----

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

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|          |                                                                                |                                        TABLE OF      CONTENTS |   |   |     |   |     |   |
|---------------|-------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|----------|--------|
|          |                                                                                |                                                                                                                                                                                                                                                        |   |   |     |   |     |   |   |   |
|          |                                                                                | PART      I                                                                                                                                                                                                                                                 |   |   |     |   |     |   | Page      No. |   |
| Item      1.  | Business                                                                            |                                                                                                                                                                                                                                                        |   |   |     |   |     |   | 3 |   |
| Item      2.  | Properties                                                                          |                                                                                                                                                                                                                                                        |   |   |     |   |     | 3      |   |
| Item      3.  | Legal      Proceedings                                                              |                                                                                                                                                                                                                                                        |   |   |     |   |     | 3      |   |
| Item      4.  | Submission      of Matters to a Vote of Security Holders                            |                                                                                                                                                                                                                                                        |   | 4      |     |
|          |                                                                                |                                                                                                                                                                                                                                                        |   |   |     |   |     |   |   |   |
|          |                                                                                | PART      II                                                                                                                                                                                                                                                |   |   |     |   |     |   |   |   |
| Item      5.  | Market      for Registrant’s Common Equity, Related StockholderMatters        |                                                                                                                                                                                                                                                        |   |   |
|          | and      Issuer Purchases of Equity Securities                                      |                                                                                                                                                                                                                                                        |   |   |     | 4      |     |
| Item      6.  | Selected      Financial Data                                                        |                                                                                                                                                                                                                                                        |   |   |     |   | 5        |   |
| Item      7.  | Management's      Discussion and Analysis of Financial Condition and Results        |                                                                                                                                                                                                                                                        |   |
|          | of      Operations                                                                  |                                                                                                                                                                                                                                                        |   |   |     |   |     | 6      |   |
| Item      7A. | Quantitative      and Qualitative Disclosures About Market Risk                     |                                                                                                                                                                                                                                                        |   |   |     |   |     | 9      |   |
| Item      8.  | Financial      Statements and Supplementary Data                                    |                                                                                                                                                                                                                                                        |   |   | 13       |   |
| Item      9.  | Changes      in and Disagreements with Accountants on Accounting and                |                                                                                                                                                                                                                                                        |   |   |
|          | Financial      Disclosure                                                           |                                                                                                                                                                                                                                                        |   |   |     |   |     | 13     |   |
| Itme      9A. | Controls      and Procedures                                                        |                                                                                                                                                                                                                                                        |   |   |     |   | 13       |   |
| Item      9B. | Other      Information                                                              |                                                                                                                                                                                                                                                        |   |   |     |   |     | 14     |   |
|          |                                                                                |                                                                                                                                                                                                                                                        |   |   |     |   |     |   |   |   |
|          |                                                                                | PART      III                                                                                                                                                                                                                                               |   |   |     |   |     |   |   |   |
| Item      10. | Directors,      Executive Officers and Corporate Governance                         |                                                                                                                                                                                                                                                        |   | 14     |     |
| Item      11. | Executive      Compensation                                                         |                                                                                                                                                                                                                                                        |   |   |     |   | 16       |   |
| Item      12. | Security      Ownership of Certain Beneficial Owners and Management and             |                                                                                                                                                                                                                                                        |   |   |
|          | Related      Stockholder Matters                                                    |                                                                                                                                                                                                                                                        |   |   |     |   | 17       |   |
| Item      13. | Certain      Relationships and Related Transactions, and Director      Independence | 18                                                                                                                                                                                                                                                          |   |
| Itme      14. | Principal      Accounting Fees and Services                                         |                                                                                                                                                                                                                                                        |   |   | 19       |
|          |                                                                                |                                                                                                                                                                                                                                                        |   |   |     |   |     |   |   |
|          |                                                                                | PART      IV                                                                                                                                                                                                                                                |   |   |     |   |     |   |   |
| Item      15. | Exhibits,      Financial Statement Schedules                                        |                                                                                                                                                                                                                                                        |   |   |  20 |
|          |                                                                                |                                                                                                                                                                                                                                                        |   |   |     |   |     |   |   |
| Signatures    |                                                                                |                                                                                                                                                                                                                                                        |   |   |     |   |  20 |

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| ·   | Our      product development efforts; |
|--------------------|---------------------------------------|

| ·   | The      commercialization of our products; |
|--------------------|---------------------------------------------|

| ·   | Anticipated      operating losses and capitalexpenditures; |
|--------------------|------------------------------------------------------------|

| ·   | Our      estimates regarding our needs for additional  financing; |
|--------------------|-------------------------------------------------------------------|

| ·   | Our      estimates for future revenues and profitability;  and |
|--------------------|----------------------------------------------------------------|

| ·   | Sources      of revenues and anticipated revenues, including contributions from      corporate collaborations, license agreements and other collaborative      efforts for the development and commercialization of our product      candidates, and the continued viability and duration of those agreements      and efforts. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                    | Common Stock |
|-------------------------|--------------|
| Quarter Ended           | High         | Low |
| 2007                    |         |   |
| March      31, 2007     | $48.00       | $27.00 |
| June      30, 2007      | $44.70       | $28.50 |
| September      30, 2007 | $33.30       | $18.30 |
| December      31, 2007  | $25.20       | $10.50 |
| 2008                    |         |   |
| March      31, 2008     | $14.40       | $6.30 |
| June      30, 2008      | $9.60        | $4.20 |
| September      30, 2008 | $6.90        | $1.50 |
| December      31, 2008  | $3.30        | $0.60 |

| 2009               |   |   |
|--------------------|--------|--------|
| March      9, 2009 | $1.50  | $0.25  |

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----

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|                                      |   | 2006        | 2007        | 2008       |
|-------------------------------------------|--------|-------------|-------------|------------|
|                                      |   |        |        |       |
| Net      Loss                             |   | $16,744,338 | $12,784,853 | $7,416,927 |
|                                      |   |        |        |       |
| Net      Revenues from Manufacturer Sales |   | $62,508     | $236,288    | $647,709   |

----

| 1.   |  Shift      in strategy – twofold:  (a) focus on sales to food manufacturers      and institutions, cease direct sales to consumers and cease producing      finished retail products; and (b) expanding our external sales force      through the establishment of relationships with domestic and international      ingredient distributors. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | Successful      results of this shift include increase in sales to both the number of food      manufacturers as well as to the volume of product being      sold.  We are currently selling to the following companies,      among many others: |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

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| ·   | developments      and resolution of current litigation that we are a party    to; |
|--------------------|-----------------------------------------------------------------------------------|

| ·   | our      cash resources and our ability to obtain additional    funding; |
|--------------------|--------------------------------------------------------------------------|

| ·   | announcements      of private or public sales ofsecurities |
|--------------------|------------------------------------------------------------|

| ·   | announcements      by us or a competitor of business development or exhibition      projects; |
|--------------------|-----------------------------------------------------------------------------------------------|

| ·   | our      entering into or terminating strategic business    relationships; |
|--------------------|----------------------------------------------------------------------------|

| ·   | changes      in government regulations; |
|--------------------|-----------------------------------------|

| ·   | changes      in our revenue or expense levels; |
|--------------------|------------------------------------------------|

| ·   | fluctuations      in operating results and general economic and other external market      factors |
|--------------------|----------------------------------------------------------------------------------------------------|

| ·   | negative      reports on us by security analysts; |
|--------------------|---------------------------------------------------|

| ·   | announcements      of new products or technologies by us or our  competitors. |
|--------------------|-------------------------------------------------------------------------------|

----

| 1.   | As      of December 31, 2008, we did not maintain effective controls over the      control environment.  Specifically we have not developed and      effectively communicated to our employees our accounting policies and      procedures.  This has resulted in inconsistent      practices.   Since these entity level programs have a pervasive      effect across the organization, management has determined that these      circumstances constitute a materialweakness. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | As      of December 31, 2008, we did not maintain effective controls over      financial statement disclosure. Specifically, controls were not designed      and in place to ensure that all disclosures required were originally      addressed in our financial statements.   Accordingly, management      has determined that this control deficiency constitutes a material      weakness. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | As      of December 31, 2008, we did not maintain effective controls over      financial reporting which resulted in the restatement of several      previously filed financial statements.  Specifically, controls      were not designed and in place to ensure that the financial impact of      certain complex equity transactions were appropriately and correctly      reported.  Furthermore, specific controls were not designed and      in place to ensure that the depreciation of leasehold improvements was      calculated and reported correctly. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| AGE    |   | NAME                      |   |   | POSITION                                                |
|--------|--------|---------------------------|--------|--------|---------------------------------------------------------|
|   |   |                      |   |   |                                                    |
| 52     |   | Steve      J. Cohen       |   |   | Director      and President                             |
|   |   |                      |   |   |                                                    |
| 56     |   | Michael      J. Theriault |   |   | Chief      Operating Officer                            |
|   |   |                      |   |   | until      August 18, 2008                              |
|   |   |                      |   |   |                                                    |
| 66     |   | Triveni      P. Shukla    |   |   | Director      and Executive VP                          |
|   |   |                      |   |   |                                                    |
| 38     |   | Brian      Chaiken        |   |   | Chief      Financial Officer                            |
|   |   |                      |   |   |                                                    |
| 59     |   | Mark      Hershhorn       |   |   | Director                                                |
|   |   |                      |   |   |                                                    |
| 51     |   | Brian      Israel         |   |   | Director                                                |
|   |   |                      |   |   |                                                    |
| 63     |   | Sheldon      Drobny       |   |   | Director                                                |
|   |   |                      |   |   | elected      December 30, 2008; resigned March 21, 2009 |
| 55     |   | Morris      Garfinkle     |   |   | Director,      appointed March 25, 2009                 |
|   |   |                      |   |   |                                                    |
| 51     |   | Michael      Donahue      |   |   | Director      from December 14, 2007                    |
|   |   |                      |   |   | to      December 30, 2008                               |
|   |   |                      |   |   |                                                    |
| 56     |   | Randal      Hoff          |   |   | Director      from December 19, 2007                    |
|   |   |                      |   |   | to      December 30, 2008                               |
|   |   |                      |   |   |                                                    |
| 61     |   | Harvey      Rosenfeld     |   |   | Director      from December 19, 2007                    |
|   |   |                      |   |   | to      December 30, 2008                               |

