UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





x Annual Report pursuant
to Section 13 or 15(d) of the Securities


Exchange
Act of 1934





For
the fiscal year ended December 31, 2009


or


 ̈ Transitional Report
pursuant to 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 pursuant to 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 pursuant 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


Note-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under
those Sections.





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 
x
    NO   o





Indicate
by checkmark if the registrant has submitted electronically and posted on its
Website, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).


YES 
o
    NO   o





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, in definitive 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  ̈ No x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter:


69,682,045
shares at a market valued by reference to the closing price of such stock
($0.02), as of June 30, 2009 was $1,393,641.





As of
April 7, 2010, there were 114,497,445 shares of Common Stock of NaturalNano,
Inc. issued and outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE - NONE





NaturalNano
Inc.


Table
of Contents





PART
      IITEM
      1.
                
                BUSINESS
                4ITEM
      2.
                
                PROPERTIES
                13ITEM
      3.
                
                LEGAL
      PROCEEDINGS
                14PART
      IIITEM
      5.
                
                MARKET
      FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                14ITEM
      7.
                
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                16ITEM
      8.
                
                FINANCIAL
      STATEMENTS
                23ITEM
      9A.(T)
                
                CONTROLS
      AND PROCEDURES
                24PART
      IIIITEM
      10.
                
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                25ITEM
      11.
                
                EXECUTIVE
      COMPENSATION
                25ITEM
      12.
                
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                28ITEM
      13.
                
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                28ITEM
      14.
                
                PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                32ITEM
      15.
                
                EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                33SIGNATURES
                39


2


PART
I





Item
1.





Business





Liquidity and 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 2009 of
$1,507,190 and had negative working capital of $5,960,528 and a stockholders'
deficiency of $5,906,179 at December 31, 2009. 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
2009, the Company entered into a series of senior secured Promissory Notes with
Platinum Partners Long Term Growth IV (“Platinum”) and Longview Special
Financing, Inc. (“Longview”), the holders of the Company’s primary debt
obligations since 2007.  The aggregate principal borrowings on the
2009 Promissory Notes from Platinum and Longview during 2009 were $181,376 and
$74,750, respectively.  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 was due and payable in
full on June 30, October 12 and November 1, 2009. Platinum has granted a waiver
of default on the outstanding principal balance through June 1, 2010. Longview
has granted a waiver of default on the outstanding principal balance through
June 1, 2010.





In
February 2009 Platinum, 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.  At that same time, the then
President and Chief Financial Officer, as well as all other directors resigned
from their positions.  As a result of the resignations, Mr. Wemett
became the Company’s sole officer and director.  Mr. Wemett continues
to actively assess the Company's operating structure with an objective to reduce
ongoing expenses, increase sources of recurring revenue as well as seeking
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.





On
September 3, 2009, Platinum filed an amendment to the 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.  The amendment removed Platinum’s right to appoint a
director to the Company.  Platinum desires to remain a passive
investor in the Company and does not want to exercise any control over the
business of the Company.  As of the date of this amendment, the Series
C Director was removed and now serves only as a director deemed elected by the
holders of the common stock and continues to serve in this capacity until the
next annual meeting of stockholders is scheduled. The amendment also added to
the Series C Preferred Stock a limitation on the conversion of such Series C
Preferred Stock, such that the number of shares of Common Stock that may be
acquired by the holder upon conversion of such Series C Preferred Stock shall be
limited to the extent necessary to ensure that following such conversion the
total number of shares of Common Stock then beneficially owned by the holder
does not exceed 4.99% of the total number of issued and outstanding shares of
Common Stock.  Based on the foregoing limitations, none of the Common
Stock underlying the Series C Preferred Stock or any of the Notes issued to
Platinum is deemed beneficially owned in excess of 4.99% of the Issuer’s
outstanding Common Stock.





On
November 30, 2009 the Company entered into $225,000 10% Subordinated Secured
Convertible Promissory Agreement (the “10% Convertible Note”) with Cape One
Finance LP, an accredited investor. The 10% Convertible Note has a fifteen month
term, bears interest at 10% per annum payable quarterly and is secured by
certain assets of the Company pursuant to a security agreement entered into on
November 30, 2009.  The Note is convertible at the investor’s option
into common stock at any time prior to maturity at $0.005 per share, subject to
certain anti-dilution provisions and provides that the result of such conversion
cannot result in the beneficial ownership in excess of 4.99% of the issued and
outstanding common stock.  Pursuant to the terms of this financing
obligation, 45,000,000 common stock purchase warrants were granted at an
exercise price of $0.025 per share, these warrants are subject to certain
anti-dilution adjustments as described in the agreement.  The net
proceeds from the 10% Convertible Note amounting to $197,000 after fees and were
restricted to general working capital purposes only.


3


The
Company has experienced recurring losses from operations since its inception and
continues to have a working capital deficiency and limited opportunities for
additional capital infusion.  The Company has experienced recurring
defaults relating to the various provisions under its current debt obligations
and is expected to require future forbearance and waivers relating to such
provisions in the future. These negative financial conditions combined with 2009
staff and officer resignations, delays experienced in product introduction and
customer acceptance raises substantial doubt of the Company’s ability to
continue as a going concern.





OTCBB
delisting December 3, 2009





The
Company received a OTCBB Delinquency Notification, dated November 24, 2009, from
the Financial Industry Regulatory Authority (FINRA) indicating that the
Company’s common stock will be removed from quotation on the OTC Bulletin Board,
effective as of the opening of trading on December 3, 2009, as a result of three
late filings (its Quarterly Report on Form 10-Q for the quarters ended March 31,
2009, June 30, 2009 and September 30, 2009) in a 24-month period. The Company
was delinquent one day in filing its Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009, which triggered the Notification. The Company
has decided not to formally appeal this decision by FINRA.





Description
of Business





NaturalNano,
Inc. was founded in December 2004 in Rochester, New York to develop proprietary
materials and processes utilizing naturally occurring nanotubes. The Company is
focused on the development of unique additives and technologies to add
commercial value to industrial polymers, plastics and
composites.  NaturalNano holds or licenses 24 patents and
applications, as well as proprietary know-how for the extraction and separation
processes, compositions and various derivative materials from halloysite
clay.





Terminology





A summary
of the terms used to describe our technologies is presented below.


·
            Nanotechnology is
      research and technology development at the 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.


·
            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.


4


·
            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. tubular quality and is mined throughout the world, for various
      commercial purposes.·
              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.


·
            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.


·
            Polymer extruder is a
      machine used to mix plastic materials including colorants and fillers
      (additives) such as halloysite in a hot melt
  state.


·
            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.





The
nanomaterial we are using is halloysite nanotubes (HNT TM ),
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.





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.





For the
twelve months ending December 31, 2009 and 2008 we invested $0.3 million and
$1.4 million, respectively, in support of our research and development programs.
Since inception, December 22, 2004, the Company has invested $6.5 million in
research and development related to the evaluation, design and development of
the Pleximer products, nanomaterial based products and filled-tube
products.





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.


5


NaturalNano’s
Pleximer concentrates have been designed to respond to certain industrial and
commercial 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




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 the Company’s
nanocomposites, as traditional composites are often brittle at the high loading
levels. We believe Pleximer can provide a lower cost alternative to other
nanocomposite materials, due to the reduced processing costs achieved by the
elimination of exfoliation and supplemental extrusion processes, described
above.





Filled
Tube Products





NaturalNano’s
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 preferred strategy for filled-tube products would be the
establishment of a joint development agreement with a field-of-use development
partner. Such JDA agreements would include various product demonstration,
validation and accreditation trials prior to market
commercialization.





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.”





Halloysite
Materials and NaturalNano’s Technologies





Halloysite
is different from other nanoclays because it allows for the potential to
eliminate certain 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 can be 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 and therefore we
believe the Company’s Pleximer products provide an opportunity for a reduction
in processing cost and improvements in performance and production rates.
PleximerTM would allow 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.


6


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. 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 an array of applications.





Strategy





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.





Under the
NRL 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.





On
November 13, 2009, the Company and the NRL agreed to an amended
commercialization plan to: (a) include cosmetics as an exclusive field of use
and (b) to extend the term of the license to May 15, 2010 in order to
continue the discussions among the parties to develop and execute an amended
license agreement. 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
critical milestones associated with the commercialization of the Pleximer and
filled-tube products include: manufacturing scale trials, customer application
definitions and formulation optimization developed in combination with the
customer validation and accreditation processes. 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 a variety of
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:


•
            Cosmetics, health and beauty
      products


•
            Household
      products


•
            Polymers,
      plastics and composites.





The
potential markets for our technologies are significant and are projected to
continue to grow as future developments in material science and customer demands
continue.





•
            The American Composites
      Manufacturers Association estimates that composite manufacturers generate
      nearly $70 billion in annual revenues.
    (www.acamet.org)


7


•
            BCC Research estimated the North
      American plastics compounding production in 2008 at 91 billion pounds and
      estimates growth to 107 billion pounds by 2014.
      (www.bccresearch.com).


•
            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.





Raw Materials and
Processing





Halloysite
and the closely related kaolonite are naturally occurring clays which are
actively mined on a 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. 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. The use of tolling arrangements would allow the
Company to limit our capital investment requirements and direct manufacturing
hiring. 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. 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. The resulting materials can then be shipped to customers for use in
their individual manufacturing processes.





The
Company has identified various sources of halloysite that are considered
suitable as suppliers. 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.





Sales
and Business Development





The
Company’s President is currently responsible for developing relationships with
prospective customers and joint research and development partners. The Company
does not maintain an in-house sales and business development team but has
utilized consultants with chemical, manufacturing and engineering experience to
assist with the design and commercialization of product and licensing revenues.
Employees for such positions could be filled as in house position in the
future, as cash flow and liquidity improvements allow.





The
Company forecasts that operating revenues will be generated from the sale of:
filled-tubes, Pleximer products and from unique sample formulations developed
from business development opportunities. Our contract research and operations
consultant receives numerous sample requests from various industry manufacturers
and works with these businesses to develop tailored product
formulations.  Management believes this growing sample formulation and
design program may result in future joint development opportunities. During 2009
the Company initiated a program to provide small quantity samples to university
researchers on a cost-free basis to encourage active research programs in the
advancement of material science applications using halloysite based
products.





During
2009 the Company noted an interest in the Company’s recent findings in the use
of halloysite nanotubes in the following area:


(a)
“controlled release” products using  filled tube applications for
medical diagnosis and treatment,


(b)
commercial and household products using anti-bacterial controlled release
products, and


(c) a
growing trend in the use of natural ingredients in health and beauty
products.


8


A Joint
Development Agreement would be the Company’s approach to business development
and product commercialization. In prior years, we entered into  JDAs
associated with the evaluating and testing of various product applications
designs. These JDAs addressed: the development of polypropylene and nylon-based
Pleximer products and a range of polymer systems associated with the development
of filled tube applications. These JDAs notably advanced our knowledge of
halloysite and related product formulations.  The goal of future JDA
agreements would be to develop and commercialize products of interest to each of
the partners. The JDAs would 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, Dow, E.I. DuPont
de Nemours & Company, 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. Numerous private firms may also be considered
competitive in the general field of supplying nanoscale materials. The Company’s
products will compete most directly with compounding companies marketing
nanoclay concentrates.





Employees





As of
December 31, 2009, the Company’s President was the only full-time
employee.  Due to the Company’s liquidity position described earlier,
spending and staffing levels have been significantly reduced compared to prior
reporting periods. 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 2009, 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.





If our
liquidity and cash positions improve, the Company will hire research staff in
connection with the product development and commercialization of our products.
There are no assurances that the Company’s liquidity and cash position will
improve and allow hiring to be initiated in the near future. Our human resource
needs have been filled through the 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.


9


Intellectual
Property





NaturalNano
owns or holds license to 24 issued or pending patents. An overview of the
Company’s issued, pending and licensed patents are summarized
below.





Issued and pending patents
assigned from Technology Innovations, LLC (our former parent) include the
following:





·
            Issued  #7,425,232  Hydrogen Storage Apparatus
      Comprised of Halloysite and Mineral Microtubules, issued on 9/16/08
      and expires on 4/15/2024,


·
            Issued
      #7,400,490 Ultra-capacitors Comprised of
      Mineral Microtubules, issued on 7/15/08 and expires on
      1/25/2025.


·
            Issued  US2008
      / 0316677A1 Ultra-capacitors Comprised of
      Mineral Microtubules  (a continuation of
      #7,400,490)


·
            Pending   Method for Stabilizing
      Nanotubular Halloysite





Pending patent applications
developed internally cover the following processes andapplications:




•
                Polymeric
      Composite including Nanoparticle Filler•
                Nanocomposite
      Master Batch Composition and Method of Manufacture•
                Nanocomposite
      Method of Manufacture•
                Polymeric
      Adhesive including Nano-particle Filler•
                Polymeric
      Coatings including Nano-particle Filler•
                Fire
      and Flame Retardant Polymer Composites•
                Nanoclay
      Filled Fluoro-polymer Dispersions and Method of Forming
    Same•
                Nanocomposite
      including Heat-treated Clay and Polymer•
                Low
      Polymer Halloysite
Coatings





Issued
patents and applications licensed on a partially-exclusive basis from the Naval
Research Laboratories include the following processes and
applications:




·
            Patent
      #5,492,696 Controlled
      Release Microstructures, expires on 2/20/2013,·
            Patent
      #6,013,206 Process
      for Formulation of High Aspect Ratio Lipid Microtubules expires on
      1/11/2017,·
            Patent
      #6,280,759 Method of
      Controlled Release and Controlled Release Microstructures expires
      on 8/28/2018,·
            Patent
      #6,913,828 Production of
      Hollow Metal Microcylinders  from Lipids, expires on
      7/5/2022,·
            Patent
      #6,936,215 Process for
      Control of Bilayer Numbers Leading to High Efficiency Production of
      Lipid  Microtubules, expires on
  8/30/2022·
            Patent
      #7,125,476 Methods and
      Devices for Microwave-attenuating Composite Materials, expires on
      10/24/2023·
            Patent
      application No. 11/229,433 entitled  Novel biodegradable biofouling
      control coating method of formulation·
            Patent
      Application No. 10/863,848 Waterborne coating containing
      microcylindrical conductors and non-conductive space filling latex
      polymers





Pending
patent applications developed jointly with the Naval Research Labs under a
Cooperative Research and Development Agreement (CRADA) include the
following:




•
            Cosmetic
      skincare applications employing mineral-derived tubules for controlled
      release•
            A
      method for treating agricultural crops using materials associated with
      tubular carriers





One
patent licensed from Ambit Corporation is under a non-exclusive license
agreement:





•
            Patent
      # 6,885,845 Personal
      Communication Device Connectivity Arrangement, expires on
      12/21/2014.


10


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, 2009, the Company had paid
$100,000 under this agreement and was delinquent in $400,000 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, 2009, the Company had paid $76,667 under this agreement and accrued
$356,333 as the 2008 and 2009 minimum royalty payments had not been paid to the
NRL. Royalty payments resulting from this agreement are expensed as incurred.




On
November 13, 2009, the Company and the NRL agreed to an amended
commercialization plan to: (a) include cosmetics as an exclusive field of use
and (b) to extend the term of the license to May 15, 2010 in order to
continue the discussions among the parties to develop and execute an amended
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. 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.





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 have assessed 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.


11


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.





Note Regarding
September 29, 2005 Merger





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




Note Regarding February 8,
2006 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
      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. There is no signed lease agreement and the cost of rent for
calendar year 2009 was $3,000. 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.





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.


12


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 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, 2009. The Company has retained counsel in connection with this demand and
continues to evaluate this demand notice and has responded to this demand. No
actions or probable settlement discussions between the parties have developed
since the filing of 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.





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.





