**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**









**FORM
      10-K**




**(Mark
      One)**




**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




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




**OR**




**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**For
      the transition period
      from** **to** **.**




**Commission
      file number 00-32019**




**TASKER
      PRODUCTS CORP.**


**(Exact
      name of registrant as specified in its charter)**




**Delaware**
            
            **88-0426048**(State
                or other jurisdiction of Incorporation or
                organization)
            
            (I.R.S.
                Employer
              Identification
                No.)




**21-00
      Route 208**


**Fairlawn,
      NJ 07410**




(Address
      of principal executive offices) (Zip Code)


**603-766-1973**


(Registrant’s
      telephone number)


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


Securities
      registered under Section 12(g) of the Exchange Act:




Common
      Stock, Par Value $0.001 Per Share


(Title
      of
      each class)




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




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




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x Noo




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









Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      the definitions of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act (Check one):




Large
      accelerated filer o Accelerated
      Filer o Non-accelerated
      filer x Smaller
      reporting Company o (do not
      check if smaller reporting company)




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




The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant, based on the average bid and asked price of the registrant’s common
      stock on June 29, 2007 was $20,732,591 (reference is made to Part II, Item
      5
      herein for a statement of assumptions upon which this calculation is based).
      The
      registrant has no non-voting stock.




There
      were 137,736,379 shares of common stock of the registrant outstanding as of
      March 14, 2008.









**INDEX**


**Page****PART
                  I**Item
                  1.
              Business
              1Item
                  1A.
              Risk
                  Factors
              10Item
                  1B.
              Unresolved
                  Staff Comments
              18Item
                  2.
              Properties
              18Item
                  3.
              Legal
                  Proceedings
              19Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              19**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              19Item
                  6.
              Selected
                  Financial Data
              21Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              23Item
                  7A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              46Item
                  8.
              Financial
                  Statements and Supplementary Data
              46Item
                  9.
              Changes
                  In and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              46Item
                  9A.
              Controls
                  and Procedures
              46Item
                  9B.
              Other
                  information
              48**PART
                  III**Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              48Item
                  11.
              Executive
                  Compensation
              52Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters ..
              62Item
                  13.
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              64Item
                  14.
              Principal
                  Accountant Fees and Services
              66**PART
                  IV**Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              67Signatures




i




**Forward-Looking
      Statements**




Because
      we want to provide you with meaningful and useful information, this annual
      report contains certain forward-looking statements that reflect our current
      expectations regarding our future results of operations, performance and
      achievements. We have tried, wherever possible, to identify these
      forward-looking statements by using words such as “anticipate,” “believe,”
“estimate,” “expect,” “plan,” “intend” and similar expressions. These statements
      reflect our current beliefs and are based on information currently available
      to
      us. Accordingly, these statements are subject to certain risks, uncertainties
      and contingencies, including the factors set forth under “Risk Factors,” which
      could cause our actual results, performance or achievements to differ materially
      from those expressed in, or implied by, any of these statements. You should
      not
      place undue reliance on any forward-looking statements. Except as otherwise
      required by federal securities laws, we undertake no obligation to release
      publicly the results of any revisions to any such forward-looking statements
      that may be made to reflect events or circumstances after the date this annual
      report is filed with the Securities and Exchange Commission or to reflect the
      occurrence of unanticipated events.




**Trademarks**




The
      Tasker name and logo and the names of products offered by us are trademarks,
      registered trademarks, service marks or registered service marks of Tasker.
      All
      other trademarks and service marks appearing in this annual report are the
      property of their respective holders.




As
      used
      herein, Tasker(TM), Unifresh(R), SaniPhresh(TM) *,* Tasker
      Blue(TM), Pacific Blue(TM) , Tasker
      Pacific Blue(TM), Close Call(R) and Breath Rephresh(TM) are trademarks of Tasker
      Products Corp.




ii




**PART
      I**




As
      used
      in this annual report on Form 10-K, “we,” “us,” “our,” “Tasker” and “our
      company” refer to Tasker Products Corp. and our subsidiaries, unless the context
      otherwise requires.




**ITEM
      1. BUSINESS**




**Overview**




We
      manufacture, distribute and market a variety of products using a process we
      refer to as “pHarlo technology.” These products are covered by one or more
      patents, or base patents and manufactured using the pHarlo technology, which
      is
      covered by those patents. The pHarlo technology utilizes a safe solution, which
      we call the pHarlo concentrate, and is a solution whose components have been
      classified as Generally Recognized as Safe (“GRAS”) by the U.S. Food and Drug
      Administration, or FDA. This safe solution enables copper sulfate, a compound
      with bacteriostatic properties, i.e., the ability to inhibit bacteria growth,
      to
      remain active throughout a wide range of pH values, or measurements of acidity
      or alkalinity in a solution. A Generally Recognized as Safe designation for
      our
      solution allows it to be added to food and means that it is considered by
      experts to be safe for human consumption within good manufacturing practices.




As
      a
      result of the 2005 Acquisition described below, we now own the utility patent
      applications and provisional patent applications associated with the pHarlo
      technology in our fields of use, and have entered into a sub-license agreement
      for the base patents associated with the pHarlo technology. We have also filed
      additional patent applications in and outside of the United States.




We
      currently market:




·
            Unifresh
                Footbath, an aid that helps clean and disinfect the hooves of dairy
                cows;






·
            SaniPhresh
                Footbath, a product used as part of a hoof maintenance program for
                dairy
                cows;






·
            Tasker
                Blue, an antimicrobial aid to be used in the scalder process of poultry
                processing, which is a method of loosening feathers so that they
                can be
                picked and removed mechanically, and the post-feather picker process,
                which is the method used in chicken processing that receives chickens
                immediately after the scalder and mechanically removes feathers;
                and






·
            Tasker
                Pacific Blue Seafood Wash, a product used in commercial and retail
                seafood
                processing to extend shelf life and reduce odors.




During
      the fiscal quarter ended June 30, 2007, we submitted protocols to be used in
      the
      testing of an application for use in the On-Line Reprocessing (“OLR”) and
      Chiller sections of poultry processing.We
      received theconsent
      from the United States Department of Agriculture’s (“USDA”)Food
      Safety and Inspection Services(“FSIS”)
      to
      proceed with in-plant testing of these applications.
      Tests
      of our On-Line Reprocessing application were suspended when we were informed
      of
      the USDA’s intention to reconsider this requirement of this section as an
      intervention point in controlling bacteria. We may resume testing of our OLR
      application when the USDA finalizes the requirements for this
      section.




We
      recently began tests of our Chiller and Post Chill Spray applications. If these
      tests are successful we expect to receive a Letter of No Objections from the
      FSIS of the USDA.





In
      December 2007, we started working with Kansas State University to test an
      application, using our antibacterial technology, for the treatment of red meat
      to inhibit and eliminate bacteria such as E. coli. We expect to complete tests
      necessary for regulatory review by the end of the first quarter of 2008.




1




We
      have
      incurred losses from operations in each quarter since we changed our business
      direction in late 2002. Our net losses for the years ended December 31, 2007,
      2006 and 2005 were approximately $41,394,000, $62,943,000 and $18,269,000,
      respectively. We expect to continue to incur losses for at least the next six
      months. We anticipate operating expenses will increase as we attempt to build
      our brands, expand our customer base and develop new products. To become
      profitable, we must increase revenue substantially and achieve and maintain
      positive gross margins. We may not be able to increase revenue and gross margins
      sufficiently to achieve profitability. If we are not able to achieve
      profitability, our results of operations and financial condition will be
      materially and adversely affected.




Based
      upon our projections of future revenues from our products and cash on hand
      and
      cash from a proposed $3-$5 million credit facility which is currently being
      negotiated, we believe that we will have adequate working capital to fund our
      operations during the next twelve months. Our ability to continue to operate
      and
      grow our business is dependent upon obtaining the proposed credit facility,
      exercise of outstanding warrants and/or generating revenue growth from
      operations. While we have been in the process of aggressively developing,
      marketing and selling our products, there can be no assurance that those efforts
      will be met with success in the marketplace or that the timing of our efforts
      will be consistent with our cash availability and burn rate. If we do not obtain
      the contemplated credit facility, obtain sufficient cash from the exercise
      of
      outstanding warrants and/or generate sufficient revenue growth from existing
      and
      new business arrangements, we will not have sufficient cash to support our
      continued operations and meet our obligations.





During
      2007, we received
      proceeds in the aggregate amount of $12,357,637 in connection with the issuance
      of  convertible
      notes and warrants in multiple private placements, which are described in detail
      under “Management’s Discussion and Analysis of Financial Condition and Results
      of Operation--Liquidity and Capital Resources.”





We
      are
      incorporated in Delaware and were first organized to explore and develop
      minerals in 1999. In late 2002, we began our current operations with the pHarlo
      technology. On June 28, 2006, we amended our articles of incorporation to change
      our name to Tasker Products Corp. On July 16, 2007 we reincorporated from the
      State of Nevada to the State of Delaware. As a result of this reincorporation,
      the number of authorized shares of our common stock increased from 300,000,000
      to 450,000,000 and we have 15,000,000 shares of preferred stock
      authorized.




Effective
      October 1, 2007, we have relocated our Corporate Office to 21-00 Route 208,
      Fairlawn, New Jersey. Our telephone number is (201) 475-7891 . Our
      website can be visited at www.taskerproducts.com. Information contained on
      our
      website is not part of this annual report.




**2005
      Acquisition**




In
      July
      2005, we acquired certain assets of pHarlo Citrus Technologies, Indian River
      Labs, LLC, pHarlo Citrus Properties Partnership, LLLP, and Coast to Coast
      Laboratories, LLC, and now own the utility patent applications and provisional
      patent applications associated with the pHarlo technology in our fields of
      use.
      In this annual report, we refer to these four entities as the “Selling Entities”
and to this acquisition as the “2005 Acquisition.” In connection with the 2005
      Acquisition, we also entered into a sub-license agreement for the base patents
      associated with the pHarlo technology.




2




**Products**




*Unifresh* (R) *Footbath*




We
      currently market Unifresh Footbath concentrate, an aid that helps clean and
      disinfect the hooves of dairy cows. Because of the bacteriostatic properties
      of
      the pHarlo technology, this product helps control bacteria that infect the
      hooves of cows and cause interdigital dermatitis, or a bacterial infection
      of
      the skin on a cow’s hoof, and interdigital papillomatosis, or an infection that
      affects a cow’s hoof that may cause severe lameness, decreased milk yield, body
      weight loss, decreased reproductive performance and increased veterinary
      expenses. Unifresh Footbath concentrate was launched during the third quarter
      of
      2005. In the fourth quarter of 2005, we discovered that our Unifresh Footbath
      product’s effectiveness was diminished in water that had abnormally high
      alkaline content, a term commonly used to refer to a substance that has a pH
      level greater than 7. We reformulated our Unifresh Footbath concentrate with
      the
      addition of a compound that neutralizes alkali (a type of base that has a pH
      greater than 7), which can increase the pH of water or soil. In the first
      quarter of 2006, we introduced our enhanced formulation to the market. It is
      currently being sold to dairy farms throughout the U.S. through our sales force,
      independent brokers and farm product distributors. We currently market the
      product as a grooming aid. No federal agency approvals are required for
      marketing this product.




*SaniPhresh(TM)
      Footbath*




We
      also
      market SaniPhresh Step 1 and Step 2 maintenance footbath. SaniPhresh is Tasker
      Products new and improved liquid footbath solution. This anti-microbial product
      has been extensively field tested and proven to be effective against digital
      dermatitis (more commonly referred to as hairy hoof-wart or strawberry warts).
      This patent pending anti-microbial formula holds copper in solution longer
      for
      maximum effectiveness, causes no tissue damage and is non-irritating to the
      animal’s skin. SaniPhresh is our most effective copper delivery system, while
      balancing issues relating to metal levels in the effluent water. The SaniPhresh
      companion product Unifresh Xtra is a highly effective liquid solution, that
      when
      used in conjunction with copper sulphate crystals provides a clear measure
      of
      effectiveness in reducing both the severity and duration of hoof infections.




*Poultry
      Processing Product*





In
      August
      2005, we began the in-plant commercial verification process for USDA approval
      to
      use the pHarlo technology in the scalder process of poultry processing. The
      first in-plant commercial verification test was completed in October 2005 and
      submitted to the USDA shortly thereafter. On February 6, 2006, we received
      a
      letter from FSIS consenting to the continuation of in-plant trials of our
      Scalder application at the facility in Athens, Georgia, as well as two
      additional poultry processing plants. The trial involved the application of
      the
      pHarlo technology as an antimicrobial in the scalder and post-feather picker
      stages. In August 2006 we received a Letter of No Objections from the USDA
      indicating that it had no objections to the use of our product as an
      antimicrobial processing aid in poultry Scalder and, in December 2006, we
      received a similar letter from the USDA to use our product in the Picker and
      New
      York Dressed Cabinet.




During
      the fiscal quarter ended June 30, 2007, we submitted protocols to be used in
      the
      testing of an application for use in the On-Line Reprocessing (“OLR”) and
      Chiller sections of poultry processing. We received the FSIS’s consent to
      proceed with in-plant testing of these applications. Tests of our OLR
      application were suspended when we were informed of the USDA’s intention to
      reconsider this requirement of this section as an intervention point in
      controlling bacteria. We may resume testing of our OLR application when the
      USDA
      finalizes the requirements for this section.




We
      recently began tests of our Chiller and Post Chill Spray application. If these
      tests are successful we expect to receive a Letter of No Objections from the
      FSIS of the USDA.




*Seafood
      Processing Product*




We
      market
      the pHarlo technology for use in pathogen reduction. Pathogen reduction is
      a
      process by which certain bacteria that cause disease or illness are reduced
      in
      number or eliminated, and the shelf life of seafood is extended. Our product,
      Tasker Pacific Blue Seafood Wash, has been tested at the North Carolina State
      Center for Marine Science & Technology, Virginia Tech University and
      Mississippi State University on shrimp, mahi mahi, salmon, flounder, scallops
      and catfish. The results of these studies indicated that the pHarlo technology
      could possibly double the shelf life on catfish filets and significantly
      increase the shelf life of scallops. No federal agency approvals are required
      for the marketing of this product beyond our FDA GRAS status.




In
      the
      processing of fish and seafood species, water is used in the process at many
      points after harvesting. Therefore, the use of dip tanks and sprays of chilled
      water are normal and common. The addition of the Tasker Pacific Blue Seafood
      Wash to these wash waters is an easy adaptation of existing process equipment.
      Our seafood application is currently in trial testing by a seafood company
      located in the southeast and in several supermarkets in the northeast.




3




*Close
      Call* (R)




Until
      March 2007 we marketed Close Call(R) as an oral hygiene breath drink that
      reduces odors from tobacco, garlic, onion and alcohol. The FDA requires
      companies making structure or function claims relating to a dietary supplement
      product, such as Close Call(R), to “certify that the firm has substantiation
      that the claim is truthful and not misleading.” While the FDA does not require
      any presentation of this support, it does require a notice of dietary supplement
      ingredients and claims. We believe that our Close Call(R) product could be
      marketed more efficiently by a company either already established in the
      industry or with more commercial resources. Therefore, we are actively seeking
      to license and/or sell the Close Call(R) brand or derivative applications.




**Government
      Approvals and Regulations**




Under
      federal law, any substance that is intentionally added to food is a food
      additive that is subject to premarket review and approval by FDA, unless the
      substance is generally recognized, among qualified experts, as having been
      adequately shown to be safe under the conditions of its intended use or unless
      the use of the substance in specific applications is otherwise excluded from
      the
      definition of a food additive. **** All
      of
      the ingredients used to produce the pHarlo concentrate are classified as
      Generally Recognized as Safe (“GRAS”) by the FDA. Therefore, we believe that our
      current line of products that utilize the pHarlo concentrate, including the
      intended uses of these products, do not require further approval by the FDA.
      These ingredients are already in wide use in the food industry and are readily
      available. The unique combination of these ingredients and the preparation
      process of the pHarlo formula are protected under three U.S. patents and are
      covered in a number of pending patent applications in the U.S. and elsewhere.
      The use of the pHarlo technology in food processing, with the exception of
      meat
      and poultry, has been approved by the FDA in letters addressed to us, dated
      February 18, 2004 and March 24, 2005.




The
      use
      of the pHarlo technology in meat and poultry food processing applications
      requires the approval of the USDA. The Food Safety and Inspection Services
      agency of the USDA shares the responsibility for reviewing antimicrobials for
      use on meat, poultry and egg products. The FSIS has the authority to determine
      whether or not new substances and uses of previously approved substances are
      suitable for use. In February of 2005, we submitted reports and laboratory
      data
      to the FSIS, requesting approval as an anti-microbial processing aide for
      poultry Scalders. The FSIS directed us to prepare a proper protocol and conduct
      an in-plant trial to prove the safety and effectiveness of the anti-microbial.
      The first in-plant commercial verification test was completed in October 2005.
      In January 2006, the FSIS indicated that the data from the in-plant trial was
      sufficient to support additional trials. These additional trials were completed,
      and the final report was submitted to the FSIS in June 2006. In August 2006
      we
      received a Letter of No Objections from the USDA indicating that it had no
      objections to the use of our product as an antimicrobial processing aid in
      poultry Scalder and, in December 2006, we received a similar letter from the
      USDA to use our product in the Picker and New York Dressed Cabinet. During
      the
      fiscal quarter ended June 30, 2007, we submitted protocols to be used in the
      testing of an application for use in the OLR and Chiller sections of poultry
      processing. We received the FSIS’s consent to proceed with in-plant testing of
      this application. Tests of our OLR application were suspended when we were
      informed of the USDA’s intention to reconsider this requirement of this section
      as an intervention point in controlling bacteria. We may resume testing of
      our
      OLR application when the USDA finalizes the requirements for this
      section.




**Manufacturing**




We
      currently manufacture the concentrate used for all of the products we currently
      market, including Unifresh and SaniPhresh Footbaths, Tasker Blue and Tasker
      Pacific Blue, in our facility located in Conroe, Texas. We believe our facility
      procedures and manufacturing process assures the finished products meet
      specifications and comply with applicable regulatory requirements, but there
      can
      be no assurance that the pertinent regulatory authorities will agree with this
      conclusion, which could result in a variety of enforcement actions. It is
      possible that additional manufacturing facilities or controls will be necessary
      to market the product lines currently under development.




4




All
      of
      the raw materials required for the production of our concentrate are widely
      available in sufficient quantities form various qualified outside vendors.
      Accordingly, we do not anticipate that there will be supply interruption of
      these materials or that price increases will have a material adverse effect
      on
      us.




**Strategic
      Relationships**




In
      2004,
      we entered into an Exclusive Field of Use License Agreement and Product Sale
      Agreement with Wynn Starr Special Products, LLC, or Wynn Starr (“Wynn Starr
      Agreement”). Under the terms of this agreement, as amended through January 23,
      2007, we have granted Wynn Starr the exclusive worldwide right to market and
      distribute products used as post-harvesting processing aids for the poultry
      industry based on the pHarlo technology. In return for this license, Wynn Starr
      will purchase licensed products from us and will share up to 25% of the net
      sale
      price per gallon sold, based on different increments of achieved net sale
      prices. The terms of this agreement are further described in “Item 13 - Certain
      Relationships and Related Transactions, and Director Independence.” As of
      December 31, 2007, we had paid $42,000 to Wynn Starr and had a receivable of
      approximately $6,700 from Wynn Starr, net of amounts owed to Wynn Starr, under
      this royalty arrangement.  Steven
      B.
      Zavagli, a former member of our board of directors, is the founder, Chairman
      and
      the Chief Executive Officer of Wynn Starr and Wynn Starr’s ultimate parent
      company, Wynn Starr Flavors, Inc. We have recently notified Wynn Starr of our
      rescission and termination of the Wynn Starr Agreement.




As
      a
      result of the 2005 Acquisition, we now own the tangible assets used in the
      manufacturing process for the pHarlo concentrate. The pHarlo concentrate is
      based upon both the patent applications that we purchased in the acquisition,
      as
      well as on the base patents associated with the pHarlo technology. We have
      entered into an exclusive worldwide license, the Sub-License Agreement, with
      pHarlo IP, LLC, the exclusive licensee of the base patents, to exploit the
      base
      patents in our fields of use. Pursuant to the Sub-License Agreement, we also
      granted pHarlo IP an exclusive royalty-free worldwide right and license to
      import, export, make, manufacture, use and sell any inventions outside of our
      fields of use that were disclosed and claimed in the patent applications that
      we
      purchased in the acquisition. The terms of the Sub-License Agreement are more
      fully discussed under the caption “Intellectual Property Rights.”




**Distribution
      Channels**




We
      expect
      to sell our products through distributors, strategic intermediaries and directly
      to commercial end-users. The choice of distribution channel will vary by product
      and will be decided by our management according to our strategic objectives.




**Competition**




Some
      or
      all of the products we intend to market may be in industries in which
      competition is intense. Our current product lines include applications in the
      poultry processing, dairy, seafood and oral hygiene industry, for which there
      are varying intensities of competition. We believe that the pHarlo technology
      will provide us with an advantage over our competition.




*Unifresh* (R) ** *and
      SaniPhresh(TM)* ** *Footbath*




Our
      Unifresh and SaniPhresh Footbaths control a hoof infection known as digital
      dermatitis that causes lameness, swelling and fever in dairy cows, resulting
      in
      a drastic decrease in milk production. Forms of treatment include antibiotic
      bandaging and topical sprays using Terramycin(TM) (oxytetracycline — an
      antibiotic) and footbaths using Formalin (a saturated solution of formaldehyde),
      copper sulfate, Tetracycline (a broad-spectrum antibiotic) or Peracetic Acid
      (a
      disinfectant and sanitizer). Unifresh and SaniPhresh Footbaths’ underlying
      technology, pHarlo, uses a highly acidified form of copper sulfate that helps
      control the bacteria that cause digital dermatitis, as compared to competing
      copper sulfate products that are non-ionized. Some competing products using
      copper sulfate include QuickHit, Healthy Foot and HoofPro+ by SSI Corporation;
      Double-Action(TM) Hoof Treatment by West Agro, Inc.; and Hoofcare Supercharger
      manufactured by Marabo.