----

----

|                         |   |     |                 |                 |                 |                  |           | AWARDS      SHARES |
|------------------------------|--------|----------|----------------------|----------------------|----------------------|-----------------------|----------------|--------------------|
|                         |   |     |                 |                 |                 |                  |           | UNDERLYING         |
| NAME      AND PRINCIPAL      |   |     |                 | OTHER                |                 | RESTRICTED      STOCK |
| POSITION                     |   | YEAR     | SALARY               | BONUS                | COMPENSATION         | OPTION AWARDS         |
|                         |   |     |                 |                 |                 |                  |           |               |
| Steve      J. Cohen          |   |     |                 |                 |                 |                  |           |
| Director      and President  | 2008   | $143,367 |    -- |   --       |                 |   --        |
|                         |   |     | 2007                 | $131,175             |    -- |   --        |           |   --     |
|                         |   |     |                 |                 |                 |                  |           |               |
| Trveni      Shukla           |   |     |                 |                 |                 |                  |           |
| Director      and Exec. VP   | 2008   | $137,100 |    -- |   --       |                 |   --        |
|                         |   |     | 2007                 | $119,400             |    -- |   --        |           |   --     |
|                         |   |     |                 |                 |                 |                  |           |               |
| Brian      Chaiken           |   | 2008     | $113,000             |    -- |   --       |                  |   -- |
| Chief      Financial Officer | 2007   | $107,400 |    -- |   --       |                 |   --        |
|                         |   |     |                 |                 |                 |                  |           |               |
| Gregory      J. Halpern      |   |     |                 |                 |                 |                  |           |
| Former      Director and CEO | 2007   | $119,099 |    -- |   --       |                 |   --        |
|                         |   |     |                 |                 |                 |                  |           |               |
| Alan      Orlowsky           |   |     |                 |                 |                 |                  |           |
| Former      Director and CFO | 2007   | $106,608 |    -- |   --       |                 |   --        |

----

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|                                                                                                                                                              |   |    |               | NUMBER      OF     |   | PERCENTAGE      OF |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------------------|--------------------|--------|--------------------|
| NAME      OF                                                                                                                                                      |   |    | SHARES             |               |   | SHARES             |
| BENEFICIAL OWNER                                                                                                                                                  |   |    | BENEFICIALLY OWNED | BENEFECIALLY OWNED |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| BENEFICIAL      OWNERS                                                                                                                                            |   |    |               |               |   |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| Nurieel      Akhamzadeh (1)                                                                                                                                       |   | 136,126 |               |               | 5.06%  |
| 4020      Moorpark Ave., #117                                                                                                                                     |   |    |               |               |   |
| San      Jose, CA 95117                                                                                                                                           |   |    |               |               |   |               |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| FORMER      DIRECTORS AND EXECUTIVE OFFICERS                                                                                                                      |   |    |               |               |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| Gregory      J. Halpern (2)                                                                                                                                       |   | 345,532 |               |               | 12.9%  |
| Alan      G. Orlowsky (3)                                                                                                                                         |   | 44,167  |               |               | 1.64%  |
| Michael      Donahue (4)                                                                                                                                          |   | 9,999   |               |               | 0.37%  |
| Randal      Hoff                                                                                                                                                  |   |    | 6,666              |               |   | 0.25%              |
| Harvey      Rosenfeld                                                                                                                                             |   |    | 22,795             |               |   | 0.85%              |
| Sheldon      Drobny (5)                                                                                                                                           |   |    | 125,020            |               |   | 4.65%              |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| CURRENT      DIRECTORS AND EXECUTIVE OFFICERS                                                                                                                     |   |    |               |               |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| Steve      J. Cohen (6)                                                                                                                                           |   |    | 210,003            |               |   | 7.81%              |
| Triveni      Shukla (7)                                                                                                                                           |   |    | 210,000            |               |   | 7.81%              |
| Mark      Hershhorn (8)                                                                                                                                           |   |    | 68,556             |               |   | 2.55%              |
| Brian      Israel (9)                                                                                                                                             |   |    | 43,332             |               |   | 1.61%              |
| Morris      Garfinkle                                                                                                                                             |   |    | 30,000             |               |   | 1.12%              |
| Brian      Chaiken (10)                                                                                                                                           |   |    | 210,000            |               |   | 7.81%              |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| Total      of All Current Directors and Executive Officers                                                                                                        |   |    |               |
|                                                                                                                                                              |   |    |               | 771,891            |   |               | 28.72% |
|                                                                                                                                                              |   |    |               |               |   |               |   |
|                                                                                                                                                              |   |    |               |               |   |               |   |
| (1)      Numbers based on NOBO list dated February 5, 2009; includes 83,333      warrants                                                                         |
| (2)      Numbers based on Form 4 filed on June 20, 2008 with the SEC, less shares      returned to Company pursuant to settlement reached September 26,      2008 |   |    |
| (3)      All 44,167 are options to purchase shares of common stock                                                                                                |   |    |
| (4)      Includes 3,333 options to purchase  shares of common      stock                                                                                |   |    |
| (5)      Numbers based on NOBO list dated February 5, 2009; includes ownership of      note convertible into 52,083 shares and 47,397 warrants                    |
| (6)      Includes 210,000 options to purchase shares of commonstock                                                                                               |   |    |
| (7)      Includes 210,000 options to purchase shares of commonstock                                                                                               |   |    |
| (8)      Includes ownership of notes and warrants convertible into 26,890 shares of      common stock                                                             |
| (9)      Includes 6,666 options to purchase shares of common stock                                                                                                |   |    |
| (10)      Includes 210,000 options to purchase shares of commonstock                                                                                              |   |    |

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| 3(i) | Articles      of Incorporation of Z Trim Holdings, Inc. (filed as Exhibit 2.1 to the      Company's Form 10-SB filed on August 21, 2000, and as Exhibit 3.3 to the      Company's Form 10-QSB filed on August 16, 2004, and incorporated herein by      reference). |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3(ii) | Bylaws      of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the      Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the      Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the      Company’s Form 8-K filed on November 16, 2007, and incorporated herein by      reference). |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.1 | Specimen      Certificate for common stock (filed as Exhibit 3.1 to the Company's Form      10-SB filed on August 21, 2000, and incorporated herein by      reference). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.2 | Form      of Subscription Agreement (filed as Exhibit 4.1 to the Company's Form 8-K      filed on March 30, 2006 and incorporated herein by    reference). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.3 | Form      of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company's      Form 8-K filed on March 30, 2006 and incorporated herein by      reference). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.4 | Form      of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's      Form 8-K filed on March 30, 2006 and incorporated herein by      reference). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.5 | Form      of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form      10-KSB filed on April 2, 2007 and incorporated herein by      reference). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.6 | Form      of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the Company’s      Form 10-KSB filed on April 2, 2007 and incorporated herein by      reference). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.7 | Form      of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s      Form 10-KSB filed on April 2, 2007 and incorporated herein by      reference). |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Steve      Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form      10-QSB for the quarter ending June 20, 2006 and incorporated herein by      reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Brian      Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit      10.2 to the Company’s Form 10-KSB filed on April 14, 2008 and incorporated      herein by reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Michael      J. Theriault Employment Agreement (filed as Exhibit 10.2 to the Company’s      Form 10-KSB filed on April 2, 2007 and incorporated herein by      reference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.4 | Z      Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the      Z Trim's Proxy Statement for its Annual Meeting conducted on June 16, 2004      and approved by its Shareholders on that date and incorporated herein by      reference). |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.5 | Industrial      Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated      May 20, 1999 (filed as Exhibit 6.7 the Company’s Registration Statement on      Form 10-SB and incorporated herein by  reference). |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.6 | Industrial      Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated      June 18, 1999 (filed as Exhibit 6.8 to Z Trim's Registration Statement on      Form 10-SB and incorporated herein by  reference). |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.7 | Assignment      of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and      Brookhaven Science Associates dated March 26 2003 (filed as Exhibit 10.14      to Z Trim's Form 10-QSB for the quarter ending September 30, 2003 and      incorporated herein by reference). |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.8 | Assignment      of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and      University of Illinois dated July 9, 2003 (filed as Exhibit 10.15 to Z      Trim's Form 10-QSB for  the quarter ending September 30, 2003      and incorporated herein byreference). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.9 | Assignment      of License Agreement between Z Trim Holdings, Inc. and Brookhaven Science      Associates dated July 22, 2003 (filed as Exhibit 10.16 to Z Trim's Form      10-QSB for the quarter ending September 30, 2003 and incorporated herein      by reference). |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 23.1* | Consent      of Blackman Kallick, LLP. |
|-------|----------------------------------------|

| 23.2* | Consent      of M&K CPAs, LLC. |
|-------|------------------------------------|

| 31.1* | Statement      Under Oath of Principal Executive Officer of the Company pursuant to      Section 302 of Sarbanes-Oxley Act of2002. |
|-------|------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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| /s/      M&K CPAs,PLLCHouston,      TexasApril      14, 2009 |
|------------------------------------------------------------------|