PART
II





Item
      5.
            Market
      for Common Equity and Related Stockholder
  Matters





The
Company’s common stock is listed on the Pink Sheets as of November 24, 2009
under the symbol NNAN.PK.  Prior to this date the Company’s common
stock was 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 exchanges
identified above,  for each quarterly period since January 1, 2008 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,
      2008First
      quarter
                  
                  $
                  0.14
                  
                  
                  $
                  0.06Second
      quarter
                  
                  
                  0.07
                  
                  
                  
                  0.05Third
      quarter
                  
                  
                  0.07
                  
                  
                  
                  0.02Fourth
      quarter
                  
                  
                  0.03
                  
                  
                  
                  0.003For the year ended December 31,
      2009First
      quarter
                  
                  $
                  0.017
                  
                  
                  $
                  0.003Second
      quarter
                  
                  
                  0.030
                  
                  
                  
                  0.002Third
      quarter
                  
                  
                  0.030
                  
                  
                  
                  0.010Fourth
      quarter
                  
                  
                  0.090
                  
                  
                  
                  0.012


13


The
closing price of the Company’s common stock on March 29, 2010, as reported
on the Pink Sheets, was $0.01 per share. As of March 29, 2010 there were
outstanding 114,497,445 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, 2009:




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
      compensationplans
      approved by
                            
                            
                            12,633,333
                            
                            
                            $
                            0.21
                            
                            
                            
                            818,366,667
                            *security
      holdersEquity
      compensationplans
      not approved by
                            
                            
                            216,409,651
                            
                            
                            $
                            0.01
                            
                            
                            
                            11,125,000
                            **security
      holdersTotal
                            
                            
                            229,042,984
                            
                            
                            
                            
                            
                            
                            
                            829,491,667


*
            These
      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.





**
            These
      shares are issuable under the Company’s 2009 incentive stock plan and
      various warrant grants made by the Company. The option 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”), 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.





Equity Compensation
Plans approved by the Company’s shareholders and authorized to grant awards are
as follows:


·
            2005
      Plan is authorized to grant up to 14 million share unit
      awards,


·
            2007
      Plan is authorized to grant up to 17 million share unit awards,
      and


·
            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, 2009 are as
follows:


-
              2009
      Plan is authorized to grant up to 20 million unit share
    awards


-
              45,000,000
      warrants granted with the November 30, 2009 10% subordinated secured
      convertible debt


-
              240,741
      warrants granted in 2007 in connection with consulting
      services,


-
              162,093,910
      warrants granted with the March 7, 2007 due diligence services provided by
      the lenders agent, and


-
              200,000
      warrants granted in connection with a short term borrowing agreement in
      2008.


14


Recent Sales of Unregistered
Securities





I
    During the fourth quarter of 2009, the Company issued
shares of common stock in connection with a Notice of Conversion received from
Longview Special Financing, Inc. as specified under the terms and conditions of
the 8% Senior Secured Convertible Debt . These shares were converted at $0.005
per share reflecting satisfaction in principal payments on the outstanding
notes:





October
12, 2009     3,500,000 shares in satisfaction of
$17,500 in principal payments


November
6, 2009   2,000,000 shares in satisfaction of $10,000 in
principal payments


November 19, 2009 2,000,000 shares in
satisfaction of $10,000 in principal payments


December 7,
2009    2,000,000 shares in satisfaction of $10,000 in
principal payments.





II   During the
fourth quarter of 2009, the Company issued  shares of common stock in
connection with a Notice of Conversion received from Platinum Long Term Growth
as specified under the terms and conditions of the 8% Senior Secured Convertible
Debt . These shares were converted at $0.005 per share reflecting satisfaction
in interest payments on the outstanding notes.





December 7,
2009    2,325,000 shares in satisfaction of $11,625 in
interest  payments.




III    On December 29,
2009, we issued an aggregate of 4,500,000 shares of common stock to Spencer
Clarke LLC, in a transaction exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4 (2) of such Act.  We
issued these shares in connection with investment banking services
performed on our behalf.  The issuance was made as 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.




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.


15





Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations





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
      ability to raise capital to fund our operations until we generate adequate
      cash flow internally;


·
            the
      terms and timing of product sales and licensing
  agreements;


·
            our
      ability to enter into strategic partnering and joint development
      agreements;


·
            our
      ability to competitively market our controlled release and filled tube
      products;


·
            the
      successful implementation of research and development
      programs;


·
            our
      ability to attract and retain key personnel
;


·
            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.




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, 2009 we were, and for 2010 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 an
emphasis on additives to 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.





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 2009 of
$1,507,190 and had negative working capital of $5,960,528 and a stockholders'
deficiency of $5,906,179 at December 31, 2009. 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.


16


During
2009, the Company entered into a series of senior secured Promissory Notes with
Platinum Partners Long Term Growth IV (“Platinum”) and Longview Special
Financing, Inc. (“Longview”), the holders of the Company’s primary debt
obligations since 2007.  The aggregate principal borrowings on the
2009 Promissory Notes from Platinum and Longview during 2009 were $181,376 and
$74,750, respectively.  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 was due and payable in
full on June 30, October 12 and November 1, 2009. Platinum has granted a waiver
of default on the outstanding principal balance through June 1, 2010. Longview
has granted a waiver of default on the outstanding principal balance through
June 1, 2010.





In
February 2009 Platinum, 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.  At that same time, the then
President and Chief Financial Officer, as well as all other directors resigned
from their positions.  As a result of the resignations, Mr. Wemett
became the Company’s sole officer and director.  Mr. Wemett continues
to actively assess the Company's operating structure with an objective to reduce
ongoing expenses, increase sources of recurring revenue as well as seeking
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.





On
September 3, 2009, Platinum filed an amendment to the 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.  The amendment removed the Platinum’s right to appoint a
director to the Company.  Platinum desires to remain a passive
investor in the Company and does not want to exercise any control over the
business of the Company.  As of the date of this amendment, the Series
C Director was removed and now serves only as a director deemed elected by the
holders of the common stock and continues to serve in this capacity until the
next annual meeting of stockholders is scheduled. The amendment also added to
the Series C Preferred Stock a limitation on the conversion of such Series C
Preferred Stock, such that the number of shares of Common Stock that may be
acquired by the holder upon conversion of such Series C Preferred Stock shall be
limited to the extent necessary to ensure that following such conversion the
total number of shares of Common Stock then beneficially owned by the holder
does not exceed 4.99% of the total number of issued and outstanding shares of
Common Stock.  Based on the foregoing limitations, none of the Common
Stock underlying the Series C Preferred Stock or any of the Notes issued to
Platinum is deemed beneficially owned in excess of 4.99% of the Issuer’s
outstanding Common Stock.





On
November 30, 2009 the Company entered into $225,000 10% Subordinated Secured
Convertible Promissory Agreement (the “10% Convertible Note”) with Cape One
Finance LP, an accredited investor. The 10% Convertible Note has fifteen month
term, bears interest at 10% per annum payable quarterly and is secured by
certain assets of the Company pursuant to a security agreement entered into on
November 30, 2009.  The Note is convertible at the investor’s option
into common stock at any time prior to maturity at $0.005 per share, subject to
certain anti-dilution provisions and provides that the result of such conversion
cannot result in the beneficial ownership in excess of 4.99% of the issued and
outstanding common stock.  Pursuant to the terms of this financing
obligation, 45,000,000 common stock purchase warrants were granted at an
exercise price of $0.025 per share, these warrants are subject to certain
anti-dilution adjustments as described in the agreement.  The net
proceeds from the 10% Convertible Note amounting to $197,000 after fees were
restricted for general working capital purposes.





The
Company has experienced recurring losses from operations since its inception and
continues to have a working capital deficiency and limited opportunities for
additional capital infusion.  The Company has experienced recurring
defaults relating to the various provisions under its current debt obligations
and is expected to require future forbearance and waivers relating to such
provisions in the future. These negative financial conditions combined with 2009
staff and officer resignations, delays experienced in product introduction and
customer acceptance raises substantial doubt of the Company’s ability to
continue as a going concern.


17


Comparison of Liquidity and
Capital Resources


for the years ended December
31, 2009 and 2008





Operating
activities


Net cash
used in operating activities in the years ended December 31, 2009 and 2008 was
$183,474 and $545,926, respectively. The net loss generated in 2009 was $4.2
million lower than the prior period reflecting the Company’s realignment of the
business after the significant change in senior management in the first quarter
of 2009.





Total
adjustments to reconcile the net loss incurred to the cash used in operations
aggregated $915,494 in 2009 and $4,127,166 in 2008. The decrease in these
non-cash items reflects decreases in depreciation due to the asset impairment
charge taken in the fourth quarter of 2008. The Company realized lower
amortization on debt discount on a year over year basis as a result of the
extension of the amortization period to January 2010 coincident with financing
received in the third quarter of 2008. The Company recognized a net credit for
stock option costs due to an increase in forfeitures and cancellations for
previously granted unvested stock options as a result of employee turnover
experienced in the first quarter of 2009. During 2009, the Company reduced
outstanding liabilities through negotiations with certain vendors, resulting in
a net gain on the forgiveness of debt of $86,245. Effective January 1, 2009, the
Company adopted the accounting prescribed by ASC 815 relating to financial
instruments that are potentially settled in the entity’s common
stock.  The adoption of this standard resulted in a gain on
adjustments to fair value on derivative liabilities of $500,779.





For the
twelve months ended December 31, 2009 and 2008 the company recognized non-cash
expenses of $1,225,079 and $1,827,049, respectively, for amortization of debt
discount and deferred financing costs incurred in connection with the 8% senior
secured convertible debt and 10% subordinate debt.





The
reduction in the net loss for the year ended December 31, 2009 reflects reduced
spending throughout the twelve month period as compared to the prior twelve
months. As described above, the Company is actively seeking opportunities to
reduce expenses and improve its liquidity position. We expect that total
spending in 2010 will be comparable to the 2009 levels, although we will
continue to invest in product and commercialization efforts as our cash position
and liquidity allow.





Investing
activities


Net cash
used in investing activities in the years ended December 31, 2009 and 2008 was
$6,600 and $248,093, respectively. Our capital investments during 2009 and 2008
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. No capital lease obligations remained outstanding as of
December 31, 2009.





Financing
Activities


Net cash
provided from financing activities in the years ended December 31, 2009 and 2008
was $278,827 and $390,227, respectively. During 2009, the Company received
additional funding in the amount of $256,126 in the form of the 8% 2009
promissory notes.  The Company repaid $110,414 on these borrowings in
the third quarter of 2009.





On
November 30, 2009 the Company entered into $225,000 10% Subordinated Secured
Convertible Promissory Agreement (the “10% Note”) with Cape One Finance LP, an
accredited investor. The 10% Convertible Note has fifteen month term, bears
interest at 10% per annum payable quarterly and is secured by certain assets of
the Company pursuant to a security agreement entered into on November 30,
2009.  The proceeds from the 10% Note were restricted for general
working capital purposes and totaled $197,000.





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. During
2008, we received cash advances of $107,200 from former affiliated entities
for shared services agreements and repaid $96,531 on related party payables
during the year.





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. The $900,000 in
principal outstanding on Technology Innovation’s 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 4.)


18


During
the year ended December 31, 2009 and 2008, we made capital lease payments of
$62,536 and $74,442, respectively.





Comparison of Statement of
Operations


For the years ended December
31, 2009 and 2008





Revenue
and Gross Profit





During
the twelve months ended December 31, 2009 and 2008, the Company recorded $81,045
and $271,844, respectively in revenue for samples, products and funded
development. The decrease in revenue of $190,799 since 2008 resulted from a
decline in orders and shipments of sample products from funded
development.  The change in the Company’s management in the first
quarter of 2009 significantly delayed business development activities. The
Company’s President continues to evaluate and seek revenue and product
opportunities. Gross margin realized in 2009 was 69% compared to 67% in
2008.  The Company expects that it may experience significant
variations in gross margins as it continues to market and develop new products
and applications in the future.





Operating
Expenses





Total
research and development expenses decreased by $1.0 million to $347,130 in the
year ended year ended December 31, 2009. This decrease is attributable to the
reduction in spending in labor and consulting related services during
2009.  As indicated above, the change in the Company’s management in
the first quarter of 2009 significantly delayed business development and
research efforts.





The
decrease in depreciation expense in 2009 reflects prior year additions reaching
the fully depreciated stage in 2009 combined with a reduction in investments
during the current year due the limited cash flow available. With the
resignation of our research team in the first quarter of 2009, outside
consultants were engaged to respond to customer formulation requests in
2009.  Employee stock compensation expense was significantly lower in
2009 compared to 2008 reflecting option grants made in prior years achieving
full vesting as well as the impact of  the forfeiture
of  unvested options  for employees terminated in the first
quarter of 2009. No option grants were made in 2009.





For the year ended
                  
                  
                  VarianceDecember 31,
                  
                  
                  increaseResearch and Development
                  
                  2009
                  
                  
                  2008
                  
                  
                  (decrease)Patent
      costs
                  
                  
                  173,947
                  
                  
                  
                  154,421
                  
                  
                  
                  19,526Depreciation
                  
                  
                  114,044
                  
                  
                  
                  149,089
                  
                  
                  
                  (35,045
                  )Salaries
      & Benefits
                  
                  
                  -
                  
                  
                  
                  555,336
                  
                  
                  
                  (555,336
                  )Stock
      option compensation
                  
                  
                  (28,538
                  )
                  
                  
                  354,508
                  
                  
                  
                  (383,046
                  )Consulting
      services
                  
                  
                  18,368
                  
                  
                  
                  97,272
                  
                  
                  
                  (78,904
                  )All
      other
                  
                  
                  69,309
                  
                  
                  
                  159,930
                  
                  
                  
                  (90,621
                  )Allocation
      to cost of goods
                  
                  
                  -
                  
                  
                  
                  ( 76,020
                  )
                  
                  
                  76,020$
                  347,130
                  
                  
                  $
                  1,394,536
                  
                  
                  $
                  (1,47,406
                  )





Management
continues to actively assess the Company's operating structure for the purpose
of controlling expenses across all categories of the business. Such evaluations
will continue with the intent to invest in research and development programs and
product development in 2010 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.


19


Total
general and administrative expense for the year ended December 31, 2009 was
$245,504 as compared to $1,571,895 for the year ended December 31, 2008. During
2009, the Company received $253,000 for QETC Facilities, Operations and Training
tax rebates from the State of New York relating to the 2008 operating period.
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 period. The Company recorded these tax rebates as a reduction to
general and administrative expenses upon receipt. Salaries, benefits and stock
compensation costs decreased in 2009 since the prior year due to the
resignations of the former staff and officers in the first quarter of
2009.





For the year ended
                  
                  
                  VarianceDecember 31,
                  
                  
                  increaseGeneral and Administrative
                  
                  2009
                  
                  
                  2008
                  
                  
                  (unfavorable)Salary
      & Benefits
                  
                  $
                  196,229
                  
                  
                  $
                  572,682
                  
                  
                  $
                  (376,453
                  )Legal
      and Professional Fees
                  
                  
                  239,145
                  
                  
                  
                  449,277
                  
                  
                  
                  (210,132
                  )Stock
      option compensation
                  
                  
                  (45,512
                  )
                  
                  
                  485,956
                  
                  
                  
                  (531,468
                  )Amortization
      of intangible assets
                  
                  
                  39,397
                  
                  
                  
                  148,054
                  
                  
                  
                  (108,657
                  )Shareholder,
      Board and Other
                  
                  
                  83,299
                  
                  
                  
                  406,999
                  
                  
                  
                  (323,700
                  )State
      Tax Fees and Rebates (net)
                  
                  
                  (267,054
                  )
                  
                  
                  (491,073
                  )
                  
                  
                  224,019$
                  245,504
                  
                  
                  $
                  1,571,895
                  
                  
                  $
                  (1,326,391
                  )





Management
continues to actively assess the Company's operating structure for the purpose
of controlling expenses across all categories of the business. We expect that
spending for general and administrative will be continue to be controlled in
2010, 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.





