiency
                    
                    
                    (4,287,389
                    )
                    
                    
                    (1,367,153
                    )Total liabilities and
      stockholders' deficiency
                    
                    $
                    845,863
                    
                    
                    $
                    2,233,966




See notes
to consolidated financial statements




F-5


NaturalNano,
Inc.


(A Development Stage
Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS




For the years ended
                  
                  
                  
                  
                  
                  From inception:December 31,
                  
                  
                  
                  
                  
                  December 22, 20042008
                  
                  
                  2007
                  
                  
                  to December 31, 2008Income:Revenue
                  
                  $
                  271,844
                  
                  
                  $
                  15,250
                  
                  
                  $
                  302,594Cost of goods
      sold
                  
                  
                  88,556
                  
                  
                  
                  -
                  
                  
                  
                  88,556Gross
      profit
                  
                  $
                  183,288
                  
                  
                  $
                  15,250
                  
                  
                  
                  214,038Operating
      expenses:Research
      and development(a)
                  
                  
                  1,394,536
                  
                  
                  
                  2,026,743
                  
                  
                  
                  6,120,989General
      and administrative(a)
                  
                  
                  1,571,895
                  
                  
                  
                  1,708,918
                  
                  
                  
                  9,379,216Loss on
      asset impairments
                  
                  
                  573,910
                  
                  
                  
                  -
                  
                  
                  
                  573,910Write down
      of prepaid inventory
                  
                  
                  -
                  
                  
                  
                  249,650
                  
                  
                  
                  249,6503,540,341
                  
                  
                  
                  3,985,311
                  
                  
                  
                  16,323,765Loss from
      Operations
                  
                  
                  (3,357,053
                  )
                  
                  
                  (3,970,061
                  )
                  
                  
                  (16,109,727
                  )Other income
      (expense):Interest
      expense, net
                  
                  
                  (2,310,433
                  )
                  
                  
                  (1,890,579
                  )
                  
                  
                  (4,181,056
                  )Income
      from cooperative research project
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  180,000Gain on
      warrant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  326,250Financing
      fees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,280,228
                  )(2,310,433
                  )
                  
                  
                  (1,890,579
                  )
                  
                  
                  (6,955,034
                  )Net loss
                  
                  $
                  (5,667,486
                  )
                  
                  $
                  (5,860,640
                  )
                  
                  $
                  (23,064,761
                  )Loss per common share - basic and
      diluted
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.05
                  )Weighted average shares
      outstanding
                  
                  
                  111,132,677
                  
                  
                  
                  122,065,645(a)  Stock based compensation
      expense included in the Statement of Operations for the years ended
      December 31, 2008and
      2007 are as follows:Research and development expense
      of $354,508 and $539,126.General and administrative expense
      of $485,956 and $372,880.


See notes
to consolidated financial statements




F-6




NaturalNano,
Inc.


(A
Development Stage Company)




CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ (DEFICIENCY) EQUITY




DeficitAdditional
                                                                                    
                                                                                    
                                                                                    Accumulated
                                                                                    
                                                                                    
                                                                                    Stockholders’Common Stock
                                                                                    
                                                                                    Preferred Stock
                                                                                    
                                                                                    Paid-in
                                                                                    
                                                                                    
                                                                                    in Development
                                                                                    
                                                                                    
                                                                                    EquityShares
                                                                                    
                                                                                    
                                                                                    Amount
                                                                                    
                                                                                    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
                                                                                    
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    100,000Net
      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
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    92,664Warrant
      issued for 4,500,000 shares of common stock for services
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    273,442
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    273,442Vesting
      of stock options granted
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    270,082
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    270,082Shares
      issued pursuant to convertible bridge notes on 11/29/05
                                                                                    
                                                                                    
                                                                                    20,939,200
                                                                                    
                                                                                    
                                                                                    
                                                                                    20,939
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,135,061
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,156,000Recapitalization
      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
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    2,125,806Grant
      of common stock in exchange for license @ $1.45 per
    share
                                                                                    
                                                                                    
                                                                                    200,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    200
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    289,800
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    290,000Grant
      of common stock as settlement of liability @ $1.45 per
    share
                                                                                    
                                                                                    
                                                                                    60,600
                                                                                    
                                                                                    
                                                                                    
                                                                                    61
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    87,809
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    87,870Grant
      of common stock as settlement of liability @ $1.52 per
    share
                                                                                    
                                                                                    
                                                                                    54,100
                                                                                    
                                                                                    
                                                                                    
                                                                                    54
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    82,178
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    82,232Common
      stock returned and cancelled @ $0.42 per share
                                                                                    
                                                                                    
                                                                                    (200,000
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (200
                                                                                    )
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    (83,800
                                                                                    )
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    (84,000
                                                                                    )Vesting
      of stock options granted
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,970,959
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,970,959Warrants
      issued:4,770,000
      shares at exercise prices from $0.75 to $1.30 per share
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,006,786
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,006,786200,000
      shares at $0.28 per share
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    32,460
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    32,460Exercise
      of stock options @ $.05 per share
                                                                                    
                                                                                    
                                                                                    826,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    826
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    40,474
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    41,300Net
      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
                                                                                    )Allocation
      of  note proceeds to warrants
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,213,600
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,213,600Fair
      market value of warrant issued to purchase:2,947,162
      with an exercise price of $0.22 price per share in partial payment of
      offering costs
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    501,018
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    501,018240,741
      shares at $0.26 per share for services
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    50,767
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    50,767Vesting
      of stock options granted
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    912,006
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    912,006Grant
      of common stock for services @:$0.36
      per share
                                                                                    
                                                                                    
                                                                                    160,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    160
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    57,440
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    57,600$0.10
      per share
                                                                                    
                                                                                    
                                                                                    340,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    340
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    33,660
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    34,000Exercise
      of stock options @ $.05 per share
                                                                                    
                                                                                    
                                                                                    680,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    680
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    33,320
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    34,000Net
      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
                                                                                    )Vesting
      of stock options granted
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    840,464
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    840,464Beneficial
      conversion feature of debt, net of taxes
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    324,811
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    324,811Grant
      of common stock for services @:
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    -$0.10
      per share
                                                                                    
                                                                                    
                                                                                    360,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    360
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    35,640
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    36,000$0.06
      per share
                                                                                    
                                                                                    
                                                                                    162,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    162
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    10,008
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    10,170$0.05
      per share
                                                                                    
                                                                                    
                                                                                    480,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    480
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    23,520
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    24,000$0.04
      per share
                                                                                    
                                                                                    
                                                                                    734,286
                                                                                    
                                                                                    
                                                                                    
                                                                                    734
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    27,903
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    28,637$0.03
      per share
                                                                                    
                                                                                    
                                                                                    2,685,715
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,686
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    83,885
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    86,571$0.02
      per share
                                                                                    
                                                                                    
                                                                                    200,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    200
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,800
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,000Fair
      market value of warrant issued as interest
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    6,490
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    6,490Issuance
      of common stock as interest payment:
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    -$0.05
      per share
                                                                                    
                                                                                    
                                                                                    6,607,493
                                                                                    
                                                                                    
                                                                                    
                                                                                    6,607
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    339,900
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    346,507Redemption
      of common stock
                                                                                    
                                                                                    
                                                                                    (69,303,189
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (69,303
                                                                                    )
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    68,303
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,000
                                                                                    )Gain
      on extinguishment of debt by shareholder
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,029,600
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,029,600Issuance
      of Series B Preferred stock
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    750,000
                                                                                    
                                                                                    750
                                                                                    
                                                                                    
                                                                                    (750
                                                                                    )
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Issuance
      of Series C Preferred stock
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,250,000
                                                                                    
                                                                                    4,250
                                                                                    
                                                                                    
                                                                                    (4,250
                                                                                    )
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Shares
      issued on debt conversion
                                                                                    
                                                                                    
                                                                                    2,200,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,200
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,800
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    11,000Net
      loss for the year ended  12/31/08
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    (5,667,486
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (5,667,486
                                                                                    )Balance
      at December 31, 2008
                                                                                    
                                                                                    
                                                                                    67,007,045
                                                                                    
                                                                                    
                                                                                    
                                                                                    67,007
                                                                                    
                                                                                    5,000,000
                                                                                    
                                                                                    5,000
                                                                                    
                                                                                    
                                                                                    18,705,365
                                                                                    
                                                                                    
                                                                                    
                                                                                    (23,064,761
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (4,287,389
                                                                                    )





See notes
to consolidated financial statements




F-7




NaturalNano,
Inc.