----

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|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                                                        |   |                                                                                                                                                                |   |                                                                                                                                                                |
| CONSOLIDATED      BALANCE SHEETS                                                                   |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| DECEMBER 31, 2008 and 2007                                                                         |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| ASSETS                                                                                             |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   | 12/31/2008                                                                                                                                                          |   | 12/31/2007                                                                                                                                                          |
|                                                                                               |   |                                                                                                                                                                |   | (Restated)                                                                                                                                                          |
| Current      Assets                                                                                |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Cash      and cash equivalents                                                                     |   |  $            592,696                                                                              |   |  $         2,436,581                                                                                              |
| Accounts      receivable (net of allowance of $10,067 in 2008                                      |   |                                                                                                                                                                |   |
| and  $1,005      in 2007)                                                                |   | 206,231                                                                                                                                                             |   |                     7,522                                       |
| Employees'  Advances                                                                     |   |                            - |   |                     2,624                                       |
| Inventory                                                                                          |   |                 182,971                                                             |   |                 592,666                                                             |
| Prepaid      expenses and other assets                                                             |   |                   86,445                                                  |   |                 149,973                                                             |
| Net      assets of discontinued operations                                                         |   |                            - |   |                         485                 |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Total      current assets                                                                          |   |             1,068,343                                                                                   |   |             3,189,851                                                                                   |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Property      and equipment, net                                                                   |   |             4,061,436                                                                                   |   |             4,990,186                                                                                   |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Long      Term Assets                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Deposit      on Fixed Asset                                                                        |   |                 240,000                                                             |   |                            - |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Other      Assets                                                                                  |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Intangible      assets, net                                                                        |   |                            - |   |                 140,001                                                             |
|         Prepaid      Loan  Cost - Long Term, Net |   |                 880,650                                                             |   |                            - |
| Deposits                                                                                           |   |                   14,453                                                  |   |                   14,453                                                  |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Total      other assets                                                                            |   |                 895,103                                                             |   |                 154,454                                                             |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |
| TOTAL      ASSETS                                                                                  |   |  $         6,264,882                                                                                              |   |  $         8,334,491                                                                                              |
|                                                                                               |   |                                                                                                                                                                |   |                                                                                                                                                                |

----

| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                                                                       |   |                                                                                                                                                                |   |                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED      BALANCE SHEETS                                                                                  |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| DECEMBER 31, 2008 and 2007                                                                                        |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                         |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   | 12/31/2008                                                                                                                                                          |   | 12/31/2007                                                                                                                                                          |
|                                                                                                              |   |                                                                                                                                                                |   | (Restated)                                                                                                                                                          |
| Current      Liabilities                                                                                          |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Accounts      payable                                                                                             |   |  $            544,325                                                                              |   |  $            709,029                                                                              |
| Accrued      expenses and other                                                                                   |   |                 335,718                                                             |   |             2,039,308                                                                                   |
| Other      Liabilities                                                                                            |   |                            - |   |                 150,000                                                             |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Total      Current Liabilities                                                                                    |   |                 880,043                                                             |   |             2,898,337                                                                                   |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|              Convertible      Notes Payable, Net |   |             2,559,736                                                                                   |   |                            - |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Total      Liabilities                                                                                            |   |             3,439,779                                                                                   |   |             2,898,337                                                                                   |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Stockholders'      Equity                                                                                         |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Common      stock, $0.00005 par value; authorized 200,000,000                                                     |   |                                                                                                                                                                |   |
| shares;      issued and outstanding 2,597,879 and                                                                 |   |                                                                                                                                                                |   |                                                                                                                                                                |
| 2,401,879      shares, respectively                                                                               |   |                     3,904                                       |   |                     3,600                                       |
|   Common      stock to be issued                                                                        |   |                            - |   |                            - |
| Additional      paid-in capital                                                                                   |   |           74,484,074                                                                                              |   |           69,603,639                                                                                              |
| Accumulated      deficit                                                                                          |   |         (71,662,875)                                                                                                        |   |         (64,171,085)                                                                                                        |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| Total      Stockholders' Equity                                                                                   |   |             2,825,103                                                                                   |   |             5,436,154                                                                                   |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |
| TOTAL      LIABILITIES AND STOCKHOLDERS' EQUITY                                                                   |   |  $         6,264,882                                                                                              |   |  $         8,334,491                                                                                              |
|                                                                                                              |   |                                                                                                                                                                |   |                                                                                                                                                                |

----

| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                  |                                                                                                                                                    |   |                                                                                                                                                    |
|--------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| CONSOLIDATED      STATEMENTS OF OPERATIONS                   |                                                                                                                                                    |   |                                                                                                                                                    |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| FOR      THE YEARS ENDED DECEMBER 31                         | 2008                                                                                                                                                    |   | 2007                                                                                                                                                    |
|                                                         |                                                                                                                                                    |   | (Restated)                                                                                                                                              |
| REVENUES:                                                    |                                                                                                                                                    |   |                                                                                                                                                    |
|   Products                                         |  $            720,899                                                                  |   |  $            616,799                                                                  |
|   Services                                         |                          - |   |                         49      |
|     Total      revenues                  |                720,899                                                       |   |                616,848                                                       |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| COST      OF REVENUES:                                       |                                                                                                                                                    |   |                                                                                                                                                    |
|   Products                                         |             2,429,620                                                                       |   |             3,085,328                                                                       |
|     Total      cost of revenues          |             2,429,620                                                                       |   |             3,085,328                                                                       |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| GROSS      MARGIN                                            |           (1,708,721)                                                                                 |   |           (2,468,480)                                                                                 |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| OPERATING      EXPENSES:                                     |                                                                                                                                                    |   |                                                                                                                                                    |
| Selling,      general and administrative                     |             4,245,405                                                                       |   |             9,362,791                                                                       |
| Impairment      of intangible assets                         |                136,668                                                       |   |                          - |
| Amortization      of intangible assets                       |                    3,333                                 |   |                  13,333                                            |
| Loss(Gain)      on asset disposals, net                      |                (74,987)                                                      |   |                107,905                                                       |
|     Total      operating expenses        |             4,310,419                                                                       |   |             9,484,029                                                                       |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| OPERATING      LOSS                                          |           (6,019,140)                                                                                 |   |         (11,952,509)                                                                                            |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| OTHER      INCOME (EXPENSES):                                |                                                                                                                                                    |   |                                                                                                                                                    |
| Rental      and other income                                 |                  24,451                                            |   |                  44,105                                            |
| Interest      income                                         |                  20,526                                            |   |                173,256                                                       |
| Interest      expense                                        |              (670,562)                                                                 |   |                  (3,570)                                           |
| Recovery      of (provision for) loan                        |                          - |   |                300,000                                                       |
| Settlement      (loss) gain                                  |              (772,202)                                                                 |   |           (1,360,981)                                                                                 |
|     Total      other income (expenses)   |           (1,397,787)                                                                                 |   |              (847,190)                                                                 |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| LOSS      FROM CONTINUING OPERATIONS                         |  $       (7,416,927)                                                                                            |   |  $     (12,799,699)                                                                                                       |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| DISCONTINUED      OPERATIONS                                 |                                                                                                                                                    |   |                                                                                                                                                    |
| Income      from discontinued operations                     |                                                                                                                                                    |   |                                                                                                                                                    |
| (net      of applicable tax of $0 in 2008 and 2007)          |  $                      -            |   |  $              14,846                                                       |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| NET      LOSS                                                |  $       (7,416,927)                                                                                            |   |  $     (12,784,853)                                                                                                       |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| Deemed      Dividend                                         | (74,863)                                                                                                                                                |   |                                                                                                                                                    |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| NET      LOSS  ATTRIBUTABLE TO COMMON STOCKHOLDERS |  $       (7,491,790)                                                                                            |   |  $     (12,784,853)                                                                                                       |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| NET      LOSS PER SHARE - BASIC AND DILUTED                  |  $                (2.95)                                           |   |  $                (5.44)                                           |
|                                                         |                                                                                                                                                    |   |                                                                                                                                                    |
| Weighted      Average Number of Shares Basic and Diluted     |             2,540,032                                                                       |   |           2,348,474                                                                                   |

----

| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                      |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |
|------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
| CONSOLIDATED      STATEMENTS OF STOCKHOLDERS' EQUITY             |                                                                                                                            |                                                                                                                                        |                                                                                                                |
|                                                             |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |   |   |
|                                                             |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |   |   |
|                                                             |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |   |   |
|                                                             | Shares      of                                                                                                                  |                                                                                                                                        | Additional                                                                                                          |                                                                                               |   |   |
|                                                             | Common                                                                                                                          | Common                                                                                                                                      | Paid-In                                                                                                             | Unamortized                                                                                        | Accumulated |   |
|                                                             | Stock                                                                                                                           | Stock                                                                                                                                       | Capital                                                                                                             | Expenses                                                                                           | Deficit | Total |
| Balance      at December 31, 2006                                |          2,066,149                                                                 |  $             3,096                                                  |  $      57,520,009                                                                                             |  $    (113,339)                                                           |  $  (51,386,232) |  $   6,023,534 |
|                                                             |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |   |   |
|   Stock      issued for services                       |                    205           |                        0 |              6,765                                 |                                                                                               |   |              6,765 |
|   Stock      and warrants issued for cash, net of fees |             296,000                                                 |                    444                       |       7,837,556                                                                       |                                                                                               |   |       7,838,000 |
|   Stock      issued for settlement                     |                 9,500                           |                      14            |            29,499                                            |                                                                                               |   |            29,513 |
|   Exercise      of stock warrants and options          |               33,805                                      |                      51            |          872,231                                                       |                                                                                               |   |          872,282 |
|   Cashless      exercise of warrants                   |                    386           |                        1 |                    - |                                                                                               |   |                     1 |
|   Stock      options issued expense                    |                                                                                                                            |                                                                                                                                        |       3,487,579                                                                       |                                                                                               |   |       3,487,579 |
|   Amortization      of services                        |                                                                                                                            |                                                                                                                                        |                                                                                                                |         113,339                                            |   |          113,339 |
|   Retired      shares                                  |               (4,167)                                     |                      (6)           |                                                                                                                |                                                                                               |   |                   (6) |
|   Retired      shares in process                       |                      - |                                                                                                                                        |        (150,000)                                                                 |                                                                                               |   |        (150,000) |
|   Net      loss                                        |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |      (12,784,853) |   (12,784,853) |
|                                                             |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |   |   |
| Balance      at December 31, 2007 (Restated)                     |          2,401,878                                                                 |  $             3,600                                                  |  $      69,603,639                                                                                             |  $               - |  $  (64,171,085) |  $   5,436,154 |
|                                                             |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |   |   |
|   Common      Stock issued for settlement loss         |             208,167                                                 | 312                                                                                                                                         |       1,353,388                                                                       |                                                                                               |   |       1,353,700 |
|   Stock      issued for directors fees                 |               33,333                                      | 50                                                                                                                                          |          229,950                                                       |                                                                                               |   |          230,000 |
|   Cancellation      of retired shares in process       |                                                                                                                            | 10                                                                                                                                          | 149,990                                                      |                                                                                               |   |          150,000 |
|   Rescinded      Shares                                | (45,500)                                                                                | (68)                                                                                                                                        |          (74,432)                                                      |                                                                                               |   |          (74,500) |
|   Warrants      issued for settlement loss             |                                                                                                                            |                                                                                                                                        |          524,665                                                       |                                                                                               |   |          524,665 |
|   Warrants      issued for placement fees              |                                                                                                                            |                                                                                                                                        |          309,547                                                       |                                                                                               |   |          309,547 |
|    Discount      on convertible debt              |                                                                                                                            |                                                                                                                                        |       2,247,784                                                                       |                                                                                               |   |       2,247,784 |
|    Deemed      Dividend                           |                                                                                                                            |                                                                                                                                        |            74,863                                            |                                                                                               |             (74,863) |                    - |
|    Stock      Based Compensation                  |                                                                                                                            |                                                                                                                                        |            40,613                                            |                                                                                               |   |            40,613 |
|    Options      issued for compensation           |                                                                                                                            |                                                                                                                                        |            24,067                                            |                                                                                               |   |            24,067 |
|    Net      loss                                  |                                                                                                                            |                                                                                                                                        |                                                                                                                |                                                                                               |        (7,416,927) |     (7,416,927) |
| Balance      at December 31, 2008                                |          2,597,878                                                                 |                 3,904                                       |  $      74,484,074                                                                                             |  $               - |  $  (71,662,875) |  $   2,825,103 |