Interest
and Other Income (expense)





Other
expense for the year ended December 31, 2009 was $970,226 as compared to
$2,310,434 for the year ended December 31, 2008. Other expense consists
primarily of interest expense and other debt related financing and amortization
expenses considered components of interest expense for financial
reporting.





As
described in Note 2 to the financial statements; interest expense includes the
amortization of the debt discount, the interest on the senior and subordinated
debt obligations and the amortization of related financing
costs.  Interest on capital lease obligations reflect a partial year
of interest expense in 2009 as these lease agreements matured in the current
year.





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 thereby resulting in a no
related  interest expense on in 2009 compared to 2008.





Interest
was earned on cash balances held at certain financial institutions during 2009
and 2008.  The decrease in interest income earned in 2009 reflects the
decline in cash on-hand during the current year.




For the year ended
                  
                  
                  VarianceDecember 31,
                  
                  
                  increaseOther Income (expense)
                  
                  2009
                  
                  
                  2008
                  
                  
                  (decrease)Amortization
      of debt discount
                  
                  $
                  (1,054,814
                  )
                  
                  $
                  (1,492,532
                  )
                  
                  $
                  (437,718
                  )Interest
      on 8% senior secured debt and notes and 10% promissory
      notes
                  
                  
                  (316,281
                  )
                  
                  
                  (422,987
                  )
                  
                  
                  (106,706
                  )Amortization
      of financing costs
                  
                  
                  (182,868
                  )
                  
                  
                  (334,517
                  )
                  
                  
                  (151,649
                  )Interest
      to TI Line of Credit
                  
                  
                  
                  
                  
                  
                  (42,018
                  )
                  
                  
                  (42,018
                  )Interest
      on capital leases
                  
                  
                  (3,476
                  )
                  
                  
                  (15,292
                  )
                  
                  
                  (11,816
                  )Interest
      on financed receivables
                  
                  
                  
                  
                  
                  
                  (6,490
                  )
                  
                  
                  (6,490
                  )Interest
      earned on cash
                  
                  
                  189
                  
                  
                  
                  3,403
                  
                  
                  
                  3,214$
                  (1,557,250
                  )
                  
                  $
                  (2,310,433
                  )
                  
                  $
                  (753,183
                  )


20


In June
2008, the FASB finalized ASC 815, formerly Emerging Issues Task Force 07-05,
“Determining Whether an
Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock,”
which was adopted by the Company effective January 1, 2009. The impact of the
adoption of this accounting guidance as of January 1, 2009 was a decrease in
Additional Paid in Capital of $501,018 and an increase in Accumulate Deficit of
$71,761. During the twelve months ended December 31, 2009, the Company
recognized $500,779 in net gains relating to the changes in fair market value
for these derivative liabilities.





Creditor
Concessions





During
the year December 31, 2009, the Company entered into various agreements with
certain vendors to settle accounts payable that were outstanding for amounts
less than the liability that was recorded in the accompanying balance sheet. As
a result of agreements completed, liabilities of $141,941 were satisfied for
revised payment terms of $55,696, resulting in a gain on forgiveness of debt of
$86,245. These vendor concessions have been treated as gains in the period that
the underlying agreements were reached.





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 2009 or
2008.





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.





Deferred
Taxes


Deferred
tax assets and liabilities are determined based on temporary differences between
income and expenses reported for financial reporting and tax
reporting.  ASC 740 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.


21


As of the
years ended December 31, 2009 and 2008, the Company has recorded a valuation
allowance to reduce its gross deferred tax assets to zero in accordance with ASC
740. In addition, as of December 31, 2009 the Company has recorded a deferred
tax liability of $11,805, 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 2009 and 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.





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


Compensation
expense related to stock-based payments is 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 as  follows:  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.





Derivative
Financial Instruments


The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair market value and then is revalued at each reporting date,
with changes in fair value reported in the consolidated statement of operations.
For stock based derivative financial instruments, the Company estimated the
total enterprise value based upon trending the firm value from December 2006 to
December 2009 and considering company specific factors including the changes in
forward estimated revenues and market factors.  Once the enterprise
value was determined an option pricing model was used to allocate the enterprise
value to the individual derivative securities in the Company’s capital
structure.  The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or equity, is
evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required within
twelve months of the balance sheet date.





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.


22





Item 9A (T)   
       Controls and
Procedures





Evaluation of Disclosure Controls and
Procedures





The
Company’s management is responsible for establishing and maintaining effective
disclosure controls and procedures. As of December 31, 2009, our Chief Executive
Officer participated 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, to allow timely decisions regarding required disclosure. In light of
the discussion of material weaknesses set forth below, this officer has
concluded that our disclosure controls and procedures were not effective as of
December 31, 2009. To the best of his knowledge, our Chief Executive Officer
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 in accordance with
accounting principles generally accepted in the United States of
America.





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 Chief Executive Officer has assessed the effectiveness
of our internal control over financial reporting as of December 31, 2009. In
making this assessment, this officer used the criteria established in Internal Control—Integrated
Framework issued 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 our Chief Executive Officer’s
assessment of our internal control over financial reporting described above,
this officer has identified the following material weaknesses in the Company’s
internal control over financial reporting as of December 31, 2009:





The
Company 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 half of
2009 the Company experienced resignations in the positions of controller, Chief
Financial Officer, and Chief Executive Officer.  Further, nearly all
aspects of our December 31, 2009 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 by outside consultants 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, the
Company  determined that the 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, 2009
consolidated financial statements and related disclosures during the audit
conducted by our independent registered public accounting firm.


23


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 Chief Executive Officer was
the only employee of the company and his responsibilities during 2009 included
all financial, treasury, asset, debt and equity functions. Additionally, 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, 2009, we did not maintain effective internal control over
financial reporting based on the criteria established in Internal Control—Integrated
Framework issued 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.





Plan
for Remediation of Material Weaknesses





In
response to the identified material weaknesses, management 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 where applicable and when resources
allow.





Notwithstanding
the material weaknesses discussed above, the Company 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 half of 2009 we experienced resignations in the positions of
controller, Chief Financial Officer, and Chief Executive Officer.  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
2009 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 sole
director and executive officer is:




Name
              
              Age
              
              Position
              
              Date Election to
                the Board *James
      Wemett
              
              60
              
              President
      and Director
              
              2/16/09





James Wemett On February 19,
2009 Mr. Wemett 
became 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. Wemett  is 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.


24


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 referred by the
president of the Company for a response.





Code
of Ethics





The
Company has adopted a Code of Ethics for the Senior Executive  Officer that
is applicable to our principal executive 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.





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. There were no Section 16(a) required filings
during the fiscal year ended December 31, 2009.





Item
      11.
            Executive
      Compensation





Summary
Compensation Table





The table
set forth below summarizes the compensation earned by our named
executive officers in 2009 and 2008.


25





SUMMARY
      COMPENSATION TABLEName and principal
                      position
                    
                    Year
                    
                    
                    Salary
                      ($)
                    
                    
                    Bonus
                      ($)
                    
                    
                    Stock
                      Awards
                      ($)
                    
                    
                    Option
                      Awards
                      ($)
                      (a)
                    
                    
                    Non-Equity
                      Incentive Plan
                      Compensation
                      ($)
                    
                    
                    Nonqualified
                      Deferred
                      Compensation
                      Earnings ($)
                    
                    
                    All Other
                      Compensation
                      ($)
                    
                    
                    Total ($)James
      Wemett President
                    
                    2009
                    
                    
                    
                    153,688
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    $
                    153,688Cathy
      Fleischer, Former President and CTO
                    
                    2008
                    *
      *
                    
                    
                    180,000
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    306,531
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    $
                    486,531Kent
      Tapper, Former CFO
                    
                    2008
                    **
                    
                    
                    140,000
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    98,884
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    
                    0
                    
                    
                    $
                    238,884




** 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 the balance sheet under Accrued Payroll at December 31, 2008
and  2009 .





(a) The
amounts in the column “Option Awards” reflect the dollar amount recognized for
financial statement reporting purposes in accordance with ASC 718, for option
awards granted pursuant to, and outside of, the NaturalNano Incentive
Compensation Plans.





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.





On
October 14, 2009, the Company established the 2009 Incentive Stock Plan (the
“2009 Plan”) without a vote from the stockholders of the Company.   The
2009 Plan provides for the grant of 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 2009 Plan is administered by the Board
of Directors and authorizes the grant of 20 million shares of the Company’s
common stock.





The plans
also provide for the granting of performance-based and restricted stock
awards.


26


In
addition to options granted under the plans described above, the Company has
from time to time made option grants outside of the incentive stock plans
described above. 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.





Outstanding
Equity Awards at December 31, 2009





The
following table summarizes information concerning outstanding equity awards held
by the named executive officers at December 31, 2009.




Stock Option AwardsName
                        
                        Number of
                          Securities underlying
                          unexercised options
                          (#) Exercisable
                        
                        Number of
                          Securities underlying
                          unexercised options
                          (#) Unexercisable
                        
                        Option
                          Exercise
                          Price($)
                        
                        Option
                          Expiration
                          DateJames
      Wemett
                        
                        50,000
                        
                        none
                        
                        
                        0.24
                        
                        11/18/2010





Certain
columnar information required by Item 402(p)(2) of Regulation SK has been
omitted for categories where there was no compensation awarded to, or paid to,
the named director during the fiscal year ended December 31, 2009.





Employment
Agreements





The
Company has no formal written or oral employment agreements with the current
President - James Wemett Mr. Wemett joined the Company in the February 2009 and
has agreed to provide services to the Company under an informal employment
agreement.





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.





Compensation
of the Board





Our sole
Director is also the President of the Company was paid an annual fee of $8,000
for services provided in 2009.   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,
2009 for our directors who are not also named executive officers:





DIRECTOR
COMPENSATION (1)




Name
                  
                  Fees Earned or
                    Paid in Cash ($)
                  
                  
                  Option Awards
                    ($) (2)
                  
                  
                  Total ($)Wemett, James
                  
                  $
                  8,000
                  
                  
                  $
                  none
                  
                  
                  $
                  8,000





(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,
2009.


27





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





The
following table sets forth certain information as of March 29, 2010 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 29,
2010. “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.




Beneficial Owner
                      
                      Number of Shares
                        Beneficially Owned
                        (1)
                      
                      
                      Percent of
                        Class(2)Directors and Executive
      Officers:James
      Wemett  President
      and Director (3)
      (4)
                      
                      
                      6,282,133
                      
                      
                      
                      5.3
                      %All
      Directors and Executive Officers as a group (1 person) (3)
      (4)
                      
                      
                      6,282,133
                      
                      
                      5.3
                      %Other 5% Beneficial
      OwnersNone





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 114,497,445 shares outstanding on
      March 29, 2010 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
      (i) currently exercisable options to purchase 50,000 shares of common
      stock at $0.24 per share (ii) 518,700 shares held by Mr. Wemett’s wife, of
      which shares Mr. Wemett disclaims beneficial ownership.4)
            Includes
      1,050,000 common shares owned by Technology Innovations, LLC (“TI”),
      currently exercisable options to purchase 1,000,000 shares of common stock
      at $0.05 per share held by TI and 3,663,423 common stock warrants with an
      exercise price of $0.082 per share granted to TI. Under this warrant
      agreement, TI may purchase up to that number of shares that would give TI
      beneficial ownership of not more than 4.99% of the Company.. Mr. Wemett
      disclaims beneficial ownership of these shares, options and warrants
      except of the extent of his beneficial ownership of his membership
      interest in TI.





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





March 7, 2007 Loan and
Security Agreement and Related Warrants





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.


28





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.





2008 Promissory
Notes





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 and to Longview (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.





2009 Promissory
Notes





During
2009, we entered into various 8% and 16% Senior Secured Promissory Notes  aggregating $181,376
and $74,750, respectively with Platinum and Longview. 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 was 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% or 16% 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 contain 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.





Waivers of Default and
Forbearance Agreements





On
November 30, 2009 the Company entered into various Forbearance Agreements with
Platinum Long Term Growth IV LLC, Platinum Advisors LLC and Longview Special
Finance Inc. (collectively referred to as “the Lenders “ ) relating to the
Company’s default on various terms and conditions with borrowing agreements. The
lenders agreed to not take any action or exercise or move to enforce any rights
or remedies provided for in the various loan documents or otherwise available to
it, under law or equity, due to the events of default under the existing Notes
until June 1, 2010 (for the debt outstanding from Platinum Long Term Growth
and Platinum Advisors) and until June 1, 2010 (for the debt outstanding from
Longview Special Finance), unless extended by the lenders in their
discretion.


29





On
November 30, 2009 the Company entered into a Forbearance Agreement with Platinum
Long Term Growth LLC due to the Company’s default on various terms and
conditions under the following borrowing agreements:


$2,750,000
8% Senior Secured Notes due March 6, 2009,


$150,000
8% Senior Secured Notes due March 6, 2009,


$59,500
8% Senior Secured Notes due January 31, 2010,


$190,000
8% Senior Secured Promissory Note due January 31, 2010,


$136,375
8% Senior Secured Promissory Note due January 31, 2010,


$5,000 8%
Senior Secured Promissory Note due June 30, 2009,


$15,000
8% Senior Secured Promissory Note due June 30, 2009, and


$25,000
16% Senior Secured Promissory Note due October 12, 2009.





On
November 30, 2009 the Company entered into a Forbearance Agreement with Platinum
Advisors LLC relating to the Company’s default on $97,500 of 8% Senior Secured
Notes due March 6, 2009.





On
November 30, 2009 the Company entered into a Forbearance Agreement with Longview
Special Finance Inc. due to the Company’s default on various terms and
conditions under the following borrowing agreements:


$500,000
8% Senior Secured Notes due March 6, 2009,


$20,000
8% Senior Secured Notes due March 6, 2009,


$30,000
Senior Secured Promissory Note due January 31, 2010,


$25,500
Senior Secured Promissory Note due January 31, 2010,


$40,000
16% Senior Secured Promissory Note due November 1, 2009.





These
Forbearance Agreements also extend to the Registration Rights Agreement entered
into by the Company on March 7, 2007. Platinum Long Term Growth and Platinum
Advisors agreed to forbear from demanding payments defined in these agreements
until June 1, 2010.  Longview Special Finance agreed to forbear from
demanding payments defined in these agreements until June 1, 2010.





Series B and C 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, 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, evidencing 750,000
shares of Series B Convertible Preferred Stock of the Company.





On
September 3, 2009, Platinum filed an amendment to the 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.  The amendment removed the Platinum’s right to appoint a
director to the Company.  Platinum desires to remain a passive
investor in the Issuer and does not want to exercise any control over the
business of the Company.  As of the date of this amendment, the Series
C Director was removed and now serves only as a director deemed elected by the
holders of the common stock and continues to serve in this capacity until the
next annual meeting of stockholders is scheduled. The amendment also added to
the Series C Preferred Stock a limitation on the conversion of such Series C
Preferred Stock, such that the number of shares of Common Stock that may be
acquired by the holder upon conversion of such Series C Preferred Stock shall be
limited to the extent necessary to ensure that following such conversion the
total number of shares of Common Stock then beneficially owned by the holder
does not exceed 4.99% of the total number of issued and outstanding shares of
Common Stock.


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). Both the Series B and Series C designations limits the holders’
rights to convert its Convertible Preferred Stock, and the aggregate voting
powers, to no more than 4.99% of the votes attributable to the total outstanding
common shares.  Accordingly, the votes attributable to the Series B
and Series C Convertible Preferred constitutes 4.99% of the aggregate votes
attributable to the Company’s outstanding shares on an as converted basis and
the votes Series B and Series C Convertible Preferred and the Series C
Convertible Preferred, voting together represent approximately 9.98% of the
aggregate votes attributable to the Company’s outstanding shares (on an as
converted basis).




30




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. 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 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. 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 August 1, 2008, $900,000 of principal
and $129,600 of accrued and unpaid interest was satisfied in exchange for this
warrant. TI and an affiliate of TI, Biomed, Inc., forgave approximately $66,000
of outstanding account payable. On September 26, 2008, the Company paid TI
$1,000 and redeemed the 69,303,189 shares of common stock held by
TI.