(A
Development Stage Company)




CONSOLIDATED
STATEMENTS OF CASH FLOWS




From inception:Years ended
                              
                              
                              December 22, 2004December 31
                              
                              
                              to December 31,2008
                              
                              
                              2007
                              
                              
                              2008Cash flows from operating
      activities:Net loss
                              
                              $
                              (5,667,486
                              )
                              
                              $
                              (5,860,640
                              )
                              
                              $
                              (23,064,761
                              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                              
                              
                              297,143
                              
                              
                              
                              141,570
                              
                              
                              
                              515,286Amortization
      of discount on convertible notes
                              
                              
                              1,492,532
                              
                              
                              
                              1,330,073
                              
                              
                              
                              2,822,605Amortization
      of deferred financing costs
                              
                              
                              334,517
                              
                              
                              
                              314,190
                              
                              
                              
                              648,707Vesting of
      stock options
                              
                              
                              840,464
                              
                              
                              
                              912,006
                              
                              
                              
                              4,993,511Issuance
      of warrants for services
                              
                              
                              6,490
                              
                              
                              
                              50,767
                              
                              
                              
                              3,369,945Issuance
      of stock for services
                              
                              
                              123,378
                              
                              
                              
                              34,000
                              
                              
                              
                              157,378Issuance
      of stock for interest
                              
                              
                              346,508
                              
                              
                              
                              
                              
                              
                              
                              346,508Forgiveness
      of interest expensed
                              
                              
                              42,016
                              
                              
                              
                              
                              
                              
                              
                              42,016Change in value of registration
      rights agreement
                              
                              
                              
                              12,128
                              
                              
                              
                              12,128Loss on
      asset impairments
                              
                              
                              573,909
                              
                              
                              
                              
                              
                              
                              
                              573,909Receipt of
      and gain on Atlas Mining warrant
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              (506,250
                              )Loss
      (gain) on disposal of asset
                              
                              
                              70,209
                              
                              
                              
                              (917
                              )
                              
                              
                              69,292Deferred
      rent
                              
                              
                              
                              
                              
                              
                              9,034
                              
                              
                              
                              9,034Changes
      in operating assets and liabilities:Decrease
      (increase) in inventory
                              
                              
                              6,940
                              
                              
                              
                              (27,149
                              )
                              
                              
                              (20,209
                              )Decrease
      (increase) in other current assets
                              
                              
                              10,451
                              
                              
                              
                              (146,246
                              )
                              
                              
                              (184,992
                              )Decrease
      in prepaid halloysite materials
                              
                              
                              
                              
                              
                              
                              249,650
                              
                              
                              
                              —Increase
      in accounts payable, accruedpayroll and accrued
      expenses
                              
                              
                              882,987
                              
                              
                              
                              132,153
                              
                              
                              
                              1,600,891Increase
      in deferred revenue
                              
                              
                              80,000
                              
                              
                              
                              
                              
                              
                              
                              80,000Increase
      (decrease) in other liability
                              
                              
                              14,016
                              
                              
                              
                              (6,000
                              )
                              
                              
                              36,016Net cash used in operating
      activities
                              
                              
                              (545,926
                              )
                              
                              
                              (2,855,381
                              )
                              
                              
                              (8,498,986
                              )Cash flows from investing
      activities:Purchase of
      property and equipment
                              
                              
                              (198,284
                              )
                              
                              
                              (169,074
                              )
                              
                              
                              (562,382
                              )Proceeds from
      sale of property and equipment
                              
                              
                              191
                              
                              
                              
                              2,937
                              
                              
                              
                              3,128Purchase of
      license
                              
                              
                              (50,000
                              )
                              
                              
                              (50,000
                              )
                              
                              
                              (200,000
                              )Proceeds from
      sale of Atlas Mining warrant
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              506,250Net cash (used in) provided by
      investing activities
                              
                              
                              (248,093
                              )
                              
                              
                              (216,137
                              )
                              
                              
                              (253,004
                              )Cash flows from financing
      activities:Proceeds
      from convertible notes
                              
                              
                              475,000
                              
                              
                              
                              3,250,000
                              
                              
                              
                              7,881,000Advances
      on related party line of credit
                              
                              
                              
                              
                              
                              
                              300,000
                              
                              
                              
                              900,000Advances
      from related parties
                              
                              
                              107,200
                              
                              
                              
                              429,984
                              
                              
                              
                              1,303,561Repayment
      of amounts due to related parties
                              
                              
                              (96,531
                              )
                              
                              
                              (414,985
                              )
                              
                              
                              (1,149,102
                              )Repayment
      of capital lease obligations
                              
                              
                              (74,442
                              )
                              
                              
                              (38,040
                              )
                              
                              
                              (112,482
                              )Payment of
      registration rights damages
                              
                              
                              
                              
                              
                              
                              (63,539
                              )
                              
                              
                              (63,539
                              )Deferred
      financing costs
                              
                              
                              (20,000
                              )
                              
                              
                              (160,600
                              )
                              
                              
                              (180,600
                              )(Redemption)
      issuance of common stock
                              
                              
                              (1,000
                              )
                              
                              
                              -
                              
                              
                              
                              99,000Proceeds
      from exercise of stock options
                              
                              
                              
                              
                              
                              
                              34,000
                              
                              
                              
                              75,300Net cash provided by financing
      activities
                              
                              
                              390,227
                              
                              
                              
                              3,336,820
                              
                              
                              
                              8,753,138(Decrease) increase in cash and
      cash equivalents
                              
                              
                              (403,792
                              )
                              
                              
                              265,302
                              
                              
                              
                              1,148Cash and cash equivalents at
      beginning of period
                              
                              
                              404,940
                              
                              
                              
                              139,638
                              
                              
                              
                              0Cash and cash equivalents at end
      of period
                              
                              $
                              1,148
                              
                              
                              $
                              404,940
                              
                              
                              $
                              1,148Supplemental
      disclosure of cash flow information:Cash paid for interest during the
      period
                              
                              $
                              8,589
                              
                              
                              $
                              134,967
                              
                              
                              $
                              143,556Schedule
      of non-cash investing and financing activities:Allocation
      of proceeds from discount onnotes payable and
      warrants grants
                              
                              $
                              475,000
                              
                              
                              $
                              3,213,600
                              
                              
                              $
                              3,688,600Issuance of warrants in partial
      payment of  financing costs
                              
                              $
                              6,490
                              
                              
                              $
                              501,018
                              
                              
                              $
                              507,508Note issued in consideration of
      deferred financing costs
                              
                              
                              $
                              97,500
                              
                              
                              $
                              97,500Registration rights
      liability
                              
                              
                              
                              
                              
                              $
                              82,849
                              
                              
                              $
                              82,489Common stock issued
      for:Convertible
      notes
                              
                              $
                              11,000
                              
                              
                              
                              
                              
                              
                              $
                              4,167,000Services
                              
                              $
                              66,000
                              
                              
                              $
                              57,600
                              
                              
                              $
                              293,702Capital lease
      obligations
                              
                              $
                              24,766
                              
                              
                              $
                              153,971
                              
                              
                              $
                              178,737Gain on extinguishment of debt by
      shareholder
                              
                              $
                              1,029,600
                              
                              
                              
                              
                              
                              
                              $
                              1,029,600Accrual for purchase of Navy
      License
                              
                              
                              
                              
                              
                              $
                              450,000
                              
                              
                              $
                              450,000Acquisition
      of license settled through issuanceof common stock (net of
      $100,000 cash)
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              $
                              290,000Common stock returned and
      cancelled for:Cancellation
      of license agreement
                              
                              
                              
                              
                              
                              
                              -
                              
                              
                              $
                              (84,000
                              )Issuance
      of warrants
                              
                              $
                              69,303
                              
                              
                              
                              
                              
                              
                              $
                              69,303




See notes
to consolidated financial statements




F-8




NaturalNano,
Inc.