5




*Poultry
      Processing*




Currently,
      there is little competition for bacterial inhibitors in the Scalder section
      of
      poultry processing; however, there are varying number of competing products
      for
      use in the OLR and Chiller sections. In the Chiller section, manufacturers
      of
      sodium hydrochloride or sodium hypochlorite, chemical compound solutions
      frequently used as disinfectants and bleaching agents, represent the dominant
      competition. We believe that our product presents a healthier, yet more
      effective, alternative to the use of sodium hydrochloride and sodium
      hypochlorite. We further believe that, because the poultry processing industry
      is a very large industry, our presence in that market will attract other
      products designed to reduce or eliminate bacteria. We believe that the
      effectiveness of the pHarlo technology and its competitive pricing will enable
      us to successfully compete against existing and future competitive products
      in
      the poultry processing industry.




*Pacific
      Blue(TM) Seafood Application*




Our
      seafood application, Pacific Blue(TM), an antibacterial treatment that reduces
      odors and extends the shelf life of seafood products, is targeted for the retail
      industry. The natural spoilers of seafood quality, bacteria, enzymes,
      dehydration, oxidation and contamination, bacteria and enzymes (proteins that
      aid in digestion) are present in all fish and shellfish, but their activity
      increases at higher temperatures. These spoilers break down the flesh of
      seafood, turning firm, resilient tissue soft and mushy. This process affects
      taste, appearance and texture and develops a strong “fishy” smell. Retailers
      displaying unpackaged fresh seafood generally maintain the seafood at
      temperatures between 29o -34o; Fahrenheit to preserve freshness. Seafood exposed
      to air will dehydrate causing a loss of fluids, which decreases the net product
      weight and damages texture and color. To prevent dehydration, retailers
      frequently mist fresh fish on display with water. Currently, our Pacific
      Blue(TM) is the treatment in the market that reduces odors on seafood by
      reducing the bacteria that causes spoilage. When and if the market for Pacific
      Blue(TM) develops, additional products created by competitors may enter the
      market and compete.




**Dependence
      on Certain Customers**




For
      the
      year ended December 31, 2006 one customer accounted for 28%, another customer
      accounted for 12% and another customer accounted for 11% of our consolidated
      revenue. For the year ended December 31, 2007 one customer accounted for 7%,
      another customer accounted for 12% and another customer accounted for 27% of
      our
      consolidated revenues.




**Intellectual
      Property Rights**




*Patents*




Pursuant
      to the 2005 Acquisition, we acquired the rights to the following utility patent
      applications, which applications included both United States applications and
      PCT applications, or patent applications filed under the Patent Cooperation
      Treaty, which allows us at a future date to file patent applications in a number
      of foreign countries or national phase filings, and included two United States
      Provisional Applications (the “Transferred Patents”):




•
            Antimicrobial
                Composition for Pre-Harvest and Post-Harvest Treatment of Plants
                and
                Animals (filed on August 20, 2004);




•
            Skin
                Care Composition for Dermatological Disorders including burn and
                wrinkle
                creams (United States Provisional Application);




•
            Oral
                Health Care Drink and Method for Reducing Malodors (filed on December
                21,
                2004);




6




•
            Antimicrobial
                Food Additive and Treatment for Cooked Food, Water and Wastewater
                (filed
                on February 24, 2005);




•
            Antimicrobial
                Processing Aid and Food Additive (United States Provisional Application);
                and




•
            Hangover
                Remedy and Alcohol Abatement Composition (filed on February 24, 2005).




In
      addition to the utility patent applications and provisional patent applications
      described above, we also recently filed in the United States Patent and
      Trademark Office three new provisional patent applications covering aspects
      of
      our technology and two continuation patent applications and three
      continuation-in-part patent applications based on a previously filed utility
      patent application. According to United States patent law, the term of issued
      patents are 20 years from the earliest date on which the corresponding
      application claims priority in the United States Patent and Trademark Office.
      The United States Patent and Trademark Office has issued one of our patent
      applications as U.S. Patent No. 7,192,618 on March 20, 2007. Additionally,
      we
      have made national phase filings for four of our patent applications in Europe
      and Mexico and for two of our patent applications in China, and plan to continue
      to make certain national phase filings with respect to our pending PCT patent
      applications.




We
      also
      entered into the Sub-License Agreement with pHarlo IP, LLC. Pursuant to the
      Sub-License Agreement, pHarlo IP has granted us an exclusive worldwide license
      to exploit the base patents (as defined below) in the following fields of use
      (the “Fields of Use”):




•
            Pre-harvest
                food processing and safety applications, including treatment for
                plants
                and animals;




•
            Post-harvest
                food processing and safety applications, including treatment for
                plants
                and animals, including the following:




•
            antimicrobial
                processing aide and food additive including specific seafood applications,
                and




•
            antimicrobial
                for airborne contaminants on cooked food;




•
            Breath
                and mouthwash applications;




•
            Hangover
                and alcohol abatement applications;




•
            Topical
                palliative for dermatological disorders, including skin moisturizing
                applications, anti-wrinkle applications and burn treatment applications;




•
            Pet
                product applications; and




•
            Antimicrobial
                water treatment applications.




Pursuant
      to the Sub-License Agreement, we granted to pHarlo IP a royalty-free, worldwide,
      exclusive right and license to import, export, make, have made, manufacture,
      use, offer for sale and sell any inventions outside the Field of Use that are
      disclosed and claimed in the Transferred Patents. In addition, pHarlo IP has
      the
      right to sublicense and assign to third parties all of the rights and licenses
      granted by us with respect to the Transferred Patents. The term of the
      Sub-License Agreement is until the expiration of the last to expire of the
      base
      patents.




To
      the
      extent that pHarlo IP expresses an intent to enter into a transaction with
      an
      unaffiliated third party pursuant to which the third party would acquire rights
      related to the base patents outside the Fields of Use, we have the right of
      first refusal to enter into the transaction with pHarlo IP for the same
      consideration and on the same terms offered to the third party (“Right of First
      Refusal”).




Subject
      to certain conditions, we may obtain a 10% equity ownership interest in Phitex
      Ltd. LLLP, the direct one hundred percent owner of pHarlo IP, the sole and
      exclusive licensee of the base patents. In the event we elect not to exercise
      this Right of First Refusal for rights to the base patents outside the Fields
      of
      Use, as an equity owner we would share in the monetary benefits derived by
      Phitex from any transaction between pHarlo IP and an unaffiliated third party
      pursuant to which that third party acquires rights to exploit the base patents
      outside the Fields of Use. Prior to the issuance of the Phitex equity interests,
      (i) the prospectus that forms part of the registration statement covering the
      resale of the shares acquired by the Selling Entities in the 2005 Acquisition
      must be amended or supplemented so that the Selling Entities can sell such
      shares for a period of 60 consecutive days; (ii) we must be in compliance with
      all of our obligations under the Asset Purchase Agreement forming part of the
      transaction documents for the 2005 Acquisition (subject to certain exceptions)
      and (iii) we must enter into a lock-up and repurchase right agreement relating
      to our Phitex equity interests. Under the lock-up and repurchase right
      agreement, Phitex will retain the right to repurchase our equity interests
      for a
      nominal amount upon a change of control of our company.




7




The
      technology that forms the basis of the pHarlo technology is derived from U.S.
      Patent No. 5,989,595 (filed on March 8, 1996), U.S. Patent No. 6,242,011(filed
      on August 5, 1999) and U.S. Patent Application Serial No. 10/453,805, the base
      patents. pHarlo IP is the sole and exclusive licensee of the base patents
      pursuant to a certain License Agreement by and between Mr. Barry Cummins and
      pHarlo IP, dated July 15, 2005, and effective as of March 18, 2005 (the “Base
      License”). Pursuant to the Base License, pHarlo IP is required to pay to Mr.
      Cummins royalties (“Base License Royalty Payments”). Pursuant to the Sub-License
      Agreement, in the event that pHarlo IP defaults in its obligations to make
      the
      Base License Royalty Payments to Mr. Cummins, pHarlo IP is required to assign
      that portion of the Base License representing all of the rights sublicensed
      to
      us under the Sub-License Agreement to us, and we will assume pHarlo IP’s
      obligation to pay the Base License Royalty Payments.




Prior
      to
      the 2005 Acquisition, on December 7, 2004, we entered into a Settlement
      Agreement and General Release pursuant to which we effectively purchased the
      exclusive rights of first refusal to applications of the pHarlo technology
      from
      Richard J. Kirby, a developer who had previously purchased the rights on July
      19, 2002. Under the terms of the settlement agreement, Mr. Kirby assigned and
      granted all his rights, titles and interests in his license agreements with
      pHarlo Citrus Technologies to us for which we agreed to pay Mr. Kirby a fee
      of
      one-half of one percent (0.5%) of net revenues generated from products using
      the
      pHarlo technology, in an amount not to exceed $400,000 in any one calendar
      year.
      On January 2006, we amended the Settlement Agreement and General Release. Under
      this amendment, sixty-five percent of half of one percent, or 0.325% of the
      fee,
      not to exceed $260,000 in any one calendar year, were to be paid to Mr. Kirby
      and the remaining thirty-five percent of one and one-half percent or 0.175%
      of
      the fee, not to exceed $140,000 in any one calendar year were to be paid to
      Mr.
      Tri Van To. As of December 31, 2006, under this agreement, we had paid fees
      to
      Mr. Kirby and Mr. To of approximately $76,000 and $8,000, respectively, in
      excess of the of the amounts earned under the agreement. In February 2007,
      Mr.
      Kirby agreed to forego any future fees in exchange for the forgiveness of any
      excess fees owed to date and a lump sum payment of $95,000. The agreement,
      related to Mr. To, continues until the termination or expiration of pHarlo
      Citrus Technologies’ patent to the licensed technology. No fees were paid to Mr.
      To under this agreement for the year ended December 31, 2007.




On
      January 26, 2006, we entered into a letter agreement with the Selling Entities
      and pHarlo IP that amended certain terms of the transaction documents related
      to
      the 2005 Acquisition, including the Sub-License Agreement. The Sub-License
      Agreement was amended, in part, to restructure the fees payable to pHarlo IP.
      Prior to the amendment, pHarlo IP had agreed to provide to us technical
      assistance necessary to implement, refine and exploit the base patents for
      the
      pHarlo technology in the Fields of Use. In consideration for the technical
      assistance, we had agreed to pay to pHarlo IP, in advance, prior to the calendar
      quarter for which they are payable, certain research and development fees
      (“R&D Fees”). The R&D Fees were originally set at a fixed amount and
      although subject to recovery in certain circumstances, were not dependent on
      sales of our products until certain thresholds had been met.




The
      amendment restructures the R&D Fees so that they are (i) payable on a
      quarterly basis within 30 days after the end of each calendar quarter and (ii)
      are based on gross sales of our company (or our affiliates) of products using
      the pHarlo technology. For fiscal year 2006, the R&D Fees must not be less
      than $150,000 and are capped at $500,000. In 2006 we paid pHarlo IP $150,000.
      There is no other minimum R&D Fees payable after 2006, although R&D Fees
      for all subsequent years are capped at specified rates.




*Trademarks*




In
      addition to our patent filings, we have also protected our intellectual property
      through trademark use and the filing of trademark applications in the United
      States and in certain foreign countries. The names under which we market our
      products are valuable assets to us and we have undertaken a program to protect
      these assets through appropriate trademark protection and our use of the names
      as trademarks.




8




We
      currently market a grooming aid that helps clean and disinfect the hooves of
      dairy cows, under the trademark *Unifresh* .
      We have
      filed trademark applications for the mark *Unifresh* in the
      United States and in Australia, Canada, China, France, Mexico and New Zealand.
      On February 14, 2006, the United States Patent and Trademark Office issued
      us
      trademark registration Serial No. 3,058,912 for our trademark *Unifresh* in the
      United States. We have additionally, received registrations for the mark *Unifresh* in
      Australia, France and New Zealand.




We
      also
      recently began marketing a product for pathogen reduction, extending the shelf
      life of certain seafood products and reducing odors under the trademark *Tasker
      Pacific Blue* .
      We have
      filed a trademark application for the mark *Tasker
      Pacific Blue* in the
      United States Patent and Trademark Office as well as in Argentina, Brazil,
      Canada, Chile, China, Mexico, Peru and the Russian Federation.




Our
      oral
      hygiene breath drink that reduces odors from tobacco, garlic, onion and alcohol
      is currently being marketed under the trademark *Close
      Call* .
      We have
      filed trademark applications for the mark *Close
      Call* in the
      United States and in Canada, China and Mexico. On May 16, 2006, the United
      States Patent and Trademark Office issued us trademark registration Serial
      No.
      3,093,254 for our trademark *Close
      Call* in the
      United States for our oral hygiene breath drink. On December 12, 2006, the
      United States Patent and Trademark Office issued us trademark registration
      Serial No. 3,184,240 for our trademark *Close
      Call* in the
      United States for our breath freshener product. We have also filed a number
      of
      applications in the United States, China and Mexico to register the mark *Close
      Call* for use
      in conjunction with the marketing of other types of products. We have received
      notices of allowance from the United States Patent and Trademark Office on
      September 27, 2005 with respect to three of these applications, on May 16,
      2006
      with respect to three of these applications, and on October 30, 2006 with
      respect to two of these applications. Three of our trademark applications in
      Mexico for the mark *Close
      Call* issued
      as registrations on December 9, 2005 and one issued as a registration on
      February 5, 2005. We have additionally received 2 registrations for the mark *Close
      Call* in
      China.




We
      have
      also filed trademark applications in the United States for the trademark Tasker
      and a number of other trademarks that we intend to use in conjunction with
      the
      marketing of future products. These trademark applications were filed as intent
      to use, or ITU, applications. Two of these applications were allowed by the
      United States Patent and Trademark Office and the others are pending.




Pursuant
      to the 2005 Acquisition we acquired trademark registration Serial No. 2,936,272,
      which was registered on March 29, 2005, for the mark *pHB0020* .




According
      to United States trademark law, these trademark registrations will remain in
      force for a period of ten years from the date of registration to the extent
      that
      the trademarks remain in continuous use during that time. These trademark
      registrations may be renewed for additional periods of ten years each, at the
      end of each successive ten year period following the date of registration.




**Product
      Development**




Research
      and development of new products using the pHarlo technology, as well as other
      products, are continually under development. Our efforts in this area are
      focused on the product applications to which we currently have rights of use.
      It
      is our intention to develop and market commercially viable applications for
      this
      technology within its product ranges. We spent approximately $1,438,000,
      $1,803,000 and $3,356,000 on product development costs for the years ended
      December 31, 2007, 2006, and 2005, respectively. This
      decrease in product development costs is primarily due to our continuing efforts
      to focus our development activities on a select smaller number of products
      that
      are closer to commercialization.




**Employees**




At
      March
      14, 2008, we had 37 full-time employees, 24 of whom are in sales and technical
      support, 1 of whom is in research and development, 7 of whom are in warehousing
      and production and of 5 whom are in finance and administration. None of our
      employees are represented by a labor union. We have not experienced any work
      stoppages and believe that employee relationships are good. Our future success
      will depend in part on our ability to attract, retain and motivate highly
      qualified technical and managerial personnel.




9




**Available
      Information**




We
      file
      annual, quarterly, and current reports, proxy statements, and other information
      with the Securities and Exchange Commission. The public may read and copy any
      documents we file at the Commission’s Public Reference Room at 100 F Street NE,
      Washington, D.C. 20549. The public may obtain information on the operation
      of
      the Public Reference Room by calling the Commission at 1-800-SEC-0330. SEC
      filings are also available to the public from the SEC’s Internet website at
      http://www.sec.gov.




We
      make
      available free of charge on or through our Internet website at
      www.taskerproducts.com our annual reports on Form 10-K, quarterly reports on
      Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
      or
      furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
      reasonably practicable after we electronically file such material with, or
      furnish it to, the Commission. Our Code of Business Conduct and Ethics is
      available on our Internet site at www.taskerproducts.com or may be obtained,
      free of charge, by writing to the Secretary, Tasker Products Corp.,21-00 Route
      208 Fairlawn, NJ 07410 .




**ITEM
      1A. RISK FACTORS**




*You
      should carefully consider the following factors as well as other information
      appearing elsewhere in this document, before you decide whether to purchase
      shares of our common stock. This document contains forward-looking statements
      that involve risks and uncertainties, and actual results may differ materially
      from the results we discuss in the forward-looking statements. If any of the
      following risks actually occur, they could have a severe negative impact on
      our
      financial results and stock price.*




**RISKS
      RELATED TO OUR BUSINESS**




***Unless
      we obtain new financing and/or generate revenue growth in the near future,
      our
      liquidity position will become significantly impaired***





We
      believe that we will have adequate working capital to fund our operations during
      the next twelve months based upon:





·
            our
                projections of future revenues from our
                products





·
            cash
                and cash equivalents as of December 31, 2007;





·
            cash
                in the amount of $135,000 received in January 2008 from the sale
                of our
                securities; and




·
            available
                cash from a proposed $3 - $5 million credit facility, which is currently
                being negotiated. We can give no assurance that we will obtain the
                proposed $3 - $5 million credit
                facility.




Our
      ability to continue to operate and grow our business is dependent upon obtaining
      the proposed credit facility, exercise of outstanding warrants and/or generating
      revenue growth from operations. While we have been in the process of
      aggressively developing, marketing and selling our products, there can be no
      assurance that those efforts will be met with success in the marketplace or
      that
      the timing of our efforts will be consistent with our cash availability and
      burn
      rate. If we do not obtain the contemplated credit facility, obtain sufficient
      cash from the exercise of outstanding warrants and/or generate sufficient
      revenue growth from existing and new business arrangements, we will not have
      sufficient cash to support our continued operations and meet our
      obligations.




10




***We
      have lost money in each fiscal quarter since we changed our business model
      to
      the development of products in the oral care, food processing, skin care, water
      purification and pet industries. We expect future losses and we may never become
      profitable.***




We
      have
      incurred losses from operations in each quarter since we changed our business
      direction in late 2002. Our net losses for the years ended December 31, 2007,
      2006 and 2005 were approximately $41,394,000, $62,943,000 and $18,269,000,
      respectively. We expect to continue to incur losses for at least the next six
      months. We anticipate operating expenses will increase as we attempt to build
      our brands, expand our customer base and develop new products. To become
      profitable, we must increase revenue substantially and achieve and maintain
      positive gross margins. We may not be able to increase revenue and gross margins
      sufficiently to achieve profitability. If we are not able to achieve
      profitability, our results of operations and financial condition will be
      materially and adversely affected.




Our
      consolidated financial statements have been prepared assuming that we will
      continue as a going concern. As discussed in the consolidated financial
      statements, we have incurred negative cash flow from operations and net losses
      since inception and have a working capital deficiency. These conditions, among
      others, raise substantial doubt about our ability to continue as a going
      concern.




***To
      the extent that future impairment charges occur, they will likely have a
      material impact on our financial results.***




In
      the
      second quarter of 2006, we tested for impairment of our intangible assets and
      our goodwill in accordance with Statement of Financial Accounting Standards
      (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
(SFAS No. 144) and SFAS No. 142 “Goodwill and Other Intangible Assets” (SFAS No.
      142), respectively. Our testing was triggered by the following events and
      circumstances that constitute impairment indicators under the literature:




•
            a
                preliminary expectation that revenues originally projected for the
                third
                and fourth quarters of 2006 would not be attained;




•
            a
                decrease in expected future cash flows; and




•
            a
                decline in the market price of our common stock




Upon
      completion of the impairment tests during the second quarter of 2006, we
      recorded non-cash impairment charges to intangible assets and goodwill of $12.2
      million and $17.9 million, respectively.




Also
      in
      the fourth quarter of 2006, we tested for impairment of our intangible assets
      and our goodwill as part of our annual goodwill impairment review. Upon
      completion of the impairment tests, we recorded non-cash impairment charges
      to
      goodwill of $13.9 million. There was no impairment of our intangible assets.




Note
      6 to
      our audited consolidated financial statements for the year ended December 31,
      2007 and December 31, 2006 describes the impairment tests performed and their
      impact during the fourth quarter of 2006 and the second quarter of 2006. There
      can be no assurance that there will not be impairment charges in subsequent
      periods as a result of our future periodic impairment reviews. To the extent
      that future impairment charges occur, they will likely have a material impact
      on
      our financial results.




***We
      have a limited operating history in our present market and prospective investors
      have a limited historical basis on which to judge our ability to be successful.***




We
      were
      originally organized for the purpose of engaging in the acquisition and
      exploration of mineral properties, primarily in the Province of British
      Columbia, Canada. During 2001, we allowed the option on our mineral property
      to
      lapse and began to investigate other business opportunities. In late 2002,
      we
      entered into an exclusive license to sell, develop, market and distribute
      consumer deodorant breath products, animal deodorant breath products and soft
      drink products using the pHarlo technology. Since late 2002, we have pursued
      this business plan and have expanded it to include the use of the pHarlo
      technology in the pre- and post-harvest food processing, skin care, pet care,
      hangover remedy, alcohol abatement and water purification industries.




11




Since
      inception, we have suffered recurring losses and net cash outflows from
      operations. We expect to continue to incur substantial losses to complete the
      development of our business. We have a limited operating history upon which
      investors may evaluate our likely future performance.




***We
      completed in July 2005 a significant acquisition of certain assets of pHarlo
      Citrus Technologies, Inc. and other related entities. We cannot guarantee that
      we will be able to manage these new assets profitably*** .




On
      July
      15, 2005, we purchased certain assets of pHarlo Citrus Technologies, Inc.,
      Indian River Labs, LLC, pHarlo Citrus Properties Partnership, LLLP and Coast
      to
      Coast Laboratories, LLC, which four entities are referred to in this annual
      report as the “Selling Entities.” This acquisition (the “2005 Acquisition”),
      represented a highly significant event for our company. Prior to the
      acquisition, we licensed the use of certain patent applications covering various
      uses for the pHarlo technology and improvements from the Selling Entities and
      also purchased the pHarlo concentrate, a concentrate made using the pHarlo
      technology from Indian River Labs. As a result of the 2005 Acquisition and
      the
      purchase of all of the working assets of Indian River Labs, we now control
      various uses of pHarlo technology in the manufacturing process for the pHarlo
      concentrate. Our business, financial condition and results of operations could
      suffer materially if we fail to successfully manage these assets and the
      manufacturing process.




***Past
      restatements and amendments to our interim financial statements and quarterly
      reports, as well as deficiencies in our disclosure controls and procedures
      and
      internal control over financial reporting, may present a risk of future
      restatements and disclosure compliance errors which could lead to legal
      exposure*** .