On August
6, 2008 in connection with the satisfaction of the Line of Credit Agreement, 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 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
23,354,008 shares at an exercise price of $0.082 per share as of December 31,
2009 assuming all other potentially dilutive instruments are also
exercised.





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. As of December
31, 2009, 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 accrued
expense related to the obligation to issue the remaining shares.





Our
current Board member, James Wemett is an equity holder of Technology
Innovations, LLC, which previously owned 56.3% of our outstanding common
stock.





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.




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;


31





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


As of
December 31, 2009 and as of the date of this filing, there is only one director
on the Company’s board of directors and this individual is not deemed
independent.





Item
      14.
            Principal
      Accountant Fees and Services





On April
24, 2008, we engaged Freed Maxick & Battaglia, CPAs, PC as our independent
registered public accounting firm for the years ending December 31, 2008 and
2009.





The
aggregate fees billed or expected to be billed by for services performed for the
years ended December 31, 2009 and 2008 are as follows:




2009
                  
                  
                  2008Audit
      Fees: Freed Maxick & Battaglia CPAs, PC
                  
                  $
                  86,900
                  
                  
                  $
                  94,850Tax
      Fees
                  
                  $
                  none
                  
                  
                  $
                  3,250





AUDIT
FEES





The
aggregate audit fees for the years ended December 31, 2009 and 2008 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





The
Company did not engage Freed Maxick & Battaglia CPAs, PC to provide any
other services during the last two fiscal years other than reported
above.





TAX
FEES





The
Company did not engage Freed Maxick & Battaglia CPAs, PC to provide tax
compliance, tax advice or tax planning services during the last two fiscal
years.





ALL OTHER
FEES





The
Company did not engage Freed Maxick & Battaglia CPAs, PC to provide any
other services during the last two fiscal years other than reported above.


32





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.




Item
      15.
  Exhibit
      No.
              
              Description
              
              Location2.1
              
              Agreement
      and Plan of Merger among NaturalNano, Inc., Cementitious Materials, Inc.
      and Cementitious Acquisitions, Inc.
              
              (1)3.2
              
              Amended
      and Restated By-laws of NaturalNano, Inc.
              
              (83)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 Notesof
      NaturalNano, Inc.
              
              (9)4.8
              
              Loan
      and Security Agreement, dated March 7, 2007, by and amongNaturalNano,
      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 issuedpursuant
      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)4.16.1
              
              Certificate
      of Designation Of Rights, Preferences, Designations, Qualifications And
      Limitations Of The Series A Preferred Stock
              
              *4.17
              
              Certificate
      Of Designation Of Rights, Preferences, Designations, Qualifications And
      Limitations Of The Series B Preferred Stock.
              
              (2.1)4.18
              
              Certificate
      Of Designation Of Rights, Preferences, Designations, Qualifications And
      Limitations Of The Series C Preferred Stock.
              
              (2.2)4.19
              
              NaturalNano,
      Inc. 2008 Incentive Stock Plan #
              
              (55)NaturalNano,
      Inc. 2009 Incentive Stock Plan #
              
              (56)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, LLCand
      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)
   33
   10.5
              
              Patent
      Assignments dated March 2, 2007 and March 5, 2007 by andbetween
      Technology Innovations, LLC and NaturalNano Research, Inc.
              
              (23)10.6
              
              Amended
      and Restated License Agreement between Ambit Corporationand
      NaturalNano, Inc., effective as of October 1, 2006
              
              (24)10.7
              
              Nonexclusive
      License between NaturalNano and U.S. Department of theNavy
      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, 2006between
      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,
      LLCand
      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 betweenNaturalNano,
      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, asAgent,
      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 NaturalNanoResearch,
      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 Corporationof
      America and NaturalNano, Inc.
              
              (47)10.24
              
              Joint
      Development Agreement dated April 24, 2007 between CascadeEngineering,
      Inc. and NaturalNano, Inc.
              
              (47)10.25
              
              Joint
      Development Agreement dated July 18, 2007 between Pactiv Corporationand
      NaturalNano, Inc.
              
              (47)10.26
              
              Employment
      Agreement with Kent A. Tapper #
              
              (41)10.27
              
              Partially
      Exclusive License between NaturalNano, Inc. and United StatesDepartment
      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
              
              (84)10.30
              
              Warrant
      purchase agreement dated June 6, 2008 between NaturalNano, Inc.and
      Ross B. Kenzie
              
              (85)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 principalamount
      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)
 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)
   34
   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)10.43
              
              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
              
              (80)10.44
              
              Letter
      Agreement dated April 8, 2009 with Platinum Advisors LLC regarding their
      forbearance $97,500 8% Senior Secured Promissory Note due March 6, 2009,
      issued on or about March 6, 2007 (together the “Notes”)
              
              (81)10.45
              
              Letter
      Agreement dated April 8, 2009 with Platinum Long Term Growth IV, LLC,
      regarding forbearance with respect to the $2,750,000 8% Senior Secured
      Promissory Note due March 6, 2009, issued on or about March 6, 2007, the
      $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or
      about August 4, 2008, the $190,000 Senior Secured Promissory Note due
      January 31, 2010, issued on or about September 29, 2008, the $59,500
      Senior Secured Promissory Note due January 31, 2010, issued on or about
      October 31, 2008 and the $14,941.34 8% Senior Secured Promissory Note,
      issued on or about February 20, 2009 (together the
“Notes”)
              
              (82)10.46
              
              Series
      C Amendment
              
              (57)10.47
              
              Letter
      Agreement dated May 20, 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.
              
              (60)10.48
              
              Letter
      Agreement dated May 20, 2009 with Platinum Advisors LLC regarding their
      forbearance with respect to $97,500 8% Senior Secured Promissory Note due
      March 6, 2009.
              
              (61)10.49
              
              Letter
      Agreement dated May 20, 2009 with Longview Special Finance Inc. regarding
      their forbearance with respect to $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, the $25,500 Senior Secured Promissory Note due January 31,
      2010.
              
              (62)10.50
              
              8%
      Senior Secured Promissory Note dated as of April 3, 2009 in the original
      principal amount of $34,750 issued by NaturalNano, Inc. and NaturalNano
      Research, Inc. to Longview Special Finance Inc.
              
              (63)10.51
              
              8%
      Senior Secured Promissory Note dated as of April 3, 2009 in the original
      principal amount of $136,375.98 issued by NaturalNano, Inc. and
      NaturalNano Research, Inc. to Platinum Long Term Growth IV,
      LLC.
              
              (64)10.52
              
              8%
      Senior Secured Promissory Note dated as of April 17, 2009 in the original
      principal amount of $5,000 issued by NaturalNano, Inc. and NaturalNano
      Research, Inc. to Platinum Long Term Growth IV, LLC.
              
              (58)10.53
              
              8%
      Senior Secured Promissory Note dated as of May 12, 2009 in the original
      principal amount of $15,000 issued by NaturalNano, Inc. and NaturalNano
      Research, Inc. to Platinum Long Term Growth IV, LLC.
              
              (59)10.54
              
              Letter
      Agreement dated August 31, 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, issued on or about March
      6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009,
      issued on or about August 4, 2008, the $190,000 Senior Secured Promissory
      Note due January 31, 2010, issued on or about September 29, 2008, the
      $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or
      about October 31, 2008 and the $14,941.34 8% Senior Secured Promissory
      Note, issued on or about February 20, 2009 (together the
      “Notes")
              
              (65)10.55
              
              Letter
      Agreement dated August 31, 2009 with Platinum Advisors LLC regarding their
      forbearance with respect to $97,500 8% Senior Secured Promissory Note due
      March 6, 2009 (the “Notes”).
              
              (66)10.56
              
              Letter
      Agreement dated August 31, 2009 with Longview Special Finance Inc.
      regarding their forbearance with respect to the $500,000 8% Senior Secured
      Promissory Note due March 6, 2009, issued on or about March 6, 2007, the
      $20,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or
      about August 4, 2008, the $30,000 Senior Secured Promissory Note due
      January 31, 2010, issued on or about September 29, 2008, and the $25,500
      Senior Secured Promissory Note due January 31, 2010, issued on or about
      October 31, 2008 (together the "Notes")
              
              (67)10.57
              
              Letter
      Agreement dated August 31, 2009 with Platinum Long Term Growth IV, LLC
      regarding their forbearance with respect to the 8% Senior Secured
      Promissory Note, dated as of April 3, 2009, in the original principal
      amount of $136,375.98, the 8% Senior Secured Promissory Note, dated as of
      April 17, 2009, in the original principal amount of $5,000, and the 8%
      Senior Secured Promissory Note, dated as of May 12, 2009, in the original
      principal amount of $15,000 (collectively the "Notes")
              
              (68)
   35
   10.58
              
              Letter
      Agreement dated August 31, 2009 with Longview Special Finance Inc.
      regarding their forbearance with respect to the 8% Senior Secured
      Promissory Note, dated as of April 3, 2009, in the original principal
      amount of $34,750 (the "Note") from NaturalNano, Inc. and NaturalNano
      Research, Inc. (jointly and severally, the "Borrower") to Longview Special
      Financing, Inc. (the "Lender")
              
              (69)10.59
              
              Letter
      Agreement dated as of October 2, 2009 with  Platinum Long Term
      Growth IV, LLC (“Platinum”) to pay Platinum the sum $25,000 plus interest
      of 16% per annum within 10 days of the date of the
    Agreement.
              
              (70)10.60
              
              Letter
      Agreement dated as of October 22, 2009 with Longview Special Finance, Inc.
      (“Longview”) to pay Longview sum $40,000 plus interest of 16% per annum
      within 10 days of the date of the Agreement.
              
              (71)10.61
              
              Letter
      Agreement dated November 10, 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, the $136,376 8% Senior Secured Promissory Note, $5,000
      due June 30, 2009, $15,000 due June 30, 2009, $25,000 due October 12,
      2009.
              
              (72)10.62
              
              Letter
      Agreement dated November 12, 2009 with Longview Special Finance Inc.
      regarding their forbearance with respect to $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, the $25,500 Senior Secured Promissory Note due
      January 31, 2010, the $34,750 8% Senior Secured Promissory Note due June
      30, 2009, the $40,000 16% Senior Secured Promissory Note due November 1,
      2009.
              
              (73)10.63
              
              Letter
      Agreement dated November 17, 2009 with Platinum Advisors LLC regarding
      their forbearance with respect to the $97,500 8% Senior Secured promissory
      notes due March 6, 2009.
              
              (74)10.63
              
              Form
      of a Subscription Agreement, dated as of November 30, 2009, by and between
      NaturalNano, Inc. and the Subscribers.
              
              (75)10.64
              
              Form
      of a Subordinated Secured Convertible Promissory Note, dated as of
      November 30, 2009, by and between  NaturalNano, Inc. and the
      Borrower.
              
              (76)16.65
              
              Form
      of a Common Stock Purchase Warrant, dated as of November 30, 2009 (Right
      to Purchase 45,000,000 shares of Common Stock of NaturalNano,
      Inc)
              
              (77)10.66
              
              Form
      of a Security Agreement, dated as of November 30, 2009, by and between
      NaturalNano, Inc. and the Subscribers.
              
              (78)10.67
              
              Letter
      Agreement, dated November 30, 2009 with Platinum Long Term Growth IV, LLC
      regarding their forbearance with respect to the $2,750,000 8% Senior
      Secured Promissory Note due March 6, 2009, issued on or about March 6,
      2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009,
      issued on or about August 4, 2008, the $190,000 Senior Secured Promissory
      Note due January 31, 2010, issued on or about September 29, 2008, the
      $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or
      about October 31, 2008 and one or more secured bridge notes in the current
      principal amount of $70,961.12 (together the “Notes”).
              
              (79)10.68
              
              Letter
      Agreement, dated November 30, 2009 with Platinum Advisors LLC regarding
      their forbearance with respect to the $97,500 8% Senior Secured Promissory
      Note due March 6, 2009.
              
              **10.69
              
              Letter
      Agreement, dated March 20, 2010 with Cape One Financial LP regarding their
      forbearance with respect to the $225,000 10% Subordinated Secured
      Promissory Note.
              
              **10.70
              
              Letter
      Agreement, dated November 30, 2009 with Longview Special Finance Inc.
      regarding their forbearance with respect to  the $500,000 8%
      Senior Secured Promissory Note due March 6, 2009, issued on or about March
      6, 2007, the $20,000 8% Senior Secured Promissory Note due March 6, 2009,
      issued on or about August 4, 2008, the $30,000 Senior Secured Promissory
      Note due January 31, 2010, issued on or about September 29, 2008, the
      $25,500 Senior Secured Promissory Note due January 31, 2010, issued on or
      about October 31, 2008, the $34,750 16% Senior Secured Promissory Note due
      January 31, 2010 and the $40,000 16% Senior Secured Promissory Note due
      November 1, 2009.
              
              **10.71
              
              Consent
      Agreement, dated November 30, 2009, by and between Platinum Long Term
      Growth IV, LLC,  Platinum Advisors LLC and  Longview
      Special Finance Inc.(“Senior Creditors”) and NaturalNano, Inc. (“Company’)
      regarding the Senior Creditors’ consent to the issuance by the Company of
      a subordinate convertible promissory note in the aggregate principal
      amount of $225,000 (the “Junior Note”), convertible (subject to
      adjustment) at a conversion price of $.005 per share of Common Stock of
      the Company.
              
              **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
              
              **31.1
              
              Certification
      of principal executive officer and principal accounting officer pursuant
      to section 302 of the Sarbanes-Oxley Act of 2002
              
              **32.1
              
              Certification
      of principal executive officer and 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 Exhibit 4.1 to Current Report on Form 8-K filed October 3,
      2008.2.2
              Incorporated
      by reference to Exhibit 4.2 to Current Report on Form 8-K filed October 3,
      2008.2.3
              Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed October
      3, 2008.
 