----

|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                                                                    |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CONSOLIDATED      STATEMENTS OF CASH FLOWS                                                                     |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| FOR      THE YEARS ENDED DECEMBER 31                                                                           |  2008                                                                                                                                                                                              |   |  2007                                                                                                                                                                                              |
|                                                                                                           |                                                                                                                                                                                                    |   |  (Restated)                                                                                                                                                                                        |
| CASH      FLOWS FROM OPERATING ACTIVITIES                                                                      |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Net      loss                                                                                                  |                   (7,416,927)                                                                                 |   |                 (12,784,853)                                                                                            |
| Less:      Income from discontinued operations, net of tax                                                     |                                  - |   |                          14,846                                            |
| Adjustments      to reconcile loss from continuing operations to                                               |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| net      cash used in operating activities:                                                                    |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Depreciation      and amortization                                                                             |                     1,228,335                                                                       |   | 1,005,665                                                                                                                                                                                               |
| Loss      on asset disposal                                                                                    |                                  - |   |                        107,905                                                       |
| Provision      for bad debt                                                                                    |                                  - |   |                            1,005                                 |
| Issuance      of common stock and warrants for services                                                        |                                  - |   |                            6,765                                 |
|  Amortization      of services                                                                            |                                  - |   |                        113,339                                                       |
| Stock      based compensation                                                                                  |                          40,613                                            |   |                     3,487,579                                                                       |
| Shares      issued for settlemnet loss                                                                         |                        513,700                                                       |   |                                  - |
| Shares      issued for director fees                                                                           |                        230,000                                                       |   |                                  - |
| Warrants      issued for settlement los                                                                        |                          68,519                                            |   |                                  - |
| BCF      Amortization                                                                                          |                        350,520                                                       |   |                                  - |
| Recovery      of loan loss                                                                                     |                                  - |   |                      (300,000)                                                                 |
| Impairment      of intangible assets                                                                           |                        136,668                                                       |   |                                  - |
| Stock      and warrant settlements                                                                             |                                  - |   |                     1,357,373                                                                       |
| Changes      in operating assets and liabilities                                                               |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Accounts      receivable                                                                                       |                      (198,708)                                                                 |   |                            3,418                                 |
| Inventory                                                                                                      |                        409,695                                                       |   |                      (388,130)                                                                 |
| Prepaid      expenses and other assets                                                                         |                          66,637                                            |   |                        (58,180)                                                      |
| Deposits                                                                                                       |                                  - |   |                          (3,350)                                           |
| Increase/(Decrease)      in:                                                                                   |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Accounts      payable and accrued expenses                                                                     |                      (548,082)                                                                 |   |                        902,284                                                       |
| CASH      USED FOR OPERATING ACTIVITIES                                                                        |                   (5,119,030)                                                                                 |   |                   (6,564,026)                                                                                 |
|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM INVESTING ACTIVITIES                                                                      |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Purchase      of Fixed Assets                                                                                  |                      (340,820)                                                                 |   |                      (784,685)                                                                 |
| Proceeds      from asset disposals                                                                             |                                  - |   |                          67,475                                            |
| CASH      USED FOR INVESTING ACTIVITIES                                                                        |                      (340,820)                                                                 |   |                      (717,210)                                                                 |
|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      FLOWS FROM FINANCING ACTIVITES                                                                       |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Loan      Costs                                                                                                |                      (766,535)                                                                 |   |                                  - |
| Net      proceeds from sales of stock                                                                          |                                  - |   |                     7,838,001                                                                       |
| Rescinded      Shares                                                                                          |                        (74,499)                                                      |   |                                  - |
|  Borrowing      on Debt                                                                                   |                     4,457,000                                                                       |   |                                  - |
| Exercise      of options and warrants                                                                          |                                  - |   |                        872,290                                                       |
| Payments      on capital lease obligations                                                                     |                                  - |   |                        (14,074)                                                      |
| Proceeds      from notes receivable for stock, net                                                             |                                  - |   |                        300,000                                                       |
|   Decrease      in note receivable for stock                                                         |                                  - |   |                                  - |
| CASH      PROVIDED BY FINANCING ACTIVITIES                                                                     |                     3,615,966                                                                       |   |                     8,996,217                                                                       |
| NET      (DECREASE)INCREASE IN CASH                                                                            |                   (1,843,884)                                                                                 |   |                     1,714,981                                                                       |
|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Net      cash and cash equivalents provided (used) by discontinued      operations                             |                                  - |   |                                  - |
|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Operating      cash from discontinued operations                                                               |                                  - |   |                          46,557                                            |
|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| CASH      AT BEGINNING OF YEAR                                                                                 |                     2,436,581                                                                       |   |                        675,043                                                       |
| CASH      AT YEAR END                                                                                          |                        592,696                                                       |   |                     2,436,581                                                                       |
| Supplemental      Disclosures of Cash Flow Information:                                                        |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
| Interest      paid                                                                                             |                                                                                                                                                                                                    |   |                            3,570                                 |
| Issuance      of common stock and warrants for services                                                        |                                                                                                                                                                                                    |   |                            6,765                                 |
| Stock      subscription payable                                                                                |                                  - |   |                        150,000                                                       |
|   Issuance      of common stock  for issuance of stock                                     |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |
|         Deferred      Loan Costs                                       |                        309,547                                                       |   |                                                                                                                                                                                                    |
|         Discount      on Convertible Debentures                        |                     2,247,784                                                                       |   |                                                                                                                                                                                                    |
|         Warrants      issued for settlement loss-Zaghi                 |                        368,822                                                       |   |                                                                                                                                                                                                    |
|         Common      Stock issued for settlement-Zaghi                  |                        839,850                                                       |   |                                                                                                                                                                                                    |
|          Warrants      issued for settlement loss-Basic Investors |                          87,324                                            |   |                                                                                                                                                                                                    |
|          Common      Stock issued for Stock payable               |                        149,990                                                       |   |                                                                                                                                                                                                    |
|           Deemed      Dividend                               |                          74,863                                            |   |                                                                                                                                                                                                    |
|           Options      issued for compensation               |                          24,067                                            |   |                                                                                                                                                                                                    |
|                                                                                                           |                                                                                                                                                                                                    |   |                                                                                                                                                                                                    |

----

----

----

----

----

|                             | 12/31/2008                                                                    |   | 12/31/2007                                                                                                          |
|----------------------------------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| Raw      materials               |  $      35,471                             |   |  $      30,402                                                                   |
| Packaging                        |             1,114 |   |          67,422                                                        |
| Work-in-process                  |             1,879 |   |             4,850                                       |
| Finished      goods              |        133,649                             |   |        489,992                                                                   |
| Other      Inventory             |          10,858                  |   |                    - |
|   Total      inventory |  $    182,971                                        |   |  $    592,666                                                                              |
|                             |                                                                          |   |                                                                                                                |
|                             |                                                                          |   |                                                                                                                |
|                             |                                                                          |   |                                                                                                                |

|                                             | 12/31/2008   |   | 12/31/2007   |
|--------------------------------------------------|--------------|--------|--------------|
| Production,      engineering and other equipment | $5,301,635   |   | $5,213,084   |
| Leasehold      improvements                      | $2,801,053   |   | $2,798,971   |
| Office      equipment and furniture              | $598,860     |   | $591,384     |
| Computer      equipment and related software     | $140,245     |   | $185,603     |
| Construction      in process - Equipment         | $53,361      |   | $62,701      |
| Construction      in process - Leasehold Impr    | $18,855      |   | $2,159       |
|                                             | $8,914,009   |   | $8,853,902   |
| Accumulated      depreciation                    | ($4,852,573) |   | ($3,863,716) |
| Property      and equipment, net                 | $4,061,436   |   | $4,990,186   |

| License      Rights to        |   |                                                                                               |   |                                                                                          |
|-------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|  Website                 |   | 2008                                                                                               |   | 2007                                                                                          |
|                          |   |                                                                                               |   |                                                                                          |
| Gross      Carrying Amount    |   |  $      200,000                                                 |   |  $         200,000                          |
|                          |   |                                                                                               |   |                                                                                          |
| Accumulated      Amortization |   |  $    (200,000)                                                           |   |          $          (59,999) |
|                          |   |                                                                                               |   |                                                                                          |
| Net                           |   | $                - |   |  $         140,001                          |
|                          |   |                                                                                               |   |                                                                                          |

----

|                                    | 12/31/2008                                                                                                                             |   | 12/31/2007                                                                                                          |
|-----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
| Accrued      legal                      |  $                     - |   |  $      458,145                                                                  |
| Accrued      payroll and taxes          |                 31,795                                 |   |            66,102                                            |
| Accrued      settlements                |               100,000                                            |   |       1,327,873                                                                       |
| Accrued      Interest                   |               124,090                                            |   |                    - |
| Accrued      expenses and other         |                 79,873                                 |   |          187,188                                                       |
| Total      accrued expenses & other |  $           335,718                                                       |   |  $   2,039,308                                                                                  |