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008




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 development and commercialization of material science
technologies with an emphasis on additives to polymers and other industrial and
consumer products by taking advantage of technology advances developed in-house
and through licenses from third parties. 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:




•
            polymers,
      plastics and composites,•
            cosmetic
      and personal care products,•
            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.




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 2008 of $5,667,486 and had negative working capital of $4,727,945 and a
stockholders' deficiency of $4,287,389 at December 31, 2008. Since inception the
Company’s growth has been funded through combination of convertible debt from
private investors and from cash advances from its former parent and majority
shareholder Technology Innovations, LLC. 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 Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations, to obtain additional financing and, ultimately, to attain
successful operations.




During
the third and fourth quarters of 2008, the Company received $390,000 and
$85,000, respectively, in connection with a contingent commitment of $2,500,000
in additional working capital.  The commitment for further capital
advances was contingent on certain operational milestones to be achieved by the
Company.  The Company had not achieved these milestones as of December
31, 2008 and as a result this agreement was terminated.




On April
3, 2009, we entered into two 8% Senior secured Promissory Notesfor $136,356 and
$34,750. The proceeds from the 2009 Promissory Notes were provided for general
working capital purposes and cannot be used to redeem or make any payment on
account of any securities due to the Lenders. The outstanding principal and all
accrued and unpaid interest is due and payable in full on June 30,
2009.




Due to the strain on the Company’s
liquidity throughout 2008, we have experienced product introduction and
commercialization delays. During the fourth quarter we implemented significant
staff and cost reductions.  As of December 31, 2008, only two
employees were active in the Company; the President and Chief Financial
Officer.  In February 2009, Platinum Long Term Growth IV, LLC, (the
“Series C Holder”), the sole holder of our Series C Convertible Preferred Stock
elected and appointed James Wemett as the Series C Director to the Registrant’s
Board of Directors.  Also in February 2008, the President and Chief
Financial Officer, as well as all other directors resigned from their
positions.  As a result of the resignations, Mr. Wemett became our
sole officer.  To fill the vacancies created by the resignations, Mr.
Wemett, our sole director and officer, appointed Kathleen Browne as Acting Chief
Financial Officer.




F-9




Management
is actively assessing the Company's operating structure with the objective to
reduce ongoing expenses, increasing sources of revenue and is negotiating the
terms of additional debt or equity financing.  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.




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.




Inventory




Inventory
is stated at the lower of cost or market value. 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. Overhead costs are
applied to inventory during production and included in cost of goods
sold.




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 it capitalized patent and licensed intangibles to determine if
the probable recovery of the net book value of the assets, as compared to
discounted future cash flows, is uncertain.  An impairment loss was
recorded relating to the capitalized patent and license agreements during the
fourth quarter of 2008. Refer to Note 4 for further discussion.




Property
and Equipment and Capital Lease Agreements




Property
and equipment are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the results of
operations for the respective period. Depreciation is provided over the
estimated useful lives of the related assets using the straight-line method.
Leasehold improvements are amortized over the lesser of the assets' useful lives
or the remaining term of the lease.





Property
and equipment, at cost, consists of the following:




2008
            
            
            2007
            
            Useful
      LifeLab
      equipment
            
            $
            562,371
            
            
            $
            458,617
            
            5
      yearsLeasehold
      improvements
            
            
            117,170
            
            
            
            57,600
            
            3-15
      yearsFurniture
      and office equipment
            
            
            -
            
            
            
            52,118
            
            3-5
      years679,541
            
            
            
            568,335Accumulated
      depreciation and amortization
            
            
            (236,438
            )
            
            
            (113,890
            )Net
      property and equipment
            
            $
            443,103
            
            
            $
            454,445




The
Company relocated its business offices in the third quarter of 2008 and as a
result $67,821 of net leasehold improvements and certain office furniture were
written off to general and administrative expenses at the time of the move. The
Company leases certain research and development equipment under the terms of
various capital lease agreements. As of December 31, 2008 and 2007, the Company
had capitalized lab equipment resulting from capital lease agreements in the
amount of $253,966 and $153,971, respectively included in the amounts above.
Amortization of leasehold improvements is provided for by the straight-line
method over the term of the lease.




F-10




Related
Party Agreements





On June
6, 2008 the Company received $200,000 under a promissory note.  Such
note did not bear any interest and was repaid on July 17, 2008 following the
collection of certain receivables.  The note had an attached 5 year
warrant to purchase 200,000 shares of the Company’s common stock for $0.33 per
common share. The Company valued such warrant at $6,490 at the date of issuance
and such amount has been recorded as additional interest related to this
note.




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 was
previously related to the Company as the former chairman of our board was the
president of BTI at the time the agreement was signed. The current president of
BTI was a member of our board during 2007 and 2008 and resigned from our board
in February 2009. 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 pays for shared administrative services provided by BTI. The amount on
the balance sheet at December 31, 2008 represents unpaid net services rendered
between  the Company and this related business.




Income
Taxes




The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS 109”), which
requires recognition of estimated income taxes payable or refundable on income
tax returns for the current year and for the estimated future tax effect
attributable to temporary differences and carry-forwards. Measurement of
deferred income items is based on enacted tax laws including tax rates, with the
measurement of deferred income tax assets being reduced by available tax
benefits not expected to be realized.  We recognize penalties and
accrued interest related to unrecognized tax benefits in income tax
expense.




Accrued
Payroll




The
Company accrues for earned and unused vacation benefits and deferred
compensation costs for amounts electively deferred by employees.




Other
Long Term Liabilities




These are
liabilities that are not expected to require liquidation within twelve months of
the balance sheet date.




Tax
Rebate from the State of New York




During
the year ended December 31, 2008 the Company received a QETC Facilities,
Operations, and Training tax rebate (“QETC rebate”) from the
State of New York of $244,000 related to 2006 and $257,000 related to
2007 and during the year ended December 31, 2007, the Company received a
QETC rebate of $103,476 related to 2005. All such amounts have
been recorded as a reduction in general and administrative
expenses.




Revenue
Recognition




The
Company has earned nominal operating revenue since inception (December 22,
2004). This revenue was generated from funded development and the delivery of
Pleximer and sample products specifically formulated for customer applications
and as such has been reported as operating revenue for financial reporting
purposes. The Company earns and recognizes such revenue to the extent such
development activities are completed or when the shipment of the sample products
has occurred and when no further performance obligation exists.




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.




F-11




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 preferred stock, convertible debt, options
and warrants outstanding during the period. Shares to be issued upon the
exercise of these instruments have not been included in the computation of
diluted loss per share as their effect is anti-dilutive based on the net loss
incurred. There were 185,436,983 and 44,025,995 shares underlying convertible
debt, outstanding options and warrants which would have been included in the
calculation for December 31, 2008 and 2007, respectively, if the Company had
generated earnings in the period.