We
      restated and amended our interim financial statements for the periods ended
      June
      30, 2004, September 30, 2004 and September 30, 2005 and filed amendments to
      our
      quarterly reports on Form 10-QSB for each of those periods reflecting these
      restatements. While in the process of amending our quarterly reports on Form
      10-QSB to restate these financial statements, we became aware of certain
      required information that had been omitted and other information that needed
      to
      be changed or corrected. As a result of the foregoing, we revised these
      quarterly reports to correct this information and to state, among other things,
      that our disclosure controls and procedures were not effective as of June 30,
      2004, September 30, 2004 and September 30, 2005.




As
      of
      December 31, 2006, and December 31, 2007, our management concluded that our
      disclosure controls and procedures were not effective. We continue taking what
      we believe to be reasonable and appropriate steps to correct these deficiencies.
      We will also continue to assess the adequacy and appropriateness of these
      actions and adjust our remediation plan as needed or to reflect changes in
      our
      business. However, we cannot be certain when these deficiencies will ultimately
      be remediated and we expect that we will need a period of time over which to
      demonstrate that our disclosure controls are functioning appropriately to
      conclude that we have adequately remediated the deficiencies. Any failure to
      implement and maintain improvements in our disclosure and internal controls
      may
      present a risk of future restatements and disclosure compliance errors and
      could
      in turn lead to legal exposure. Any failure to improve these controls to address
      the identified deficiencies, or any other unidentified deficiencies, could
      also
      cause investors to lose confidence in our reported financial information, which
      could have a negative impact on the trading price of our common stock. This
      could have a material adverse effect on our business and financial results.




***We
      have limited experience in the marketing of our products and may not be able
      to
      market them successfully*** .




We
      currently market Unifresh(R) and SaniPhresh(TM) ** Footbaths,
      grooming aids that helps clean and disinfect the hooves of dairy cows, Tasker
      Blue, an antimicrobial aid used in the scalder process of poultry processing
      and
      the post-feather picker process and Tasker Pacific Blue(TM) Seafood Wash, a
      product used in commercial and retail seafood processing to extend shelf life.
      Shelf life extension is the act of increasing the length of the time a product
      can spend during processing, distribution and retail before becoming
      unacceptable for consumption.




12




The
      markets to which we sell our products are diverse and we may not be aware of
      all
      the customs and practices and may not be able to successfully compete in these
      industries. We believe that we will need to hire appropriate consultants and
      staff to reach all of these markets successfully. The consultants that we may
      retain may not have sufficient experience to enable us to completely understand
      the characteristics of these diverse industries. There can be no assurance
      that
      we will properly ascertain or assess any and all risks inherent in our proposed
      markets or that we will successfully enter into new markets or grow in our
      existing markets.




***Our
      ability to reach some of the markets currently set forth in our business plan
      will require regulatory approval. In addition, new products that we may develop
      or acquire may also require regulatory approval.***




The
      ingredients that we use to produce the pHarlo concentrate are classified by
      the
      FDA as “Generally Recognized as Safe”. Therefore, we believe that our current
      line of products that utilize the pHarlo concentrate; including the intended
      uses of these products, do not require further approval by the FDA. However,
      we
      may develop or acquire future products that use ingredients that will need
      to be
      approved by the FDA, or we may alter the intended uses of our current product,
      such that those products require additional FDA approval(s). There can be no
      assurance that FDA approval, if necessary, will be obtained.




Subsequent
      to December 31, 2006, we began the in-plant testing of an application of Tasker
      Blue for use in the On-Line Reprocessing, the final spray wash, section and
      received in March 2008 authorization to proceed with in-plant tests for an
      application in the Post Chill Spray, or cold water spray, section in an effort
      to receive consent from the USDA to market these applications to poultry
      processors for commercial use. Tests of our On-Line Reprocessing application
      were suspended when we were informed of the USDA’s intention to reconsider this
      requirement of this section as an intervention point in controlling bacteria.
      We
      may resume testing of our OLR application when the USDA finalizes the
      requirements for this section. We began tests for the Chiller and Post Chiller
      Spray application in the first quarter of 2008. If the Chiller and Post Chiller
      Spray tests are successful and we receive a Letter of No Objections from the
      FSIS, we will have commercial applications in six of the seven intervention
      stages of poultry processing. We have begun the commercialization phase of
      this
      application of the pHarlo technology. There can be no assurance that we will
      successfully complete the commercial verification process. If we do not
      successfully complete the commercial verification process, this may have a
      material adverse effect on our business plan. In addition to the poultry
      processing industry, we are currently marketing the pHarlo technology for use
      in
      seafood processing. There can be no assurance that the products will obtain
      all
      necessary approvals, or, if granted, that the approvals will not include
      significant limitations on the indicated uses for which the products may be
      marketed or other restrictions or requirements that may reduce the value of
      the
      products




***A
      key component of our business strategy is the proprietary nature of the pHarlo
      concentrate, and, therefore, our inability to protect our intellectual property
      rights could materially harm our business.***




The
      pHarlo concentrate that we produce is based upon both the patent applications
      that we purchased in the 2005 Acquisition, as well as on certain base patents
      and base patent applications, or patents and applications that we license.
      We
      have entered into an exclusive worldwide royalty free sub-license with pHarlo
      IP, the exclusive licensee of the base patents and base patent applications, to
      exploit these base patents and applications in certain fields of use. Protecting
      this intellectual property, in addition to protecting the patent applications
      that we purchased in the 2005 Acquisition, is a key component to the success
      of
      our business. If an infringement occurs within the field of use specified in
      our
      sub-license agreement, there can be no assurance that we would be successful
      in
      any action to protect our rights under the patent applications that we have
      purchased. In addition, there can be no assurance that the base patent
      applications or the patent applications that we have purchased will ultimately
      be protected by an issued patent.




***Intense
      competition could harm our financial performance and the value of your
      investment*** .




Some
      of
      the industries in which we are or will be marketing our products are
      characterized by intense competition.




13




Our
      Unifresh and SaniPhresh ** Footbaths
      control a hoof infection known as digital dermatitis that causes lameness,
      swelling and fever in dairy cows, resulting in a drastic decrease in milk
      production. Forms of treatment include antibiotic bandaging and topical sprays
      using Terramycin(R) (oxytetracycline — an antibiotic) and footbaths using
      Formalin (a saturated solution of formaldehyde), copper sulfate, Tetracycline
      (a
      broad-spectrum antibiotic) or Peracetic Acid (a disinfectant and sanitizer).
      Unifresh Footbath’s underlying technology, pHarlo technology, uses a highly
      acidified form of copper sulfate that helps control the bacteria that cause
      digital dermatitis. Some competing products using copper sulfate include
      QuickHit, Healthy Foot and HoofPro+ by SSI Corporation; Double-Action(TM) Hoof
      Treatment by West Agro, Inc.; and Hoofcare Supercharger manufactured by Marabo.




Currently,
      there is little competition for bacterial inhibitors in the scalding process
      of
      poultry processors. We intend to expand the use of the pHarlo technology into
      the remaining operations of poultry processing. However, we believe we will
      encounter competition in the chill process from manufacturers of sodium
      hydrochloride or sodium hypochlorite, chemical compound solutions frequently
      used as disinfectants and bleaching agents. The chill process is cold water
      or
      air that is used in poultry processing to reduce the temperature of the carcass
      to 40 degrees Fahrenheit in order to maintain food safety.




Currently,
      our seafood application product, Pacific Blue(TM), is the only treatment in
      the
      market that reduces odors on seafood by reducing the bacteria that causes
      spoilage. When and if the market for Pacific Blue(TM) develops, additional
      products created by competitors may enter the market and compete.




There
      may
      be a number of companies, universities and research organizations actively
      engaged in research and development of technology that could be similar to
      our
      processes and ultimately become our competitors. We cannot assure you that
      we
      will be able to successfully compete with current or future competitors who
      may
      have substantially greater assets, technical staff, established market share
      and
      greater financial and operating resources than we have. If we are unable to
      successfully compete with these industry competitors, it may have a material
      adverse effect on our business plan.




***Some
      provisions of our amended and restated articles of incorporation, bylaws, and
      Delaware law may inhibit potential acquisition bids that may be considered
      favorable to our stockholders.***




Our
      corporate documents contain provisions that may enable our board of directors
      to
      resist a change in control of our company even if a change in control were
      to be
      considered favorable by our stockholders. These provisions include:




•
            limitations
                on persons authorized to call a special meeting of stockholders;




•
            the
                ability of a majority of the directors then in office to fill vacancies
                in
                directorships; and




•
            no
                cumulative voting.




These
      and
      other provisions contained in our amended and restated articles of incorporation
      and bylaws could delay or discourage transactions involving an actual or
      potential change in control of us or our management, including transactions
      in
      which our stockholders might otherwise receive a premium for their shares over
      then current prices, and may limit the ability of stockholders to remove our
      current management or approve transactions that our stockholders may deem to
      be
      in their best interests and, therefore, could adversely affect the price of
      our
      common stock.




In
      addition, we are subject to control share acquisitions provisions and affiliated
      transaction provisions of the Delaware General Corporation Law, the applications
      of which may have the effect of delaying or preventing a merger, takeover or
      other change of control of us and therefore could discourage attempts to acquire
      our company.




**RISKS
      RELATED TO OUR COMMON STOCK**




***If
      we are unable to comply with the terms of registration rights agreements to
      which we are a party, we may be obligated to pay liquidated damages to some
      of
      our security holders.***




In
      connection with our April 2004, July 2004, December 2004, September 2005 and
      January 2006 private placements, we entered into registration rights agreements
      with certain of our security holders in which we agreed to prepare and file
      with
      the SEC registration statements to register certain shares of common stock,
      which registration statements must be maintained effective for certain specified
      periods. If we are unable to comply with these provisions of these registration
      rights agreements, we may be obligated to pay liquidated damages to the holders
      of the securities covered by such registration rights agreements. If we are
      required to pay such liquidated damages or other amounts to these holders,
      our
      business, financial condition, operating results and cash flows would be
      materially adversely affected.




14




Registration
      statements with respect to the April 2004, July 2004 and December 2004 private
      placements were filed and declared effective in a timely manner. However, on
      June 14, 2006, we notified the holders of securities acquired in these private
      placements that the prospectuses contained within these registration statements
      contained financial and other information that was not current and that, as
      a
      result, such prospectuses could not be used to offer and sell such securities.
      Our obligation to accrue liquidated damages under these registration rights
      agreements ceased in April 30 and July 22, 2006, respectively. For the period
      through July 22, 2006, we have accrued $442,000 in liquidated damages related
      to
      these agreements.




We
      were
      unable to have the registration statement registering resale of securities
      purchased in the September 2005 private placement declared effective by the
      deadline specified in the applicable registration rights agreement. However,
      in
      connection with the January 2006 private placement, we obtained waivers of
      all
      claims for liquidated damages relating to our inability to have such
      registration statement declared effective by the specified deadline. Under
      the
      waiver, the date by which the registration statement covering resale of the
      securities purchased in the September 2005 private placement was required to
      be
      declared effective was extended to May 23, 2006. On April 26, 2006, we filed
      a
      registration statement registering resale of securities purchased in the
      September 2005 and January 2006 private placements. We believe, that as it
      relates to the September 2005 private placement, we have used our best efforts
      to cause the registration statement to be declared effective and, therefore,
      pursuant to the terms of the September 2005 registration rights agreement,
      we
      believe that we are not currently liable for liquidated damages as a result
      of
      the registration statement not being declared effective by May 23, 2006. Should
      the rights holders dispute that our best efforts were used, and we either accede
      to the assertion or are found to not have used our best efforts, the estimated
      maximum amount of liquidated damages for which we would be liable, assuming ineffectiveness
      from May 23, 2006 to October 31, 2006, is approximately $43,000. Also,
      as
      it relates to the January 2006 private placement, we, despite using our best
      efforts, failed to have the registration statement declared effective by the
      SEC
      on or before October 26, 2006. Consequently, as of December 31, 2006 we were
      required to issue to each holder of the January 2006 private placement, shares
      and warrants equal to one percent of the respective number of shares and
      warrants purchased by each holder or an aggregate of 133,359 shares of common
      stock and warrants to purchase 133,359 shares of common stock. As of December
      31, 2007, we had not issued these shares and warrants.





We
      are
      required to file a series of registration statements covering the resale of
      the
      shares of common stock underlying the 6% Notes, the Warrants, the December
      6%
      Notes and the December Warrants as well as the warrants issued to the placement
      agent in connection with the issuance of the First Bridge Notes, Second Bridge
      Notes and 6% Notes issued for cash and in connection with the Tender Offer
      (all
      as defined below). In the event we fail to file or cause these registration
      statements to become effective within specified time periods, we will be
      required to pay liquidated damages (except with respect to warrants issued
      to
      the placement agent) equal to 1% of the principal amount of the affected notes
      and the purchase price of shares of common stock issued on conversion of these
      notes and exercise of related warrants for each 30-day delay in the filing
      or
      effectiveness of such registration statement (or such lesser pro-rata amount
      for
      any period of less than 30 days).




If
      we are
      required to pay such liquidated damages or other amounts to these holders,
      our
      business, financial condition, operating results and cash flows would be
      materially adversely affected.




***Future
      sales of our common stock may cause our stock price to decline.***




Since
      our
      inception, we have funded operations through common stock issuances in order
      to
      meet our strategic objectives. We have completed six private sales of common
      stock and securities convertible into common stock. We may, in the future,
      issue
      more shares of common stock in sales that may or may not be registered under
      the
      Securities Act of 1933, or the Securities Act. Our stock price may decline
      due
      to future sales of our shares or even the perception that such sales may occur.




15




***Our
      stock price has been extremely volatile in recent years and continues to
      fluctuate widely.***




Our
      common stock is traded on the OTC Bulletin Board. There can be no assurance
      that
      an active public market will continue for the common stock, or that the market
      price for the common stock will not decline below its current price. The price
      of our common stock may be influenced by many factors, including, but not
      limited to, investor perception of us and our industry and general economic
      and
      market conditions. The trading price of our common stock has fluctuated widely
      in recent years, ranging from a low of $0.06 per share in the fourth quarter
      of
      fiscal year 2006 to a high of $5.15 per share in the first quarter of fiscal
      year 2005, and continues to be subject to wide fluctuations in response to
      announcements of our business developments or our competitors, quarterly
      variations in operating results and other events or factors. In addition, stock
      markets have experienced extreme price volatility in recent years. This
      volatility has had a substantial effect on the market prices of companies,
      at
      times, for reasons unrelated to their operating performance. Such broad market
      fluctuations may adversely affect the price of our common stock.




***The
      large number of shares available for future sale could adversely affect the
      price of our common stock.***





As
      of
      March 14, 2008:




·
            17,647,148
                shares of common stock were issuable as compensation for employees,
                directors and consultants upon exercise of outstanding stock options
                with
                a weighted average exercise price of $0.37 per
                share;




·
            51,210,312
                shares of our common stock were issuable as compensation for employees,
                directors and consultants upon exercise of our outstanding warrants
                with
                exercise prices between $0.11 and $0.33 per
                share;




·
            82,820,823
                shares of common stock were issuable upon exercise of outstanding
                warrants
                with exercise prices between $0.0725 and $2.00 per
                share;




·
            551,724
                shares of common stock were issuable upon the conversion of the
                outstanding First Bridge Note with a conversion price of $0.0725
                per
                share;




·
            124,978,812
                shares of common stock were issuable upon the conversion of the 6%
                Notes
                with conversion prices between $0.0725 and $0.11 per
                share.


·
              371,612
                    shares and 71,970 shares of common stock were issuable upon the
                    conversion
                    of the Interest Notes with conversion prices of $0.0725 and $0.11
                    per
                    share respectively;
 ·
                  23,694,955
                          shares of our common stock were issuable upon conversion
                          of the December
                          6% Notes with a conversion price of $0.09 per share;
                          and




In
      addition, the registration rights agreement for the January 2006 private
      placement requires us to pay liquidated damages in the form of additional common
      stock and warrants. As of September 30, 2007, 133,359 shares and 133,359
      warrants are issuable as liquidated damages under the terms of the January
      2006
      registration rights agreement.




We
      are
      required to file a series of registration statements covering the resale of
      the
      shares of common stock underlying the 6% Notes, the Warrants, the December
      6%
      Notes, the December Warrants and the Interest Notes, as well as the warrants
      issued to the placement agent in connection with the issuance of the First
      Bridge Notes, Second Bridge Notes and 6% Notes issued for cash and in connection
      with the Tender Offer. In the event we fail to file or cause these registration
      statements to become effective within specified time periods, we will be
      required to pay liquidated damages (except with respect to warrants issued
      to
      the placement agent) equal to 1% of the principal amount of the affected notes
      and the purchase price of shares of common stock issued on conversion of these
      notes and exercise of related warrants for each 30-day delay in the filing
      or
      effectiveness of such registration statement (or such lesser pro-rata amount
      for
      any period of less than 30 days).




16




Substantially
      all of the shares underlying these notes, options and warrants have been or
      would be registered for resale, and none of them are subject to any contractual
      restrictions on resale. Future sales of any of these shares, or the anticipation
      of such sales, could adversely affect the market price of our common stock
      and
      could materially impair our future ability to raise capital through an offering
      of equity securities. Further, any issuance of a substantial number of these
      shares would dilute the ownership interest of existing stockholders and could
      result in increased volatility in the price of our common stock.




***The
      effect of a possible reverse split of our common stock is
      unknown.***




At
      our
      2007 Annual Meeting of Stockholders, our stockholders approved a proposal
      granting our board of directors the discretionary authority to effect a reverse
      stock split at any time prior to June 30, 2009, without further stockholders’
approval. The board of directors has no immediate plans to effectuate a reverse
      split. The range at which the board could effect the reverse stock split is
      from
      one-for-five to one-for-twenty, with the exact exchange ratio to be set by
      the
      board of directors in its sole discretion within this range at the time it
      elects to effect a reverse split. The effect of the reverse split upon the
      market price for our common stock cannot be accurately predicted. In particular,
      there is no assurance that prices for shares of our common stock after the
      reverse split will be five to twenty times, as applicable, greater than the
      price for shares of our common stock immediately prior to the reverse split.
      Furthermore, there can be no assurance that the marketability of the common
      stock will improve and that the market price of our common stock immediately
      after the proposed reverse split will be maintained for any period of time.
      Moreover, because some investors may view the reverse split negatively, there
      can be no assurance that the reverse split will not adversely impact the market
      price of our common stock or, alternatively, that the market price following
      the
      reverse split will either exceed or remain in excess of the current market
      price.




***Our
      common stock, which is quoted on the OTC Bulletin Board, has several
      disadvantages from those securities traded on The Nasdaq Stock Market.***




Our
      common stock, which is quoted on the OTC Bulletin Board, has several
      disadvantages from those securities traded on The Nasdaq Stock Market. These
      disadvantages include the following:




•
            The
                SEC’s order handling rules, which apply to Nasdaq-listed securities,
                do
                not apply to securities quoted on the OTC Bulletin Board.




•
            While
                The Nasdaq Stock Market has rigorous listing standards to ensure
                the high
                quality of its issuers, and can delist issuers for not meeting those
                standards, the OTC Bulletin Board has no listing standards. Rather,
                it is
                the market maker who chooses to quote a security on the system by
                filing
                an application with the National Association of Securities Dealers,
                or
                NASD. The NASD cannot deny an application by a market maker to quote
                the
                stock of a company. The only requirement for inclusion in the OTC
                Bulletin
                Board is that the issuer be current in its reporting requirements
                with the
                SEC.




•
            Trading
                activity on the OTC Bulletin Board in general is not conducted as
                efficiently and effectively as with Nasdaq-listed securities. Investors
                must contact a broker-dealer to trade OTC Bulletin Board securities.
                Investors do not have direct access to the bulletin board service.
                For
                bulletin board securities, there only has to be one market maker.




•
            Bulletin
                board transactions are conducted almost entirely manually. Because
                there
                are no automated systems for negotiating trades on the bulletin board,
                they are conducted via telephone. In times of heavy market volume,
                the
                limitations of this process may result in a significant increase
                in the
                time it takes to execute investor orders. Therefore, when investors
                place
                an order to buy or sell a specific number of shares at the current
                market
                price, it is possible for the price of a stock to go up or down
                significantly during the lapse of time between placing a market order
                and
                getting execution.




•
            Shares
                traded on the OTC Bulletin Board generally are quoted with greater
                spreads
                between bid and ask prices and may be more expensive to buy or sell.




•
            Because
                bulletin board stocks are usually not followed by analysts, there
                may be
                lower trading volume than for Nasdaq-listed securities.




17




***If
      we fail to remain current on our reporting requirements, we could be removed
      from the OTC Bulletin Board, which would limit the ability of broker-dealers
      to
      sell our securities and the ability of stockholders to sell their securities
      in
      the secondary market.***




Companies
      like Tasker that trade on the OTC Bulletin Board must be reporting issuers
      under
      Section 12 of the Exchange Act of 1934, and must be current in their filing
      with
      the SEC of periodic reports under Section 13, in order to maintain price
      quotation privileges on the OTC Bulletin Board. If we fail to remain current
      with respect to reporting requirements, we could be removed from the OTC
      Bulletin Board. In such event, the market liquidity for our securities could
      be
      severely adversely affected because the ability of broker-dealers to sell our
      securities and the ability of stockholders to sell their securities in the
      secondary market would be limited.




***Since
      our common stock is subject to the SEC’s penny stock rules, broker-dealers may
      experience difficulty in completing customer transactions and trading activity
      in our securities may be adversely affected.***




A
      public
      company’s common stock is subject to the penny stock rules promulgated under the
      Securities Exchange Act of 1934, or Exchange Act, unless its net tangible assets
      are greater than $2,000,000 or its common stock has a market price per share
      greater than $5.00. Under these rules, broker-dealers who recommend such
      securities to persons other than institutional accredited investors must:




•
            make
                a special written suitability determination for the purchaser;




•
            receive
                the purchaser’s written agreement to a transaction prior to sale;




•
            provide
                the purchaser with risk disclosure documents that identify certain
                risks
                associated with investing in “penny stocks” and that describe the market
                for these “penny stocks,” as well as a purchaser’s legal remedies; and




•
            obtain
                a signed and dated acknowledgment from the purchaser demonstrating
                that
                the purchaser has actually received the required risk disclosure
                document
                before a transaction in “penny stock” can be completed.




Since
      our
      common stock is subject to these rules, broker-dealers may find it difficult
      to
      effect customer transactions and trading activity in our securities may be
      adversely affected. As a result, the market price of our securities may be
      depressed, and you may find it more difficult to sell our securities.




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**




There
      are
      no unresolved written comments from the staff of the SEC regarding our periodic
      or current reports received not less than 180 days before the end of our fiscal
      year to which this Form 10-K relates.