----

----

----

|                                                                     |   | Year      Ended                                                           |   |                       Year Ended  |
|--------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                     |   | December      31                                                          |   |                            December 31 |
|                                                                     |   | 2008                                                                      |   | 2007                                                                                                                                            |
| Numerator:                                                               |   |                                                                      |   |                                                                                                                                            |
| Net      Loss From Continuing Operations                                 |   |  $      (7,416,927)                                                  |   |  $      (12,799,699)                                                                                                                       |
| Deemed  Dividend/      Income from discontinuing operations    |   |  $      (74,863)                       |   |  $         14,846                                                                             |
| Net      Loss  Attributable to Common Stockholders             |   |  $      (7,491,790)                                                  |   |  $      (12,784,853)                                                                                                                       |
| Denominator:                                                             |   |                                                                      |   |                                                                                                                                            |
|                                                                     |   |                                                                      |   |                                                                                                                                            |
| Weighted      average number of shares outstanding                       |   |       2,540,032                             |   |        2,348,474                                                                                             |
|                                                                     |   |                                                                      |   |                                                                                                                                            |
| Net      loss per share from continuing operations- basic and    diluted |   |  $          (2.92) |   |  $            (5.45)                                                           |
| Income      per share from discontinued operations - basic and diluted   |   |  $          (0.03) |   |  $             0.01                                                       |
| Net      loss per share-basic and diluted                                |   |  $          (2.95) |   |  $            (5.44)                                                           |

----

|                                  |   | 2008                                                                                                                      |                                                                                         |   | 2007                      |                                                               |
|---------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|--------|---------------------------|--------------------------------------------------------------------|
|                                  |   |                                                                                                                      | Weghted                                                                                      |   |                      | Weghted                                                            |
|                                  |   | Number                                                                                                                    | Average                                                                                      |   | Number                    | Average                                                            |
|                                  |   | of                                                                                                                        | Exercise                                                                                     |   | of                        | Exercise                                                           |
|                                  |   | Shares                                                                                                                    | Price                                                                                        |   | Shares                    | Price                                                              |
| Outstanding      at beginning of year |   |         553,184                                                                   |  $         31.20                           |   | 676,192                   |  $         29.70 |
| Granted                               |   |             3,333                                             |  $           8.10                |   | 84,400                    |  $         35.70 |
| Exercised                             |   |                     - | $               - |   | (15,111)                  |  $         23.10 |
| Expired      and Cancelled            |   |       (125,435)                                                                             |  $         27.71                           |   | (192,297)                 |  $         28.80 |
| Outstanding      at end of period     |   |         431,082                                                                   |  $         32.04                           |   |    553,184 |  $         31.20 |
|                                  |   |                                                                                                                      |                                                                                         |   |                      |                                                               |
| Exercisable      at end of period     |   |         429,415                                                                   |  $         32.13                           |   | 542,351                   |  $         29.40 |

----

|                                                | 2008                                                                                                         |   | 2007                               |
|-----------------------------------------------------|--------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| Weighted      average fair value per option granted |                     $ 0.90        |   |  $ 9.60                  |
| Risk-free      interest rate                        |             3      - 4.6 %                       |   | 3.07%                              |
| Expected      dividend yield                        |                       0.00%  |   | 0.00%                              |
| Expected      lives                                 |                 1      - 1.5 |   |      3.00 |
| Expected      volatility                            |  86.32      - 130.22%                                                                                   |   | 90.72%                             |

|               |   |                                                                                                         |   | Weighted                                                                                      |   |                                       |   |                                                                                                         |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                         |   | Average                                                                                       |   | Weighted                                   |   |                                                                                                         |
| Range      of      |   |                                                                                                         |   | Remaining                                                                                     |   | Average                                    |   |                                                                                                         |
| Exercise           |   | Options                                                                                                      |   | Contractual                                                                                   |   | Exercise                                   |   | Options                                                                                                      |
| Prices             |   | Outstanding                                                                                                  |   | Life                                                                                          |   | Price                                      |   | Exercisable                                                                                                  |
|  $0.30-$45.00 |   |                414,582            |   |                1.2 |   |  $     30.60 |   |                412,915            |
|  $45.3-$90.00 |   |                  16,500 |   |                1.2 |   |  $     70.50 |   |                  16,500 |
|               |   |                431,082            |   |                1.2 |   |  $     32.10 |   |                429,415            |

----

----

| Year Ended | Rentals        |
|------------|----------------|
| 2009       | 286,415        |
| 2010       | 65,919         |
| 2011       | -              |
| 2012       | -              |
| 2013       | -              |
|       | $      352,334 |

----

----

| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                                                             |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
|---------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|--------|--------------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|-------------|-----------|------------------|
| CONSOLIDATED      BALANCE SHEETS                                                                        |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| DECEMBER      31  2007  and  2006                                         |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| ASSETS                                                                                                  |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   | Unaudited   |      |             |
|                                                                                                    | 2007                                                                                                            |   |         |      |                                                                                                                                        |   | 2006             |   |        |      |             |
|                                                                                                    | As      reported                                                                                                |   | Adjustments  |      | As      Restated                                                                                                                            |   | As      reported |   | Adjustments |      | As      Restated |
| Current      Assets                                                                                     |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Cash      and cash equivalents                                                                          | $2,436,581                                                                                                      |   | $0           |      | $2,436,581                                                                                                                                  |   | $675,043         |   | $0          |      | $675,043         |
| Accounts      receivable (net of allowance of $1,005 in 2007                                            |                                                                                                            |   |         |      |                        - |   |             |   |        |      |             |
| and      $0 in 2006)                                                                                    |                7,522                 |   | 0            |      |                 7,522                                       |   | 11,945           |   | 0           |      | 11,945           |
| Inventory                                                                                               |           592,666                                             |   | 0            |      |            592,666                                                                   |   | 204,536          |   | 0           |      | 204,536          |
| Prepaid      expenses and other assets                                                                  |           152,597                                             |   | 0            |      |            152,597                                                                   |   | 94,417           |   | 0           |      | 94,417           |
| Net      assets of discontinued operations                                                              |                   485 |   | 0            |      |                    485                       |   | 32,196           |   | 0           |      | 32,196           |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Total      current assets                                                                               |        3,189,851                                                             |   | 0            |      |         3,189,851                                                                                   |   | 1,018,137        |   | 0           |      | 1,018,137        |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Property      and equipment, net                                                                        |        6,221,653                                                             |   | (1,231,467)  |  (a) |         4,990,186                                                                                   |   | 6,262,971        |   | (889,757)   |  (a) | 5,373,214        |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Other      Assets                                                                                       |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Intangible      assets, net                                                                             |           140,001                                             |   | 0            |      |            140,001                                                                   |   | 153,334          |   | 0           |      | 153,334          |
| Deposits                                                                                                |             14,453                                  |   | 0            |      |               14,453                                                  |   | 11,103           |   | 0           |      | 11,103           |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Total      other assets                                                                                 |           154,454                                             |   | 0            |      |            154,454                                                                   |   | 164,437          |   | 0           |      | 164,437          |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| TOTAL      ASSETS                                                                                       | $9,565,958                                                                                                      |   | ($1,231,467) |      | $8,334,491                                                                                                                                  |   | $7,445,545       |   | ($889,757)  |      | $6,555,788       |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                               |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Current      Liabilities                                                                                |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Accounts      payable                                                                                   | $709,029                                                                                                        |   | $0           |      | $709,029                                                                                                                                    |   | $355,679         |   | $0          |      | $355,679         |
| Accrued      expenses                                                                                   | 2,039,308                                                                                                       |   | 0            |      | 2,039,308                                                                                                                                   |   | 162,500          |   | 0           |      | 162,500          |
| Other      liabilities                                                                                  | 150,000                                                                                                         |   | 0            |      | 150,000                                                                                                                                     |   | 0                |   | 0           |      | 0                |
| Capital      lease obligations                                                                          | 0                                                                                                               |   | 0            |      | 0                                                                                                                                           |   | 14,074           |   | 0           |      | 14,074           |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Total      current liabilities                                                                          | 2,898,337                                                                                                       |   | 0            |      | 2,898,337                                                                                                                                   |   | 532,253          |   | 0           |      | 532,253          |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Stockholders'      Equity                                                                               |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Common      stock, $0.00005 par value; authorized 200,000,000                                           |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| shares;      issued and outstanding 72,056,375 and                                                      |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| 61,984,484      shares, respectively                                                                    | 3,600                                                                                                           |   | 0            |      | 3,600                                                                                                                                       |   | 3,096            |   | 0           |      | 3,096            |
| Additional      paid-in capital                                                                         | 69,603,639                                                                                                      |   | 0            |      | 69,603,639                                                                                                                                  |   | 55,495,659       |   | 0           |      | 55,495,659       |
| Unamortized      expenses                                                                               | 0                                                                                                               |   | 0            |      | 0                                                                                                                                           |   | (113,339)        |   | 0           |      | (113,339)        |
| Accumulated      deficit                                                                                | (62,939,618)                                                                                                    |   | (1,231,467)  |  (a) | (64,171,085)                                                                                                                                |   | (48,472,124)     |   | (889,757)   |  (a) | (49,361,881)     |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| Total      stockholders' equity                                                                         | 6,667,621                                                                                                       |   | (1,231,467)  |      | 5,436,154                                                                                                                                   |   | 6,913,292        |   | (889,757)   |      | 6,023,535        |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| TOTAL      LIABILITIES AND STOCKHOLDERS' EQUITY                                                         | $9,565,958                                                                                                      |   | ($1,231,467) |      | $8,334,491                                                                                                                                  |   | $7,445,545       |   | ($889,757)  |      | $6,555,788       |
|                                                                                                    |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |        |      |             |
| (a)      Adjust Leasehold Improvements useful life to correctly state the net value      of Fix Assets. |                                                                                                            |   |         |      |                                                                                                                                        |   |             |   |