Share
Based Payments




The
Company has three incentive stock plans: the 2005 Incentive Stock Plan (the
“2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007
Plan”), and the 2008 Incentive Stock Plan (“the 2008 Plan”) or (collectively,
the “Plans”).  The Plans provide 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.




The
Company accounts for stock option awards granted under the Plans in accordance
with Statement of Financial Accounting Standard No. 123 (revised 2004),
“Share-Based Payment”, (“SFAS 123(R)”). Under SFAS 123R, compensation expense
related to stock based payments are recorded over the requisite service period
based on the grant date fair value of the awards.  The Company uses
the Black-Scholes option pricing model for determining the estimated fair value
for stock-based awards. The Black-Scholes model requires the use of assumptions
which determine the fair value of stock-based awards, including the option’s
expected term and the price volatility of the underlying stock.





The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF 96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18,
“Accounting Recognition for Certain Transactions Involving Equity Instruments
Granted to Other Than Employees.” The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at
which a commitment for performance by the consultant or vendor is reached or
(ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the
equity instrument is recognized over the term of the consulting
agreement




Stock Split




On
January 27, 2006, the Company 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.




Fair Value of Financial
Instruments




Statements
of Financial Accounting Standards No. 107, “Disclosures about Fair Value of
Financial Instruments,” requires disclosure of fair value information about
financial instruments. Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information available to management as
of December 31, 2008.




These
financial instruments include cash and cash equivalents, accounts payable and
accrued expenses, convertible notes payable and capital leases. Fair values were
assumed to approximate carrying values for these financial instruments since
they are short-term in nature and their carrying amounts approximate fair values
or they are receivable or payable on demand. The fair value of the Company’s
capitalized lease obligations and convertible notes payable is estimated based
upon the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. The
carrying value approximates the fair value of these debt instruments in 2008 and
2007.




F-12




Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the amounts reported and disclosed in the financial
statements and the accompanying notes. Actual results could differ materially
from these estimates. On an ongoing basis, we evaluate our estimates, including
those related to the accounts receivable, fair values of intangible assets,
useful lives of intangible assets and property and equipment, fair values of
options and warrants to purchase our common stock, deferred revenue and income
taxes, among others. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities.




Recent
Accounting Pronouncements




EITF Issue No.
07-5Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock




In June 2008 the FASB ratified
EITF 07-5,Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock, which requires that
an instrument’s contingent exercise provisions be analyzed first. If this
evaluation does not preclude consideration of an instrument as indexed to its
own stock, the instrument’s settlement provisions are then analyzed. EITF
No. 07-5 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years, with recognition of a cumulative effect of a change in accounting
principle for all instruments existing at the effective date to the balance of
retained earnings. The Company is currently evaluating the potential impact, if
any, that EITF 07-5 will have on its consolidated financial
statements.





FSP APB
14-1 Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)





In
May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which clarifies the accounting for convertible debt
instruments that may be settled in cash upon conversion, including partial cash
settlement. FSP APB 14-1 specifies that an issuer of such instruments should
separately account for the liability and equity components of the instruments in
a manner that reflects the issuer’s non-convertible debt borrowing rate when
interest costs are recognized in subsequent periods. FSP APB 14-1 is effective
for fiscal years beginning after December 15, 2008, and retrospective
application is required for all periods presented. The Company is currently
evaluating the potential impact, if any, the adoption of FSP APB 14-1 on its
consolidated financial statements.




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




2.      8%
SENIOR CONVERTIBLE DEBT




As of
December 31, 2008 the consolidated balance sheet reflects a current liability of
$2,811,605 for the Initial and New Notes (the “Notes” issued and outstanding as
described below), net of $999,895 of discount. These notes have been classified
as a current due to the Company’s default on certain provisions of the agreement
including those related to the payment of interest and the registration rights
agreement (described further below.) The lenders have signed a forbearance
agreement related to these default provisions through May 20, 2009. As of
December 31, 2007, the consolidated balance sheet reflects a long term liability
of $1,330,073 for the Notes, net of $2,017,427 of discount.




The
discount on these notes will be amortized using a straight line method and
classified as interest during the term of the Notes through the period ending
January 31, 2010. The Company has
determined the use of the straight-line method for the amortizationof the discountis an appropriate effective yield method
as required by EITF 98-5 as the principal of the note is due in full at
maturity, the interest in not compounding and therefore this method
appropriately matches the interest expense to the cash flow of the
note.




F-13




During
the twelve months ended December 31, 2008 and 2007, the Company recorded
$1,492,532 and $1,330,073 respectively, in amortization expense relating to the
discount on the Notes. This amortization is included as interest expense in the
accompanying Statement of Operations.





The Loan
and Security Agreement and the related underlying notes issued in accordance
with the Initial Note agreement had the original conversion price of $.22 (as
cited in the March 7, 2007 agreement) adjusted to a conversion price of $0.005.
This conversion price was triggered as a result of the issuance of the New Notes
(described below) on September 29, 2008 thereby resulting in a reset of (a) the
conversion price of the Initial Notes, (b) the exercise price of the warrants
related to the Initial Notes and (c) the number of shares that may be purchased
by such warrants.




During
2008 we issued an aggregate of 6,607,493 shares of our common stock to Platinum
in satisfaction of $346,507 of interest due on the Notes.




The
Initial Notes March 7, 2007





On March
7, 2007, we entered into a Loan and Security Agreement (the “Purchase
Agreement”) for $3,347,500 (the “Initial Notes”) 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 represented an aggregate of
15,215,910 common shares issuable upon the conversion of the principal amount of
the notes at the original fixed conversion price of $0.22 per share at the time
of the agreement.




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 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). This provision of the agreement was triggered on September 29, 2008 in
connection with the issuance of the New Notes, described below. None of these
warrants have been exercised. 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. As described above, this anti-dilution
provision was triggered in the third quarter of 2008 when the conversion price
was modified to $0.005.




F-14




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 was originally due and payable on March 7,
2009 and extended to January 31, 2010 under a forbearance agreement entered into
in 2008. 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. As described above, this
anti-dilution provision was triggered in the third quarter of 2008 when the
conversion price was modified to $0.005.




The fair
value of the warrants on the date of grant was determined using the
Black-Scholes model and was measured on March 7, 2007 at $3,767,046. Because the
net proceeds of the 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 the term of the
Notes. During the year ended December 31, 2008 and 2007, the Company recorded
$1,371,916 and $1,330,073, respectively, 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 the Initial 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.




F-15




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 $334,517 and $314,190 in the years ended December 31, 2008 and 2007,
respectively.




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 in such liquidated damages 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. As of the fourth quarter of 2008, the registration statement had not
updated with the requisite SEC filings and as such, the Company was in default
of this provision of the Registration Rights Agreement. The lenders have
provided the Company a forbearance agreement related to this default through May
20, 2009. At December 31, 2008 the outstanding balance for this obligation was
$82,489.




The
New Notes-September 29, 2008




On
September 29, 2008, the Company entered into a new Loan and Security Agreement
(the “New Notes”), by and among Platinum and Longview allowing for borrowing of
up to $2,500,000. During the year ended December 31, 2008, the Company received
an aggregate of $475,000 and in turn issued 8% senior secured promissory notes
due January 31, 2010 to the Lenders.  The Loan Agreement provides for
additional advances, subject to performance milestones being achieved by the
Company that could total an additional $2,025,000. These milestones had not been
achieved as of December 31, 2008 and as a result this agreement was terminated.
The New Notes are convertible into common stock of the Company, with a
conversion price of $0.005 that bear interest at the rate of 8% per annum, with
interest payable quarterly, in arrears, in freely traded stock or in cash at
election of the Company.  All unpaid interest and principal will be
due and payable at maturity on January 31, 2010 and no payments of interest are
required prior to January 31, 2009.