**ITEM
      2. PROPERTIES**




Effective
      October 1, 2007, we have relocated our Corporate Office from Danbury,
      Connecticut, to Fairlawn, New Jersey. As a result of this relocation we lease
      in
      New Jersey 2,000 square feet of office space under a lease that expires in
      October 2010. Additionally, we lease approximately 9,000 square feet of office
      space at our former corporate headquarters in Danbury, Connecticut under a
      lease
      that expires in April 2010. We are currently pursuing restructuring alternatives
      of our Danbury, Connecticut, lease. We also occupy approximately 27,000 square
      feet of manufacturing, warehouse and office space under a lease in Conroe,
      Texas
      that expires in September 2009. We also rent on a month to month basis 400
      square feet of office space in Portsmouth, New Hampshire.




18




**ITEM
      3.** **LEGAL
      PROCEEDINGS**




We
      are
      involved in certain legal proceedings and we are subject to certain lawsuits,
      claims and regulations in the ordinary course of our business. Although the
      ultimate effect of these matters is often difficult to predict, we believe
      that
      their resolution will not have a material adverse effect on our financial
      statements.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




No
      matter
      was submitted to a vote of our stockholders, through the solicitation of proxies
      or otherwise, during the fourth quarter of fiscal year 2007.




There
      was
      no matter submitted during the fourth quarter of the fiscal year covered by
      this
      report to a vote of security holders, through the solicitation of proxies or
      otherwise.




**PART
      II**




**ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES**




**Market
      for Common Stock**




Our
      common stock is currently quoted on the OTC Bulletin Board under the symbol
      “TKER.”






The
      following table sets forth, for the periods indicated, the high and low bids
      for
      our common stock-based on inter-dealer prices, without retail mark-up, mark-down
      or commission and may not represent actual transactions.




**Price
                    Range of Common Stock****Quarter
                    Ended**
                
                **High**
                
                **Low****Fiscal
                    2006**First
                    Quarter
                
                $
                1.04
                
                $
                0.54Second
                    Quarter
                
                $
                0.74
                
                $
                0.44Third
                    Quarter
                
                $
                0.57
                
                $
                0.08Fourth
                    Quarter
                
                $
                0.26
                
                $
                0.06**Fiscal
                    2007**First
                    Quarter ..
                
                $
                0.23
                
                $
                0.12Second
                    Quarter ..
                
                $
                0.36
                
                $
                0.17Third
                    Quarter ..
                
                $
                0.29
                
                $
                0.14Fourth
                    Quarter ..
                
                $
                0.36
                
                $
                0.14




As
      of
      March 14, 2008, we had 137,736,397 shares of common stock outstanding and
      approximately 100 stockholders of record. Because many of the shares are held
      by
      brokers and other institutions on behalf of stockholders, we are unable to
      estimate the total number of individual stockholders represented by these
      holders of record.




The
      closing price for our common stock on March 14, 2008 was $0.08. For purposes
      of
      calculating the aggregate market value of the shares of our common stock held
      by
      non-affiliates, as of June 29, 2007, as shown on the cover page of this report,
      it has been assumed that all of the outstanding shares were held by
      non-affiliates except for the shares beneficially held by our directors and
      executive officers and stockholders beneficially holding 10% or more of our
      outstanding common stock, as reflected in filings such persons are required
      to
      make with the Securities and Exchange Commission under Sections 13(d) or 13(g)
      of the Exchange Act. However, there may be other persons who may be deemed
      to be
      affiliates of ours.




19




We
      have
      never paid dividends on our common stock. We intend to retain our earnings
      for
      use in our business and, therefore, do not anticipate paying any cash dividends
      on our common stock for the foreseeable future.




**Performance
      Graph**




The
      graph
      below compares the performance of our common stock with the performance of
      the
      S&P SC 600 and S&P SC Diversified Chemicals from February 20, 2002 (the
      date our common stock commenced trading) through December 31, 2007.









**12/31/2002**
            
            **12/31/2003**
            
            **12/31/2004**
            
            **12/31/2005**
            
            **12/31/2006**
            
            **12/31/2007****Tasker
                Products Corp.**
            
            **$**
            **100.00**
            
            **$**
            **12.20**
            
            **$**
            **228.46**
            
            **$**
            **59.35**
            
            **$**
            **15.04**
            
            **$**
            **4.23****S&P
                SC 600**
            
            **$**
            **100.00**
            
            **$**
            **98.41**
            
            **$**
            **115.37**
            
            **$**
            **90.98**
            
            **$**
            **131.03**
            
            **$**
            **193.82****S&P
                SC Diversified Chemicals**
            
            **$**
            **100.00**
            
            **$**
            **138.73**
            
            **$**
            **170.08**
            
            **$**
            **183.02**
            
            **$**
            **210.62**
            
            **$**
            **209.98**




**Recent
      Unregistered Sales of Securities**




·
            On
                September 28, 2007, November 29, 2007 and December 14, 2007, we issued
                6%
                Secured Convertible Promissory Notes (the “6% Notes”) to accredited
                investors in the aggregate principal amount of $12,684,597. Please
                refer
                to “Item 7. Management’s Discussion and Analysis of Financial Condition
                and Results of Operation--Liquidity and Capital Resources--Financing
                Activities” for further details.






20




·
            As
                of December 20, 2007, we issued 6% Secured Convertible Promissory
                Notes
                due December 2010 (the “December 6% Notes”) in an aggregate principal
                amount of $2,032,546 (convertible into 22,583,844 shares of our common
                stock at an initial conversion price of $0.09 per share) and warrants
                to
                purchase an aggregate of 2,710,061 shares of our common stock at
                an
                exercise price of $0.15 per share (the “December Warrants”). We issued
                these securities in connection with its solicitation of the exercise
                of
                warrants to purchase common stock at an exercise price of $0.09 per
                share
                (the “Tender Offer”). Please refer to “Item 7. Management’s Discussion and
                Analysis of Financial Condition and Results of Operation--Liquidity
                and
                Capital Resources--Financing Activities” for further details.


·
            As
                of December 31, 2007, consistent with the terms of the original 6%
                Notes,
                we issued additional 6% Notes in the aggregate principal amount of
                $34,859
                to eleven holders of such original 6% Notes in lieu of a cash interest
                payment (the “Interest Notes”). The Interest Notes, which are materially
                identical in their terms to the original 6% Notes issued in exchange
                for
                First Bridge Notes, are convertible into an aggregate of 371,612
                and
                71,970 shares of our common stock at conversion prices of $0.0725
                and
                $0.11 per share respectively.




**ITEM
      6. SELECTED FINANCIAL DATA**




The
      following table sets forth our selected historical consolidated financial data
      as of and for each of the five years ended December 31, 2007.




The
      selected consolidated financial data for the years ended December 31, 2007,
      2006, 2005 and 2004 and as of December 31, 2007 and 2006 have been derived
      from
      the financial statements of Tasker Products Corp., included in this annual
      report, which have been audited by Rothstein, Kass & Company, P.C., an
      independent registered public accounting firm. The selected historical
      consolidated financial data as of and for the years ended December 31, 2003
      have
      been derived from our consolidated financial statements not included in this
      annual report, which have been audited by Morgan and Company. As a result of
      the
      2005 Acquisition, financial data for periods prior to the 2005 Acquisition
      may
      not be comparable with financial data for periods following the 2005
      Acquisition.




The
      following financial data should be read in conjunction with “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” and
      our historical consolidated financial statements and the notes thereto included
      elsewhere in this report. Until December 31, 2005, we were a development stage
      company.




**Statement
      of Operations Data (in thousands except per share data):**




**Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Revenues
              
              $
              2,601
              
              $
              1,486
              
              $
              705
              
              $
              —
              
              $
              —Impairment
                  of goodwill and intangible assets
              
              
              —
              
              
              44,081
              
              
              —
              
              
              —
              
              
              —Write-off
                  of raw materials
              
              
              129
              
              
              839
              
              
              —
              
              
              —
              
              
              —Litigation
                  settlement
              
              
              —
              
              
              423
              
              
              —
              
              
              —
              
              
              —Loss
                  from operations
              
              
              (14,051
              )
              
              (62,051
              )
              
              (16,964
              )
              
              (3,368
              )
              
              (501
              )Other
                  income (expense)
              
              
              (27,332
              )
              
              (892
              )
              
              (1,305
              )
              
              (2,704
              )
              
              (106
              )Net
                  loss
              
              
              (41,394
              )
              
              (62,943
              )
              
              (18,269
              )
              
              (6,072
              )
              
              (607
              )Net
                  loss per common share, basic and diluted
              
              $
              (0.38
              )
              $
              (0.60
              )
              $
              (0.25
              )
              $
              (0.26
              )
              $
              (0.05
              )Weighted
                  average common shares outstanding
              
              
              109,890
              
              
              104,081
              
              
              73,549
              
              
              23,597
              
              
              13,003




21




**Balance
      Sheet Data (in thousands):**


**As
                  of December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Working
                  capital (deficit)
              
              $
              (32,222
              )
              $
              (3,981
              )
              $
              (603
              )
              $
              14,334
              
              $
              34Total
                  assets
              
              
              23,927
              
              
              21,967
              
              
              68,854
              
              
              16,767
              
              
              548Long-term
                  liabilities
              
              
              984
              
              
              30
              
              
              1,574
              
              
              1,389
              
              
              386Stockholders’
                  equity (deficit)
              
              $
              (12,697
              )
              $
              16,229
              
              $
              63,288
              
              $
              14,244
              
              $
              21Number
                  of shares outstanding at end of period
              
              
              121,456
              
              
              106,340
              
              
              89,167
              
              
              48,864
              
              
              14,511




22




**ITEM
        7.** **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with the selected
      consolidated financial data appearing in the section “Selected
      Financial Data” and the consolidated financial statements and notes thereto
      appearing elsewhere in this Annual Report on Form 10-K. This discussion contains
      forward-looking statements that involve risks and uncertainties. See
“Forward-Looking Statements” and “Risk Factors” for a description of the
      important factors that could cause actual results to differ materially from
      those contained in these forward-looking statements.




**Business
      Overview**




We
      manufacture, distribute and market a variety of products using a process we
      refer to as “pHarlo technology.” These products are covered by one or more
      patents, or base patents, and manufactured using the pHarlo technology, which
      is
      covered by those patents. The pHarlo technology utilizes a safe solution, which
      we call the pHarlo concentrate, a solution whose components have been classified
      as “Generally Recognized as Safe” by the U.S. Food and Drug Administration, or
      FDA. This safe solution enables copper sulfate, a compound with bacteriostatic
      properties, i.e., the ability to inhibit bacteria growth, to remain active
      throughout a wide range of pH values, or measurements of acidity or alkalinity
      in a solution.





We
      currently market:




·
            Unifresh
                Footbath, an aid that helps clean and disinfect the hooves of dairy
                cows;




·
            SaniPhresh
                Footbath, a product used as part of a hoof maintenance program for
                dairy
                cows;




·
            Tasker
                Blue, an antimicrobial aid to be used in the scalder process of poultry
                processing, which is a method of loosening feathers so that they
                can be
                picked and removed mechanically, and the post-feather picker process,
                which is the method used in chicken processing that receives chickens
                immediately after the scalder and mechanically removes feathers;
                and




·
            Tasker
                Pacific Blue Seafood Wash, a product used in commercial and retail
                seafood
                processing to extend shelf life and reduce odors.




We
      are
      currently seeking to license and/or sell the Close Call(R) brand and derivative
      applications. For a more detailed description of our products, see “Item 1 -
      Business Products”




**Financial
      Overview**




Until
      December 31, 2005, we were a development stage company. The quarterly period
      ended March 31, 2006 was the first period during which we were considered an
      operating company.




We
      believe that we will have adequate working capital to fund our operations during
      the next twelve months based upon:


·
              our
                    projections of future revenues from our
                    products;




·
            cash
                and cash equivalents as of December 31, 2007;





·
            cash
                in the amount of $135,000 received in January 2008 from the sale
                of our
                securities; and




·
            available
                cash from a proposed $3 - $5 million credit facility, which is currently
                being negotiated. We can give no assurance that we will obtain the
                proposed $3 - $5 million credit
                facility.




23


Our
      ability to continue to operate and grow our business is dependent upon obtaining
      the proposed credit facility, exercise of outstanding warrants and/or generating
      revenue growth from operations. While we have been in the process of
      aggressively developing, marketing and selling our products, there can be no
      assurance that those efforts will be met with success in the marketplace or
      that
      the timing of our efforts will be consistent with our cash availability and
      burn
      rate. If we do not obtain the contemplated credit facility, obtain sufficient
      cash from the exercise of outstanding warrants and/or generate sufficient
      revenue growth from existing and new business arrangements, we will not have
      sufficient cash to support our continued operations and meet our
      obligations.




**Impairment
      of goodwill and intangible assets**




In
      the
      second quarter of 2006, we tested for impairment of our intangible assets and
      our goodwill in accordance with Statement of Financial Accounting Standards
      (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
and SFAS No. 142 “Goodwill and Other Intangible Assets” respectively. Our
      testing was triggered by the following events and circumstances that constitute
      impairment indicators under the literature:




•
            a
                preliminary expectation that revenues originally projected for the
                third
                and fourth quarters of 2006 would not be attained;




•
            a
                decrease in expected future cash flows; and




•
            a
                decline in the market price of our common stock




Upon
      completion of the impairment tests, we recorded non-cash impairment charges
      to
      intangible assets and goodwill of $12.2 million and $17.9 million, respectively.




In
      the
      fourth quarter of 2006, we tested for impairment of our intangible assets and
      our goodwill as part of our annual goodwill impairment review. Upon completion
      of the impairment tests, we recorded additional non-cash impairment charges
      to
      goodwill of $13.9 million. There was no further impairment of our intangible
      assets.




In
      the
      fourth quarter of 2007, we tested for impairment of our intangible assets and
      our goodwill as part of our annual goodwill impairment review. Our impairment
      tests resulted in no additional impairment of our goodwill or our intangible
      assets.




Note
      6 to
      our consolidated financial statements for the year ended December 31, 2007
      describes the impairment tests performed and their impact during 2007. There
      can
      be no assurance that there will not be impairment charges in subsequent periods
      as a result of our future periodic impairment reviews. To the extent that future
      impairment charges occur, they will likely have a material impact on our
      financial results.




**Related
      Party Transactions**




*Greg
      Osborn*




In
      April
      2007, we entered into an employment agreement with Greg Osborn in connection
      with his appointment as Executive Chairman, effective March 14, 2007. See
“Management—Employment Agreements—Greg Osborn” for a discussion of the terms of
      this employment agreement. Mr. Osborn is the Managing Partner of Indigo
      Ventures, LLC, an affiliate of Indigo Securities, LLC, the firm that served
      as
      the placement agent for the offerings of our First Bridge Notes, Second Bridge
      Notes, 6% Notes and our Tender Offer Notes. Mr. Osborn is also a registered
      representative of Indigo Securities. In connection with its services as
      placement agent in these transactions, Indigo Securities received an aggregate
      cash fee of $1,427,763 and seven-year warrants to purchase an aggregate of
      approximately 16,552,377 shares of our common stock at exercise prices between
      $0.0725 and $0.11 per share. Please see “Item 13 - Certain Relationships and
      Related Transactions, and Director Independence” for a summary of payments
      received by Indigo Securities as placement agent. Indigo Securities is entitled
      to a placement agent’s fee with respect to any securities purchased in any
      subsequent offering by any investors introduced to us by the placement agent,
      if
      such subsequent offering is consummated any time within the twelve month period
      following the final closing of the offering of the 6% Notes.




24




*Wynn
      Starr*




In
      2004,
      we entered into an Exclusive Field of Use License Agreement and Product Sale
      Agreement with Wynn Starr Special Products, LLC. Under the terms of this
      agreement, as amended through January 23, 2007, we have granted Wynn Starr
      the
      exclusive, worldwide right to market and distribute products used as
      post-harvesting processing aids for the poultry industry based on the pHarlo
      technology. As of December 31, 2007, we had paid $42,000 to Wynn Starr and
      had a
      receivable of approximately $6,700 from Wynn Starr, net of amounts owed to
      Wynn
      Starr, under this royalty arrangement. Steven B. Zavagli, a former member of
      our
      board of directors, is the founder, Chairman and the Chief Executive Officer
      of
      Wynn Starr and Wynn Starr’s ultimate parent company, Wynn Starr Flavors, Inc. We
      have recently notified Wynn Starr of our rescission and termination of the
      Wynn
      Starr Agreement. The
      terms
      of the agreement are further described in “Item 13 - Certain Relationships and
      Related Transactions, and Director Independence.”




**Severance
      Costs**




In
      connection with certain employee termination actions during the third and fourth
      quarter of fiscal year 2007 and the first and third quarters of fiscal year
      2006, we recorded severance costs of approximately $82,000 for three non
      executive employees and $259,000 for one executive and eleven non executive
      employees respectively.




**Critical
      Accounting Policies and Estimates**




Our
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States. The preparation of these
      consolidated financial statements requires us to make estimates and assumptions
      that affect the reported amounts of assets, liabilities, revenues, costs and
      expenses and related disclosures. We evaluate our estimates and assumptions
      on
      an ongoing basis. Our actual results may differ from these estimates under
      different assumptions or conditions.




We
      believe that several accounting policies are important to understanding our
      historical and future performance. We refer to these policies as “critical”
because these specific areas generally require us to make judgments and
      estimates about matters that are uncertain at the time we make the estimate,
      and
      different estimates—which also would have been reasonable—could have been used,
      which would have resulted in different financial results.




*Derivative
      Instruments*




To
      date,
      we have entered into several debt and equity transactions to fund our
      operations. A number of these transactions involved the issuance of convertible
      debt and warrants. Certain of these transactions also included registration
      rights agreements that impose significant penalties on us if certain conditions
      are not met. As a result of these transactions we face a number of unique and
      complex accounting issues such as the ones discussed below.




We
      have
      issued and outstanding several financial instruments with embedded derivative
      features, consisting of convertible debt and warrants. We analyze these
      financial instruments in accordance with SFAS No. 133 and Emerging Issues Task
      Force, (EITF) Issue Nos. 00-19 and 05-02 to determine if these hybrid contracts
      have embedded derivatives that must be bifurcated. In addition, free-standing
      warrants are accounted for as either equity or liabilities in accordance with
      the provisions of EITF Issue No. 00-19.




25




EITF
      Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
      Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock’” addresses financial instruments, such as convertible notes and stock
      purchase warrants, which are accounted for under EITF 00-19, that are issued
      with a corresponding right to have these securities registered pursuant to
      a
      registration rights agreement that includes a liquidated damages clause.
      Alternative accounting treatments of registration rights are discussed in EITF
      Issue No. 05-4. We have adopted View C as described in the EITF Issue No. 05-4
      Issue Summary No. 1. Under View C, registration rights agreements and the
      associated financial instruments are accounted for as separate instruments.
      Accordingly, we have given only prospective application to this guidance. On
      December 21, 2006 the Financial Accounting Standards Board issued FASB Staff
      Position (FSP) EITF No. 00-19-2 which is effective for fiscal years beginning
      after December 15, 2006. This FSP specifies that the contingent obligation
      to
      make future payments or otherwise transfer consideration under a registration
      rights agreement, whether issued as a separate agreement or included as a
      provision of a financial instrument or other agreement, should be separately
      recognized and measured in accordance with FASB Statement No. 5, *Accounting
      for Contingencies* EITF.
      Our treatment of the registration rights agreement as separate instruments
      is
      consistent with this FSP.




In
      connection with our examination of past transactions for application of EITF
      Issue No. 05-4, we noted that for the period from entering into the April 2004
      Securities Purchase Agreement until we increased our authorized shares in August
      2004, we had insufficient shares to meet all potential obligations to issue
      shares under our convertible notes and exercisable warrants and options. Under
      EITF Issue No. 00-19, a liability should be recognized for those financial
      instruments for that period, with any changes in the fair value of such
      liabilities recognized in our consolidated statement of operations. Based on
      our
      analysis of such liabilities, we determined the effect of any such amounts
      to be
      immaterial.




In
      April
      2004 and July 2004, we entered into private placement agreements, and
      registration rights agreements for convertible debentures and warrants. Based
      on
      the interpretive guidance in EITF Issue No. 05-4 due to an uncapped liquidated
      damages provision in the registration rights agreements, we determined that
      the
      registration rights are derivative liabilities that should be bifurcated from
      the related financial instruments. Accordingly, the estimated fair value of
      the
      registration rights derivative of $244,000 was recorded as a liability as of
      October 1, 2005, the beginning of the first fiscal period after September 15,
      2005, the date that EITF postponed further deliberations. As of December 31,
      2006, the full amount of the derivative liability balance was reversed since
      the
      shares purchased under the April 2004 and July 2004 private placements could
      be
      sold under former Rule 144(k) of the Securities Act of 1933 and we had recorded
      the full and maximum amount of the actual incurred liquidated damages of
      approximately $442,000, associated with these registration rights agreements.
      Additionally, we recorded approximately $141,000 of interest and late fees
      related to the April 2004 and July 2004 convertible debentures. Both of these
      amounts are included in the other accrued liabilities.




In
      connection with our December 2004 and January 2006 private placements, our
      estimated fair value of the related registration rights derivative was
      immaterial at the inception and at each reporting date since and, consequently,
      we have not recorded a liability. At each reporting period, we calculate the
      estimated fair value of the registration rights derivatives. If the underlying
      assumptions of the calculation change such that the estimated fair value is
      not
      immaterial, we will record a liability at that time.




In
      connection with our September 2005 private placement, our estimated fair value
      of the related registration rights derivative at its inception was immaterial
      and we did not record a liability. Subsequently, in connection with the January
      2006 private placement, we amended our September 2005 agreement with the rights
      holder to waive the liquidated damages relating to our inability to have such
      registration statement declared effective by May 23, 2006. On April 26, 2006,
      we
      filed a registration statement registering resale of securities purchased in
      the
      September 2005 and January 2006 private placements. We believe that as it
      relates to the September 2005 private placement, we have used our best efforts
      to cause the registration statement to be declared effective and, therefore,
      pursuant to the terms of the September 2005 registration rights agreement,
      we
      are not currently liable for liquidated damages as a result of the registration
      statement not being declared effective by May 23, 2006. Should the rights
      holders dispute that our best efforts were used, and we either accede to the
      assertion or are found to not have used our best efforts, the estimated maximum
      amount of liquidated damages for which we would be liable, assuming
      ineffectiveness from May 23, 2006 to October 31, 2006, is approximately
      $43,000.