----

| Z      TRIM HOLDINGS, INC. AND SUBSIDIARIES                                                         |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|--------|------------------|-----------|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|------------------|-----------|---------------------------------------------------------------------------------------|
| CONSOLIDATED      STATEMENTS OF OPERATIONS                                                          |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   | Unaudited        |      |                                                                                  |
| FOR      THE YEARS ENDED DECEMBER 31                                                                |                                                                                       |   |        2007 |      |                                                                                        |   |                                                                                  |   |        2006 |      |                                                                                  |
|                                                                                                | As      reported                                                                      |   | Adjustments      |      | As      Restated                                                                            |   | As      reported                                                                      |   | Adjustments      |      | As      Restated                                                                      |
| REVENUES:                                                                                           |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
|   Products                                                                                | $616,799                                                                              |   | $0               |      | $616,799                                                                                    |   | $103,269                                                                              |   |             |      | $103,269                                                                              |
|   Services                                                                                | 49                                                                                    |   | 0                |      | 49                                                                                          |   | 735                                                                                   |   |             |      | 735                                                                                   |
|     Total      revenues                                                         | 616,848                                                                               |   | 0                |      | 616,848                                                                                     |   | 104,004                                                                               |   | 0                |      | 104,004                                                                               |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| COST      OF REVENUES:                                                                              |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
|   Products                                                                                | 2,776,362                                                                             |   | 308,966          |  (a) | 3,085,328                                                                                   |   | 1,788,594                                                                             |   | 280,711          |  (a) | 2,069,305                                                                             |
|     Total      cost of revenues                                                 | 2,776,362                                                                             |   | 308,966          |      | 3,085,328                                                                                   |   | 1,788,594                                                                             |   | 280,711          |      | 2,069,305                                                                             |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| GROSS      MARGIN                                                                                   | (2,159,514)                                                                           |   | (308,966)        |      | (2,468,480)                                                                                 |   | (1,684,590)                                                                           |   | (280,711)        |      | (1,965,301)                                                                           |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| OPERATING      EXPENSES:                                                                            |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| Selling,      general and administrative                                                            | 9,330,046                                                                             |   | 32,745           |  (a) | 9,362,791                                                                                   |   | 14,517,659                                                                            |   | 32,743           |  (a) | 14,550,402                                                                            |
| Reduction      of intangible assets                                                                 | 0                                                                                     |   | 0                |      | 0                                                                                           |   | 341,250                                                                               |   | 0                |      | 341,250                                                                               |
| Amortization      of intangible assets                                                              | 13,333                                                                                |   | 0                |      | 13,333                                                                                      |   | 34,333                                                                                |   | 0                |      | 34,333                                                                                |
| Loss      on asset disposals, net                                                                   | 107,905                                                                               |   | 0                |      | 107,905                                                                                     |   | 0                                                                                     |   | 0                |      | 0                                                                                     |
|     Total      operating expenses                                               | 9,451,284                                                                             |   | 32,745           |      | 9,484,029                                                                                   |   | 14,893,242                                                                            |   | 32,743           |      | 14,925,985                                                                            |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| OPERATING      LOSS                                                                                 | (11,610,798)                                                                          |   | (341,711)        |      | (11,952,509)                                                                                |   | (16,577,832)                                                                          |   | (313,454)        |      | (16,891,286)                                                                          |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| OTHER      INCOME (EXPENSES):                                                                       |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| Rental      and other income                                                                        | 44,105                                                                                |   | 0                |      | 44,105                                                                                      |   | 42,000                                                                                |   | 0                |      | 42,000                                                                                |
| Interest      income                                                                                | 173,256                                                                               |   | 0                |      | 173,256                                                                                     |   | 90,873                                                                                |   | 0                |      | 90,873                                                                                |
| Recovery      of loan loss                                                                          | 300,000                                                                               |   | 0                |      | 300,000                                                                                     |   | 0                                                                                     |   | 0                |      | 0                                                                                     |
| Interest      expense                                                                               | (3,570)                                                                               |   | 0                |      | (3,570)                                                                                     |   | (14,059)                                                                              |   | 0                |      | (14,059)                                                                              |
| Settlement      (loss) gain                                                                         | (1,360,981)                                                                           |   | 0                |      | (1,360,981)                                                                                 |   | 7,500                                                                                 |   | 0                |      | 7,500                                                                                 |
|     Total      other income (expenses)                                          | (847,190)                                                                             |   | 0                |      | (847,190)                                                                                   |   | 126,314                                                                               |   | 0                |      | 126,314                                                                               |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| LOSS      FROM CONTINUING OPERATIONS                                                                | (12,457,988)                                                                          |   | (341,711)        |      | (12,799,699)                                                                                |   | (16,451,518)                                                                          |   | (313,454)        |      | (16,764,972)                                                                          |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| DISCONTINUED      OPERATIONS                                                                        |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| Income      from discontinued operations                                                            |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| (net      of applicable tax of $0 in 2007 and 2006)                                                 | 14,846                                                                                |   | 0                |      | 14,846                                                                                      |   | 20,634                                                                                |   | 0                |      | 20,634                                                                                |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| NET      LOSS                                                                                       | (12,443,142)                                                                          |   | (341,711)        |      | (12,784,853)                                                                                |   | (16,430,884)                                                                          |   | (313,454)        |      | (16,744,338)                                                                          |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| Net      Loss per Share from continuing operations                                                  |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
|  -      Basic and Diluted                                                                      |  $            (0.18) |   |             |      |  $             (0.18) |   |  $            (0.28) |   |             |      |  $            (0.28) |
| Net      Loss per Share - Basic and Diluted                                                         |  $            (0.18) |   |             |      |  $             (0.18) |   |  $            (0.28) |   |             |      |  $            (0.28) |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| Weighted      Average Number of Shares Basic and Diluted                                            | 70,454,211                                                                            |   |             |      | 70,454,211                                                                                  |   | 59,635,899                                                                            |   |             |      | 59,635,899                                                                            |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |
| (a)      Adjust Leasehold Improvements useful life to correctly state the      depreciation expense |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |
|                                                                                                |                                                                                  |   |             |      |                                                                                        |   |                                                                                  |   |             |      |                                                                                  |

----

| CONSOLIDATED      BALANCE SHEETS (Unaudited)                                                              |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|-----------|-------------------------------------------------------------------------------------------|
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| MARCH      31                                                                                             |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| ASSETS                                                                                                    |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   | As      reported                                                                                                  |   | Adjustments                                                                                                                     |      | As      Restated                                                                          |
|                                                                                                      |   | 3/31/2008                                                                                                         |   | 3/31/2008                                                                                                                       |      | 3/31/2008                                                                                 |
| Current      Assets                                                                                       |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Cash      and cash equivalents                                                                            |   |  $          996,426                                        |   |                                                                                                                            |      |  $      996,426                                        |
| Accounts      receivable (net of allowance of $1,005 in 2008                                              |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| and  $1,005      in 2007)                                                                       |   |                 18,080            |   |                                                                                                                            |      |            18,080                  |
| Inventory                                                                                                 |   |               672,740                       |   |                                                                                                                            |      |          672,740                             |
| Prepaid      expenses and other assets                                                                    |   |               106,807                       |   |                                                                                                                            |      |          106,807                             |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Total      current assets                                                                                 |   |           1,794,053                                             |   |                      - |      |       1,794,053                                             |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Property      and equipment, net                                                                          |   |           6,072,324                                             |   |           (87,779)                                                            |  (a) |       5,984,545                                             |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Other      Assets                                                                                         |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Deposits                                                                                                  |   |                 14,453            |   |                                                                                                                            |      |            14,453                  |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Total      other assets                                                                                   |   |                 14,453            |   |                      - |      |            14,453                  |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| TOTAL      ASSETS                                                                                         |   |  $       7,880,830                                                        |   |  $      (87,779)                                                                             |      |  $  7,793,051                                                              |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                 |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   | Unaudited                                                                                                         |   |                                                                                                                            |      |                                                                                      |
|                                                                                                      |   | As      reported                                                                                                  |   | Adjustments                                                                                                                     |      | As      Restated                                                                          |
|                                                                                                      |   | 3/31/2008                                                                                                         |   | 3/31/2008                                                                                                                       |      | 3/31/2008                                                                                 |
| Current      Liabilities                                                                                  |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Accounts      payable                                                                                     |   |  $          893,147                                        |   |                                                                                                                            |      |  $      893,147                                        |
| Accrued      expenses and other                                                                           |   |           1,017,562                                             |   |                                                                                                                            |      |       1,017,562                                             |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Total      current liabilities                                                                            |   |           1,910,709                                             |   |                      - |      |       1,910,709                                             |
| TOTAL      LIABILITIES                                                                                    |   |           1,910,709                                             |   |                      - |      |       1,910,709                                             |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Stockholders'      Equity                                                                                 |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Common      stock, $0.00005 par value; authorized 200,000,000                                             |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| shares;      issued and outstanding 75,056,375 and                                                        |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| 72,056,375      shares, respectively                                                                      |   |                   3,753 |   |                                                                                                                            |      |               3,753 |
| Additional      paid-in capital                                                                           |   |         70,792,295                                                        |   |                                                                                                                            |      |    70,792,295                                                              |
| Accumulated      deficit                                                                                  |   |       (64,825,927)                                                                  |   |           (87,779)                                                            |  (a) |   (64,913,706)                                                                  |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| Total      stockholders' equity                                                                           |   |           5,970,121                                             |   |           (87,779)                                                            |      |       5,882,342                                             |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| TOTAL      LIABILITIES AND STOCKHOLDERS' EQUITY                                                           |   |  $       7,880,830                                                        |   |  $      (87,779)                                                                             |      |  $  7,793,051                                                              |
|                                                                                                      |   |                                                                                                              |   |                                                                                                                            |      |                                                                                      |
| (a)      Adjust Leasehold Improvements useful life to correctly state the net value      of Fixed Assets. |   |                                                                                                              |