  36
   2.4
              Incorporated
      by reference to Exhibit 10.2 to Current Report on Form 8-K filed October
      3, 2008.2.5
              Incorporated
      by reference to Exhibit 10.3 to Current Report on Form 8-K filed October
      3, 2008.2.6
              Incorporated
      by reference to Exhibit 10.4 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 Exhibit 10.1 to Current Report on Form 8-K filed March 8,
      2007
   37
   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, 200855.
              Incorporated
      by reference to Exhibit 4.19 to Quarterly Report on Form 10-Q filed
      November 19, 200856.
              Incorporated
      by reference to Exhibit 4.4 to Registration Statement on Form S-8 filed
      October 15, 200957.
              Incorporated
      by reference to Exhibit 10.42 to Quarterly Report on Form 10-Q filed
      September 14, 200958.
              Incorporated
      by reference to Exhibit 4.20 to Current Report on Form 8-K filed April 21,
      200959.
              Incorporated
      by reference to Exhibit 4.20 to Current Report on Form 8-K filed May 13,
      200960.
              Incorporated
      by reference to Exhibit 10.46 to Quarterly Report on Form 10-Q filed June
      19, 200961.
              Incorporated
      by reference to Exhibit 10.47 to Quarterly Report on Form 10-Q filed June
      19, 200962
              Incorporated
      by reference to Exhibit 10.48 to Quarterly Report on Form 10-Q filed June
      19, 200963
              Incorporated
      by reference to Exhibit 10.49 to Quarterly Report on Form 10-Q filed June
      19, 200964
              Incorporated
      by reference to Exhibit 10.50 to Quarterly Report on Form 10-Q filed June
      19, 200965
              Incorporated
      by reference to Exhibit 10.53 to Quarterly Report on Form 10-Q filed
      September 15, 200966
              Incorporated
      by reference to Exhibit 10.54 to Quarterly Report on Form 10-Q filed
      September 15, 200967
              Incorporated
      by reference to Exhibit 10.55 to Quarterly Report on Form 10-Q filed
      September 15, 200968
              Incorporated
      by reference to Exhibit 10.56 to Quarterly Report on Form 10-Q filed
      September 15, 200969
              Incorporated
      by reference to Exhibit 10.57 to Quarterly Report on Form 10-Q filed
      September 15, 200970
              Incorporated
      by reference to Exhibit 4.21 to Current Report on Form 8-K filed October
      2, 200971
              Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed October
      23, 200972
              Incorporated
      by reference to Exhibit 10.58 to Quarterly Report on Form 10-Q filed
      November 24, 200973
              Incorporated
      by reference to Exhibit 10.59 to Quarterly Report on Form 10-Q filed
      November 24, 200974
              Incorporated
      by reference to Exhibit 10.60 to Quarterly Report on Form 10-Q filed
      November 24, 200975
              Incorporated
      by reference to Exhibit 10.1 to Current Report on Form 8-K filed December
      12, 200976
              Incorporated
      by reference to Exhibit 10.2 to Current Report on Form 8-K filed December
      12, 200977
              Incorporated
      by reference to Exhibit 10.3 to Current Report on Form 8-K filed December
      12, 200978
              Incorporated
      by reference to Exhibit 10.4 to Current Report on Form 8-K filed December
      12, 200979
              Incorporated
      by reference to Exhibit 10.5 to Current Report on Form 8-K filed December
      12, 200980
              Incorporated
      by reference to Exhibit 10.43 to Annual Report on Form 10-K filed April
      15, 200981
              Incorporated
      by reference to Exhibit 10.44 to Annual Report on From 10-K filed April
      15, 200982
              Incorporated
      by reference to Exhibit 10.45 to Annual Report on From 10-K filed April
      15, 200983
              Incorporated
      by reference to Exhibit 3.(II) to Quarterly Report on Form 10-Q filed
      on November 14, 200884
              Incorporated
      by reference to Exhibit 10.29 to Quarterly Report on Form 10-Q filed
      on November 14, 200885
              Incorporated
      by reference to Exhibit 10.30 to Quarterly Report on Form 10-Q filed
      on November 14, 2008


38


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
      9, 2010James
      Wemett
              
              (Principal
      Executive Officer)
                andChief
      Financial Officer(Principal
      Accounting Officer)





In
accordance with the Exchange Act, this report has been signed below by the
following person on behalf of the registrant and in the capacities and on the
dates indicated.





Signature
              
              Title
              
              Date/s/James Wemett
              
              President
      and Director
              
              April
      9, 2010James
      Wemett
              
              (Principal
      Executive Officer)
                andChief
      Financial Officer(Principal
      Accounting Officer)


39


NATURALNANO,
INC.


(A
Development Stage Company)





CONSOLIDATED
FINANCIAL STATEMENTS





December
31, 2009





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








Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders


NaturalNano,
Inc





We have
audited the consolidated balance sheets of NaturalNano, Inc. and Subsidiaries (a
development stage company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity (deficiency), and
cash flows for the years then ended and for the cumulative period from inception
(December 22, 2004)  through December 31, 2009. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits 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 audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NaturalNano, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended and for the cumulative period from
inception (December 22, 2004) through December 31, 2009 in conformity with
United States generally accepted accounting principles.





As
discussed in Note 5 to the consolidated financial statements, in connection with
the required adoption of a new accounting principle in the fiscal year ending
December 31, 2009, the Company considered certain instruments to be derivative
liabilities as of January 1, 2009.





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, has experienced recurring defaults related to various
provisions of debt instruments, 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 9,
2010


F-2


NaturalNano, Inc.


(A
Development Stage Company)


CONSOLIDATED BALANCE SHEETS




December 31,2009
                            
                            
                            2008AssetsCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            89,901
                            
                            
                            $
                            1,148Halloysite
      and Pleximer inventory
                            
                            
                            15,467
                            
                            
                            
                            20,209Other
      current assets
                            
                            
                            233,589
                            
                            
                            
                            184,992Total
      current assets
                            
                            
                            338,957
                            
                            
                            
                            206,349Deferred
      financing costs, net
                            
                            
                            42,892
                            
                            
                            
                            196,411Property
      and equipment, net
                            
                            
                            296,262
                            
                            
                            
                            443,103Total
      non-current assets
                            
                            
                            339,154
                            
                            
                            
                            639,514Total
      Assets
                            
                            $
                            678,111
                            
                            
                            $
                            845,863Liabilities
      and Stockholders' DeficiencyLiabilitiesCurrent
      liabilities:Senior
      secured convertible notes, net of $78,981  and $999,895
      discount, respectively
                            
                            $
                            3,655,019
                            
                            
                            $
                            2,811,605Senior
      secured promissory notes
                            
                            
                            145,711
                            
                            
                            
                            -Accounts
      payable
                            
                            
                            478,227
                            
                            
                            
                            563,830Accrued
      expenses
                            
                            
                            542,117
                            
                            
                            
                            309,048Accrued
      payroll
                            
                            
                            499,589
                            
                            
                            
                            480,453Patent
      license obligation-current
                            
                            
                            756,333
                            
                            
                            
                            544,333Deferred
      revenue
                            
                            
                            70,000
                            
                            
                            
                            80,000Registration
      rights liability
                            
                            
                            82,489
                            
                            
                            
                            82,489Derivative
      liability
                            
                            
                            70,000
                            
                            
                            
                            -Capital
      lease obligations-current
                            
                            
                            -
                            
                            
                            
                            62,536Total
      current liabilities
                            
                            
                            6,299,485
                            
                            
                            
                            4,934,294Deferred
      tax liability
                            
                            
                            11,805
                            
                            
                            
                            150,189Derivative
      liability
                            
                            
                            14,603
                            
                            
                            
                            -10%
      Subordinated secured convertible note, net of $12,603
    discount
                            
                            
                            212,397
                            
                            
                            
                            -Other
      long term liabilities
                            
                            
                            46,000
                            
                            
                            
                            48,769Total
      Liabilities
                            
                            
                            6,584,290
                            
                            
                            
                            5,133,252Commitments
      and contingencies  ( See Note 12)Stockholders’
      Equity (Deficiency)Preferred
      Stock - $.001 par value, 10 million shares authorizedSeried
      B - issued and outstanding 750,000 with an aggregate liquidation
      preference of $1,500
                            
                            
                            750
                            
                            
                            
                            750Seried
      C - issued and outstanding 4,250,000 with an aggregate liquidation
      preference value of $8,500
                            
                            
                            4,250
                            
                            
                            
                            4,250Common
      Stock - $.001 par value 5 billion authorized, issued and outstanding
      98,882,045 and 67,007,045,
                              respectively
                            
                            
                            98,882
                            
                            
                            
                            67,007Additional
      paid in capital
                            
                            
                            18,633,561
                            
                            
                            
                            18,705,365Deficit
      accumulated in development stage
                            
                            
                            (24,643,622
                            )
                            
                            
                            (23,064,761
                            )Total
      stockholders' deficiency
                            
                            
                            (5,906,179
                            )
                            
                            
                            (4,287,389
                            )Total
      liabilities and stockholders' deficiency
                            
                            $
                            678,111
                            
                            
                            $
                            845,863





See notes
to consolidated financial statements


F-3





NaturalNano,
Inc.


(A
Development Stage Company)


CONSOLIDATED STATEMENTS OF
OPERATIONS





For the years ended
                    
                    
                    From inception:December 31,
                    
                    
                    December 22, 20042009
                    
                    
                    2008
                    
                    
                    to December 31,
                      2009Income:Revenue
                    
                    $
                    81,045
                    
                    
                    $
                    271,844
                    
                    
                    $
                    383,639Cost
      of goods sold
                    
                    
                    25,375
                    
                    
                    
                    88,556
                    
                    
                    
                    113,931Gross
      profit
                    
                    
                    55,670
                    
                    
                    
                    183,288
                    
                    
                    
                    269,708Operating
      expenses:Research
      and development  (a)
                    
                    
                    347,130
                    
                    
                    
                    1,394,536
                    
                    
                    
                    6,468,119General
      and administrative  (a)
                    
                    
                    245,504
                    
                    
                    
                    1,571,895
                    
                    
                    
                    9,624,720Loss
      on asset impairments
                    
                    
                    -
                    
                    
                    
                    573,910
                    
                    
                    
                    573,910Write
      down of prepaid inventory
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    249,650592,634
                    
                    
                    
                    3,540,341
                    
                    
                    
                    16,916,399Loss
      from Operations
                    
                    
                    (536,964
                    )
                    
                    
                    (3,357,053
                    )
                    
                    $
                    (16,646,691
                    )Other
      income (expense):Interest
      expense, net
                    
                    
                    (1,557,250
                    )
                    
                    
                    (2,310,433
                    )
                    
                    
                    (5,738,306
                    )Net
      gain on derivative liability
                    
                    
                    500,779
                    
                    
                    
                    -
                    
                    
                    
                    500,779Gain
      on forgiveness of debt
                    
                    
                    86,245
                    
                    
                    
                    -
                    
                    
                    
                    86,245Income
      from cooperative research project
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    180,000Gain
      on warrant
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    326,250Financing
      fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,280,228
                    )(970,226
                    )
                    
                    
                    (2,310,433
                    )
                    
                    
                    (7,925,260
                    )Net
      loss
                    
                    $
                    (1,507,190
                    )
                    
                    $
                    (5,667,486
                    )
                    
                    $
                    (24,571,951
                    )Loss
      per common share - basic and diluted
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.05
                    )Weighted
      average shares outstanding
                    
                    
                    73,222,731
                    
                    
                    
                    111,132,677





(a)
            Stock
      based compensation expense included in the Statement of Operations for the
      years ended December 31, 2009 and 2008 are as
  follows:


Research
and development expense of ($28,538) and $354,508.


General
and administrative expense of ($45,512) and $485,956.





See notes
to consolidated financial statements


F-4





NaturalNano,
Inc.


(A
Development Stage Company)




CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ EQUITY (DEFICIENCY)




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
      shares 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
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                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
                                )Cumulative effect of
      adoption of accounting for instruments
      indexed to common stock as of 1/1/09
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (501,108
                                )
                                
                                
                                (71,671
                                )
                                
                                
                                (572,779
                                )Vesting
      of stock options granted
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (74,050
                                )
                                
                                
                                
                                
                                
                                
                                (74,050
                                )Grant
      of common stock for services @:$0.01
      per share
                                
                                
                                8,475,000
                                
                                
                                
                                8,475
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                67,970
                                
                                
                                
                                
                                
                                
                                
                                76,445$0.02
      per share
                                
                                
                                4,500,000
                                
                                
                                
                                4,500
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                76,500
                                
                                
                                
                                
                                
                                
                                
                                81,000$0.03
      per share
                                
                                
                                400,000
                                
                                
                                
                                400
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                12,600
                                
                                
                                
                                
                                
                                
                                
                                13,000Shares
      issued on debt conversion
                                
                                
                                15,500,000
                                
                                
                                
                                15,500
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                62,000
                                
                                
                                
                                
                                
                                
                                
                                77,500Issuance
      of common stock as interest payment:$0.05
      per share
                                
                                
                                3,000,000
                                
                                
                                
                                3,000
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                12,000
                                
                                
                                
                                
                                
                                
                                
                                15,000Allocation
      of note proceeds to discount
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                272,284
                                
                                
                                
                                
                                
                                
                                
                                272,284Net
      loss for the year ended  12/31/09
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (1,507,190
                                )
                                
                                
                                (1,507,190
                                )Balance
      at December 31, 2009
                                
                                
                                98,882,045
                                
                                
                                
                                98,882
                                
                                
                                
                                5,000,000
                                
                                
                                $
                                5,000
                                
                                
                                
                                18,633,561
                                
                                
                                $
                                (24,643,622
                                )
                                
                                
                                (5,906,179
                                )





See notes
to consolidated financial statements


F-5


NaturalNano,
Inc.


(A
Development Stage Company)




CONSOLIDATED STATEMENTS OF CASH
FLOWS




From inception:Years ended
                                          
                                          
                                          December 22, 2004December 31
                                          
                                          
                                          to December 31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009Cash
      flows from operating activities:Net
      loss
                                          
                                          $
                                          (1,507,190
                                          )
                                          
                                          $
                                          (5,667,486
                                          )
                                          
                                          $
                                          (24,571,951
                                          )Adjustments to reconcile net loss to net cash used
      in operating activities:Depreciation
      and amortization
                                          
                                          
                                          153,441
                                          
                                          
                                          
                                          297,143
                                          
                                          
                                          
                                          668,727Amortization
      of discount on convertible notes
                                          
                                          
                                          1,042,211
                                          
                                          
                                          
                                          1,492,532
                                          
                                          
                                          
                                          3,864,816Amortization
      of deferred financing costs
                                          
                                          
                                          182,868
                                          
                                          
                                          
                                          334,517
                                          
                                          
                                          
                                          831,575Vesting
      of stock options
                                          
                                          
                                          (74,050
                                          )
                                          
                                          
                                          840,464
                                          
                                          
                                          
                                          4,919,461Non-cash
      gain on forgiveness of debt
                                          
                                          
                                          (86,245
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (86,245
                                          )Fair
      value adjustment of derivative liabilities
                                          
                                          
                                          (488,176
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (488,176
                                          )Issuance
      of stock for services
                                          
                                          
                                          170,445
                                          
                                          
                                          
                                          123,378
                                          
                                          
                                          
                                          327,823Issuance
      of stock for interest
                                          
                                          
                                          15,000
                                          
                                          
                                          
                                          346,508
                                          
                                          
                                          
                                          361,508Issuance
      of warrants for services
                                          
                                          
                                          
                                          
                                          
                                          
                                          6,490
                                          
                                          
                                          
                                          3,369,945Forgiveness
      of interest expensed
                                          
                                          
                                          
                                          
                                          
                                          
                                          42,016
                                          
                                          
                                          
                                          42,016Loss
      on asset impairments
                                          
                                          
                                          
                                          
                                          
                                          
                                          573,909
                                          
                                          
                                          
                                          573,909Loss
      (gain) on disposal of asset
                                          
                                          
                                          
                                          
                                          
                                          
                                          70,209
                                          
                                          
                                          
                                          69,292Receipt
      of and gain on Atlas Mining warrant
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (506,250
                                          )Change
      in value of registration rights agreement
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          12,128Deferred
      rent
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          9,034Changes in operating assets and
      liabilities:Decrease
      (increase) in inventory
                                          
                                          
                                          4,742
                                          
                                          
                                          
                                          6,940
                                          
                                          
                                          
                                          (15,467
                                          )(Increase)
      decrease in other current assets
                                          
                                          
                                          (48,597
                                          )
                                          
                                          
                                          10,451
                                          
                                          
                                          
                                          (233,589
                                          )Increase
      in accounts payable, accruedpayroll,
      accrued expenses and patent lease obligation
                                          
                                          
                                          464,846
                                          
                                          
                                          
                                          882,987
                                          
                                          
                                          
                                          2,065,737(Decrease)
      increase in deferred revenue
                                          
                                          
                                          (10,000
                                          )
                                          
                                          
                                          80,000
                                          
                                          
                                          
                                          70,000(Decrease)
      increase in other liability
                                          
                                          
                                          (2,769
                                          )
                                          
                                          
                                          14,016
                                          
                                          
                                          
                                          33,247Net
      cash used in operating activities
                                          
                                          
                                          (183,474
                                          )
                                          
                                          
                                          (545,926
                                          )
                                          
                                          
                                          (8,682,460
                                          )Cash
      flows from investing activities:Purchase
      of property and equipment
                                          
                                          
                                          (6,600
                                          )
                                          
                                          
                                          (198,284
                                          )
                                          
                                          
                                          (568,982
                                          )Purchase
      of license
                                          
                                          
                                          
                                          
                                          
                                          
                                          (50,000
                                          )
                                          
                                          
                                          (200,000
                                          )Proceeds
      from sale of property and equipment
                                          