26




As
      it
      relates to the January 2006 private placement, we, despite using our best
      efforts, failed to have the registration statement declared effective by the
      SEC
      on or before October 26, 2006. Consequently, as of December 31, 2006 we are
      required to issue to each holder of the January 2006 private placement, shares
      and warrants equal to one percent of the respective number of shares and
      warrants purchased by each holder or an aggregate of 138,859 shares of common
      stock and warrants to purchase 138,859 shares of common stock.





We
      are
      required to file a series of registration statements covering the resale of
      the
      shares of common stock underlying the 6% Notes, the Warrants, the December
      6%
      Notes and the December Warrants as well as the warrants issued to the placement
      agent in connection with the issuance of the First Bridge Notes, Second Bridge
      Notes and 6% Notes issued for cash and in connection with the Tender Offer.
      In
      the event we fail to file or cause these registration statements to become
      effective within specified time periods, we will be required to pay liquidated
      damages (except with respect to warrants issued to the placement agent) equal
      to
      1% of the principal amount of the affected notes and the purchase price of
      shares of common stock issued on conversion of these notes and exercise of
      related warrants for each 30-day delay in the filing or effectiveness of such
      registration statement (or such lesser pro-rata amount for any period of less
      than 30 days). We have assessed the probability of incurring liquidated damages
      as remote and have not recorded any liability.





We
      have
      not incurred any liquidated damages liabilities related to any of our other
      registration rights agreements.




*Goodwill
      and Intangible Assets*




The
      discussions under the captions “Goodwill” and “Intangible Assets” below,
      describe the valuation methods we used to estimate the fair values. We have
      made
      assumptions in our valuation methods that we will achieve certain levels of
      revenue and funding of cash requirements, many of which are dependent upon
      certain factors outside of our control. If we do not meet our projections,
      we
      may be required to record additional impairment charges. To the extent that
      future impairment charges occur, they will likely have a material impact on
      our
      financial results. We anticipate that we will need approximately an additional
      $4 million to support our operations and meet our obligations over the next
      twelve months. We are currently reviewing alternative methods of financing,
      including private issuances of debt and/or equity. We have a limited history
      on
      which to base our projections and on which to determine the accuracy of our
      projections.




**Goodwill**




*Impairment
      test June 2006*




In
      the
      second quarter of 2006, we tested for impairment of our goodwill in accordance
      with SFAS No. 142. Our testing was triggered by a preliminary expectation that
      revenues originally projected for the third and fourth quarters of 2006 would
      not be attained, a decrease in expected future cash flows and a decline in
      the
      market price of our common stock. These events and circumstances constitute
      impairment indicators under the literature. Upon completion of the impairment
      tests, we recorded a non-cash impairment charge to goodwill of $17.9 million.
      At
      June 30, 2006, the carrying value of goodwill before the impairment charge
      was
      approximately $41.7 million and the carrying value of the reporting unit was
      $68.2 million. Our estimate of the fair value of the reporting unit, and after
      recording impairments of our intangible assets and goodwill, the carrying value,
      was $38.1 million, and our estimate of the closing price on June 30, 2006 was
      $51.5 million, which exceeded our estimate of fair value by $13.4 million.
      At
      June 30, 2006, after recording an impairment charge to the intangible assets
      of
      $12.2 million based on their estimated fair value, the carrying value of the
      reporting unit was $56.0 million, resulting in an impairment charge to goodwill
      of $17.9 million. After the impairment charge, the carrying value of the
      goodwill was $23.8 million.




27


The
      fair
      value of the reporting unit was based on the income approach using a discounted
      cash flow model. Cash flow projections were based on our revenue projections
      for
      our products. As a result of the circumstances outlined in the following, we
      reduced our revenue projections by 68% for 2006 and for 2007, 54% for 2008,
      46%
      for 2009 and 43% for 2010. We projected revenue growth rates of 300% in 2007,
      as
      compared to the significantly reduced revenue amount base in 2006, and from
      reduced revenue levels, growth rates per year of 80%, 55% and 38% for 2008,
      2009
      and 2010, respectively, a growth rate of 7% per year in 2011 through 2015 and
      a
      terminal growth rate of 5% for all subsequent years. The major component of
      the
      reduction in the projected revenue was the indefinite delay in the
      implementation of the enforcement framework of EU regulations regarding the
      welfare of poultry birds. We removed from our projections all revenue related
      to
      our poultry pen spray product since we are not certain of the timing of the
      enforcement of these regulations. Additionally, in order for this product to
      be
      sold in the U.S., we need to make additional revisions to its formulation that
      will require time and additional resources. Consequently, we have not included
      any U.S. revenue in our projections. We also reduced our projections related
      to
      our Unifresh Footbath product since our distributors were unable to devote
      the
      level of sale and technical personnel to promote and educate our customers
      on
      the benefits of our products that we originally anticipated. On the other hand,
      the expectation of receipt of USDA approval in the third quarter of 2006
      (received in August 2006) for the application of our poultry processing wash
      in
      the scalder process, resulted in the increase of projected revenues related
      to
      this product. However, we are still in the process of completing the commercial
      verification process for the poultry processing wash and the Tasker Pacific
      Blue
      Seafood Wash as we do not yet have a proven record of acceptance of our products
      by our target audience. Customers in our industry are traditionally averse
      to
      entering into long-term agreements, therefore limiting our ability to commit
      distributors or predict specific customer purchase volumes. If we do not
      commercially verify these products, we may need to record an additional
      impairment charge. To the extent an additional impairment charge is required,
      it
      will likely have a material impact on our financial results.




The
      discount rate used in the discounted cash flow analysis was 25% and was based
      on
      venture capital rates for start-up companies in similar industries.




The
      table
      below presents a sensitivity analysis of the effect on enterprise fair value
      for
±5% change per projected year in earnings before taxes and ±1% change in the
      discount rate:


**Earnings
                  Before Taxes**
              
              **24%
                  Discount**
                **Rate**
              
              **25%
                  Discount**
                **Rate**
              
              **26%
                  Discount**
                **Rate****(in
                  millions)**-5%
              
              $
              38.7
              
              $
              35.7
              
              $
              33.0As
                  projected
              
              $
              41.3
              
              $
              38.1
              
              $
              35.3+5%
              
              $
              43.9
              
              $
              40.5
              
              $
              37.4




The
      table
      below presents a sensitivity analysis of the effect on enterprise fair value
      (including tax amortization benefit) for ±1% change in the revenue terminal
      growth rate and ±1% change in the discount rate:




**Terminal
                  Growth Rate**
              
              **24%
                  Discount**
                **Rate**
              
              **25%
                  Discount**
                **Rate**
              
              **26%
                  Discount**
                **Rate****(in
                  millions)**4%
              
              $
              40.4
              
              $
              37.3
              
              $
              34.65%
              
              $
              41.3
              
              $
              38.1
              
              $
              35.36%
              
              $
              42.3
              
              $
              38.9
              
              $
              35.9




*Impairment
      test December 2006*




In
      the
      fourth quarter of 2006, we tested for impairment of our goodwill in accordance
      with SFAS No. 142. Our goodwill review was performed as part of our annual
      goodwill impairment review. Upon completion of the impairment tests, we recorded
      non-cash impairment charges to goodwill of $13.9 million. There was no
      impairment of our intangible assets.




At
      December 31, 2006, the carrying value of goodwill before the impairment charge
      was approximately $23.8 million and the carrying value of the reporting unit
      was
      $30.7 million. Our estimate of the fair value of the reporting unit was $14.2
      million and after recording impairments of our goodwill, the carrying value,
      was
      $16.8 million. After the impairment charge, the carrying value of the goodwill
      was approximately $9.8 million.


28


The
      fair
      value of the reporting unit was based on a weighted average of the income
      approach using a discounted cash flow model and the market approach using the
      company’s market capitalization. Cash flow projections were based on our revenue
      projections for our products. We projected revenue growth rates of 114% in
      2008,
      as compared to a relatively lower revenue base in 2007; a growth rate of 42%
      in
      2008, declining in 7% increments to a 23% growth rate in 2011; a growth rate
      of
      18% in 2012 gradually declining to a 10% growth rate in 2016; and a terminal
      value based on a enterprise value to EBITDA multiple of 7.5. The majority of
      the
      decrease in the overall revenue, both in absolute dollars and in growth
      percentage, was due to the reduction of our revenue projections for Unifresh
      Footbath product as compared to the projections used in the June 2006 cash
      flow
      projections. This decrease was partially offset by the increase in projected
      sales of our poultry processing wash (Tasker Blue) for which we received letters
      from the FSIS of the USDA indicating that it had no objection to the use of
      our
      product as an antimicrobial processing aid in poultry scalders and in the
      post-feather picker-rails processes in August 2006 and in December 2006,
      respectively. Subsequent to December 31, 2006, we submitted protocols to be
      used
      in the testing of an application for use in the On-Line Reprocessing (“OLR”) and
      Chiller sections. We received the FSIS’s consent to proceed with in-plant
      testing of these applications. Tests of our OLR application were subsequently
      suspended when we were informed of the USDA’s intention to reconsider this
      requirement of this section as an intervention point in controlling bacteria.
      We
      may resume testing of our OLR application when the USDA finalizes the
      requirements for this section. We recently began tests of our Chiller and Post
      Chill Spray application. If these tests are successful, we expect to receive
      a
      Letter of No Objections from the FSIS of the USDA.




However,
      we are still in the process of completing the commercial verification process
      for the poultry processing wash and the Tasker Pacific Blue Seafood Wash as
      we
      do not yet have a proven record of acceptance of our products by our target
      audience. Customers in our industry are traditionally averse to entering into
      long-term agreements, therefore limiting our ability to commit distributors
      or
      predict specific customer purchase volumes. If we do not commercially verify
      these products, we may need to record an additional impairment charge.




The
      discount rate used in the discounted cash flow analysis was 24% and was based
      on
      a weighted average cost of capital (WACC). The required rates of return on
      equity and debt were weighted to arrive at the WACC. The table below presents
      a
      sensitivity analysis of the effect on enterprise fair value for a ±5% change per
      projected year in earnings before taxes and a ±1% change in the discount rate:




**Earnings
                  Before Taxes**
              
              **23%
                  Discount**
                **Rate**
              
              **24%
                  Discount**
                **Rate**
              
              **25%
                  Discount**
                **Rate****(in
                  millions)**-5%
              
              $
              13.9
              
              $
              12.6
              
              $
              11.3As
                  projected
              
              $
              14.6
              
              $
              13.1
              
              $
              11.8+5%
              
              $
              15.2
              
              $
              13.7
              
              $
              12.3
  The
        table
        below presents a sensitivity analysis of the effect on enterprise fair value
        (including tax amortization benefit) of a ±5% change in the EBITDA multiple used
        in the terminal value and a ±1% change in the discount rate:
  **Enterprise
                  Value to**
                **EBITDA
                  multiple**
              
              **23%
                  Discount**
                **Rate**
              
              **24%
                  Discount**
                **Rate**
              
              **25%
                  Discount**
                **Rate****(in
                  millions)**7.125
              
              $
              13.9
              
              $
              12.6
              
              $
              11.3As
                  projected -7.5
              
              $
              14.6
              
              $
              13.1
              
              $
              11.87.875
              
              $
              15.2
              
              $
              13.7
              
              $
              12.3
  See
        also
        Note 6 to our consolidated financial statements for the year ended December
        31,
        2007 for a description of the impairment tests performed and their impact
        during
        2006.




29




*Intangible
      Assets*




In
      addition to our annual goodwill review, we also perform periodic reviews of
      the
      carrying value of our other intangible assets. These intangible assets consist
      of utility patent applications. We specifically consider whether any indicators
      of impairment are present, including:




•
            whether
                there has been a significant decrease in the market price of an asset;




•
            whether
                there has been a significant adverse change in the extent or manner
                in
                which an asset is used; and




•
            whether
                there is an expectation that the asset will be sold or disposed of
                before
                the end of its originally estimated useful life.




If
      indicators of impairment are present, an estimate of the undiscounted cash
      flows
      that the specific asset is expected to generate is made to ensure that the
      carrying value of the asset can be recovered. These estimates involve
      significant subjectivity.




Consistent
      with this policy, in the second quarter of 2006, we tested for impairment of
      our
      intangible assets in accordance with SFAS No. 144 “Accounting for the Impairment
      or Disposal of Long-Lived Assets” (SFAS No. 144). Our testing was triggered by a
      preliminary expectation that third and fourth quarter 2006 originally projected
      revenues would not be attained, a decrease in expected future cash flows and
      a
      decline in the market price of our common stock. These events and circumstances
      constitute impairment indicators under the literature. Upon completion of the
      impairment tests, we recorded a non-cash impairment charge to intangible assets
      of $12.2 million. At June 30, 2006 and after giving effect to the impairment
      charge, the carrying value of the intangible assets was approximately $8.3
      million.




*Valuation
      of Acquired Intangible Assets*




In
      connection with the 2005 Acquisition, we recorded other intangible assets
      relating to acquired utility patent applications. The valuation process used
      to
      calculate the value assigned to the acquired intangible assets is complex and
      involves significantly subjective financial projection estimates. The principal
      component of the valuation is the determination of discounted future cash flows
      expected to be derived from the use of these intangible assets. In addition,
      there are a number of other variables that we considered for purposes of
      projecting these future cash flows, including those listed below.




There
      is
      inherent uncertainty involved with this estimation of cash flows from intangible
      assets, and, while our estimates are consistent with our internal planning
      assumptions, the ultimate accuracy of these estimates is only verifiable over
      time. Further, the projections required for the valuation process normally
      utilize a ten-year forecast, which exceeds our normal internal planning and
      forecasting timeline. The particularly sensitive components of these estimates
      include, but are not limited to:




·
            the
                selection of an appropriate discount rate;




·
            the
                required return on all assets employed by the valued asset to generate
                future income streams;




·
            our
                projected overall revenue growth;




·
            our
                gross margin estimates;




·
            our
                patent-pending technology and its useful life;




·
            our
                planned level of operating expenses; and




·
            our
                effective tax rate.




30


*Impairment
      test June 2006*




Our
      revenue projection, the same as those used in our reporting unit cash flow
      projections for purposes of evaluating any impairment of goodwill, assumes
      growth rates of 300% in 2007, as compared to a relatively low revenue base
      in
      2006, growth rates per year of 80%, 55% and 38% in 2008, 2009 and 2010,
      respectively, and a growth rate of 7% per year in 2011 through 2015. The
      majority of the reduction in the amount of revenue was due to the indefinite
      delay of the enforcement framework of EU regulations regarding the welfare
      of
      poultry birds. We removed from our projections all revenue related to our
      poultry pen spray product since we are not certain of the timing of the
      enforcement of these regulations. Additionally, in order for this product to
      be
      sold in the U.S., we need to make additional revisions to its formulation.
      Consequently, we have not included any U.S. revenue in our projections. We
      also
      reduced our projections related to our Unifresh Footbath product since our
      distributors were unable to devote the level of sale and technical personnel
      to
      promote and educate our customers on the benefits of our product that we
      originally anticipated. On the other hand, the expectation of receipt of USDA
      approval in the third quarter of 2006 (received in August 2006) for the
      application of our poultry processing wash in the scalder process resulted
      in
      the increase of projected revenues related to this product. However, we are
      still in the process of completing the commercial verification process for
      the
      poultry processing wash and the Tasker Pacific Blue Seafood Wash as we do not
      yet have a proven record of acceptance of our products by our target audience.
      Customers in our industry are traditionally averse to entering into long-term
      agreements, therefore limiting our ability to commit distributors or predict
      specific customer purchase volumes. If we do not commercially verify these
      products, we may need to record an additional impairment charge. To the extent
      an additional impairment charge is required, it will likely have a material
      impact on our financial results.




The
      discount rate used in the discounted cash flow analysis was 16%. The discount
      rate was based on a cost of equity analysis, which was based on industry rates
      of returns, by applying the Capital Asset Pricing Model (CAPM). The royalty
      rate
      was 5%, which was based primarily on the royalty rate we paid to pHarlo IP
      LLC
      prior to the acquisition of the patents, as well as economic factors.




The
      table
      below presents a sensitivity analysis of the effect on the fair value of the
      intangible assets of a ±5% change in revenue per projected year (including tax
      amortization benefit) and a ±1% change in the discount rate:


**Revenue
                  Change for Each Year**
              
              **15%
                  Discount**
                **Rate**
              
              **16%
                  Discount**
                **Rate**
              
              **17%
                  Discount**
                **Rate****(in
                  millions)**-5%
              
              $
              8.1
              
              $
              7.7
              
              $
              7.3As
                  projected
              
              $
              8.8
              
              $
              8.3
              
              $
              7.8+5%
              
              $
              9.4
              
              $
              8.9
              
              $
              8.4
  The
        table
        below presents a sensitivity analysis of the effect on the fair value of
        the
        intangible assets of a ±1% change in the royalty rate and a ±1% change in the
        discount rate:
  **Royalty
                  Rate**
              
              **15%
                  Discount**
                **Rate**
              
              **16%
                  Discount**
                **Rate**
              
              **17%
                  Discount**
                **Rate****(in
                  millions)**4%
              
              $
              6.2
              
              $
              5.9
              
              $
              5.65%
              
              $
              8.8
              
              $
              8.3
              
              $
              7.86%
              
              $
              11.2
              
              $
              10.6
              
              $
              10.1
  *Impairment
        test December 2007*




At
      December 31, 2007, the carrying value of our intangible assets, excluding
      goodwill, was approximately $7.1 million. As a result of the impairment of
      goodwill, we also reviewed our intangible assets, excluding goodwill, for
      impairment. None of these assets were deemed to be impaired as of December
      31,
      2007.




*Inventory
      Valuation and Classification*




Our
      inventory is valued at the lower of cost or market on a first in first out
      (FIFO) basis of accounting. We regularly review inventory balances to determine
      whether a write-down is necessary. We consider various factors in making this
      determination, including recent sales history and predicted trends, industry
      market conditions, general economic conditions, the age of our inventory and
      recent quality control data. Changes in the factors above or other factors
      could
      result in significant additional inventory cost reductions and write-offs.
      During the year ended December 31, 2007, we wrote off approximately $129,000
      of
      raw material that was either obsolete or not usable


31


*Stock-Based
      Compensation*




Effective
      January 1, 2006, we adopted SFAS 123R, “Share-Based Payment,” requiring the
      expense recognition of the estimated fair value of all share-based payments
      issued to employees. Prior to this, the estimated fair value associated with
      such awards was not recorded as an expense, but rather was disclosed in a
      footnote to our financial statements. For the year ended December 31, 2007,
      we
      recorded approximately $4.5 million of stock based compensation expense, of
      which approximately $2.8 million was attributable to employees’, employee board
      members’ and officers’ stock options and warrants and the remainder,
      approximately $1.7 million, was attributable to stock options and warrants
      awarded to consultants and non-employee board members.




The
      valuation of employee stock options and warrants is an inherently subjective
      process since market values are generally not available for long-term,
      non-transferable employee stock options and warrants. Accordingly, an option
      pricing model is utilized to derive an estimated fair value. In calculating
      the
      estimated fair value of our stock options and warrants, we used a Black-Scholes
      pricing model which requires the consideration of the following six variables
      for purposes of estimating fair value:




•
            the
                stock option or warrant exercise price,




•
            the
                expected term of the option or warrant,




•
            the
                grant date fair value of our common stock, that is issuable upon
                exercise
                of the option or warrant,




•
            the
                expected volatility of our common stock,




•
            expected
                dividends on our common stock (we do not anticipate paying dividends
                for
                the foreseeable future), and




•
            the
                risk free interest rate for the expected option or warrant term,
                and




•
            the
                expected forfeiture rate




Of
      the
      variables above, the selection of an expected term and expected stock price
      volatility are the most subjective. Our estimate of the expected term for
      options and warrants awarded in the twelve months ended December 31, 2007 was
      between 4 and 6 years and was derived based on the weighted average of the
      sum
      of the vesting term and the original contract term at the date of issuance.
      In
      estimating our stock price volatility, we analyzed our historic volatility
      for a
      period equal to the expected term of our stock options and warrants awarded
      in
      the twelve months ended December 31, 2007, by reference to actual stock prices
      during this period and calculated an estimated volatility between 129% and
      141%.
      The stock options and warrants were valued taking into consideration forfeiture
      rates ranging from 6.6% to 14.5%. The estimated forfeiture rate is determined
      quarterly for unvested options and warrants based on the historical rates of
      forfeiture. Due to the variety of grant transactions, setting an estimated
      forfeiture rate by grant is deemed impractical. We believe that each of these
      estimates, including both expected term and volatility, is reasonable in light
      of the data we analyzed. However, as with any estimate, the ultimate accuracy
      of
      these estimates is only verifiable over time.




The
      specific valuation assumptions noted above were applied to stock options and
      warrants that we granted subsequent to our adoption of SFAS 123R. We expect
      that
      share-based compensation expense will continue to have a material impact on
      our
      financial results for all subsequent fiscal years.




**Recent
      Accounting Pronouncements**




In
      February 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
      Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
      instruments that have embedded derivatives to be accounted for as a whole
      (eliminating the need to bifurcate the derivative from its host) if the holder
      elects to account for the whole instrument on a fair value basis. SFAS 155
      also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006. The Company has elected not
      to
      apply the provisions of SFAS No. 155 to its consolidated financial statements.


32




In
      July
      2006, the Financial Accounting Standards Board issued Interpretation No. 48,
      “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 creates a single
      accounting and disclosure model for uncertain tax positions, provides guidance
      on the minimum threshold that a tax uncertainty is required to meet before
      it
      can be recognized in the financial statements and applies to all tax positions
      taken by a company; both those deemed to be routine as well as those for which
      there may be a high degree of uncertainty. We adopted FIN 48 effective January
      1, 2007 and it did not have a material effect on our consolidated financial
      statements.