----

| CONSOLIDATED      STATEMENTS OF OPERATIONS (Unaudited)                                              |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------------------------------------------------------------------------|
| FOR      THE THREE MONTHS ENDED MARCH 31                                                            |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
|                                                                                                |   | As      reported                                                                                                                                        |   | Adjustments                                                                                                                     |      | As      Restated                                                                                                                |
|                                                                                                |   | 2008                                                                                                                                                    |   | 2008                                                                                                                            |      | 2008                                                                                                                            |
| REVENUES:                                                                                           |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
|   Products                                                                                |   |  $             66,444                                                             |   |                                                                                                                            |      |  $        66,444                                                                   |
|   Services                                                                                |   |                          - |   |                                                                                                                            |      |                      - |
|     Total      revenues                                                         |   |                 66,444                                                  |   |                      - |      |            66,444                                                        |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| COST      OF REVENUES:                                                                              |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
|   Products                                                                                |   |               493,705                                                             |   | 79,409                                                                                                                          |  (a) |          573,114                                                                   |
|     Total      cost of revenues                                                 |   |               493,705                                                             |   |            79,409                                                        |      |          573,114                                                                   |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| GROSS      MARGIN                                                                                   |   |             (427,261)                                                                       |   |           (79,409)                                                            |      |        (506,670)                                                                             |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| OPERATING      EXPENSES:                                                                            |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| Selling,      general and administrative                                                            |   |           1,318,530                                                                                   |   | 8,370                                                                                                                           |  (a) |    1,326,900                                                                                                     |
| Impairment      of intangible assets                                                                |   |               136,668                                                             |   |                                                                                                                            |      |       136,668                                                                                     |
| Amortization      of intangible assets                                                              |   |                   3,333                                       |   |                                                                                                                            |      |            3,333                                                         |
| Loss      on asset disposals, net                                                                   |   |               (75,000)                                                            |   |                                                                                                                            |      |        (75,000)                                                                              |
|     Total      operating expenses                                               |   |           1,383,531                                                                                   |   |               8,370                                       |      |       1,391,901                                                                                   |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| OPERATING      LOSS                                                                                 |   |          (1,810,792)                                                                                       |   |           (87,779)                                                            |      |     (1,898,571)                                                                                             |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| OTHER      INCOME (EXPENSES):                                                                       |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| Rental      and other income                                                                        |   |                 10,863                                                  |   |                                                                                                                            |      |         10,863                                                                          |
| Interest      income                                                                                |   |                 13,836                                                  |   |                                                                                                                            |      |         13,836                                                                          |
| Interest      expense                                                                               |   |                       (35)                |   |                                                                                                                            |      |                (35)                                  |
| Settlement      (loss) gain                                                                         |   |             (100,180)                                                                       |   |                                                                                                                            |      |     (100,180)                                                                                               |
|     Total      other income (expenses)                                          |   |               (75,516)                                                            |   |                      - |      |           (75,516)                                                            |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| LOSS      FROM CONTINUING OPERATIONS                                                                |   |  $     (1,886,308)                                                                                                        |   |  $      (87,779)                                                                             |      |  $      (1,974,087)                                                                                                        |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| NET      LOSS                                                                                       |   |  $     (1,886,308)                                                                                                        |   |  $      (87,779)                                                                             |      |  $      (1,974,087)                                                                                                        |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| Net      Loss per Share from continuing operations                                                  |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
|  -      Basic and Diluted                                                                      |   |  $                (0.03)                                           |   |  $           (0.00)                                                 |      |  $           (0.03)                                                 |
| Net      Loss per Share - Basic and Diluted                                                         |   |  $                (0.03)                                           |   |  $           (0.00)                                                 |      |  $           (0.03)                                                 |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| Weighted      Average Number of Shares Basic and Diluted                                            |   |         75,056,375                                                                                              |   |    75,056,375                                                                                                    |      |    75,056,375                                                                                                    |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                            |      |                                                                                                                            |
| (a)      Adjust Leasehold Improvements useful life to correctly state the      depreciation expense |   |                                                                                                                                                    |   |                                                                                                                            |

----

| CONSOLIDATED      BALANCE SHEETS (Unaudited)                                                                             |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| JUNE      30                                                                                                             |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| ASSETS                                                                                                                   |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   | As      reported                                                                                                  |   | Adjustments                                                                                                                                             |      | As      Restated                                                                                                  |
|                                                                                                                     |   | 6/30/2008                                                                                                         |   | 6/30/2008                                                                                                                                               |      | 6/30/2008                                                                                                         |
| Current      Assets                                                                                                      |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Cash      and cash equivalents                                                                                           |   |  $          719,591                                        |   |                                                                                                                                                    |      |  $          719,591                                        |
| Accounts      receivable (net of allowance of $10,067 in 2008                                                            |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| and  $1,005      in 2007)                                                                                      |   | 115,168                                                                                                           |   |                                                                                                                                                    |      | 115,168                                                                                                           |
| Inventory                                                                                                                |   |               534,212                       |   |                                                                                                                                                    |      |               534,212                       |
| Prepaid      expenses and other assets                                                                                   |   |               530,723                       |   |                                                                                                                                                    |      |               530,723                       |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Total      current assets                                                                                                |   |           1,899,694                                             |   |                          - |      |           1,899,694                                             |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Property      and equipment, net                                                                                         |   |           5,909,456                                             |   |             (175,561)                                                                       |  (a) |           5,733,895                                             |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Other      Assets                                                                                                        |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Deposits                                                                                                                 |   |                 14,453            |   |                                                                                                                                                    |      |                 14,453            |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Total      other assets                                                                                                  |   |                 14,453            |   |                          - |      |                 14,453            |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| TOTAL      ASSETS                                                                                                        |   |  $       7,823,603                                                        |   |  $         (175,561)                                                                                  |      |  $       7,648,042                                                        |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   | Unaudited                                                                                                         |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   | As      reported                                                                                                  |   | Adjustments                                                                                                                                             |      | As      Restated                                                                                                  |
|                                                                                                                     |   | 6/30/2008                                                                                                         |   | 6/30/2008                                                                                                                                               |      | 6/30/2008                                                                                                         |
| Current      Liabilities                                                                                                 |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Accounts      payable                                                                                                    |   |  $          994,254                                        |   |                                                                                                                                                    |      |  $          994,254                                        |
| Accrued      expenses and other                                                                                          |   |               619,966                       |   |                                                                                                                                                    |      |               619,966                       |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Total      Current Liabilities                                                                                           |   |           1,614,220                                             |   |                          - |      |           1,614,220                                             |
| TOTAL      LIABILITIES                                                                                                   |   |           1,614,220                                             |   |                          - |      |           1,614,220                                             |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
|                Notes      Payable - Long Term |   |                 16,397            |   |                                                                                                                                                    |      |                 16,397            |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Total      Liabilities                                                                                                   |   |           1,630,617                                             |   |                          - |      |           1,630,617                                             |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Stockholders'      Equity                                                                                                |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Common      stock, $0.00005 par value; authorized 200,000,000                                                            |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| shares;      issued and outstanding 75,826,375 and                                                                       |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| 72,056,375      shares, respectively                                                                                     |   |                   3,815 |   |                                                                                                                                                    |      |                   3,815 |
| Additional      paid-in capital                                                                                          |   |         72,649,285                                                        |   |                                                                                                                                                    |      |         72,649,285                                                        |
| Accumulated      deficit                                                                                                 |   |       (66,460,114)                                                                  |   |             (175,561)                                                                       |  (a) |       (66,635,675)                                                                  |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| Total      Stockholders' Equity                                                                                          |   |           6,192,986                                             |   |             (175,561)                                                                       |      |           6,017,425                                             |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| TOTAL      LIABILITIES AND STOCKHOLDERS' EQUITY                                                                          |   |  $       7,823,603                                                        |   |  $         (175,561)                                                                                  |      |  $       7,648,042                                                        |
|                                                                                                                     |   |                                                                                                              |   |                                                                                                                                                    |      |                                                                                                              |
| (a)      Adjust Leasehold Improvements useful life to correctly state the net value      of Fixed Assets.                |   |                                                                                                              |

----

| CONSOLIDATED      STATEMENTS OF OPERATIONS (Unaudited)                                              |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| FOR      THE SIX MONTHS ENDED JUNE 30                                                               |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|                                                                                                |   | As      reported                                                                                                                                        |   | Adjustments                                                                                                                                             |      | As      Restated                                                                                                                                        |
|                                                                                                |   | 2008                                                                                                                                                    |   | 2008                                                                                                                                                    |      | 2008                                                                                                                                                    |
| REVENUES:                                                                                           |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|   Products                                                                                |   |  $          238,307                                                                              |   |                                                                                                                                                    |      |  $          238,307                                                                              |
|   Services                                                                                |   |                          - |   |                                                                                                                                                    |      |                          - |
|     Total      revenues                                                         |   |               238,307                                                             |   |                          - |      |               238,307                                                             |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| COST      OF REVENUES:                                                                              |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|   Products                                                                                |   |           1,047,917                                                                                   |   |               158,818                                                             |  (a) |           1,206,735                                                                                   |
|     Total      cost of revenues                                                 |   |           1,047,917                                                                                   |   |               158,818                                                             |      |           1,206,735                                                                                   |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| GROSS      MARGIN                                                                                   |   |             (809,610)                                                                       |   |             (158,818)                                                                       |      |             (968,428)                                                                       |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| OPERATING      EXPENSES:                                                                            |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Selling,      general and administrative                                                            |   |           2,713,056                                                                                   |   |                 16,741                                                  |  (a) |           2,729,797                                                                                   |
| Impairment      of intangible assets                                                                |   |               136,668                                                             |   |                                                                                                                                                    |      |               136,668                                                             |
| Amortization      of intangible assets                                                              |   |                   3,333                                       |   |                                                                                                                                                    |      |                   3,333                                       |
| Loss      on asset disposals, net                                                                   |   |               (74,987)                                                            |   |                                                                                                                                                    |      |               (74,987)                                                            |
|     Total      operating expenses                                               |   |           2,778,070                                                                                   |   |                 16,741                                                  |      |           2,794,811                                                                                   |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| OPERATING      LOSS                                                                                 |   |          (3,587,680)                                                                                       |   |             (175,559)                                                                       |      |          (3,763,239)                                                                                       |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| OTHER      INCOME (EXPENSES):                                                                       |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Rental      and other income                                                                        |   |                 17,663                                                  |   |                                                                                                                                                    |      |                 17,663                                                  |
| Interest      income                                                                                |   |                 15,608                                                  |   |                                                                                                                                                    |      |                 15,608                                                  |
| Interest      expense                                                                               |   |               (23,043)                                                            |   |                                                                                                                                                    |      |               (23,043)                                                            |
| Settlement      (loss) gain                                                                         |   |                 32,891                                                  |   |                                                                                                                                                    |      |                 32,891                                                  |
|     Total      other income (expenses)                                          |   |                 43,119                                                  |   |                          - |      |                 43,119                                                  |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| LOSS      FROM CONTINUING OPERATIONS                                                                |   |  $     (3,544,561)                                                                                                        |   |  $         (175,559)                                                                                  |      |  $     (3,720,120)                                                                                                        |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| NET      LOSS                                                                                       |   |  $     (3,544,561)                                                                                                        |   |  $         (175,559)                                                                                  |      |  $     (3,720,120)                                                                                                        |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Net      Loss per Share from continuing operations                                                  |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|  -      Basic and Diluted                                                                      |   |  $                (0.05)                                           |   |  $                (0.00)                                           |      |  $                (0.05)                                           |
| Net      Loss per Share - Basic and Diluted                                                         |   |  $                (0.05)                                           |   |  $                (0.00)                                           |      |  $                (0.05)                                           |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Weighted      Average Number of Shares Basic and Diluted                                            |   |         75,804,708                                                                                              |   |         75,804,708                                                                                              |      |         75,804,708                                                                                              |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| (a)      Adjust Leasehold Improvements useful life to correctly state the      depreciation expense |   |                                                                                                                                                    |   |