The New
Notes are secured on a pari-passu basis with the Initial Notes and (i) senior to
all other current and future indebtedness, (ii) secured by all of the assets of
the Company and each of the Company’s subsidiaries and (iii) unconditionally
guaranteed by all of the Company’s subsidiaries.  The Company and the
Lenders (and their affiliates) entered into Forbearance Agreements for the
purpose of making the maturity for the Existing Debt coterminous with the
maturity date for the New Notes and that they will not enforcetheir rights provided for
in the loan documents.




F-16




The
Company considered SFAS No. 133 and EITF 00-19 and determined that the embedded
conversion feature, included in the Initial Notes, met the criteria to be
classified as equity and as a result did not require derivative treatment.
Because the New Notes are convertible into common stock of the Company at a
price less than the fair market value of the Company’s common stock on the dates
the New Notes were issued, there is a beneficial conversion feature related to
the New Notes.  The intrinsic value of the common stock each note is
convertible into is greater than the face value of each note. The value of the
beneficial conversion feature to be recorded was limited by EITF 98-05 to
$475,000, the face value of the New Notes.  The beneficial conversion
feature was recorded as equity and as a discount to the New Notes. This discount
is being amortized on a straight line basis over the term of the notes. During
the year ended December 31, 2008, the Company recorded $120,616 of amortization
expense, which is included in the interest expense for financial reporting
purposes.




As
of December 31, 2008 the total common shares underlying the Initial and New
Notes represent an aggregate of 762,300,000 common shares issuable upon the
conversion of the principal amount of these Notes at the fixed conversion price
of $0.005 per share.  On September 29, 2008, the Investors agreed to
cancel warrants to purchase 1,218,950,060 shares of common stock at $0.005 per
share in exchange for shares of preferred stock (see Note 7).  The
remaining warrants held by Platinum Advisors, LLC gave the holder the right to
purchase 162,093,910 shares of the Company’s common stock for $0.005 per
share.




3.
            AGREEMENTS
      WITH TECHNOLOGY INNOVATIONS, LLC




Prior to
September 26, 2008, TI was 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. TI founded NaturalNano, Inc., a Delaware corporation on
December 22, 2004, with an initial cash contribution of $100,000 for all of the
then outstanding shares of common stock.




Redemption
of TI common stock and grant of warrant in exchange for TI debt





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 bore interest at the rate of 8% per annum.
The Agreement contained conventional terms, including provisions relating to
events of default. Amounts borrowed under this agreement were to be used for
general working capital needs. The repayment obligation under this Line of
Credit Agreement was 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 Notes (see Note 2), TI agreed not to
demand repayment as long as any amounts were outstanding on the Notes. As of
December 31, 2007, $900,000 in principal and $87,584 in interest had been
advanced under this agreement and was included in Related party note payable in
the balance sheet.




On August
1, 2008, in connection with, and as a condition to the financing provided by
Platinum and Longview (see Note 2), Technology Innovations, LLC
(“TI”)  agreed (a) to sell its common share holdings in the Company at
the direction of the Company for the sum of $1,000, and (b) agreed to cancel and
forgive all principal, interest, fees and expenses accrued and due pursuant the
Credit Agreement and note entered into by the Company with TI in connection with
a line of credit provided by TI to the Company (the “TI Debt”).  On
September 26, 2008, the Company paid TI $1,000 and redeemed the 69,303,189
shares of common stock held by TI.




Also on
August 1, 2008 the $900,000 principal outstanding to TI, along with $129,600 of
accrued and unpaid interest, was satisfied in exchange for a warrant, described
below, resulting in a gain on extinguishment of liabilities with a shareholder
recorded as an increase in additional-paid-in-capital. The Company recorded a
total of $42,016 of interest expense related to this note during 2008 and
$70,838 in 2007.  Additionally, TI, and an affiliate of TI, Biomed,
Inc. forgave approximately $66,000 of outstanding current account
payable.




In
connection with the satisfaction of the Line of Credit Agreement, the Company
issued TI on August 6, 2008 a warrant to purchase up to 4.99% of the Company’s
common stock.  Under the warrant TI may purchase up to that number of
shares that would give TI beneficial ownership of not more than 4.99% of the
Company.  The price to be paid for the shares, if purchased on or
before February 13, 2009 would have been computed as $25 million divided by the
fully diluted common stock outstanding on the date of exercise. If the purchase
occurs after February 13, 2009 and before the warrant expires on February 11,
2011, the purchase price shall be computed as $40 million divided by the fully
diluted common shares outstanding on the date of exercise.  Based on
the terms of the warrant conversion agreement TI has the right to purchase up to
82,707,293 shares at an exercise price of $0.0149 per share as of December 31,
2008.




F-17




On
September 26, 2008, TI and the Company entered into a consulting agreement under
which TI agreed to provide certain advisory services until September 26,2009.  In
exchange for such services, the Company is to issue to TI common stock valued at
an aggregate of $66,000 based upon the trailing 20 day volume weighted average
price (the “VWAP”) on the date of issue. To the extent that the VWAP on the
date, or an effective Form S-8 registering shares issued to TI, is less than the
VWAP on the date such shares were issued the Company agreed to pay TI such
difference in cash. As of December 31, 2008, TI was issued 300,000 shares of
common stock valued at $11,700 under the Company’s 2007 Incentive Stock Plan and
$54,700 is included as an accrued expense related to the obligation to issue
remaining shares.




Other
Transactions with TI




In
connection with the 8% senior secured convertible debt (see Note 2), on March 2
and 5, 2007, 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 dated March 7, 2007 (the “Lock-Up Letter”), that for a period of two
years from the date of the Lock-Up Letter it would 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 Platinum 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 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.




On August
21, 2008 the lease for the Company’s business offices was assigned to Technology
Innovations, LLC, releasing the Company from the related obligations for that
agreement.




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 was
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 allows the Company to 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
License Agreement provides for a license issue fee of $500,000 to be paid in
installments as follows: $50,000 in October 2007, $50,000 in August 2008,
$100,000 in October 2008, $100,000 in December 2008, $100,000 in June 2009, and
$100,000 in December 2009. As of December 31, 2008, the Company had paid
$100,000 under this agreement and was delinquent in $200,000 of payments defined
under the agreement.




The
License Agreement provides for royalties of 5% of net sales, subject to certain
minimum royalty payments. The agreement requires minimum annual royalty
payments, paid in advance, in October of the year prior to the royalty period.
Minimum annual royalties defined under this agreement are as follows: $76,667
for amounts payable in 2007, $144,333 for amounts payable in 2008, $212,000 for
amounts payable in 2009, $279,667 for amounts payable in 2010, $347,333 for
amounts payable in 2012 and $30,000 per year thereafter as defined. As of
December 31, 2008, the Company had paid $76,667 under this agreement. Royalty
payments resulting from this agreement are expensed as incurred.




F-18




Prior to
the fourth quarter of 2008, the Company had been amortizing the $500,000 Navy
license issue fee over the five year term of the license agreement on a
straight-line basis. During the fourth quarter of 2008, the Company evaluated
the recoverability of the net capitalized license issue fee and determined that
the Company’s probable recovery of the net book value of this asset as compared
to forecasted discounted future cash flows including required minimum royalty
payments was uncertain.  As such, the carrying value of this
capitalized license issue fee was reduced to zero during the fourth quarter of
2008. This asset impairment determination was based on management’s judgments
regarding the Company’s current cash position, the requirements for minimum
annual funding requirements for royalties and the uncertainty regarding the
implementation of research and commercialization programs due to the Company’s
current liquidity position (as discussed in Note 1). In connection with this
evaluation, a fourth quarter impairment loss of $ 375,000 was recorded to the
Statement of Operations thereby fully writing off the net book value of this
intangible asset at December 31, 2008.