In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (“SAB 108”), which provides guidance for quantifying financial
      statement misstatements. The Company adopted the provisions of SAB 108 in 2006.
      The adoption of this guidance did not have a material effect on our consolidated
      financial statements.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
      defines fair value, establishes a framework for measuring fair value and
      requires additional disclosures about fair value measurements. SFAS No. 157
      is
      effective for fiscal years beginning after November 15, 2007. The adoption
      of
      SFAS No. 157 did not have a material effect on our consolidated financial
      statements.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
      to measure many financial instruments, and certain other items, at fair value.
      SFAS 159 applies to reporting periods beginning after November 15, 2007. We
      are
      currently evaluating the effect, if any, the adoption of SFAS No. 159 will
      have
      on our consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007) “ *Business
      Combinations* ”
(“SFAS
      141R”), which requires the acquiring entity in a business combination to
      recognize all (and only) the assets acquired and liabilities assumed in the
      transaction; establishes the acquisition-date fair value as the measurement
      objective for all assets acquired and liabilities assumed; and requires the
      acquirer to disclose to investors, and other users, all of the information
      they
      need to evaluate and understand the nature and financial effect of the business
      combination. SFAS 141R will be effective for acquisitions with a date on or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. We will apply SFAS 141R for any of our applicable
      acquisitions beginning January 1, 2009.




In
      December 2007, the FASB issued SFAS No. 160 “ *Noncontrolling
      Interests in Consolidated Financial*  *Statements-an
      amendment of ARB No. 51* ”
(“SFAS
      160”), which requires the recognition of a noncontrolling interest (minority
      interest) as equity in the consolidated financial statements and separate from
      the parent’s equity; the inclusion of the amount of net income attributable to
      the noncontrolling interest in consolidated income on the face of the income
      statement; and a parent recognize a gain or loss in net income when a subsidiary
      is deconsolidated. SFAS 160 will be effective for the fiscal years beginning
      on
      or after December 15, 2008. We will apply SFAS 160 to any applicable
      transactions beginning January 1, 2009.




33




**Results
      of Operations**




**Year
      Ended December 31, 2007 Compared to Year Ended December 31, 2006**




***Revenues***




Revenues
      for the year ended December 31, 2007 were approximately $2.6 million compared
      with approximately $1.5 million for the corresponding period in 2006. This
      increase was primarily due to the increase in sales volume of Tasker Blue,
      our
      poultry processing product, which we expect to continue to increase as a result
      of our intensified marketing efforts and the expansion of our distributor
      network. Also, to a lesser extent, the increase in revenue is attributable
      to
      the increase in sales volume of our Unifresh(R) Footbath product and the
      introduction of the SaniPhresh Footbath product.




***Gross
      Margin***




Gross
      margin for the year ended December 31, 2007 was $1,981,000 compared to $549,000
      for the year ended December 31, 2006. Gross margin as a percent of revenues
      increased from 37% for the year ended December 31, 2006 to 76% for the year
      ended December 31, 2007. This increase is primarily due to higher margin product
      mix, but also due to increased poultry and footbath product sales in 2007 and
      the absence in 2007 of the $158,000 write-off of finished goods inventory that
      was recorded in 2006.




***Selling,
      General and Administrative (“SGA”)***




SGA
      expenses are primarily comprised of sales and marketing costs, employee
      compensation, professional fees, and general administrative expenses. SGA
      expenses decreased by approximately $398,000 from $13.8 million for the year
      ended December 31, 2006, to $13.4 million for the year ended December 31, 2007.
      We anticipate that SGA costs will decrease as a percentage of revenues in fiscal
      year 2008 based on current revenue projections.




Sales
      and
      marketing expenses consist primarily of sales commissions and consulting fees,
      promotional expenses, advertising, public relations and trade shows. Sales
      and
      marketing expenses decreased by approximately $99,000 due to a decrease in
      public relations printing and advertising expenses of $183,000 and a decrease
      in
      sales consulting fees of $301,000. This decrease was partially offset by an
      increase in sales commissions of $331,000 and an increase in trade shows and
      promotional expenses of $15,000 related to our increased efforts to promote
      our
      products, as well as, an increase in royalties of $39,000.




Compensation
      expenses consist primarily of salaries and other related costs for senior
      management, sales and field technicians, and finance and administrative
      employees of our company. Compensation expense decreased by approximately
      $556,000 from $ 3.2 million for the year ended December 31, 2006 to $2.7 million
      for the year ended December 31, 2007, primarily due to lower executive
      compensation in 2007.




Professional
      fees consist primarily of legal, accounting and investor relation fees.
      Professional fees increased by $47,000 primarily due to an increase in
      accounting and audit fees of $382,000 and investor relation expenses of $10,000,
      partially offset by a decrease in legal fees of $345,000.




General
      and administrative expenses consist primarily of rent, insurance, travel and
      entertainment and other expenses. General and administrative costs increased
      by
      $535,000 from $3.1 million in 2006 to $3.6 million in 2007. This increase was primarily
      due to $249,000 of accrued office lease exit costs, net of estimated sublease
      income, in connection with the lease of our former corporate office in Danbury,
      Connecticut, which
      is
      scheduled to expire in April 2010, and increases in consulting and outside
      service expenses of $516,000, shipping costs of $162,000 and travel expense
      of
      $77,000. The increase was partially offset by a decrease in general insurance
      cost of approximately $135,000 and $332,000 in settlement fees.





Stock
      based compensation expense for selling, general and administrative employees
      decreased by approximately $324,000 from $4.6 million for the year ended
      December 31, 2006 to $4.3 million for the year ended December 31, 2007. The
      expense associated with these awards is recorded within the same functional
      expense category as cash compensation for the respective employee. For the
      year
      ended December 31, 2007, stock compensation expense was allocated as follows:




**(in
                thousands)**General
                and administrative
            
            $
            4,389Sales
                and Marketing
            
            
            (88
            )$
            4,301


34


***Product
      Development***




Product
      development expenses consist primarily of personnel costs to support product
      development, installation costs at potential customers, product samples and
      testing. Product development and research expenses decreased by approximately
      $365,000, from $1.8 million in 2006 to approximately $1.4 million in 2007.
      This
      decrease is primarily due to our continuing efforts to focus our development
      activities on a select smaller number of products that are closer to
      commercialization. The decrease in the number of products we were developing
      and
      testing during the year 2007 resulted in a decrease in consulting and payroll
      expenses of approximately $273,000, a decrease in product development and
      testing expenses of $147,000, a decrease in travel expenses of $74,000, a
      decrease in stock based compensation expense of $45,000 and a decrease in
      warehouse expenses of $111,000. This decrease was partially offset by an
      increase in product supplies and samples of $285,000. We expect that in fiscal
      2008 product development expense will continue to increase in absolute dollars
      as we continue to have an increased number of product installations on poultry
      processing plants to enhance our existing product lines by testing their use
      in
      new markets, but should decrease as a percentage of total revenues.




**Depreciation
      and Amortization Expense**




Depreciation
      and amortization expense, which includes the amortization of identifiable
      intangible assets, decreased by approximately $590,000 from approximately $1.7
      million for the year ended December 31, 2006 to approximately $1.1 million
      for
      the year ended December 31, 2007. The decrease is primarily due to a decrease
      in
      intangible amortization costs of $608,000, resulting from a reduction in the
      value of our intangibles asset upon recording an impairment charge of
      approximately $12.2 million in 2006. This patent intangible has a current
      estimated value of approximately $7.1 million and is being amortized over 10.5
      years. Depreciation increased by $18,000 due to machinery and equipment
      additions.




***Impairment
      of goodwill and intangible assets***




In
      2007
      no impairment costs were recorded for goodwill and intangible assets. See
      discussion under “Critical Accounting Policies and Estimates.”




***Write-off
      of raw materials***




We
      wrote
      off $129,000 of raw material during the year, compared to $839,000 in 2006.
      The
      material written off comprised of inventory that required to be reworked to
      conform to the current formulation version of our products.




***Litigation
      Settlement***




In
      2007
      we did not record any litigation settlement expenses. In 2006, we recorded
      litigation settlement expenses of $423,000.




***Interest
      Expense***




Interest
      expense increased by approximately $524,000 from $180,000 for the year ended
      December 31, 2006, to approximately $704,000 for the year ended December 31,
      2007, primarily due to an increase of $641,000 in interest expense in connection
      with the First and Second Bridge Notes, the 6% Notes and the December 6% Notes,
      partially offset by lower interest expense of $117,000 on notes issued to
      certain shareholders in November 2002 and interest on the note issued to Indian
      River Labs (“ IRL ”) . The
      notes issued to shareholders matured on November 26, 2007 and were paid in
      full
      by the issuance of 3,298,442 shares of common stock. The note issued to IRL
      was
      paid in full in July 2007. Please see “Financing Activities” below for a
      discussion of the IRL note.




***Interest
      Income***




Interest
      income decreased by approximately $134,000 from $215,000 for the year ended
      December 31, 2006 to approximately $81,000 for the year ended December 31,
      2007,
      primarily due to a decrease in interest earned from the Company’s investments in
      marketable securities, as compared to the year ended December 31,
      2006.


35


***Finance
      costs related to long-term debt***




Finance
      costs related to long-term debt increased from $0 in 2006 to $8,326,000 in
      2007
      due **** to
      $7,364,000 of finance costs **** in
      connection with the issuance of the 6% Notes, and $962,000 of finance
      costs **** in
      connection with the issuance of the December 6% Notes. These amounts represent
      the fair value of warrants and conversion rights in excess of the proceeds
      received or the fair value of stock issued in conversion of notes in excess
      of
      the carrying value of the notes.




***Amortization
      of debt discount***




In
      connection with our financing arrangements we issue equity instruments or
      include conversion terms at discount to the current market price. We are
      required to allocate a portion of the proceeds to these features, which result
      in a debt discount. The debt discount is amortized over the stated life of
      the
      loan. During the year ended December 31, 2007, the following amounts were
      amortized; $4,510,000 is due to the amortization of the debt discount related
      to
      the fair value of the beneficial conversion feature of the First Bridge Notes,
      $1,621,000 is to due to the amortization of the discount related to the fair
      value of the four-year warrants issued in connection with the First Bridge
      Notes, $716,000 is due to amortization of the debt discount related to the
      fair
      value of the derivative liabilities in connection with the Second Bridge Notes,
      $20,000 is due to amortization of the debt discount related to the fair value
      of
      the derivative liabilities in connection with the Tender Offer, and $975,000
      is
      due to amortization of the debt discount related to the fair value of the
      derivative liabilities in connection with the 6% Notes.




***Amortization
      of deferred financing costs***




In
      connection with our financing arrangements we engaged a placement agent to
      facilitate the process. In connection with that engagement we paid a cash fee,
      issued equity instruments or made some combination of those payments. Such
      amounts are amortized over the stated life of the financing if it is a debt
      transaction or recorded as a cost of the offering if it is an equity
      transaction. The following amounts related to debt financing were amortized
      during the year ended December 31, 2007; $1,807,000 is due to the amortization
      of the fair value of the placement agent seven-year warrants issued in
      connection with the First Bridge Notes and issuable in connection with the
      Second Bridge Note and 6% Notes, and $1,047,000 is due to the amortization
      of
      the placement agent fee issued in connection with the First Bridge Notes, Second
      Bridge Notes and 6% Notes.




***Loss
      on extinguishment of debt***




For
      the
      year ended December 31, 2007, we recorded a non cash loss of $17.1 million
      on
      the exchange of the First and Second Bridge Notes for the 6% Notes. The loss
      primarily resulted from the terms of the conversion feature of the 6% Notes,
      as
      well as the value of the additional warrants issued to holders of the First
      and
      Second Bridge Notes. In recording the 6% Notes, the net carrying amount of
      the
      First and Second Bridge Notes, related derivative conversion liability and
      deferred financing costs were written off and new derivative liabilities for
      the
      conversion feature and warrants, as well as the principal balance of the 6%
      Notes and a full debt discount were recorded.




***Change
      in value of derivative liability***




Derivative
      liabilities result from the requirement to treat certain embedded features
      of
      our debt and equity instruments as liabilities. Such items are required to
      be
      recorded at, and subsequently adjusted at each reporting date to, fair value.
      Changes in fair value are recognized in our statement of operations. For the
      year ended December 31, 2007, we recorded a net non cash gain of $10.1 million.
      The gain primarily resulted from $18.2 million gain due to a decrease in fair
      value of the derivative liabilities related to the 6% Notes and a $92,000 gain
      due to a decrease in the fair value of the derivative liability related to
      the
      placement agent warrants, which was partially offset by $7.5 million loss due
      to
      the increase in the fair value of the derivative liabilities related to the
      conversion feature of the Second Bridge Notes prior to their conversion and
      a
      $700,000 loss due to the increase in the fair value of the derivative
      liabilities related to the Tender Offer.


36


***Liquidated
      damages***




No
      additional liquidated damages are required to be accrued under the registration
      statements for the April 2004 and July 2004 private placements since our
      obligation to accrue damages ceased in April 30, 2006 and July 22, 2006,
      respectively since the shares purchased under the April 2004 and July 2004
      private placements could be sold after those dates under former Rule 144(k)
      of
      the Securities Act of 1933. No additional liquidated damages obligation exists
      under the January 2006 registration statement.




***Other***




Other
      income and expenses, decreased by approximately $258,000 for the year ended
      December 31,2007 as compared to December 31,2006 This was primarily due to
      a
      decrease in income from registration rights, a derivative accrual reversal
      of
      $235,000 and an increase in the loss on disposal of assets of $23,000.




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




***Revenues***




Revenues
      for the year ended December 31, 2006, were approximately $1.5 million compared
      with approximately $705,000 for the corresponding period in 2005. This increase
      was primarily due to the increase in sales of Unifresh(R) Footbath which we
      expect to continue to increase as a result of our intensified marketing efforts
      and the expansion of our distributor network. Also, to a lesser extent, the
      increase in revenue is attributable to the sales of our poultry processing
      product.




***Gross
      Margin***




During
      the year ended December 31, 2006, we wrote off approximately $158,000 of Close
      Call (R) finished
      goods inventory that we estimated would not be sold prior to its shelf
      expiration date.




***Selling,
      General and Administrative***




SGA
      expenses are primarily comprised of sales and marketing costs, employee
      compensation, professional fees, and general administrative costs. SGA costs
      increased by approximately $1.9 million from $11.9 million for the year ended
      December 31, 2005, to $13.8 million for the year ended December 31,
      2006.  Sales
      and
      marketing expenses consist primarily of salaries and other related costs for
      sales and marketing personnel, sales commissions, promotional expenses,
      advertising, public relations and trade shows. Sales and marketing costs
      decreased by approximately $241,000 due to a decrease in promotional and
      advertising expenses of $211,000, a decrease in marketing expenses of $ 161,000
      and a decrease in sales commissions of $71,000. This decrease was partially
      offset by an increase in consulting sales fees of $303,000 related to increased
      efforts to promote our products.




Compensation
      expense consists primarily of salaries and other related costs for senior
      management, finance and administrative employees of our company. Compensation
      expense decreased by approximately $832,000 from $ 4.1 million for the year
      ended December 31, 2005 to $3.2 million for the year ended December 31, 2006,
      primarily due to the termination of three executive and eleven non executive
      employees and the reduction in salary for three other non executive employees.


37


Professional
      fees consist primarily of legal, accounting and investor relation fees.
      Professional fees decreased by $2.0 million from $4.1 million in 2005 to $2.1
      million in 2006 primarily due to a non-cash charge of approximately $2.5 million
      incurred in 2005 for stock options issued to an investor relations consultant
      in
      the year ended December 31, 2005, and a decrease in accounting fees of $155,000,
      partially offset by an increase of approximately $681,000 in legal fees
      associated with our increased litigation activity and the SEC filings for the
      year ended December 31, 2006.




General
      and administrative expenses consist primarily of rent, insurance, travel and
      entertainment and other expenses. General and administrative costs increased
      by
      $755,000 from $2.3 million in 2005 to $3.1 in 2006. This increase was
      attributable to, a settlement fee of approximately $249,000 for the termination
      of minimum purchase commitment obligations for Close Call(R) bottles, increase
      in travel and entertainment expenses of approximately $74,000, an increase
      in
      general insurance cost of approximately $105,000 and a net increase in other
      administrative expenses.




Stock
      based compensation expense for selling, general and administrative employees
      increased by approximately $4.4 million from $484,000 for the year ended
      December 31, 2005 to $4.9 million for the year ended December 31, 2006. This
      increase is the result of our adoption of SFAS 123R in January 2006. The expense
      associated with these awards is recorded within the same functional expense
      category as cash compensation for the respective employee. For the year ended
      December 31, 2006, stock compensation expense was allocated as
      follows:


**(in
                  thousands)**General
                  and administrative
              
              $
              4,084Sales
                  and marketing
              
              
              541Product
                  development
              
              
              239$
              4,864




***Product
      Development***




Product
      development consists primarily of personnel costs to support product
      development. Product development and research costs decreased by approximately
      $1.6 million from $3.4 million in 2005 to approximately $1.8 million in 2006.
      This decrease is primarily due to our decision to focus our development efforts
      in a select smaller number of products, which were closer to commercialization
      rather than the larger number of products we were developing in the same time
      period in 2005. The decrease in the number of products we were developing and
      testing during the year 2006 resulted in a decrease in consulting expenses
      of
      approximately $1.4 million and a decrease in third party laboratory testing
      costs of approximately $607,000. This decrease was partially offset by an
      increase in stock based compensation expense of approximately $239,000, an
      increase in warehouse expenses of approximately $147,000 and an increase in
      parts and supplies expense of $187,000.




***Depreciation
      and Amortization Expense***




Depreciation
      and amortization expense, which includes the amortization of identifiable
      intangible assets, increased by approximately $603,000 from approximately $1.1
      million for the year ended December 31, 2005 to approximately $1.7 million
      for
      the year ended December 31, 2006, primarily due to the increased amortization
      period of our utility patent intangible in 2006 as the intangible assets were
      acquired midway through fiscal 2005. This patent intangible, after the
      impairment charge of approximately $12.2 million recorded in the second quarter
      of 2006, has a current estimated value of approximately $7.9 million and is
      being amortized over 10.5 years.


38


***Impairment
      of goodwill and intangible assets***




In
      2006
      we recorded a non-cash impairment charge to goodwill and intangible assets
      of
      approximately $44.1 million. See discussion under “Critical Accounting Policies
      and Estimates.”




***Write-off
      of raw materials***




We
      believe that our Close Call(R) product could be marketed more efficiently by
      a
      company either already established in the industry or with more commercial
      resources. Therefore, we are currently seeking to license and/or sell the Close
      Call(R) brand or derivative applications. In implementing this approach and
      in
      an effort to reduce warehousing expenses we adjusted the level of Close Call(R)
      raw materials and finished goods in the third and fourth quarter of 2006.
      Accordingly, we wrote off $ 839,000 of Close Call(R) empty bottles, related
      packaging material.




***Litigation
      Settlement***




In
      2006
      we recorded a litigation settlement of approximately $423,000 related to an
      employment claim brought against the company by a former employee.




***Interest
      Expense***




Interest
      expense increased by approximately $387,000 from $220,000 for the year ended
      December 31, 2005, to approximately $607,000 for the year ended December 31,
      2006  primarily
      due to amortization of debt discount-warrants and beneficial conversion feature
      and amortization of placement agent fees.




***Interest
      Income***




Interest
      income increased by approximately $80,000 from $135,000 for the year ended
      December 31, 2005 to approximately $215,000 for the year ended December 31,
      2006
      primarily due to an increase in interest earned from the Company’s investments
      in marketable securities, as compared to the year ended December 31,
      2005.




***Loss
      on Equity Investee***




In
      the
      fourth quarter of 2006 our negotiations to license the Biofilm product from
      the
      owner and inventor of the product, failed. The value assigned to our Biofilm
      investment was based on the commercialization potential of the Biofilm product.
      In absence of this license and in the absence of any revenues expected to be
      realized by Biofilm from other sources, we believed that our 27% interest in
      Biofilm is other than temporarily impaired. Consequently, we wrote off in full
      the balance of our investment in Biofilm of approximately $665,000 in 2006.




***Liquidated
      damages***




Liquidated
      damages related to the registration statements for the April 2004 and July
      2004
      private placements decreased by approximately $131,000 from approximately
      $286,000 for the year ended December 31, 2005, to approximately $155,000 for
      the
      year ended December 31, 2006. The decrease is  because
      our obligation to accrue liquidated damages under these registration rights
      agreements ceased in April 30, 2006 and July 22, 2006, respectively since the
      shares purchased under the April 2004 and July 2004 private placements could
      be
      sold after those dates pursuant to former Rule 144(k) under the Securities
      Act
      of 1933. This decrease was offset by an increase of approximately $23,000 in
      liquidated damages related to the registration statement for the January 2006
      private placement. No additional liquidated damages obligation exists under
      the
      January 2006 registration statement.




39




***Other
      Expenses***




We
      incurred other income, net of approximately $168,000 for the year ended December
      31, 2006, as compared to $881,000 of other expense, net for the year ended
      December 31, 2005. In 2006 the other income, net was attributable to the
      reversal of the registration rights derivative liability of $235,000 recorded
      in
      the fourth fiscal quarter of 2005. The reversal was due to the fact that the
      shares purchased under the April 2004 and July 2004 private placements could
      be
      sold under former Rule 144(k) of the Securities Act of 1933 and we had recorded
      the full and maximum amount of the actual incurred liquidated damages of
      approximately $442,000, associated with these registration rights agreements.
      This reversal was offset by a loss on the disposal of assets in the amount
      of
      $67,000. The other expenses, net of approximately $881,000 for the year ended
      December 31, 2005, related primarily to a reserve recorded for certain notes
      receivable in the amount of $890,000.




**Liquidity
      and Capital Resources**




*Overview*




Since
      our
      inception, we have funded operations and investing activities through the sale
      of common stock, warrants and convertible debt under several private placements.
      Requirements for liquidated damages under some of these private placements
      may
      have an impact on our future liquidity. To date we have satisfied and/or
      received waivers for the provisions of a majority of the agreements that would
      have otherwise required us to pay liquidated damages. However, we have not
      received waivers and from time to time we have not satisfied some of the
      provisions of the registration rights agreements for the April 2004 and July
      2004 convertible debt. Nevertheless, our obligation to accrue liquidated damages
      under these registration rights agreements ceased in April 30 and July 22,
      2006,
      respectively. Through December 31, 2007, we have accrued $442,000 in liquidated
      damages related to these agreements. Also as of December 31, 2007 we have
      accrued $23,000, the full amount of liquidated damages required under the
      January 26, 2006 registration rights agreement.





*Going
      Concern*





We
      believe that we will have adequate working capital to fund our operations during
      the next twelve months based upon:




·
            our
                  projections of future revenues from our
                  products;




·
            cash
                and cash equivalents as of December 31, 2007;





·
            cash
                in the amount of $135,000 received in January 2008 from the sale
                of our
                securities; and




·
            available
                cash from a proposed $3- $5 million credit facility, which is currently
                being negotiated. We can give no assurance that we will obtain the
                proposed $3- $5 million credit
                facility.