                                          
                                          
                                          
                                          
                                          
                                          191
                                          
                                          
                                          
                                          3,128Proceeds
      from sale of Atlas Mining warrant
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          506,250Net
      cash (used in) provided by investing activities
                                          
                                          
                                          (6,600
                                          )
                                          
                                          
                                          (248,093
                                          )
                                          
                                          
                                          (259,604
                                          )Cash
      flows from financing activities:Proceeds
      from senior secured convertible notes
                                          
                                          
                                          
                                          
                                          
                                          
                                          475,000
                                          
                                          
                                          
                                          7,881,000Proceeds
      from 10% senior secured Promissory Notes
                                          
                                          
                                          197,500
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          197,500Proceeds
      from senior secured Promissory Notes
                                          
                                          
                                          256,126
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          256,126Payment
      on senior secured Promissory Notes
                                          
                                          
                                          (110,414
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (110,414
                                          )Deferred
      financing costs
                                          
                                          
                                          (1,849
                                          )
                                          
                                          
                                          (20,000
                                          )
                                          
                                          
                                          (182,449
                                          )Repayment
      of capital lease obligations
                                          
                                          
                                          (62,536
                                          )
                                          
                                          
                                          (74,442
                                          )
                                          
                                          
                                          (175,018
                                          )Advances
      from related parties
                                          
                                          
                                          
                                          
                                          
                                          
                                          107,200
                                          
                                          
                                          
                                          1,303,561Reduction
      in amounts due to related parties
                                          
                                          
                                          
                                          
                                          
                                          
                                          (96,531
                                          )
                                          
                                          
                                          (1,149,102
                                          )(Redemption)
      issuance of common stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,000
                                          )
                                          
                                          
                                          99,000Proceeds
      from exercise of stock options
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          75,300Advances
      on related party line of credit
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          900,000Payment
      of registration rights damages
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (63,539
                                          )Net
      cash provided by financing activities
                                          
                                          
                                          278,827
                                          
                                          
                                          
                                          390,227
                                          
                                          
                                          
                                          9,031,965Increase
      (decrease)  in cash and cash equivalents
                                          
                                          
                                          88,753
                                          
                                          
                                          
                                          (403,792
                                          )
                                          
                                          
                                          89,901Cash
      and cash equivalents at beginning of period
                                          
                                          
                                          1,148
                                          
                                          
                                          
                                          404,940
                                          
                                          
                                          
                                          0Cash
      and cash equivalents at end of period
                                          
                                          $
                                          89,901
                                          
                                          
                                          $
                                          1,148
                                          
                                          
                                          $
                                          89,901Supplemental
      disclosure of cash flow information:Cash
      paid for interest during the period
                                          
                                          $
                                          3,778
                                          
                                          
                                          $
                                          8,589
                                          
                                          
                                          $
                                          147,334Schedule
      of non-cash investing and financing activities:Common
      stock issued for Convertible notes
                                          
                                          $
                                          77,500
                                          
                                          
                                          $
                                          11,000
                                          
                                          
                                          $
                                          4,244,500Allocation
      of note proceeds to discount on debt
                                          
                                          $
                                          12,603
                                          
                                          
                                          $
                                          475,000
                                          
                                          
                                          $
                                          3,835,103Issuance
      of warrants in partial payment of  financing
    costs
                                          
                                          
                                          
                                          
                                          
                                          $
                                          6,490
                                          
                                          
                                          $
                                          507,508Capital
      lease obligations
                                          
                                          
                                          
                                          
                                          
                                          $
                                          24,766
                                          
                                          
                                          $
                                          178,737Gain
      on extinguishment of debt by shareholder
                                          
                                          
                                          
                                          
                                          
                                          $
                                          1,029,600
                                          
                                          
                                          $
                                          1,029,600Common
      stock returned and cancelled for:Issuance
      of warrants
                                          
                                          
                                          
                                          
                                          
                                          $
                                          69,303
                                          
                                          
                                          $
                                          69,303Cancellation
      of license agreement
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          (84,000
                                          )Accrual
      for purchase of Navy License
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          400,000Note
      issued in consideration of deferred financing costs
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          97,500Registration
      rights liability
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          82,489Acquisition
      of license settled through issuance of common stock (net of $100,000
      cash)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          290,000





See notes to consolidated financial statements


F-6




NaturalNano,
Inc.


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009




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:




•        Cosmetics, health and beauty
products


•        Household products


•        Polymers,
plastics and composites.




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 and 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 2009 of
$1,507,190 and had negative working capital of $5,960,528 and a stockholders'
deficiency of $5,906,179 at December 31, 2009. 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
2009, the Company entered into a series of senior secured Promissory Notes with
Platinum Partners Long Term Growth IV (“Platinum”) and Longview Special
Financing, Inc. (“Longview”), the holders of the Company’s primary debt
obligations since 2007.  The aggregate principal borrowings on the
2009 Promissory Notes from Platinum and Longview during 2009 were $181,376 and
$74,750, respectively.  The proceeds from the senior secured
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 was due
and payable in full on June 30, October 12 and November 1, 2009. Platinum
has granted a waiver of default on the outstanding principal balance through
June 1, 2010. Longview has granted a waiver of default on the outstanding
principal balance through June 1, 2010.





In
February 2009 Platinum, 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.  At that same time, the then
President and Chief Financial Officer, as well as all other directors resigned
from their positions.  As a result of the resignations, Mr. Wemett
became the Company’s sole officer and director.  Mr. Wemett continues
to actively assess the Company's operating structure with an objective to reduce
ongoing expenses, increase sources of recurring revenue as well as seeking
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.


F-7





On
September 3, 2009, Platinum filed an amendment to the 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.  The amendment removed the Platinum’s right to appoint a
director to the Company.  Platinum desires to remain a passive
investor in the Company and does not want to exercise any control over the
business of the Company.  As of the date of this amendment, the Series
C Director was removed and now serves only as a director deemed elected by the
holders of the common stock and continues to serve in this capacity until the
next annual meeting of stockholders is scheduled. The amendment also added to
the Series C Preferred Stock a limitation on the conversion of such Series C
Preferred Stock, such that the number of shares of Common Stock that may be
acquired by the holder upon conversion of such Series C Preferred Stock shall be
limited to the extent necessary to ensure that following such conversion the
total number of shares of Common Stock then beneficially owned by the holder
does not exceed 4.99% of the total number of issued and outstanding shares of
Common Stock.  Based on the foregoing limitations, none of the Common
Stock underlying the Series C Preferred Stock or any of the Notes issued to
Platinum is deemed beneficially owned in excess of 4.99% of the Issuer’s
outstanding Common Stock.





On
November 30, 2009 the Company entered into $225,000 10% Subordinated Secured
Convertible Promissory Agreement (the “10% Convertible Note”) with Cape One
Finance LP, an accredited investor. The 10% Convertible Note has fifteen month
term, bears interest at 10% per annum payable quarterly and is secured by
certain assets of the Company pursuant to a security agreement entered into on
November 30, 2009.  The Note is convertible at the investor’s option
into common stock at any time prior to maturity at $0.005 per share, subject to
certain anti-dilution provisions and provides that the result of such conversion
cannot result in the beneficial ownership in excess of 4.99% of the issued and
outstanding common stock.  Pursuant to the terms of this financing
obligation, 45,000,000 common stock purchase warrants were granted at an
exercise price of $0.025 per share, these warrants are subject to certain
anti-dilution adjustments as described in the agreement.  The net
proceeds from the 10% Convertible Note amounting to $197,000 after fees and were
restricted for general working capital purposes only.





The
Company has experienced recurring losses from operations since its inception and
continues to have a working capital deficiency and limited opportunities for
additional capital infusion.  The Company has experienced recurring
defaults relating to the various provisions under its current debt obligations
and is expected to require future forbearance and waivers relating to such
provisions in the future. These negative financial conditions combined with 2009
staff and officer resignations, delays experienced in product introduction and
customer acceptance raises substantial doubt of the Company’s ability to
continue as a going concern.





Reclassifications


Certain
prior year amounts have been reclassified to conform to the current year
presentation.





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.




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.


F-8





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




2009
                                
                                
                                2008
                                
                                Useful LifeLab
      equipment
                                
                                $
                                568,020
                                
                                
                                $
                                562,371
                                
                                5
      yearsLeasehold
      improvements
                                
                                
                                118,120
                                
                                
                                
                                117,170
                                
                                3-15
      years686,140
                                
                                
                                
                                679,541Accumulated
      depreciation and amortization
                                
                                
                                (389,878
                                )
                                
                                
                                (236,438
                                )Net
      property and equipment
                                
                                $
                                296,262
                                
                                
                                $
                                443,103




The
Company leases certain research and development equipment under the terms of
various capital lease agreements. As of December 31, 2008 the Company had
capitalized lab equipment resulting from capital lease agreements in the amount
of $253,966 included in the amounts above. As of December 31, 2009 all
capitalized leases were paid in full and the Company assumed ownership of the
equipment. Amortization of leasehold improvements is provided for by the
straight-line method over the term of the lease.





Accrued
Payroll


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





Related
Party Transactions


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.





Derivative
Financial Instruments


The
Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair market value and then is revalued at each reporting date,
with changes in fair value reported in the consolidated statement of
operations. For stock based derivative financial instruments, the Company
estimated the total enterprise value based upon trending the firm value from
December 2006 to December 2009 considering company specific factors including
the changes in forward estimated revenues and market factors.  Once
the enterprise value was determined an option pricing model was used to allocate
the enterprise value to the individual derivative securities in the Company’s
capital structure.  The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or equity,
is evaluated at the end of each reporting period. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be
required within twelve months of the balance sheet date.




Income
Taxes


The
Company accounts for income taxes in accordance with ASC 740 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.


F-9





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, 2009 the Company received a QETC Facilities,
Operations, and Training tax rebate (“QETC rebate”) from the State of New
York of $253,000 related to the tax year ended December 31,
2008.  During the year ended December 31, 2008 the Company received
$244,000 related to 2006 and $257,000 related to 2007. 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.




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 convertible 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.





As of
December 31, 2009 there were 412,528,308 and 1,611,605,911 shares underlying
preferred stock, convertible debt, outstanding options and warrants that could
potentially dilute future earnings. These potentially dilutive shares have been
limited by certain debt and equity agreements with Platinum Long Term Growth,
Platinum Advisors, Longview Special Finance and Technology Innovations LLC.
These agreements provide limitations on the conversion of the dilutive
instruments such that the number of shares of Common Stock that may be acquired
by the holder upon conversion of such instruments shall be limited to ensure
that following such conversion the total number of shares of Common Stock then
beneficially owned by the holder does not exceed 4.99% of the total number of
issued and outstanding shares of Common Stock.




Share
Based Payments


The
Company has four 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”) and the 2009 Stock Incentive
Plan (“the 2009 Plan”) or (collectively, the “Plans”).  The Plans
provide for issuance of share-based awards to officers, key employees,
non-employee directors, vendors 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 ASC 718. Under ASC 718, 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.


F-10





The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of FASB ASC
505-50, Equity-Based Payments to Non-Employees (Formerly FASB Staff Positions
Emerging Issues Task Force Issue No. 96-18 and 00-18.) 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




Fair
Value of Financial Instruments


These
financial instruments include cash and cash equivalents, accounts payable and
accrued expenses, notes payable, capital leases and derivative liabilities. Fair
values for all instruments except for derivative liabilities 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 2009 and
2008.





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 such estimates. 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


In June
2009, the FASB issued the accounting codification provisions (the
“Codification”) as described in FASB ASC 105, Generally Accepted
Accounting Principles (formerly SFAS No. 168, The FASB Accounting
Codification and the Hierarchy of Generally Accepted Accounting Principles).
Released on July 1, 2009, the Codification became the source of authoritative
non-governmental U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of these provisions, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification became non-authoritative. The Codification was effective for the
Company’s quarterly reporting period ended September 30, 2009. The adoption of
the provisions did not have any impact on the Company’s consolidated financial
statements other than changes in referencing to authoritative accounting
pronouncements.





Effective
January 1, 2009, the Company adopted new provisions of FASB ASC 815-40, Contracts in
Entity’s own Equity (formerly FASB Staff Position Emerging Issues Task
Force Issue No. 07-05,  Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entity’s Own Stock ) which applies to any freestanding
financial instruments or embedded features that have the characteristics of a
derivative and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock. The Company adopted this standard on
January 1, 2009 and has included additional disclosures in its consolidated
financial statements. See Note 5 Derivative Liability for a further discussion
regarding the Company’s measurement of derivative instruments





In May
2009, the FASB issued a new provision as described in FASB ASC 855, Subsequent
Events (formerly SFAS No. 165,  Subsequent Events), which
provides guidance on events that occur after the balance sheet date but prior to
the issuance of the financial statements. The provisions distinguish events
requiring recognition in the financial statements and those that may require
disclosure in the financial statements and requires disclosure of the date
through which subsequent events were evaluated. The FASB subsequently issued ASU
2010-09 which among other things eliminated the requirement that SEC registrants
disclose the date through which it has evaluated subsequent events. The
provisions are effective for interim and annual periods ending after June 15,
2009. The adoption of the provisions did not have any impact on the Company’s
consolidated financial statements.


F-11





In April
2009, the FASB issued new provisions of FASB ASC 825, Financial
Instruments (formerly FASB Staff Position FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments) requiring entities to
provide disclosures about the fair value of financial instruments in interim
financial information. The provisions require an entity to disclose in the body
or in the accompanying notes of its summarized financial information for interim
reporting periods and in its financial statements for annual reporting periods
the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the statement of
financial position. The Company adopted the provisions for the quarter ended
June 30, 2009 and the adoption of the provisions did not have a material impact
on the Company’s consolidated financial statements.




ASU No. 2010-06, Fair Value
Measurements and Disclosures (Topic 820) – Improving Disclosures about fair
Value Measurementsaffects all entities that are required to make
disclosures about recurring and  nonrecurring fair value measurements
under FASB ASC Topic 820, originally issued as FASB Statement No. 157, Fair
Value Measurements. The ASC requires certain new disclosures and clarifies two
existing disclosures requirements. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for the fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years..The Company is currently evaluating  the potential impact of
the adoption on the consolidate financial position, results of operations and
cash flows.




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 AND PROMISSORY NOTES




As of
December 31, 2009, the consolidated Balance Sheet reflects a current liability
of $3,655,019 ($2,811,606 at December 31, 2008) for senior secured convertible
and non-convertible promissory notes.  As further described below, the
Company has defaulted on certain provisions of the notes. Platinum Long Term
Growth and Platinum Advisors have granted waivers of default on their
outstanding principal balance of $3,317,961 through June 1, 2010. Longview
Special Finance has granted a waiver of default on their outstanding principal
of $561,750 through June 1, 2010.





Debt
discount on these notes is 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
amortization of the discount is an appropriate effective yield method as
required by FASB ASC 470-20, Debt with Conversions and Other Options
(Formerly FASB Staff Positions Emerging Issues Task Force Issue
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.During the twelve months ended
December 31, 2009 and 2008, the Company recorded $1,054,814 and $1,492,532
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 convertible notes issued in
accordance with the Initial Note agreement had the original conversion price of
$0.22 (as cited in the March 7, 2007 agreement) which was adjusted to a
conversion price of $0.005 in accordance with the anti-dilution provisions of
this loan and security agreement. This conversion price was triggered as a
result of the issuance of the 2008 Promissory 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.


F-12





During
2009, the Company issued 115,500,000 shares of common stock upon conversion of
$77,500 of outstanding principal by Longview Special Finance. During 2009 and
2008, respectively, we issued an aggregate of 3,000,000 and 6,607,493 shares of
our common stock to Platinum in satisfaction of $15,000 and $346,507 of interest
due on the 8% Senior Secured 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.




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. This anti-dilution provision was triggered
in the third quarter of 2008 when the conversion price was modified to
$0.005.