During
the twelve months ended December 31, 2008 and 2007, $100,000 and $25,000,
respectively, of amortization expense was recognized for this license
agreement.




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
Company had been amortizing the Ambit license over an estimated useful life of 9
years which would have been completed in 2014. During the fourth quarter of
2008, the Company evaluated the recoverability of the net book value of this
intangible asset and determined that the Company’s probable recovery of the net
book value of this asset as compared to forecasted discounted future cash flows
was uncertain.  As such, the carrying value of this license was
reduced to zero during the fourth quarter of 2008. This asset impairment
determination was based on management’s judgment regarding the Company’s current
cash position, and the uncertainty regarding the implementation of research and
commercialization programs due to the Company’s current liquidity position (as
discussed above.). In connection with this evaluation, a fourth quarter
impairment loss was recorded of $ 198,910 to the Statement of Operations thereby
fully writing off the net book value of this intangible asset at December 31,
2008.




During
the twelve months ended December 31, 2008 and 2007, $33,152 of amortization
expense was recognized prior to the impairment loss.




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. In consideration of
these actions and due to the related uncertainty of the future delivery of this
inventory, all prepaid inventory related to Atlas Mining Company was marked down
to zero with a corresponding  charge to operational expense in
2007.




F-19




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.




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.




6.   
 INCOME TAXES





Following
is a summary of the components giving rise to the income tax provision (benefit)
for the years ended December 31:





The
provision (benefit) for income taxes consists of the following:





2008
              
              
              2007Currently
      payable:Federal
              
              $
              -
              
              
              $
              -State
              
              
              -
              
              
              
              -Total
      currently payable
              
              
              -
              
              
              
              -Deferred:Federal
              
              
              246,260
              
              
              
              (1,006,088
              )State
              
              
              (841,484
              )
              
              
              (226,152
              )Total
      deferred
              
              
              (595,224
              )
              
              
              (1,232,240
              )Less
      increase in valuation allowance
              
              
              595,224
              
              
              
              1,232,240Net
      deferred
              
              
              -
              
              
              
              -Total
      income tax provision (benefit)
              
              $
              -
              
              
              $
              -





Individual
components of deferred taxes are as follows:





2008
                              
                              
                              2007Deferred tax assetsNet
      operating loss carry forwards
                              
                              $
                              3,902,103
                              
                              
                              $
                              3,394,155Equity
      issued for services
                              
                              
                              1,811,973
                              
                              
                              
                              2,110,105Other
                              
                              
                              419,953
                              
                              
                              
                              34,545Total
                              
                              
                              6,134,029
                              
                              
                              
                              5,538,805Less
      valuation allowance
                              
                              
                              (6,134,029
                              )
                              
                              
                              (5,538,805
                              )Gross
      deferred tax asset
                              
                              $
                              -
                              
                              
                              $
                              -Deferred tax liabilitiesBeneficial
      Conversion Feature
                              
                              $
                              150,189
                              
                              
                              $
                              -Gross
      deferred tax liabilities
                              
                              $
                              150,189
                              
                              
                              $
                              -Net
      deferred tax liabilities
                              
                              $
                              150,189
                              
                              
                              $
                              -





As of
December 31, 2008 the Company has a deferred income tax liability of $150,189
which consists of the tax effect of the difference in the basis between GAAP and
tax purposes for the beneficial conversion feature in connection with the Notes
entered into during 2008 with the offset recorded through Additional Paid in
Capital as an offset to the beneficial conversion feature.  This
deferred tax liability will decrease with a corresponding increase to Additional
Paid in Capital as the beneficial conversion feature is amortized over the term
of the Notes.




F-20




The
Company has approximately $12,002,000 in federal net operating loss
carryforwards (“NOL’s”) available to reduce future taxable
income.  Due to the uncertainty of the Company’s ability to generate
sufficient taxable income in the future to utilize the NOL’s before they expire,
the Company has recorded a valuation allowance to reduce the gross deferred tax
asset to zero.  A portion of the net operating loss carryforward,
amounting to approximately $840,000, relates to tax deductions for stock awards,
options and warrants exercised subsequent to the implementation of
SFAS 123(R), which are not included in the determination of the deferred
tax asset above and will be recognized in accordance with SFAS 123(R) when
realized for tax purposes.  These carryforwards expire at various
dates from 2025 through 2028.





Internal
Revenue Code Section 382 (“Section 382”) imposes limitations on the availability
of a company’s net operating losses and other corporate tax attributes as
ownership changes occur.  As a result of the transactions discussed in
Note 2, 3 and 7, a Section 382 ownership change is expected and a study will be
required to determine the date of the ownership change. The amount of the
Company’s net operating losses and other tax attributes incurred prior to the
ownership change may be limited based on the value of ownership
change.  A full valuation allowance has been established for the gross
deferred tax asset related to the net operating losses and other corporate tax
attributes available. Accordingly, any limitation resulting from Section 382
application is not expected to have an material effect on the balance sheet or
statements of operations of the Company.





The
differences between the United States statutory federal income tax rate and the
effective income tax rate in the accompanying consolidated statements of
operations are as follows:




2008
              
              
              2007Statutory
      United States federal rate
              
              
              34.0
              %
              
              
              34.0
              %State
      taxes, net of federal benefit
              
              
              9.6
              
              
              
              2.8Nondeductible
      Interest Expense
              
              
              (11.9
              )
              
              
              (9.5
              )Gain
      on Extinguishment of debt
              
              
              (5.9
              )
              
              
              -Change
      in valuation allowance
              
              
              (10.5
              )
              
              
              (21.0
              )Nondeductible
      Stock Based Compensation
              
              
              (14.8
              )
              
              
              (4.7
              )Other
              
              
              (0.5
              )
              
              
              (1.6
              )Effective
      tax rate
              
              
              -
              %
              
              
              -
              %





In July
2006, the FASB released Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement 109” (“FIN48”). Effective for
fiscal years beginning after December 15, 2006, FIN48 provides guidance on the
financial statement recognition and measurement for income tax positions that we
have taken or expect to take in our income tax returns. It also provides related
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. We adopted the provisions of FIN48
on January 1, 2007. The adoption did not have a material impact on the Company’s
consolidated results of operations and financial position, and therefore, the
Company did not have any adjustment to the January 1, 2007 beginning balance of
retained earnings.





A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:


Unrecognized
      tax benefits balance at January 1, 2008
              
              $
              0Gross
      increase for tax positions of prior years
              
              
              515,000Gross
      decrease for tax positions of prior years
              
              
              —Gross
      increase for tax positions of current year
              
              
              —Gross
      decrease for tax positions of current year
              
              
              —Settlements
              
              
              —Lapse
      of statute of limitations
              
              
              —Unrecognized
      tax benefits balance at December 31, 2008
              
              $
              515,000




At
December 31, 2008, the total unrecognized tax benefits of $515,000 have
been netted against the related deferred tax assets.




The
Company recognizes interest accrued and penalties related to unrecognized tax
benefits in tax expense. During the years ended December 31, 2008 and 2007 the
Company recognized no interest and penalties.




F-21




The
Company files income tax returns in the U.S. federal jurisdiction and New York
State. The tax years 2005-2007 generally remain open to examination by major
taxing jurisdictions to which the Company is subject.