Our
      ability to continue to operate and grow our business is dependent upon obtaining
      the proposed credit facility, exercise of outstanding warrants and/or generating
      revenue growth from operations. While we have been in the process of
      aggressively developing, marketing and selling our products, there can be no
      assurance that those efforts will be met with success in the marketplace or
      that
      the timing of our efforts will be consistent with our cash availability and
      burn
      rate. If we do not obtain the contemplated credit facility, obtain sufficient
      cash from the exercise of outstanding warrants and/or generate sufficient
      revenue growth from existing and new business arrangements, we will not have
      sufficient cash to support our continued operations and meet our
      obligations.




40




*Operating
      Activities*




Our
      cash
      and cash equivalents balance was approximately $2,671,000 and $932,000 at
      December 31, 2007 and December 31, 2006, respectively.




Net
      cash
      used in operating activities for the year ended December 31, 2007 was
      approximately $8.3 million, compared to approximately $9.7 million in 2006
      and
      approximately $11.8 in 2005.




Our
      inventory level was reduced to approximately $285,000 for the year ended
      December 31, 2007, from approximately $300,000 for the year ended December
      31,
      2006, as a result of the write-off of raw materials The material written off
      comprised of inventory that required to be reworked to conform to the current
      formulation version of our products.




*Investing
      Activities*




Net
      cash
      used in investing activities for the year ended December 31, 2007 was
      approximately $87,000, and approximately $123,000 and $7.7 million for the
      years
      ended December 31, 2006 and 2005, respectively.




*Financing
      Activities*




As
      partial consideration for the purchase of the pHarlo assets in the July 2005
      acquisition, we issued a promissory note in the amount of $1,931,973 to Indian
      River Labs, L.L.C (“IRL”). The promissory note bears interest of 3.4% per annum
      and was payable in equal bi-weekly principal installments of $37,153, plus
      interest, through July 2007. The note was paid in full in July 2007. During
      2007
      we paid approximately $605,000 under the Indian River Labs promissory note.




The
      net
      cash provided by our financing activities during the year ended December 31,
      2007 was approximately $10.2 million, as compared to approximately $9.7 million
      and $6.3 million for the years ended 2006 and 2005, respectively.





Between
      December 1, 2006 and May 1, 2007, we issued 10% Convertible Promissory Notes
      (the “First Bridge Notes”) to accredited investors in the aggregate principal
      amount of $6,295,091. The First Bridge Notes were convertible into an aggregate
      of 86,828,841 shares of common stock at a conversion price of $0.0725 per share.
      The First Bridge Notes had a term of six months from the date of issuance with
      various maturity dates starting June 1, 2007. As an inducement for the investors
      to purchase the First Bridge Notes, we issued to these investors four-year
      warrants, which entitle them to purchase an aggregate of 34,972,728 shares
      of
      common stock, which number of shares is based on 50% of the principal amount
      of
      the notes purchased by the investor and divided by the per share exercise price
      of $0.09. As discussed below, First Bridge Notes in the aggregate principal
      amount of $6,255,091, as well as the interest thereon, were exchanged for 6%
      Notes. As of December 31, 2007, one First Bridge Note in the aggregate principal
      amount of $40,000 remained outstanding. The remaining First Bridge Note has
      matured according to its terms, but no demand for payment has been made by
      its
      holder. We will either pay such note and related interest when demand is made
      or, if elected by the holder, convert the notes and accrued interest into common
      stock.




On
      June
      4, 2007, we issued 10% Convertible Promissory Notes (the “Second Bridge Notes”)
      to one accredited investor in the aggregate principal amount of $2,000,000.
      The
      Second Bridge Notes were convertible into shares of common stock at a conversion
      price of the lower of $0.16 per share or 90% of the per share amount of a
      qualified financing or if such qualified financing had not been completed by
      July 4, 2007, the lower of $0.16 per share or 80% of the per share amount of
      a
      qualified financing. Based on a conversion price of $0.16 per share, the Second
      Bridge Notes were convertible into 12,500,000 shares of common stock. The Second
      Bridge Notes had a term of six months from the date of issuance. As an
      inducement for the investor to purchase the Second Bridge Notes, we issued
      to
      this investor four-year warrants, which entitle it to purchase an aggregate
      of
      1,000,000 shares of common stock, a number of shares that is based on 10% of
      the
      principal amount of the notes purchased by the investor and divided by the
      per
      share exercise price of $0.20. As discussed below, Second Bridge Note in the
      aggregate principal amount of $2,000,000, as well as the interest thereon,
      was
      exchanged for 6% Notes. As of December 31, 2007, no Second Bridge Notes remained
      outstanding.


41




On
      September 28, 2007, November 29, 2007 and December 14, 2007, we issued the
      6%
      Notes to accredited investors in the aggregate principal amount of $12,684,597.
      The aggregate consideration of $12,684,597 was in the form of cash ($3,950,000),
      exchange of the First Bridge Notes (aggregate principal amount of $6,255,091
      and
      the accrued interest thereon of $415,617) and exchange of the Second Bridge
      Notes (aggregate principal amount of $2,000,000 and the accrued interest thereon
      of $63,889)




The
      net
      cash proceeds from the sale of the 6% Notes issued in 2007 ($3,950,000) are
      intended to be used for working capital and general corporate
      purposes.




The
      6%
      Notes have the following basic terms:




·
            Interest
                on the 6% Notes is payable on a quarterly basis in cash or through
                the
                issuance of additional 6% Notes.




·
            The
                term of the 6% Notes is three years from the date of issuance, maturing
                on
                September 27, 2010.




·
            The
                6% Notes constitute our senior indebtedness; provided that (i) the
                lenders
                under a contemplated $3 million credit facility and (ii) holders
                of the
                December 6% Notes have a priority security interest in the collateral
                (described below).





·
            The
                6% Notes are secured by a first priority security interest in all
                of our
                assets (including after-acquired assets, all receivables, intellectual
                property and the stock of our subsidiaries), subject only to the
                prior
                rights of (i) the lenders under a contemplated $3 million credit
                facility
                and (ii) the holders of the December 6%
                Notes.




·
            The
                6% Notes are automatically convertible into our common stock at the
                then
                applicable conversion price, in the event that our common stock trades
                at
                a price per share greater than 200% of the then current conversion
                price
                of the 6% Notes for 30 consecutive trading days and such shares are
                traded
                at an average daily dollar volume greater than $300,000 (average
                share
                price times the average volume) during the same 30 day trading
                period.




·
            The
                6% Notes purchased for cash are convertible, in whole or in part,
                at the
                holders’ option, at any time or from time to time, into shares of common
                stock at a conversion price of $0.11 per
                share.




·
            The
                6% Notes received in exchange for First Bridge Notes are convertible,
                in
                whole or in part, at the holders’ option, at any time or from time to
                time, into shares of common stock at a conversion price of $0.0725
                per
                share.




·
            The
                6% Notes received in exchange for Second Bridge Notes are convertible,
                in
                whole or in part, at the holders’ option, at any time or from time to
                time, into shares of common stock at a conversion price of $0.099
                per
                share.




·
            The
                6% Notes contain certain other protective provisions for the benefit
                of
                holders, including:




·
            restrictions
                on the incurrence of liens, the incurrence of debt senior to or pari
                passu
                with the 6% Notes and the future issuance of equity and convertible
                debt
                securities;




·
            a
                mandatory redemption payment of 110% of the principal amount of the
                6%
                Notes (x) in the event we are prohibited from issuing shares of common
                stock, (y) upon the occurrence of an Event of Default (as defined
                in the
                6% Note and the subscription agreement to the 6% Notes) that continues
                for
                more than 20 business days or (z) upon the liquidation of the Company
                and
                150% of the principal amount of the 6% Notes in the event of a Change
                in
                Control (as defined in the subscription agreement to the 6% Notes);
                and


42


·
            penalties
                for delays in the delivery of shares upon conversion of the 6% Notes
                or
                exercise of the Warrants (as defined below) or in the removal of
                any
                restrictive legend on shares of common stock in the event of a Rule
                144
                sale and for losses incurred as a result of any Investor buy-in of
                shares
                of common stock resulting from such delays.




·
            Investors
                have the right to participate in our future financings, if any, on
                or
                before June 1, 2009 involving the issuance of common stock or other
                securities convertible into, or exercisable for, common stock (other
                than
                certain exempt issuances).




Each
      investor of the 6% Notes received Warrants to purchase a number of shares of
      common stock as follows: (i) each investor that paid for 6% Notes by delivery
      of
      First Bridge Notes received Warrants to purchase a number of shares of common
      stock equal to 30% of such investor’s purchase price for the 6% Notes divided by
      $0.15, (ii) the investor that paid for 6% Notes by delivery of Second Bridge
      Notes received Warrants to purchase a number of shares of common stock equal
      to
      70% of such investor’s purchase price for the 6% Notes divided by $0.15, and
      (iii) each investor that paid for 6% Notes with cash received Warrants to
      purchase a number of shares of common stock equal to 50% of such investor’s
      purchase price for the 6% Notes divided by $0.15. The Warrants have a cashless
      exercise provision if a registration statement with respect to the warrant
      shares is not effective within two years after the date of issuance. The
      Warrants expire on September 28, 2011 and have an initial exercise price of
      $0.15 per share. The conversion price of the 6% Notes and the exercise price
      of
      the Warrants are subject to customary anti-dilution adjustments and also subject
      to proportional adjustment for stock splits, stock dividends, recapitalizations
      and similar events. In addition, anti-dilution protection is provided following
      conversion of the 6% Notes into shares of common stock.





As
      of
      December 20, 2007, we issued the December 6% Notes in an aggregate principal
      amount of $2,032,546 (convertible into 22,583,844 shares of our common stock
      at
      an initial conversion price of $0.09 per share) and December Warrants to
      purchase an aggregate of 2,710,061 shares of our common stock at an exercise
      price of $0.15 per share. We issued these securities in lieu of common stock
      in
      connection with our solicitation of the exercise of warrants to purchase common
      stock at an exercise price of $0.09 per share or our Tender Offer. The gross
      proceeds from the warrant exercise (approximately $2.0 million) were released
      from escrow on December 31, 2007. The terms of the December 6% Notes and
      December Warrants are materially identical to the terms of the 6% Notes and
      Warrants, respectively, except that the December Notes mature on December 20,
      2010 and have an initial conversion price of $0.09 and the December Warrants
      expire on December 20, 2011.





As
      of
      December 31, 2007, consistent with the terms of the original 6% Notes, we issued
      additional 6% Notes in the aggregate principal amount of $34,859 to eleven
      holders of such original 6% Notes in lieu of a cash interest payment (the
“Interest Notes”). The terms of the Interest Notes, are materially identical to
      the terms of the original 6% Notes issued in exchange for First Bridge Notes.
      The Interest Notes are convertible into an aggregate of 371,612 and 71,970
      shares of our common stock at conversion prices of $0.0725 and $0.11 per share
      respectively.




Although
      generally accepted accounting principles require us to record derivative
      liabilities totaling $31.7 million as of December 31, 2007 with respect to
      the
      Warrants issued in connection with both the September and December 6% Notes,
      as
      well as the embedded conversion feature of the 6% Notes, such amount does not
      represent the cash amounts we are required to pay in the future. We do not
      expect to pay more than $13.0 million with respect to the principal of these
      6%
      Notes and $2.2 million with respect to the accrued interest due over the life
      of
      the 6% Notes. The cash amount to repay principal and interest of the 6% Notes
      may be reduced further if the holders of the 6% Notes elect to convert their
      Notes, prior to their maturity, into shares of common stock.




43




**Registration
      Rights Agreements**




On
      April
      26, 2006, we filed a registration statement registering the resale of securities
      purchased in the September 2005 and January 2006 private placements. This
      registration statement was declared effective by the SEC on October 31, 2006.
      As
      it relates to the September 2005 private placement, we have used our best
      efforts to cause the registration statement to be declared effective and,
      therefore, pursuant to the terms of the September 2005 registration rights
      agreement, we believe that we are not currently liable for liquidated damages
      as
      a result of the registration statement not being declared effective by May
      23,
      2006. Should the rights holders dispute that our best efforts were used, and
      we
      either accede to the assertion or are found to not have used our best efforts,
      the estimated maximum  amount
      of
      liquidated damages for which we would be liable, assuming
      ineffectiveness from May 23, 2006 to October 31, 2006, is approximately
      $43,000 .




As
      it
      relates to the January 2006 private placement, despite using our best efforts,
      we failed to have the registration statement declared effective by the SEC
      on or
      before October 26, 2006. Consequently, as of December 31, 2006 we were required
      to issue to each holder of the January 2006 private placement, shares and
      warrants equal to one percent of the respective number of shares and warrants
      purchased by each holder or an aggregate of 133,359 shares of common stock
      and
      warrants to purchase 133,359 shares of common stock. As of December 31, 2007,
      we
      had not issued these shares and warrants.




We
      are
      required to file a series of registration statements covering the resale of
      the
      shares of common stock underlying the 6% Notes, the Warrants, the December
      6%
      Notes and the December Warrants as well as the warrants issued to the placement
      agent in connection with the issuance of the First Bridge Notes, Second Bridge
      Notes and 6% Notes issued for cash and in connection with the Tender Offer.
      In
      the event we fail to file or cause these registration statements to become
      effective within specified time periods, we will be required to pay liquidated
      damages (except with respect to warrants issued to the placement agent) equal
      to
      1% of the principal amount of the affected notes and the purchase price of
      shares of common stock issued on conversion of these notes and exercise of
      related warrants for each 30-day delay in the filing or effectiveness of such
      registration statement (or such lesser pro-rata amount for any period of less
      than 30 days).




The
      6%
      Notes and Warrants have the following registration rights:




·
            *Upfront
                Registration*:
                We are required to file a registration statement covering the resale
                of
                shares of common stock underlying the 6% Notes and the related warrants
                within 60 days of September 28, 2007 (the “Filing Date”) and to cause the
                registration statement to become effective within 120 days of September
                28, 2007 (the “Effective Date”). In the event we fail to file or cause
                these registration statements to become effective within specified
                time
                periods, we will be required to pay liquidated damages equal to 1%
                of the
                principal amount of the affected notes and the purchase price of
                shares of
                common stock issued on conversion of these notes and exercise of
                related
                warrants for each 30-day delay in the filing or effectiveness of
                such
                registration statement (or such lesser pro-rata amount for any period
                of
                less than 30 days). An Event of Default with respect to the 6% Notes
                will
                occur if the Filing Date occurs later than 90 days following September
                28,
                2007 (the “Closing Date”) or if the Effective Date occurs later than 270
                days following the Closing Date.




·
            *Additional
                Registration Statement*:
                If we cannot include all of the common stock underlying the 6% Notes
                and
                the related warrants in a registration statement without it being
                deemed a
                primary offering by the Securities and Exchange Commission, then
                we will
                include in the registration statement the maximum number of securities
                that can be included therein, with the number of such securities
                to be
                allocated among the investors in proportion to the total registrable
                securities held by each investor on the date that the registration
                statement is filed. With respect to any securities that are not included
                in the registration statement, we will include the maximum amount
                of such
                securities in subsequent registration statements that will be filed
                on the
                earliest possible date on which such securities can be included without
                the subsequent registration statement being deemed a primary offering
                of
                securities by us.


44


·
            *Demand
                and Piggy-back Registrations*:
                The holders of more than 50% of the shares of common stock issuable
                upon
                conversion of the 6% Notes or exercise of the related warrants shall
                be
                entitled to one demand registration right commencing 61 days after
                the
                Closing Date until the second anniversary of the Closing Date. The
                investors will also be entitled to “piggy-back” registration rights on all
                registration statements filed by us (other than registration statements
                on
                Form S-4 or S-8 relating to issuances of securities in connection
                with
                business acquisitions or in connection with stock option or other
                employee
                benefit plans).




·
            We
                will bear all registration expenses (other than brokers' commissions
                and
                similar expenses and legal and other costs of the holders of
                securities).




The
      December 6% Notes and December Warrants have the same registration rights as
      the
      6% Notes and Warrants, except that the trigger dates for the registration rights
      are based on a December 20, 2007 issue date. The Interest Notes have the same
      registration rights as the 6% Notes, except that the trigger dates for the
      registration rights are based on December 31, 2007 issue date.




**Off-Balance
      Sheet Arrangements**




During
      the twelve months ended December 31, 2007, we did not engage in material
      off-balance sheet activities, including the use of structured finance, special
      purpose entities; material trading activities in non-exchange traded commodity
      contracts; or transactions with persons or entities that benefit from their
      non-independent relationship with us.




**Contrac** t **ual
      Obligations and Commitments**




We
      had
      the following commitments as of December 31, 2007, which are comprised primarily
      of a research and development fee contract, consulting and employment contracts,
      a vendor agreement, notes payable, as well as numerous operating leases (In
      thousands):


**Total**
                
                **Less
                    than**
                  **one
                    year**
                
                **1-3**
                  **years**
                
                **3-5**
                  **years**
                
                **More
                    than**
                  **5
                    years**Research
                    & Development (“R&D”)fees
                    (1)
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —Consulting
                    agreements
                
                
                91
                
                
                84
                
                
                7
                
                
                —
                
                
                —Employment
                    agreements (2)
                
                
                713
                
                
                464
                
                
                249
                
                
                —
                
                
                —Vendor
                    agreements
                
                
                23
                
                
                23
                
                
                —
                
                
                —
                
                
                —Operating
                    leases
                
                
                769
                
                
                352
                
                
                417
                
                
                —
                
                
                —Note(s)
                    payable
                
                
                996
                
                
                12
                
                
                964
                
                
                20
                
                
                —Long-term
                    convertible notes
                
                
                12,719
                
                
                —
                
                
                12,719
                
                
                —
                
                
                —First
                    Bridge Notes
                
                
                40
                
                
                40
                
                
                —
                
                
                —
                
                
                —Total
                
                $
                15,339
                
                $
                975
                
                $
                14,356
                
                $
                20
                
                $
                —




(1) On
      January 26, 2006, R&D fees payable under a Patent and Sub-License Agreement
      with pHarlo IP were amended so that these fees are (i) payable on a quarterly
      basis within 30 days after the end of each calendar quarter and (ii) are based
      on gross sales of the Company (or its affiliates) of products using the pHarlo
      technology. For fiscal year 2006, the R&D Fees were required to be at least
      $150,000 and could not exceed $500,000. The R&D Fees have no minimum amounts
      payable after 2006; however, they were capped at $2,000,000 for 2007, and are
      capped at $4,000,000 for 2008, $8,000,000 for 2009 and $10,000,000 for 2010
      and
      beyond. In fiscal year 2007 we paid $84,478 and accrued $39,819 under this
      agreement.




(2)  
      In fiscal year 2007, the Company terminated several of its employment agreements
      and entered into new employment agreements. As of December 31, 2007 the
      estimated future minimum annual compensation under the employment agreements,
      for 2008, 2009 and 2010, is approximately $464,000, $212,000 and $37,000,
      respectively.


45




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




**Interest
      Rate Risk**




Our
      exposure to market risk, including changes in interest rates, relates primarily
      to cash and cash equivalents. These investments bear interest at a variable
      interest rate, which is subject to market changes. We have not entered into
      any
      interest rate swap agreements, or other instruments to minimize our exposure
      to
      interest rate fluctuations. We have not had any derivative instruments in the
      past and do not presently plan to in the future. Our investment portfolio
      consists of demand deposits and money market mutual funds. Due to the highly
      liquid nature of our investment, a sudden sharp change in interest rates would
      not have a material adverse effect on the value of the portfolio.




**ITEM
      8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




Supplementary
      Data appears on page 71and the Index to the Consolidated Financial Statements
      and Financial Statements appear on pages F-1 to F-36 of
      this
      Annual Report on Form 10-K.




**ITEM
        9.** **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL 
DISCLOSURE**




None.




**ITEM
      9A. CONTROLS AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




We
      maintain a system of disclosure controls and procedures, as defined in Exchange
      Act Rule 13a-15(e),which is designed to provide reasonable assurance that
      information, which is required to be disclosed in our reports filed pursuant
      to
      the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is
      accumulated and communicated to management in a timely manner. Under the
      supervision and with the participation of management, including our Chairman,
      Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
      of our effectiveness of disclosure controls and procedures as of the end of
      the
      period covered by this Annual Report on Form 10-K. Based on that evaluation,
      the
      Chief Executive Officer and Chief Financial Officer concluded that our
      disclosure controls and as
      of the
      end of the period covered by this report were not effective due to the
      deficiencies described in our Management’s Report on Internal Control over
      Financial Reporting below.





We
      instituted and are continuing to implement corrective actions with respect
      to
      the deficiencies in our disclosure controls and procedures.




**Changes
      in Internal Control over Financial Reporting**





There
      has
      not been any change in our internal control over financial reporting in
      connection with the evaluation required by Rule 13a-15(d) under the Exchange
      Act
      that occurred during the quarter ended December 31, 2007, that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.


46


**Management’s
      Report on Internal Control over Financial Reporting**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting,
      as
      defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
      the supervision of, our principal executive and principal financial officers
      and
      effected by our Board of Directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that:




•
                Pertain to the maintenance of records that in reasonable detail accurately
                and fairly reflect the transactions and dispositions of our assets;





•
                Provide reasonable assurance that transactions are recorded as necessary
                to permit preparation of financial statements in accordance with
                generally
                accepted accounting principles, and that our receipts and expenditures
                are
                being made only in accordance with authorizations of our management
                and
                directors; and





•
                Provide reasonable assurance regarding prevention or timely detection
                of
                unauthorized acquisition, use or disposition of our assets that could
                have
                a material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate. All internal control systems, no matter
      how well designed, have inherent limitations. Therefore, even those systems
      determined to be effective can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation. The scope of management’s
      assessment of the effectiveness of internal control over financial reporting
      includes all of our Company’s consolidated subsidiaries.




Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making this assessment, our management
      used the criteria set forth by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (COSO) in “Internal Control-Integrated Framework.” Based on
      this assessment, management believes that, as of December 31, 2007, our internal
      control over financial reporting was not effective due
      to
      the following
      deficiencies:





1)
            Although
                we have a Code of Business Conduct and Ethics Policy, there is currently
                no process in place that formalizes acknowledgement of the Code of
                Business Conduct and Ethics Policy by our employees. Management is
                planning to implement this control to be effective by the end of
                year
                2008.





2)
            We
                have not implemented a comprehensive fraud risk assessment program
                to help
                identify the potential for material misstatement due to
                fraud.