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 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”) covered 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”) covered 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. Each
series of Warrants contained anti-dilution protection that automatically
adjusted the exercise price of such series of Warrants when the Company issued
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. This anti-dilution provision was triggered in the
third quarter of 2008 when the conversion price was modified to $0.005. On
September 29, 2008 Platinum and Longview agreed to exchange these warrants for
5,000,000 shares of preferred stock (see Stockholders Equity
Note).


F-13





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. The Company
recorded a discount on such Notes in the amount of $3,347,500 for the fair value
of these warrants, limited by the aggregate proceeds received. This discount is
being amortized on a straight line basis over the term of the Notes and 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. 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. Each series of
Warrants contained anti-dilution protection that automatically adjusted the
exercise price of such series of Warrants when the Company issued 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. This anti-dilution provision was triggered in the third quarter of
2008 and the conversion price was modified to $0.005. As of December 31, 2009
and 2008, there were 162,093,910 of these warrant rights, held by Platinum
Advisors, LLC, to purchase shares of common stock at $0.005 per
share.





The
Platinum Advisors Note provides a limitation on the conversion of such note,
such that the number of shares of Common Stock that may be acquired by the
holder upon conversion of such note shall be limited to the extent necessary to
ensure that following such conversion the total number of shares of Common Stock
then beneficially owned by the holder does not exceed 4.99% of the total number
of issued and outstanding shares of Common Stock.




Registration Rights
Agreement


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.




As of the
fourth quarter of 2009, the registration statement had not been 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 June 1, 2010 and June 30,
2010. 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
was 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. At December 31, 2009 and 2008 the
outstanding balance for this obligation was $82,489.


F-14




September 29, 2008 Promissory
Notes


On
September 29, 2008, the Company entered into a Loan and Security Agreement (the
“2008 Promissory 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.  This agreement
provided for additional advances, subject to performance milestones being
achieved by the Company. These milestones were not achieved and as a result this
agreement was terminated.





The 2008
Promissory Notes are convertible into common stock of the Company, with a
conversion price of $0.005 per share.  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 FASB ASC 470-20,
Debt with Conversions and Other Options (Formerly FASB Staff Positions Emerging
Issues Task Force Issue 98-5) 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.





All
unpaid interest and principal were due and payable at maturity on January 31,
2010. Platinum Long Term Growth and Platinum Advisors have granted waivers of
default on their outstanding principal balance of through June 1, 2010. Longview
Special Finance has granted a waiver of default on their outstanding principal
of through June 1, 2010.




The 2008
Promissory 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
enforce   their rights provided for in the loan documents.





As of December 31, 2009 and 2008, the total common shares
underlying the Initial and 2008 Notes represent an aggregate of 791,800,000
and 762,300,000, respectively, common shares issuable upon the conversion of the
principal amount of these Notes at the fixed conversion price of $0.005 per
share.





2009
Senior Secured Promissory Notes


During
2009, we entered into various Senior Secured Promissory Notes aggregating
to  $181,376 and $74,750, respectively, with Platinum and Longview
(“the 2009 Senior Secured Promissory Notes”). The 2009 Senior
Secured 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 Senior Secured
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 was due
and payable in full on June 30, 2009 (the maturity date of the notes.) The 2009
Senior Secured Promissory Notes bear interest, in arrears, at a rate of 8% or
16% and were 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 Company
repaid $110,414 on these borrowings in the third quarter of 2009 upon the
receipt of $253,000 from the QETC Facilities, Operations, and Training rebate
(“the QETC rebate”) from the State of New York related to the 2008 tax year as
required in the debt agreement.





3.
            10% SUBORDINATED SECURED
      CONVERTIBLE NOTE





10% Convertible
Notes


On
December 4, 2009, the Company received net proceeds of $197,500 pursuant to the
terms of a subscription agreement dated as of November 30, 2009 with Cape One
Financial LP an accredited investor (“the Investor”).  Pursuant to the
terms of the Subscription Agreement the Company issued (i) a 10% Subordinated
Secured Convertible Promissory Note (“the 10% Convertible Note”) in the
principal amount of $225,000 and (ii) a five-year common stock purchase
warrant to purchase 45,000,000 shares, subject to certain anti-dilution
provisions in the agreement of the Company’s common stock, par value $0.001 per
share at an exercise price of $0.025 per share for a purchase price of
$225,000.


F-15





The 10%
Convertible Note has a 15-month term, bears interest at 10% per annum and is
secured by certain assets of the Company pursuant to a security agreement, dated
November 30, 2009.  The 10% Convertible Note is convertible into
Common Stock at any time prior to maturity (provided that such conversion does
not result in the holder and its affiliates beneficially owning in excess of
4.99% (9.99% upon 61 days’ prior written notice) of the issued and outstanding
Common Stock at $0.005 per share (the “Conversion Price”), subject to adjustment
upon the occurrence of certain anti-dilution events.  Interest under
the Note is due quarterly in cash or if registered, in the Company’s common
stock at a 20% discount in accordance with a formula set forth in the 10%
Note.  The 10% Note and security interest is subordinate to certain
outstanding senior indebtedness of the Company held by Platinum Long Term Growth
IV, LLC, Platinum Advisors LLC and Longview Special Finance Inc. (“Senior
Lenders”). Upon the occurrence of Events of Default as set forth in the Note,
the principal and interest due under the Note may be accelerated and the
interest rate payable may be increased to 18%.





Warrant Agreement and Debt
Discount


As
further consideration, the Company issued to Cape One Financial LP 45 million
warrants for the purchase of the Company’s common stock any time prior to
December 4, 2012 at an exercise price of $0.025 per share.  The
Warrant provides for cashless exercise and contains full ratchet and other
anti-dilution provisions.  The Warrant is convertible by the Investor
into Common Stock at any time during the term of the Warrant (provided that such
exercise does not result in the holder and its affiliates beneficially owning in
excess of 4.99% (9.99% upon 61 days’ prior written notice) of the issued and
outstanding Common Stock.





The
warrant and conversion terms related to the transaction were considered to be
derivatives as a result of the antidilution provisions. The fair value of the
Cape One derivatives was determined by estimating the total enterprise value of
the Company based upon trending the firm value from December 2006 to December
2009 and considering company specific factors thereafter including the changes
in forward estimated revenues and market factors.  An option pricing
model was then used to allocate $12,603 to the Cape One
derivatives.





Debt
discount on these notes is amortized using a straight line method and classified
as interest during the term of the Notes through the period ending March 4,
2011. The Company has determined the use of the straight-line method for the
amortization of the discount is an appropriate effective yield method as
required by generally accepted accounting principles as the principal of the
note is due in full at maturity, the interest is not compounding and therefore
this method appropriately matches the interest expense to the cash flow of the
note.





10% Convertible Note
Covenants and Other Agreements


The
proceeds from the 10% Convertible Note, after taking into account expenses
related to the Offering including a $20,000 commitment fee paid to the Investor
and $7,500 paid to the Investor’s counsel was $197,000. The proceeds from the
10% Convertible Note were restricted for general working capital
purposes.





The
Subscription Agreement provides for mandatory redemption in certain
circumstances: (i) The Company is prohibited from issuing Conversion Shares
or Warrant Shares, (ii) redeemed securities junior to the Note, or (iii) if an
Event of Default as defined in the Note and Subscription Agreement has occurred
which is not cured in 7 days.  In addition, upon a Change of Control
(as defined in the Subscription Agreement), the Company may be required to pay
the Investor an amount equal to the principal outstanding amount under the Note
multiplied by 125%, plus unpaid interest.




As of
December 31, 2009, the Company was not in compliance with certain debt covenants
including limitations on the use of proceeds.  On March 20, 2010 the
Company received a waiver from the Lenders indicating that the Lender will not
demand payment of principal, default interest and liquidated damages as a result
of non-compliance with any existing covenant violations through January 1,
2011.





The
Conversion Shares and Warrant Shares granted in connection with the 10%
Convertible Note have piggyback registration rights as described in the
Subscription Agreement. Except for certain excepted issuances, if during the
term of the Note, the Company consummates a certain new equity or financing
transaction, the Investor has the right to exchange the Note for securities
issued in such new transaction. The Investor is entitled to liquidated damages
of $100 per business day for each $10,000 of principal under the Note for
Conversion Shares or purchase price of Warrant Shares or the Mandatory
Redemption Amount that is not timely paid or delivered or for Unlegended Shares
(as defined in the Subscription Agreement) not timely delivered. In addition,
the company may be required to redeem the Conversion Shares at a price per share
equal to the greater of 120% or the Unlegened Redemption Amount for failure to
deliver Unlegended Shares for 30 days in any 360 day period. The issuances of
the Note and Warrant were made pursuant to a private placement under Section
4(2) of the Securities Act of 1933, as amended (the “Act”), and/or Rule 506 of
Regulation D promulgated under the Act, pursuant to the terms of the
Subscription Agreement.


F-16





Senior Secured Notes
Forbearance Agreements received from Senior Lenders in connection with the 10%
Notes


Pursuant
to forbearance agreements, dated November 30, 2009 with each of its current
secured senior lenders, each such Senior Lender agreed to forbear from
exercising its rights and remedies under the Senior
Debt and related loan documents until June 1, 2010 or June 30, 2010, unless
earlier terminated in accordance with the Forbearance Agreements. During the
forbearance period, the Company agrees, among other things, not to make any
payment or concession to other lenders without the consent of the Senior
Lenders.  The Senior Lenders have also agreed, pursuant to a consent
agreement with the Company, dated November 30, 2009 (the “Consent Agreement”),
to permit the Company to issue the Note, as junior debt.





4.
            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 August
1, 2008, in connection with, and as a condition to the 2008 Promissory Notes
provided by Platinum and Longview (described in 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.
Additionally, TI, and an affiliate of TI, Biomed, Inc. forgave approximately
$66,000 of outstanding current account payable.




On August
6, 2008 and in connection with 2008 Promissory Notes provided by Platinum and
Longview, the Company issued TI a warrant to purchase up to 4.99% of the
Company’s common stock.  Under the warrant agreement 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 23,354,008 shares at an exercise price of $0.082
per share as of December 31, 2009 assuming all other potentially dilutive
instruments are also exercised.




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.  On September 26, 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.


F-17





Other
Transactions with TI


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 are fully vested.





5.
            DERIVATIVE
      LIABILITIES




In June
2008, the FASB finalized ASC 815, formerly Emerging Issues Task Force 07-05,
“Determining Whether an
Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock,”
which was adopted by the Company effective January 1, 2009.





Under ASC
815, instruments which do not have fixed settlement provisions are deemed to be
derivative instruments. Historically, the Company has included anti-dilution
provisions in certain of its debt obligations in order to protect the warrant
and debt holders from the potential dilution associated with future financings.
In accordance with ASC 815, such warrants and the debt conversion features have
been re-characterized as derivative liabilities as of January 1, 2009 for
obligations outstanding on January 1, 2009 and as of the date of the obligation
for financing agreements entered into thereafter.  ASC 815, formerly
SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” requires that the fair
value of these liabilities be re-measured at the end of every reporting period
with the change in value reported in the statement of operations.





For stock
based derivative financial instruments, the Company estimated the total
enterprise value based upon trending of the firm value from December 2006 to
December 2009 considering company specific factors including the changes in
forward estimated revenues and market factors.  Once the enterprise
value was determined an option pricing model was used to allocate the enterprise
value to the individual derivative and other securities in the Company’s capital
structure.  The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or equity, is
evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required within
twelve months of the balance sheet date.





The
Company’s derivative liabilities as of December 31, 2009 are as
follows:


·
                The
      debt conversion feature embedded in the 8% Senior Secured Convertible
      notes entered into in March 2007 which contains anti-dilution provisions
      that would be triggered if the Company issued instruments with rights to
      the Company’s common stock at prices below this exercise price (described
      in Note 2.)


·
                  The
      162,093,910 warrants granted to Platinum Advisors LLC at an exercise price
      of $0.005 per share in 2007 as consideration for due diligence services in
      connection with the 8% Senior Secured Convertible debt entered into in
      2007 (described in Note 2.) These warrants contain anti-dilution
      provisions that would be triggered if the Company issued instruments with
      rights to the Company’s common stock at prices below this exercise
      price.


·
                    The
      warrant granted to Technology Innovations LLC (“TI”) in August 2008,
      (described in Note 4 above.) The warrant was determined not to have a
      fixed settlement provision as the exercise price will fluctuate based upon
      the number of shares fully diluted
outstanding.


·
                  The
      debt conversion feature and the 45 million warrants exercisable at $0.0025
      per share granted in connection with the 10% Subordinated Secured
      Convertible debt entered into in November 2009.  These
      agreements contain anti-dilution provisions that would be triggered if the
      Company issued instruments with rights to the Company’s common stock at
      prices below the exercise price (described in Note
  3.)




ASC 815
was implemented in the first quarter of 2009 and is reported as a cumulative
effect of a change in accounting principle. As a result, the cumulative effect
on the accounting for the warrants was as follows:


F-18





Derivative Instrument
                  
                  Decrease in
                    Additional
                    Paid-in-
                    Capital
                  
                  
                  Increase(decrease)
                    in Accumulated
                    Deficit
                  
                  
                  January 1,
                    2009
                    Derivative
                    Liability
                  
                  
                  December 31,
                    2009
                    Derivative
                    LiabilityPlatinum
      Advisors warrants
                  
                  $
                  501,018
                  
                  
                  $
                  (447,817
                  )
                  
                  $
                  53,201
                  
                  
                  $
                  2,000TI
      warrants
                  
                  
                  —
                  
                  
                  
                  5,151
                  
                  
                  
                  5,151
                  
                  
                  
                  —8%
      Notes conversion feature
                  
                  
                  —
                  
                  
                  
                  514,427
                  
                  
                  
                  514,427
                  
                  
                  
                  70,00010%
      Notes conversion feature
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  
                  2,897Cape
      One warrants
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  
                  9,706Total
                  
                  $
                  501,018
                  
                  
                  $
                  71,761
                  
                  
                  $
                  572,779
                  
                  
                  $
                  84,603




The
Platinum Advisor warrants were valued on January 1, 2009 at $501,018, their
relative fair value on the date of grant, as an increase to additional
paid-in-capital. Charges to Accumulated Deficit include $71,761 in gains
resulting from the decrease in the fair value of the derivative liabilities
through December 31, 2008. As of the date of implementation of this accounting
standard, the derivative liability amount reflected the fair value of each
derivative instrument as of the January 1, 2009. The derivative liability
associated with the 8% Notes conversion feature has been classified as short
term as the associated debt matures January 30, 2010. The Platinum Advisor, TI
warrants, the 10% Notes conversion feature and the Cape One warrants mature in
2011 and accordingly are presented as long term liabilities.




During
the twelve months ended December 31, 2009, the Company recognized $500,779 in
net gains relating to the changes in fair market value for these derivative
liabilities.





Fair
Value Valuation Hierarchy Measurement


ASC
820 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows.


·
            Level
      1 inputs are quoted prices (unadjusted) in active markets for identical
      assets or liabilities.


·
            Level
      2 inputs are quoted prices for similar assets and liabilities in active
      markets or inputs that are observable for the asset or liability, either
      directly or indirectly through market corroboration, for substantially the
      full term of the financial
instrument.


·
            Level
      3 inputs are unobservable inputs based on the Company’s own assumptions
      used to measure assets and liabilities at fair
  value.


A
financial asset or liability’s classification within the hierarchy is determined
based on the lowest level input that is significant to the fair value
measurement.




The
derivative liabilities are measured at fair value using certain estimated
factors such as volatility and probability and are classified within Level 3 of
the valuation hierarchy. The following table provides a roll forward of the
liabilities carried at fair value measured using significant unobservable inputs
(level 3).