7.      STOCKHOLDERS
EQUITY




On
October 9, 2008, the Company mailed an Information Statement on Schedule 14c,
informing the stockholders that a majority of the common shares outstanding as
of September 12, 2008 had voted to, among other things; amend the Company’s
Certificate of Incorporation to increase the authorized common stock to
5,000,000,000 shares from 300,000,000 shares.




As of
December 31, 2008 the Company was authorized to issue up to 5,000,000,000 shares
of common stock and 10,000,000 shares of preferred stock.




Preferred
Stock Issuances




On
September 29, 2008 the Investors agreed to exchange detachable warrants (see
Note 2) to purchase 1,218,750,060 shares of common stock of the Company for
$0.005 per share held by such Investors related to the March 6, 2007 convertible
notes payable for 5,000,000 shares of preferred stock.




On
October 7, 2008, the Company filed a Certificate of Designation of Rights,
Preferences, Designations, Qualifications and Limitations of the Series C
Preferred Stock (the “Series C Designation”) with the Secretary of State of the
State of Nevada, and prepared a preferred stock certificate for delivery to
Platinum Long Term Growth IV, LLC, evidencing 4,250,000 shares of Series C
Convertible Preferred Stock of the Company (“Series C”).  On October
7, 2008, the Company also filed a Certificate of Designation of Rights,
Preferences, Designations, Qualifications and Limitations of the Series B
Preferred Stock (the “Series B Designation”) with the Secretary of State of the
State of Nevada, and prepared a preferred stock certificate for delivery to
Longview Special Funding, Inc., evidencing 750,000 shares of Series B
Convertible Preferred Stock of the Company (“Series B”).  The Series B
and Series C have an aggregate liquidation preference of $10,000 and participate
in any dividends or distributions to the common shareholders on an as converted
basis.




Each
share of the Series B Convertible Preferred Stock, and each share of Series C
Convertible Preferred Stock is convertible into 160 shares of the Company’s
common stock and votes on an as-converted basis (with each share having 160
votes).  However, the Series B Designation limits the holder’s right
to convert its Series B Convertible Preferred Stock, and the aggregate voting
power attributable to its Series B Convertible Preferred Stock, to no more than
4.99% of the votes attributable to the total outstanding common
shares.  Accordingly, the votes attributable to the Series B
Convertible Preferred constitutes 4.99% of the aggregate votes attributable to
the Company’s outstanding shares (on an as converted basis) and the votes
attributable to the Series C Convertible Preferred Stock, therefore, represent
approximately 86.74% of the aggregate votes attributable to the Company’s
outstanding shares (on an as converted basis), and the votes Series B
Convertible Preferred and the Series C Convertible Preferred, voting together
represent approximately 91.73% of the aggregate votes attributable to the
Company’s outstanding shares (on an as converted basis).




Common
Stock Issuances




During
the twelve months ended December 31, 2008, the Company issued an aggregate of
6,607,493 shares of its common stock in satisfaction of interest obligations to
its senior debt holders (see Note 2).




In 2008,
the Company issued 4,275,715 shares of its common stock to Sichenzia Ross
Friedman and Ference in settlement of a liability accrued for general legal
services received by the Company between October 2007 and December 2008. The
Company issued 340,000 shares of common stock for such obligation in 2007 which
was valued at $34,000 as of December 31, 2007. The aggregate shares of common
stock issued and received in 2008 in connection with these services was valued
at $175,621 based on the market price of the Company’s common stock when the
required performance by the attorney was complete.




In March
2008 the Company issued 46,286 shares of its common stock to Everblak, Inc. in
settlement of a liability accrued for services to be received by the Company
between November 2007 and March 2009. The common stock issued and received in
connection with this transaction has been valued at $2,057 based on the market
price of the Company’s common stock when the shares were delivered and the
required performance by Everblak, Inc. was complete.




F-22




In
September 2008, the Company issued 300,000 shares of common stock to TI as
partial satisfaction of a contractual liability (see Note 3) amounting to
$11,700.




On March
26, 2007, we issued 100,000 common 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. The common stock issued in connection with these transactions has been
valued at $57,600 based on the market price of the stock when the services were
delivered and required performance by the vendor was 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.




Warrants
Grants




The
Company has issued warrants to purchase shares of its common stock to certain
consultants and debt holders. As of December 31, 2008, there were common stock
warrants outstanding to purchase an aggregate 162,534,651 shares of common
stock, excluding the shares available under the TI warrant, pursuant to the
warrant grant agreements described below.




During
2007 the Company issued $3,347,500 of 8% senior convertible notes and 25,106,254
in detachable warrants (as further described below and in Note 2.) During the
third quarter of 2008, the Company issued the New Notes for $475,000 of debt
securities having a conversion price of $0.005 per common share, which triggered
the anti-dilution provisions of the Initial Notes and the attached
warrants.  On September 29, 2008, the Investors agreed to cancel
1,218,750,060 warrants in exchange for shares of preferred stock, as allowed
under the agreement.  As of December 31, 2008, the remaining warrants
held by Platinum Advisors, LLC give the holder the right to purchase 162,093,910
shares of the Company’s common stock for $0.005 per share.




In
consideration for the cancellation of TI’s debt (see Note 3), on August 6, 2008
the Company issued TI a warrant to purchase up to 4.99% of the Company’s common
stock.  Under the warrant TI may purchase up to that number of shares
that would give TI beneficial ownership of not more than 4.99% of the
Company.  The price to be paid for the shares, if purchased on or
before February 13, 2009 will be computed as $25 million divided by the fully
diluted common stock outstanding on the date of exercise. If any such purchase
occurs after February 13, 2009 and before the warrant expires on February 11,
2011, the purchase price shall be computed as $40 million divided by the fully
diluted common shares outstanding on the date of exercise.  On the
date that the warrant was issued, TI beneficially owned 4.05% of the Company
through common stock and derivatives convertible into common stock within 60
days from the issue date held by TI and its affiliates. Based on the terms of
the warrant conversion agreement TI has the right to purchase up to 82,707,293
shares at an exercise price of $0.0149 per share as of December 31,
2008.




On June
6, 2008 the Company received $200,000 under a promissory note and issued a 5
year warrant to purchase 200,000 shares of the Company’s common stock for $0.33
per common share, the Company valued such warrant at $6,490 as of the repayment
date of the note. During the twelve months ended December 31, 2008, $ $6,490,
was realized as additional interest expense related to this
warrant.





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
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 expired unexercised on December 27, 2008. The value of the services
received in connection with this agreement, was 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.




F-23




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
              EquityCMI
      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
            
            
            
            
            
            
            
            100,000Cancellation
      of NN shares November 29, 2005
            
            
            (20,000,000
            )
            
            
            (20,000
            )
            
            
            (80,000
            )
            
            
            
            
            
            
            (100,000
            )Elimination
      of CMI accumulated deficit
            
            
            
            
            
            
            
            
            
            
            (367,465
            )
            
            
            367,465November
      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.
            INCENTIVE
      STOCK PLANS




Under the
Company’s 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated
2007 Incentive Stock Plan (the “2007 Plan”) and the 2008 Incentive Stock Plan
(the”2008 Plan”), officers, employees, 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 are
issued by the Company upon exercise by any option holder pursuant to any grant
of such shares. The Plans are authorized to grant awards as follows: the 2005
Plan is authorized to grant up to 14 million share unit awards, the 2007 Plan is
authorized to grant up to 17 million share unit awards, and the 2008 Plan is
authorized to grant up to 800 million unit share awards.