----

| CONSOLIDATED      BALANCE SHEETS (Unaudited)                                                                             |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| SEPTEMBER      30                                                                                                        |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| ASSETS                                                                                                                   |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   | As      reported                                                                                                                                        |   | Adjustments                                                                                                                                             |      | As      Restated                                                                                                  |
|                                                                                                                     |   | 9/30/2008                                                                                                                                               |   | 9/30/2008                                                                                                                                               |      | 9/30/2008                                                                                                         |
| Current      Assets                                                                                                      |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Cash      and cash equivalents                                                                                           |   |  $       1,102,485                                                                                              |   |                                                                                                                                                    |      |  $       1,102,485                                                        |
| Accounts      receivable (net of allowance of $10,067 in 2008                                                            |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| and  $1,005      in 2007)                                                                                      |   | 188,375                                                                                                                                                 |   |                                                                                                                                                    |      | 188,375                                                                                                           |
| Inventory                                                                                                                |   |               398,153                                                             |   |                                                                                                                                                    |      | 398,153                                                                                                           |
| Prepaid      expenses and other assets                                                                                   |   |               326,857                                                             |   |                                                                                                                                                    |      | 326,857                                                                                                           |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Total      current assets                                                                                                |   |           2,015,870                                                                                   |   |                          - |      |           2,015,870                                             |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Property      and equipment, net                                                                                         |   |           5,756,402                                                                                   |   |             (263,339)                                                                       |  (a) | 5,493,063                                                                                                         |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Other      Assets                                                                                                        |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|         Prepaid      Loan  - Long Term                                 |   |               711,811                                                             |   |                                                                                                                                                    |      |               711,811                       |
| Deposits                                                                                                                 |   |                 14,453                                                  |   |                                                                                                                                                    |      |                 14,453            |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Total      other assets                                                                                                  |   |               726,264                                                             |   |                          - |      |               726,264                       |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| TOTAL      ASSETS                                                                                                        |   |  $       8,498,536                                                                                              |   |  $         (263,339)                                                                                  |      |  $       8,235,197                                                        |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| LIABILITIES      AND STOCKHOLDERS' EQUITY                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|                                                                                                                     |   | Unaudited                                                                                                                                               |   |                                                                                                                                                    |      |                                                                                                              |
| Current      Liabilities                                                                                                 |   | 9/30/2008                                                                                                                                               |   |                                                                                                                                                    |      |                                                                                                              |
| Accounts      payable                                                                                                    |   |  $          723,607                                                                              |   |                                                                                                                                                    |      |  $          723,607                                        |
| Accrued      expenses and other                                                                                          |   |               440,028                                                             |   |                                                                                                                                                    |      |               440,028                       |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Total      Current Liabilities                                                                                           |   |           1,163,635                                                                                   |   |                          - |      |           1,163,635                                             |
| TOTAL      LIABILITIES                                                                                                   |   |           1,163,635                                                                                   |   |                          - |      |           1,163,635                                             |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
|                Notes      Payable - Long Term |   |               723,238                                                             |   |                                                                                                                                                    |      |               723,238                       |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Total      Liabilities                                                                                                   |   |           1,886,873                                                                                   |   |                          - |      |           1,886,873                                             |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Stockholders'      Equity                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Common      stock, $0.00005 par value; authorized 200,000,000                                                            |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| shares;      issued and outstanding 78,976,375 and                                                                       |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| 72,056,375      shares, respectively                                                                                     |   |                   3,972                                       |   |                                                                                                                                                    |      |                   3,972 |
|   Common      stock to be issued                                                                               |   |                          - |   |                                                                                                                                                    |      |                                                                                                              |
| Additional      paid-in capital                                                                                          |   |         74,851,936                                                                                              |   |                                                                                                                                                    |      |         74,851,936                                                        |
| Notes      Receivable                                                                                                    |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Accumulated      deficit                                                                                                 |   |       (68,244,245)                                                                                                        |   |             (263,339)                                                                       |  (a) |       (68,507,584)                                                                  |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| Total      Stockholders' Equity                                                                                          |   |           6,611,663                                                                                   |   |             (263,339)                                                                       |      |           6,348,324                                             |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| TOTAL      LIABILITIES AND STOCKHOLDERS' EQUITY                                                                          |   |  $       8,498,536                                                                                              |   |  $         (263,339)                                                                                  |      |  $       8,235,197                                                        |
|                                                                                                                     |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                              |
| (a)      Adjust Leasehold Improvements useful life to correctly state the net value      of Fixed Assets.                |   |                                                                                                                                                    |

----

| CONSOLIDATED      STATEMENTS OF OPERATIONS (Unaudited)                                              |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| FOR      THE NINE MONTHS ENDED SEPTEMBER 30                                                         |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|                                                                                                |   | As      reported                                                                                                                                        |   | Adjustments                                                                                                                                             |      | As      Restated                                                                                                                                        |
|                                                                                                |   | 2008                                                                                                                                                    |   | 2008                                                                                                                                                    |      | 2008                                                                                                                                                    |
| REVENUES:                                                                                           |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|   Products                                                                                |   |  $          502,792                                                                              |   |                                                                                                                                                    |      |  $          502,792                                                                              |
|   Services                                                                                |   |                          - |   |                                                                                                                                                    |      |                          - |
|     Total      revenues                                                         |   |               502,792                                                             |   |                          - |      |               502,792                                                             |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| COST      OF REVENUES:                                                                              |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|   Products                                                                                |   |           1,573,272                                                                                   |   |               238,228                                                             |  (a) |           1,811,500                                                                                   |
|     Total      cost of revenues                                                 |   |           1,573,272                                                                                   |   |               238,228                                                             |      |           1,811,500                                                                                   |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| GROSS      MARGIN                                                                                   |   |          (1,070,480)                                                                                       |   |             (238,228)                                                                       |      |          (1,308,708)                                                                                       |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| OPERATING      EXPENSES:                                                                            |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Selling,      general and administrative                                                            |   |           3,551,374                                                                                   |   |                 25,111                                                  |  (a) |           3,576,485                                                                                   |
| Impairment      of intangible assets                                                                |   |               136,668                                                             |   |                                                                                                                                                    |      |               136,668                                                             |
| Amortization      of intangible assets                                                              |   |                   3,333                                       |   |                                                                                                                                                    |      |                   3,333                                       |
| Loss      on asset disposals, net                                                                   |   |               (74,987)                                                            |   |                                                                                                                                                    |      |               (74,987)                                                            |
|     Total      operating expenses                                               |   |           3,616,388                                                                                   |   |                 25,111                                                  |      |           3,641,499                                                                                   |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| OPERATING      LOSS                                                                                 |   |          (4,686,868)                                                                                       |   |             (263,339)                                                                       |      |          (4,950,207)                                                                                       |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| OTHER      INCOME (EXPENSES):                                                                       |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Rental      and other income                                                                        |   |                 23,005                                                  |   |                                                                                                                                                    |      |                 23,005                                                  |
| Interest      income                                                                                |   |                 18,286                                                  |   |                                                                                                                                                    |      |                 18,286                                                  |
| Interest      expense                                                                               |   |             (101,004)                                                                       |   |                                                                                                                                                    |      |             (101,004)                                                                       |
| Settlement      (loss) gain                                                                         |   |             (582,111)                                                                       |   |                                                                                                                                                    |      |             (582,111)                                                                       |
|     Total      other income (expenses)                                          |   |             (641,824)                                                                       |   |                          - |      |             (641,824)                                                                       |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| LOSS      FROM CONTINUING OPERATIONS                                                                |   |  $     (5,328,692)                                                                                                        |   |  $         (263,339)                                                                                  |      |  $     (5,592,031)                                                                                                        |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| NET      LOSS                                                                                       |   |  $     (5,328,692)                                                                                                        |   |  $         (263,339)                                                                                  |      |  $     (5,592,031)                                                                                                        |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Net      Loss per Share from continuing operations                                                  |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
|  -      Basic and Diluted                                                                      |   |  $                (0.07)                                           |   |  $                (0.00)                                           |      |  $                (0.07)                                           |
| Net      Loss per Share - Basic and Diluted                                                         |   |  $                (0.07)                                           |   |  $                (0.00)                                           |      |  $                (0.07)                                           |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| Weighted      Average Number of Shares Basic and Diluted                                            |   |         76,279,153                                                                                              |   |         76,279,153                                                                                              |      |         76,279,153                                                                                              |
|                                                                                                |   |                                                                                                                                                    |   |                                                                                                                                                    |      |                                                                                                                                                    |
| (a)      Adjust Leasehold Improvements useful life to correctly state the      depreciation expense |   |                                                                                                                                                    |   |

----