Fair
      value at adoption – 1/1/2009
                  
                  $
                  572,779Gain recognized
      in Q1 2009
                  
                  
                  (8,398
                  )Gain
      recognized in Q2 2009
                  
                  
                  (452,872
                  )Gain recognized
      in Q3 2009
                  
                  
                  (72,106)Derivative  liability
      issued Q4 2009
                  
                  
                  12,603Loss recognized
      in Q4 2009
                  
                  
                  32,597Fair
      value – 12/30/2009
                  
                  $
                  84,603





6.       PATENT LICENSE
AGREEMENTS




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.


F-19





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, 2009, the Company had paid
$100,000 under this agreement and was delinquent in $400,000 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 and accrued
$356,333. The 2008 and 2009 minimum royalty payments are considered delinquent
as they remain unpaid at December 31, 2009. Royalty payments resulting from this
agreement are expensed as incurred.





On
November 13, 2009, the Company and the NRL agreed to an amended
commercialization plan to: (a) include cosmetics as an exclusive field of use
and (b) to extend the term of the license to May 15, 2010 in order to
continue the discussions among the parties to develop and execute an amended
license agreement. 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.





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 2008 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, $100,000, 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. 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 and an 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.  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 previously discussed). During the
twelve months ended December 31, 2008, $33,152 of amortization expense was
recognized prior to the impairment loss.


F-20





7.   
 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:


2009
                      
                      
                      2008Currently
      payable:Federal
                      
                      $
                      -
                      
                      
                      $
                      -State
                      
                      
                      -
                      
                      
                      
                      -Total
      currently payable
                      
                      
                      -
                      
                      
                      
                      -Deferred:Federal
                      
                      
                      (205,879)
                      
                      
                      
                      246,260State
                      
                      
                      131,547
                      
                      
                      
                      (841,484
                      )Total
      deferred
                      
                      
                      (74,332)
                      
                      
                      
                      (595,224
                      )Less
      increase in valuation allowance
                      
                      
                      74,332
                      
                      
                      
                      595,224Net
      deferred
                      
                      
                      -
                      
                      
                      
                      -Total
      income tax provision (benefit)
                      
                      $
                      -
                      
                      
                      $
                      -





Individual
components of deferred taxes are as follows:


2009
                    
                    
                    2008Deferred tax assetsNet
      operating loss carry forwards
                    
                    $
                    4,191,765
                    
                    
                    $
                    3,902,103Equity
      issued for services
                    
                    
                    1,257,973
                    
                    
                    
                    1,811,973Other
                    
                    
                    433,738
                    
                    
                    
                    419,953Total
                    
                    
                    5,883,476
                    
                    
                    
                    6,134,029Less
      valuation allowance
                    
                    
                    (5,883,476)
                    
                    
                    
                    (6,134,029
                    )Gross
      deferred tax asset
                    
                    $
                    -
                    
                    
                    $
                    -Deferred tax liabilitiesBeneficial
      Conversion Feature
                    
                    $
                    11,805
                    
                    
                    $
                    150,189Gross
      deferred tax liabilities
                    
                    $
                    11,805
                    
                    
                    $
                    150,189Net
      deferred tax liabilities
                    
                    $
                    11,805
                    
                    
                    $
                    150,189





As of
December 31, 2009 and 2008, the Company has a deferred income tax liability of
$11,805 and $150,189, respectively 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 various financing obligations entered
into during 2009 and 2008 with the offset recorded through Additional Paid in
Capital attributable 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.





The
Company has approximately $14,346,000 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 ASC 718,
which are not included in the determination of the deferred tax asset above and
will be recognized in accordance with ASC 718 when realized for tax
purposes.  These carryforwards expire at various dates from 2025
through 2029.


F-21





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 controlling ownership by
Technology Innovations, 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 a 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:




2009
                          
                          
                          2008Statutory
      United States federal rate
                          
                          
                          34.0
                          %
                          
                          
                          34.0
                          %State
      taxes, net of federal benefit
                          
                          
                          (5.8
                          )
                          
                          
                          9.6Nondeductible
      Interest Expense
                          
                          
                          (23.6
                          )
                          
                          
                          (11.9
                          )Gain
      on Extinguishment of debt
                          
                          
                          -
                          
                          
                          
                          (5.9
                          )Change
      in valuation allowance
                          
                          
                          (4.9
                          )
                          
                          
                          (10.5
                          )Nondeductible
      Stock Based Compensation
                          
                          
                          -
                          
                          
                          
                          (14.8
                          )Other
                          
                          
                          0.3
                          
                          
                          
                          (0.5
                          )Effective
      tax rate
                          
                          
                          0
                          %
                          
                          
                          0
                          %





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





Unrecognized
      tax benefits balance at January 1
                      
                      $
                      515,000
                      
                      
                      —Gross
      increase for tax positions of prior years
                      
                      
                      570,000
                      
                      $
                      515,000Gross
      decrease for tax positions of prior years
                      
                      
                      (52,000)
                      
                      
                      —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
                      
                      $
                      1,033,000
                      
                      $
                      515,000




At
December 31, 2009 and 2008, the total unrecognized tax benefits of $ 1,033,000
and $515,000, respectively, 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, 2009 and 2008 the
Company recognized no interest and penalties.




The
Company files income tax returns in the U.S. federal jurisdiction and New York
State. The tax years 2006-2009 generally remain open to examination by major
taxing jurisdictions to which the Company is subject.


F-22




8.      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, 2009 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 Platinum and Longview 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 and 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). Both the Series B and Series C
designations limits the holders’ rights to convert its Convertible Preferred
Stock, and the aggregate voting powers, to no more than 4.99% of the votes
attributable to the total outstanding common shares.  Accordingly, the
votes attributable to the Series B and Series C Convertible Preferred
constitutes 4.99% of the aggregate votes attributable to the Company’s
outstanding shares on an as converted basis and the votes Series B and Series C
Convertible Preferred and the Series C Convertible Preferred, voting together
represent approximately 9.98% of the aggregate votes attributable to the
Company’s outstanding shares (on an as converted basis).  The Series B
Convertible Preferred Stock has an aggregate liquidation value of $1,500 and the
Series C Convertible Preferred Stock has an aggregate liquidation value of
$8,500.





On
September 3, 2009, Platinum filed an amendment to the 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.  The amendment removed the Platinum’s right to appoint a
director to the Company.  Platinum desires to remain a passive
investor in the Issuer and does not want to exercise any control over the
business of the Company.  As of the date of this amendment, the Series
C Director was removed and now serves only as a director deemed elected by the
holders of the common stock and continues to serve in this capacity until the
next annual meeting of stockholders is scheduled. The amendment also added to
the Series C Preferred Stock a limitation on the conversion of such Series C
Preferred Stock, such that the number of shares of Common Stock that may be
acquired by the holder upon conversion of such Series C Preferred Stock shall be
limited to the extent necessary to ensure that following such conversion the
total number of shares of Common Stock then beneficially owned by the holder
does not exceed 4.99% of the total number of issued and outstanding shares of
Common Stock.





Common
Stock Issuances


During
the twelve months ended December 31, 2009, the Company issued an aggregate of
15,500,000 and 3,000,000 shares, respectively of its common stock in
satisfaction of principal and interest obligations to its senior debt holders
(see Note 2). 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.




During
the fourth quarter of 2009, we issued an aggregate of 8,875,000 shares of common
stock to 23 individuals or entities in connection with professional consulting,
lab and research services, facility rent, and website assistance provided in
2009 to the Company in an aggregate amount of $89,445.  On December
29, 2009, we issued an aggregate of 4,500,000 shares of common stock valued at
$81,000 to Spencer Clarke LLC, in connection with investment banking services.





F-23




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
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
September 2008, the Company issued 300,000 shares of common stock to TI as
partial satisfaction of a contractual obligation and the shares were valued at
$11,700 (See Note 4).




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.





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, 2009 and 2008 respectively,
there were common stock warrants outstanding to purchase an aggregate
207,534,651 and 162,534,651 shares of common stock, excluding the warrant shares
available to TI, 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 described below and in Note 2.) During the third
quarter of 2008, the Company issued the 2008 Promissory 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, Platinum and Longview agreed to
cancel 1,218,750,060 warrants in exchange for shares of preferred stock, as
allowed under the agreement.  As of December 31, 2009 and 2008, there
were remaining 162,093,910 of these warrant rights, held by Platinum Advisors,
LLC, to purchase shares of common stock at $0.005 per share.




In
consideration for the cancellation of TI’s debt (see Note 4), 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.   Based on
the terms of the warrant conversion agreement TI has the right to purchase up to
24,354,008 shares at an exercise price of $0.082 per share as of December 31,
2009 assuming all other potentially dilutive instruments are also
exercised.


F-24





On
December 4, 2009, the Company issued 45 million warrants to Cape One Financial
LP in connection with the 10% Notes (described in Note 3) for the purchase of
the Company’s common stock any time prior to December 4, 2012 at an exercise
price of $0.025 per share.  The Warrant provides for cashless exercise
and contains full ratchet and other anti-dilution provisions.  The
Warrant is convertible into common stock at any time during the term of the
Warrant (provided that such exercise does not result in the holder and its
affiliates beneficially owning in excess of 4.99% (9.99% upon 61 days’ prior
written notice) of the issued and outstanding Common Stock.





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
recognized 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.





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.





9.
            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”), the 2008 Incentive Stock Plan
(the”2008 Plan”) and the 2009 Stock Incentive Plan (the “2009 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 plans also provide 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. The 2009 Plan is authorized to grant up to 20
million unit share awards.





Employee
stock compensation expense was ($74,050) for the twelve months ended December
31, 2009 compared to $840,464 for the twelve months ended December 31, 2008. The
negative compensation in 2009 reflects the impact of forfeitures of unvested
options for employees terminated in the first quarter of 2009. No option
grants were made in 2009.





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




2009
                                                            
                                                            
                                                            2008Shares
                                                            
                                                            
                                                            Weighted
                                                              Average
                                                              Exercise
                                                              Price
                                                            
                                                            
                                                            Weighted
                                                              Average
                                                              Remaining
                                                              Life-years
                                                            
                                                            
                                                            Shares
                                                            
                                                            
                                                            Weighted
                                                              Average
                                                              Exercise
                                                              Price
                                                            
                                                            
                                                            Weighted
                                                              Average
                                                              Remaining
                                                              Life-yearsOutstanding
      at beginning of year
                                                            
                                                            
                                                            22,033,166
                                                            
                                                            
                                                            $
                                                            0.19
                                                            
                                                            
                                                            
                                                            6.16
                                                            
                                                            
                                                            
                                                            18,389,000
                                                            
                                                            
                                                            $
                                                            0.20
                                                            
                                                            
                                                            
                                                            7.37Granted
      during the year
                                                            
                                                            
                                                            0
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            6,395,000
                                                            
                                                            
                                                            $
                                                            0.08Cancelled
      or forfeited
                                                            
                                                            
                                                            (9,399,833
                                                            )
                                                            
                                                            $
                                                            0.12
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            (2,750,834
                                                            )
                                                            
                                                            $
                                                            0.18Options
      outstanding at end of year
                                                            
                                                            
                                                            12,633,333
                                                            
                                                            
                                                            $
                                                            0.21
                                                            
                                                            
                                                            
                                                            6.01
                                                            
                                                            
                                                            
                                                            22,033,166
                                                            
                                                            
                                                            $
                                                            0.19
                                                            
                                                            
                                                            
                                                            6.15Options
      exercisable at end of year
                                                            
                                                            
                                                            12,633,333
                                                            
                                                            
                                                            $
                                                            0.21
                                                            
                                                            
                                                            
                                                            6.01
                                                            
                                                            
                                                            
                                                            21,116,498
                                                            
                                                            
                                                            $
                                                            0.19
                                                            
                                                            
                                                            
                                                            6.16Shares
      issued in current year as restricted grants
                                                            
                                                            
                                                            8,875,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            4,620,001Available
      for future grant
                                                            
                                                            
                                                            829,491,667
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            801,809,667




F-25




As of
December 31, 2009, the aggregate intrinsic value of the stock options
outstanding and exercisable was $0.  No incentive stock option awards were
exercised in 2009 or 2008.




During
2006 the Company made certain option grants for an aggregate of 90,000 common
stock options outside of the stock incentive plans described above. These grants
included 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, 2009 there was no
intrinsic value of these outstanding options.




The
Company uses the Black-Scholes pricing model to value options granted under the
Plans. The Black-Scholes model utilizes the undiscounted quoted market price of
the Company’s common stock and considers assumptions related to exercise price,
expected volatility, risk-free interest rate, and the weighted average expected
term of the stock option grants. Expected volatility assumptions utilized in the
model were based on volatility of the Company’s stock price, the risk-free rate
is derived from the U.S. treasury yield and the Company used a weighted average
expected term No option grants were made during the twelve month period ended
December 31, 2009. The Black-Scholes assumptions used for option grants made in
2008 are as follows: (a) risk free interest rate from 2.7 to 3.5% (b) expected
term from 2.5 to 5 years (c) expected stock volatility of 115% to 192% and (d)
expected dividends of zero. The weighted average grant date fair value of the
2008 grants was $0.07 per share.





10.     CREDITOR
CONCESSIONS





During
the year December 31, 2009, the Company entered into various agreements with
certain vendors to settle accounts payable that were outstanding for amounts
less than the liability that was recorded in the accompanying balance sheet. As
a result of agreements completed, liabilities of $141,941 were satisfied for
revised payment terms of $55,696, resulting in a gain on forgiveness of debt of
$86,245. These vendor concessions have been treated as gains in the period that
the underlying agreements were reached.





11.         COMMITMENTS AND LEASE
OBLIGATIONS




Lease
obligations


On
December 7, 2007, we entered into an agreement to lease approximately 9,200
square feet in Rochester, NY for laboratory space for a period beginning
December 17, 2007 and ending February 28, 2011. From the period starting March
1, 2008 until February 28, 2011 the rent shall be $3,300 per month. We have the
option to terminate this lease agreement at any time after March 1, 2010 with a
60 day notice. We also have the option of up to six (6) one year renewals of the
lease agreement under substantially the same terms except that the rent shall be
$3,400 per month during any such renewal period. Total rent expense for the
years ended December 31, 2009 and 2008 was $42,600 and $62,298 respectively.
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. There is no signed lease agreement and the cost of
rent for calendar year 2009 was $3,000.


F-26





Commitments


As more
fully described in Note 6, 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.





Presented
below are the minimum future payments under these license and lease agreements.
Past due amounts are included current liabilities at December 31, 2009 and are
included in the 2010 commitment.




For the period ending December 31:
                                
                                Patent
                                  License
                                
                                
                                Office andlab space
                                
                                
                                Total2010
                                
                                $
                                1,036,000
                                
                                
                                $
                                39,600
                                
                                
                                $
                                1,075,6002011
                                
                                
                                347,333
                                
                                
                                
                                6,600
                                
                                
                                
                                353,9332012
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —2013
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Thereafter
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Total
      contractual cash obligations
                                
                                $
                                1,383,333
                                
                                
                                $
                                46,200
                                
                                
                                $
                                1,429,533




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 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, 2009. The Company has retained counsel in connection with this demand and
continues to evaluate this demand notice and has responded to this demand. No
actions or probable settlement discussions between the parties have developed
since the filing of 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.





12.     SUBSEQUENT
EVENTS





Common
Stock Issued


Subsequent
to December 31, 2009 and prior to the filing of this report, the Company issued
15,615,400 common shares as follows:


·
            9,390,400
      shares to Platinum Long Term Growth IV in payment of interest on the 8%
      Senior Secured Convertible Notes


·
            6,225,000
      shares to twelve individuals in payment under consulting service and
      vendor agreements related to the first quarter of
  2010.




Letter of Intent
 Subsequent
to December 31, 2009, the Company entered into a letter of intent to acquire a
51% interest in a privately owned technology company that has historically had
minimal revenue.  The Company is in the process of negotiating definitive
agreements and expects to consummate the transaction in the second quarter of
2010.  The consideration will be shares of the Company’s common stock, as
well as warrants exercisable in the event that certain revenue targets are
reached.


F-27