F-24




A summary
of the status of outstanding incentive stock plans is presented
below:




2008
                                  
                                  
                                  2007Shares
                                  
                                  
                                  Weighted Average
                                    Exercise Price
                                  
                                  
                                  Weighted
                                    Average
                                    Remaining
                                    Life-years
                                  
                                  
                                  Shares
                                  
                                  
                                  Weighted Average
                                    Exercise Price
                                  
                                  
                                  Weighted
                                    Average
                                    Remaining
                                    Life-yearsOutstanding
      at beginning of year
                                  
                                  
                                  18,389,000
                                  
                                  
                                  $
                                  0.20
                                  
                                  
                                  
                                  7.37
                                  
                                  
                                  
                                  10,374,000
                                  
                                  
                                  $
                                  0.19
                                  
                                  
                                  
                                  8.67Granted
      during the year
                                  
                                  
                                  6,395,000
                                  
                                  
                                  $
                                  .08
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,895,000
                                  
                                  
                                  $
                                  0.21
                                  
                                  
                                  
                                  6.42Exercised
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (680,000
                                  )
                                  
                                  $
                                  0.05Cancelled
      or forfeited
                                  
                                  
                                  (2,750,834
                                  )
                                  
                                  $
                                  .18
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (200,000
                                  )
                                  
                                  $
                                  0.05Options
      outstanding at end of year
                                  
                                  
                                  22,033,166
                                  
                                  
                                  $
                                  0.19
                                  
                                  
                                  
                                  6.15
                                  
                                  
                                  
                                  18,389,000
                                  
                                  
                                  $
                                  0.20
                                  
                                  
                                  
                                  7.37Options
      exercisable at end of year
                                  
                                  
                                  21,116,498
                                  
                                  
                                  $
                                  0.19
                                  
                                  
                                  
                                  6.16
                                  
                                  
                                  
                                  10,932,751
                                  
                                  
                                  $
                                  0.18
                                  
                                  
                                  
                                  7.62Shares
      issued as restricted grants
                                  
                                  
                                  4,622,001
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  340,000Available
      for future grant
                                  
                                  
                                  801,809,667
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  10,405,000




The
weighted-average grant date fair value for December 31, 2008 was $.07. The total
fair value of shares vested during the year was $815,454. As of December 31,
2008, the aggregate intrinsic value of the stock options outstanding and
exercisable was $0. During 2008, no option awards were exercised.




As of
December 31, 2008, the amount of unvested compensation is not expected to be
material and is expected to vest over the next year.
  In
addition to options granted under the Company’s 2005 and 2007 Plans described
above, during 2006 the Company 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 fair value of these stock options on the date of grant was determined
utilizing the Black-Scholes model. At December 31, 2008 there was no intrinsic
value of these outstanding options.




F-25









Black-Scholes
      Valuation Assumptions:
              
              2008
              
              2007Risk-free
      interest rate
              
              
              2.7-3.5%
              
              
              3.1-5.0%Expected
      term
              
              
              2.5-5.0
              
              
              4-9.7Expected
      stock volatility
              
              
              115%
      - 192%
              
              
              107%-114%Expected
      dividends
              
              
              zero
              
              
              zero




9.
            COMMITMENTS
      AND LEASE OBLIGATIONS




On
February 1, 2006, the Company entered into a two year lease agreement that
included a one year renewal option and expired on January 31,
2009.  This space, representing approximately 3,000 square feet of
laboratory space, had been used in the establishment of our initial research
facility and was located in Rochester, New York.  The annual rent for
each of the initial two years of the agreement was $46,187 and increased to
$47,687 when the Company exercised its option to renew the lease for a final
year. The Company was responsible for its pro rata share of the operating costs
of the facility during the lease period and such costs were assessed annually by
the landlord.  On March 31, 2008, the Company and the landlord agreed
to terminate this lease effective May 31, 2008. The company relocated its
business offices to this location coincident with the Schoen Place lease
assignment described below.




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, the annual base rent was $44,000. On August 21, 2008 the lease for the
Company’s business offices was assigned to Technology Innovations, LLC,
releasing the Company from the related obligations for that
agreement.





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, 2008 and 2007 was $62,298 and
$91,911 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 2014.




F-26




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
              
              
              Total2009
              
              $
              67,003
              
              
              $
              756,333
              
              
              $
              2,325
              
              
              $
              42,900
              
              
              $
              868,5612010
              
              
              3,757
              
              
              
              279,667
              
              
              
              —
              
              
              
              39,600
              
              
              
              323,0242011
              
              
              —
              
              
              
              347,333
              
              
              
              —
              
              
              
              6,600
              
              
              
              353,9332012
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —2013
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Thereafter
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      contractual cash obligations
              
              $
              70,760
              
              
              $
              1,383,333
              
              
              $
              2,325
              
              
              $
              89,100
              
              
              $
              1,545,518




(1)
Capital equipment includes $4,505 of interest related to the remaining principal
amount of $66,255.




10.
            SUBSEQUENT
      EVENT




Creditor
Concessions and Debt Restructuring




Subsequent
to December 31, 2008 agreements have been reached with certain vendors to settle
accounts payable that were outstanding as of December 31, 2008 for amounts less
than the liability that is recorded in the accompanying balance
sheet.  As a result of these agreements liabilities of $130,802 have
been satisfied for revised payment terms of $50,135.  The resulting
vendor concessions of $80,667 will be treated as a gain in the period that the
agreements are reached.


Legal
Proceedings




On March
24, 2009 the Company received a demand notice from an attorney representing a
group of certain former employees of the Company, including but not limited to
the Company’s former President and Chief Financial Officer, demanding immediate
payment of $331,265 for certain deferred compensation, severance and vacation
benefits. Each of the former employees cited in the demand notice, as well as
other former employees, had executed written agreements during 2008 that allowed
the Company to defer certain of these compensation payments. The Company is
evaluating the components of this demand notice and is working to respond to
this demand. Due to the Company’s current cash and liquidity position discussed
above and the current evaluation of the items in the demand notice, the timing
of future payment of these outstanding amounts in uncertain. The Company has
accrued for earned and unused vacation benefits and deferred payroll costs for
amounts electively deferred by these and other former employees in the amount of
$480,453 as of December 31, 2008, which includes $261,265 of the total amount
demanded by the employees included in the demand notice.








8%
Senior secured Promissory Notes April 3, 2009




On April
3, 2009, we entered into two 8% Senior secured Promissory Notesfor $136,356 and
$34,750, respectively (the “2009 Promissory Notes”) with Platinum Long Term
Growth IV, LLC (“Platinum”), and Longview Special Financing, Inc. (“Longview”
and together with Platinum, collectively, the “Lenders”). The 2009 Promissory
Notes are secured by, among other things, (i) the continuing security interest
in certain assets of the Company pursuant to the terms of the Initial Notes (see
Note 2) dated March 7, 2007, (ii) the Pledge Agreement, as defined in the
Initial Notes, and (iii) the Patent Security Agreement, dated as of March 6,
2007.




F-27




The
proceeds from the 2009 Promissory Notes are available for general working
capital purposes and cannot be used to redeem or make any payment on account of
any securities due to the Lenders. The outstanding principal and all accrued and
unpaid interest is due and payable in full on June30, 2009 (the maturity date of
the notes.) The 2009 Promissory Notes bear interest, in arrears, at a rate of 8%
per annum payable in cash on June 30, 2009. In the event of a default (as
defined in the agreement), interest will be charged at 16% during the period of
the default and until such default has been cured.




The 2009
Promissory Notes contains a provision for a mandatory principal prepayment upon
the Company’s receipt of any funds from any source including the receipt of any
payment from the State of New York or any other sources. The outstanding
principal is payable in full at the earlier of the maturity date (June 30, 2009)
or earlier as defined by the mandatory prepayment provision, as described above.
The Company incurred fees and expense of $3,685 in the first quarter of 2009 in
securing these notes.




F-28