3)
            There
                is no formal policy and no documented procedures in place to govern
                the
                approval or processing of invoices without a purchase
                order.





4)
            Policies
                and procedures surrounding inventory adjustments resulting from disposal,
                obsolescence, or excess inventory are not formalized.





5)
            We
                do not maintain an accounting policy that establishes the guidelines
                and
                procedures to ensure that the inventory will be properly controlled
                and
                costed, and to prevent losses or
                shortages.


47


6)
            There
                is no current process in place to track the specific identity and
                existence of fixed assets.





7)
            Our
                review procedures relating to the financial close process are deficient.





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




**ITEM
      9B. OTHER INFORMATION**




None.


**PART
      III**




**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**






Set
      forth
      below is information concerning each of our directors and executive officers
      as
      of March 14, 2008.


**Name**
              **Age**
              **Position**Greg
                  Osborn
              43
              Executive
                  Chairman and DirectorLanny
                  Dacus
              67
              President,
                  Chief Executive Officer and DirectorStathis
                  Kouninis
              46
              Chief
                  Financial Officer, Treasurer and SecretaryJoseph
                  P. Carfora
              57
              DirectorTimothy
                  M. Lane
              60
              DirectorFrederick
                  G. Ledlow
              80
              DirectorWilliam
                  P. Miller
              70
              DirectorPeter
                  O’Gorman
              69
              Director




***Greg
      Osborn*** has been
      Executive Chairman and a director of our company since March 2007.
      Mr. Osborn is the founder and since 1999 has been the Managing Director of
      Indigo Ventures LLC. Between December 2006 and December 2007, Indigo Ventures’
affiliate, Indigo Securities LLC, served as the placement agent for the offering
      of the 6% Notes and the December 6% Notes in the Tender Offer. Mr. Osborn is
      also a registered representative with Indigo Securities LLC. Mr. Osborn
      received a B.S. in Finance and Economics from Ramapo College of New Jersey.
      Mr. Osborn serves on the board of directors of Celsia Technologies and The
      Children of Bellevue. Mr. Osborn is a corporate advisor to
      Ideavillage.com.




***Lanny
      Dacus*** has been
      President, Chief Executive Officer and a director of our company since December
      2006. Mr. Dacus was involved in the development and growth of Enterprise
      Rent-A-Car, where he worked for 26 years, retiring in 1996 as President of
      its
      New York Group.




***Stathis
      Kouninis*** has been
      Chief Financial Officer of our company since February 2006, Treasurer of our
      company since March 2006 and Secretary of our company since April 2006. From
      November 2004 to February 2006, Mr. Kouninis served on the Staff of the Division
      of Corporation Finance of the U.S. Securities and Exchange Commission. From
      January 2004 to November 2004, Mr. Kouninis was the Director of Finance for
      Bottomline Technologies, Inc., a publicly traded financial process software
      company. From January 2003 to December 2003, Mr. Kouninis was the Chief
      Financial Officer of PCA, Inc., a non-profit educational organization. From
      May
      2000 to January 2003, Mr. Kouninis was Director of Finance for CMGI, Inc.,
      a
      publicly traded Internet technology company. Mr. Kouninis received a Bachelor
      of
      Science degree from the University of Massachusetts, and an Accounting Post
      Baccalaureate and a Master of Science degree in Taxation from Bentley College.


48


***Joseph
      P. Carfora*** has been
      a director of our company since February 2007.  He has been the senior
      partner at the Law Offices of Joseph P. Carfora since December 1,
      2007.  Mr. Carfora was the founding partner and, between 2005 and
      2007, was the senior litigation partner of the firm of Carfora Klar Gallo
      Vitucci Pinter & Cogan.  Previously and from 1999, Mr. Carfora was a
      partner with Motola Klar Dinowitz & Carfora. Mr. Carfora is a member of the
      American Bar Association and Association of the Bar of the City of New York.
      Mr.
      Carfora is a graduate of California Western School of Law and he holds a Juris
      Doctor Degree in Law and a Bachelors Degree in Business and Finance.




***Timothy
      M. Lane*** has been
      a director of our company since June 2007. Mr. Lane has been Chief
      Executive Officer of Everest Advisors since June 1997. Mr. Lane was with PepsiCo
      between 1981 and 1996, most recently as the Chief Executive Officer of PepsiCo
      Restaurants International for Asia and the Middle East (KFC, Pizza Hut and
      Taco
      Bell). Mr. Lane served as chairman, president and CEO of Holiday Inn Worldwide,
      a hotel group and division of Bass PLC in 1996. Mr. Lane received a Bachelor
      of
      Science in accounting from the University of Dayton and an MBA from the
      University of Chicago.




***Frederick
      G. Ledlow*** has been
      a director of our company since December 2006. Mr. Ledlow has been a private
      investor since 1995. Mr. Ledlow is the retired president of Cyanamid of Canada
      (a subsidiary of American Cyanamid, now American Home Products). Mr. Ledlow
      currently serves on the board of directors of Orangeville Inn & Suites, Inc.
      and has served as a board director and Audit Committee Chairman for National
      Registry Inc.




***William
      P. Miller*** has been
      a director of our company since May 2006. Mr. Miller has been a private investor
      since 2000. He is a board member and Chairman of the Audit Committee of Helios
      and Matheson North America (formerly known as The A Consulting Team), a NASDAQ
      listed company. He is a board member of Beth Israel Hospital, the New York
      Eye
      and Ear Infirmary and Lighthouse International.




***Peter
      O’Gorman*** has been
      a director of our company since January 2007. Mr. O’Gorman has been a private
      investor since 2001. Mr. O’Gorman was a former Executive Vice President of the
      Great Atlantic and Pacific Tea Company.




**Determination
      of Director Independence**




The
      board
      of directors has determined that each of Joseph P. Carfora, Timothy M. Lane,
      Frederick G. Ledlow, William P. Miller and Peter O’Gorman, who collectively
      constitute a majority of the board, meets the general independence standards
      set
      forth in the Nasdaq Marketplace rules. In addition, the board has made a
      subjective determination as to each of the foregoing individuals that no
      relationships exist that, in the opinion of the board, would interfere with
      the
      exercise of independent judgment in carrying out the responsibilities of a
      director.




**Committees
      of the Board of Directors**




The
      board
      of directors currently has an Audit Committee, a Compensation Committee and
      a
      Corporate Governance Committee.




William
      P. Miller, Timothy M. Lane and Peter O’Gorman are the members of the Audit
      Committee. Mr. Miller is the Chairman of the Audit Committee. The board of
      directors has determined that each member of the Audit Committee meets the
      Nasdaq Marketplace definition of “independent” for audit committee purposes. The
      board of directors has also determined that Mr. Miller meets the SEC
      definition of an “audit committee financial expert.” The Audit Committee’s
      purpose is to represent and provide assistance to our board in fulfilling its
      oversight responsibility to the stockholders, potential stockholders, the
      investment community and others of our accounting and financial reporting
      processes and the audits of our financial statements. In discharging its
      oversight role, the Audit Committee is empowered to investigate any matter
      brought to its attention with full access to all books, records, facilities
      and
      personnel of the company. The Audit Committee has the authority to engage
      independent legal, accounting and other advisers, as it determines necessary
      to
      carry out its duties. The Audit Committee has sole authority to approve related
      fees and retention terms of such advisers. Among the primary activities of
      the
      Audit Committee are the appointment, compensation, retention and oversight
      of
      our independent registered public accounting firm.


49


The
      Compensation Committee consists of Peter O’Gorman, Frederick G. Ledlow and
      William P. Miller. Mr. O’Gorman is the Chairman of the Compensation Committee.
      The board of directors has determined that each member of the Compensation
      Committee meets the Nasdaq Marketplace definition of “independent” for
      compensation committee purposes. The Compensation Committee has a written
      charter. The Compensation Committee is primarily responsible for approving
      the
      compensation for our chief executive officer and, in consultation with our
      chief
      executive officer, approving the compensation of other executive officers and
      administering our 2006 Stock Plan. However, see “—Compensation Discussion and
      Analysis” as to the recent determination of compensation packages.




The
      Corporate Governance Committee, which was formed in September 2007, consists
      of
      Frederick G. Ledlow, Joseph P. Carfora and Timothy M. Lane. Mr. Ledlow is the
      Chairman of the Corporate Governance Committee. The board of directors has
      determined that each member of the Corporate Governance Committee meets the
      Nasdaq Marketplace definition of “independent” for compensation committee
      purposes. The Corporate Governance Committee has a written charter. The
      Corporate Governance Committee is primarily responsible for developing and
      recommending to the board corporate governance principles, advising the board
      with respect to the structure and composition of committees of the board,
      recommending the compensation of the members of the board and addressing certain
      conflicts of interest.




Each
      committee has the power to engage independent legal, financial or other
      advisors, as it may deem necessary, without consulting or obtaining the approval
      of the board of directors or any officer of our company.




**Meetings
      of the Board of Directors and Committees**




During
      2007, there were six meetings of the board of directors and four meetings of
      the
      Audit Committee. The Compensation and Corporate Governance Committees did not
      have any meetings during 2007.Each director, who was a director of our company
      at the time of the board meeting, attended all of the meetings of the board
      of
      directors. Each director attended all of the meetings of each Committee of
      which
      he was then a member.




**Director
      Nomination Process**




We
      do not
      have a nominating committee as the board has determined, given its relatively
      small size, that the function of a nominating committee could be performed
      by
      the board as a whole without unduly burdening the duties and responsibilities
      of
      the board members. The board does not currently have a charter or written policy
      with regard to the nominating process.




At
      this
      time, we do not have a formal policy with regard to the consideration of any
      director nominees recommended by our stockholders because historically we have
      not received nominations from our stockholders and the costs of establishing
      and
      maintaining procedures for the consideration of stockholder nominations would
      be
      unduly burdensome. However, any recommendations received from stockholders
      will
      be evaluated in the same manner that potential nominees recommended by board
      members, management or other parties are evaluated. Any stockholder nominations
      proposed for consideration should include the nominee’s name and qualifications
      for board membership and should be addressed to: Stathis Kouninis, Chief
      Financial Officer, Tasker Products Corp., 21-00 Route 208, Fairlawn, New Jersey
      07410. We do not intend to treat stockholder recommendations in any manner
      different from other recommendations.


50




Qualifications
      for consideration as a board nominee may vary according to the particular areas
      of expertise being sought as a complement to the existing board composition.
      However, in making its nominations, the board of directors consider, among
      other
      things, an individual’s business experience, industry experience, breadth of
      knowledge about issues affecting us, time available for meetings and
      consultation regarding company matters and other particular skills and
      experience possessed by the individual.




We
      do not
      currently employ an executive search firm, or pay a fee to any other third
      party, to locate qualified candidates for director positions.




**Code
      of Ethics**




Effective
      September 2007, the board of directors adopted a Code of Business Conduct and
      Ethics and Compliance Program that applies to, among other persons, our
      President and Chief Executive Officer (being our principal executive officer),
      our Chief Financial Officer (being our principal financial and accounting
      officer), as well as persons performing similar functions. We have made the
      Code
      of Ethics available on our website at www.taskerproducts.com under the heading
      “Investor Relations.”




**Stockholder
      Communication with Board Members**




We
      maintain board member contact information for stockholders, both telephone
      and
      email, on our website (www.taskerproducts.com) under the headings “Contact Us”
and “Investor Relations,” respectively. By following the Contact Us link, a
      stockholder will be given access to our telephone number and mailing address
      and
      by following the Investor Relations link, a stockholder is provided our email
      address. Communications sent to us and specifically marked as a communication
      for the board will be forwarded to the board or specific members of the board
      as
      directed in the stockholder communication. In addition, communications received
      via telephone for the board are forwarded to the board by an officer of our
      company.




**Board
      Member Attendance at Annual Meetings**




The
      board
      of directors does not have a formal policy regarding attendance of directors
      at
      our annual stockholder meetings, although all board members are encouraged
      to
      attend.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Exchange Act requires our directors and executive officers and
      persons who own beneficially more than 10% of our common stock to file reports
      of ownership and changes in ownership of such common stock ****** with
      the
      Securities and Exchange Commission ,
      and to
      deliver copies of such reports with us. Based solely upon a review of the copies
      of such reports delivered to us, we believe that during 2007 such reporting
      persons complied with the filing requirements of said Section 16(a) except
      that
      Lanny Dacus did not file on a timely basis two Forms 4 reflecting three
      transactions each, three Forms 4 reflecting two transactions each and one Form
      4
      reflecting one transaction; Stathis Kouninis did not file on a timely basis
      one
      Form 4 reflecting one transaction, Joseph Carfora did not file on a timely
      basis
      one Form 3, one Form 4 reflecting three transactions, one Form 4 reflecting
      two
      transactions and one Form 4 reflecting one transaction; Frederick Ledlow did
      not
      file on a timely basis two Forms 4 reflecting three transactions each and one
      Form 4 reflecting two transactions; Peter O’Gorman did not file on a timely
      basis one Form 3, two Forms 4 reflecting three transactions each, one Form
      4
      reflecting two transactions and one Form 4 reflecting one transaction; Timothy
      Lane did not file on a timely basis one Form 3, one Form 4 reflecting three
      transactions and one Form 4 reflecting one transaction; Greg Osborn did not
      file
      one Form 3, one Form 4 reflecting three transactions and two Forms 4 reflecting
      one transaction each; and Leonid Frenkel did not file one Form 3 and two Forms
      4
      reflecting one transaction each **.**


51




**ITEM
      11. EXECUTIVE COMPENSATION**




**Compensation
      Discussion and Analysis**




This
      Compensation Discussion and Analysis (the “CD&A”) is provided to generally
      explain the compensation awarded, earned by or paid during 2007 to our named
      executive officers including our Executive Chairman, Greg Osborn, Chief
      Executive Officer, Lanny Dacus, and Chief Financial Officer, Stathis Kouninis.
      In addition, the CD&A is intended to supplement the information provided in
      the following tables and the narrative information that accompanies them. The
      CD&A outlines the primary objectives and overall structure of our executive
      compensation program and describes the process used to establish named executive
      officer compensation each year. The CD&A also defines and describes the
      primary components of the named executive officers’ 2007 compensation.




The
      numerous changes in management during the past 18 months resulted in our board
      of directors negotiating individual compensation packages with each named
      executive officer. Accordingly, the Compensation Committee has not established
      a
      uniform compensation policy for the named executive officers.




The
      elements of our compensation program for named executive officers include
      salary, a discretionary bonus, and equity compensation. In addition, our named
      executive officers participate in the benefit plans (health, disability and
      group term life) that are generally available to all employees. We provide
      limited perquisites and fringe benefits for our named executive officers. We
      have no 401(k) plan, retirement plan or deferred compensation plan.




Salary
—
      We provide salary to our named executive officers according to the employment
      agreement negotiated with each one of them. In the case of Mr. Osborn and Mr.
      Dacus who each has a lot of responsibility for the performance and growth of
      our
      company, salary is modest, representing a small fraction of their total annual
      compensation.




Bonus
—
      We do not have a formal bonus plan. Annual bonuses, if any, for our named
      executive officers are granted at the discretion of the board. In 2007, Mr.
      Kouninis received a bonus of $15,000 in connection with the completion of a
      certain round of financing as specified in his employment agreement.




Equity-based
      compensation — A substantial portion of the compensation of our named executive
      officers is in the form of options and warrants, which are exercisable at
      specified prices into a specified number of shares of our common stock. This
      is
      intended to incentivize performance that will increase our value to our
      shareholders. A
      large
      portion of the **** 10,125,000 warrants
      that Mr. Osborn and **** 18,000,000
      warrants that Mr.
      Dacus **** received
      under their respective employment agreements **** vest
      based on their **** respective ability
      to bring in new customers, as described more fully in Notes
      3
      and 5, respectively, to the
      Grants of Plan Based Awards Table. The
      number of warrants or options awarded to the named executive officers is
      determined on a case by case basis at the date of hire of the named executive
      officer. Any additional option or warrant awards are granted by the Compensation
      Committee and are based on the performance of the named executive officer.
      The
      exercise price of the award is based on the closing price of our common stock
      on
      the trading day before the day the board of directors authorized the stock
      option or warrant grant.




Prior
      to
      June 1, 2006, we awarded stock options as part of our equity compensation.
      Post
      June 1, 2006, we awarded warrants as part of our equity compensation to our
      named executive officers.




In
      December 2006, we cancelled options previously granted to Stathis Kouninis,
      one
      of our named executive officers and issued new options for a like number of
      shares at a reduced exercise price (we refer to these options as “repriced”
options). Specifically, on December 26, 2006, 450,000 options awarded to Mr.
      Kouninis, our Chief Financial Officer, on February 8, 2006 were repriced from
      $1.00 per share to $0.14 per share and we awarded to Mr. Kouninis 550,000
      warrants at an exercise price of $0.14 per share in order to retain his
      services. The exercise price for the repriced options and the award of the
      warrants was based on the closing price of our common stock on December 22,
      2006, the trading day before December 26, 2006, the day that the board of
      directors approved the reprice and the warrant grant. Specifically, on February
      5, 2007 and September 18, 2007 we awarded to Mr. Kouninis, as additional
      compensation, 500,000 warrants at an exercise price of $0.14 per share and
      250,000 warrants at an exercise price of $0.18 per share, respectively.


52




Benefits
      — We do not have special benefits for our named executive officers. They
      participate in health, life, and disability benefit programs that are generally
      available to all of our employees.




Perquisites
      and fringe benefits — The named executive officers are entitled to drive a
      company-leased car and we reimburse the expenses of operating the car.




There
      is
      no stock ownership policy for our executive officers.




For
      purposes of the Summary Compensation Table, there were no named executive
      officers other than Messrs. Osborn, Dacus and Kouninis.




**Compensation
      Committee Report**




Our
      Compensation Committee has reviewed and discussed the Compensation Discussion
      and Analysis required by Item 402(b) of Regulation S-K with management and,
      based on such review and discussions, the Compensation Committee recommended
      to
      the board that the Compensation Discussion and Analysis be included in this
      annual report on Form 10-K.




Compensation
      Committee of the Board of Directors


Peter
      O’Gorman, Chairman


Frederick
      G. Ledlow


William
      P. Miller




53






**Summary
      Compensation Table**






The
      following table summarizes the total compensation paid or earned by each of
      the
      named executive officers for the fiscal years ended December 31, 2007 and 2006.


**Name
                  and Principal Position**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Stock**
                **option/warrant**
                **awards
                  (1)**
              
              **All
                  Other**
                **Compensation**
              
              **Total**
                **Compensation**Greg
                  Osborn (2)
                Executive
                  Chairman
              
              
              2007
              
              $
              54,900
              
              
              —
              
              $
              806,088
              
              
              —
              
              $
              860,988Lanny
                  Dacus (3)
                President
                  and Chief
                Executive
                  Officer
              
              
              2007
                2006
              
              $
                $
              60,000
                3,423
              
              
              —
                —
              
              $
                $
              1,646,023
                21,894
              
              $
                $
              2,295
                561
              
              $
                $
              1,708,318
                25,878Stathis
                  Kouninis (4)
                Chief
                  Financial Officer,
                Treasurer
                  & Secretary
              
              
              2007
                2006
              
              $
                $
              193,272
                145,962
              
              $
              15,000
                —
              
              $
                $
              240,873
                202,044
              
              $
              3,204
                —
              
              $
                $
              452,349
                348,006


________




(1)
            The
                amounts shown in this column reflect the dollar amount recognized
                for
                financial statement reporting purposes for the fiscal year ended
                December
                31, 2007 (in accordance with FAS 123(R)). See Note 9 to the audited
                consolidated financial statements included elsewhere in this annual
                report
                on Form 10-K, for a discussion of the assumptions used to value the
                options and warrants. These amounts do not reflect the actual value
                that
                will be realized by the named executive officers.




(2)
            Mr.
                Osborn was appointed Executive Chairman of our company on March 14,
                2007.




(3)
            Mr.
                Dacus was appointed President and Chief Executive Officer of our
                company
                on December 12, 2006 and December 14, 2006, respectively.




(4)
            Mr.
                Kouninis was appointed Chief Financial Officer of our company on
                February
                13, 2006.




**Grants
      of Plan Based Awards**




The
      following table sets forth information concerning individual grants of stock
      options and warrants made during 2007 and 2006to the named executive officers
      in
      the Summary Compensation Table.




**Estimated
                Future Payout under**
              **Equity
                Incentive Plan Awards**
            **All
                Other Option/**
              **Warrant
                Awards**
            **Exercise
                Price**
              **of
                Option/**
              **Warrant
                Awards**
            **Closing
                Price**
              **at
                Date of**
              **Grant
                (1)**
            **Grant
                Date**
              **Fair
                Value of**
              **Option/Warrant**
              **Awards
                (2)****(#
                of securities underlying options/warrants)**
            **($
                per share)**
            **($
                per share)****Name**
            **Grant
                Date**
            **Target**
            **Maximum**Greg
                Osborn
            03/14/07
            7,500,000(3)
            7,500,000(3)
            
            0.19
            0.19
            $1,250,25003/14/07
            
            
            2,625,000(4)
            0.19
            0.19
            $453,338Lanny
                Dacus
            12/01/06
            6,000,000(5)
            6,000,000(5)
            
            0.12
            0.17
            $985,20012/01/06
            5,569,444(5)
            5,569,444(5)
            
            0.18
            0.17
            $900,02212/01/06
            
            
            1,652,778(6)
            0.12
            0.17
            $271,38612/01/06
            
            
            4,777,778(6)
            0.11
            0.17
            $786,900Stathis
                Kouninis
            02/08/06
            
            
            450,000
            1.00
            0.92
            $348,07512/26/06
            
            
            450,000
            0.14
            0.18
            $11,115(7)12/26/06
            
            
            550,000
            0.14
            0.18
            $89,70502/05/07
            
            
            500,000
            0.14
            0.13
            $57,55009/18/07
            
            
            250,000
            0.14
            0.18
            $38,250




__________




(1)
            The
                exercise price of the award is based on the closing price of our
                common
                stock on the trading day before the day the board of directors authorized
                the stock option or warrant grant.




54




(2)
            These
                values are calculated based on the FAS 123(R) aggregate fair value
                at the
                grant date. These amounts do not reflect the actual value that will
                be
                realized by the named executive officers.




(3)
            Mr.
                Osborn was granted warrants exercisable for 7,500,000 shares of our
                common
                stock as of March 14, 2007. Warrants exercisable for 1,250,000 shares,
                at
                an exercise price of $0.19 per share, vested on June 30, 2007.Warrants
                exercisable for 1,250,000 shares each, at an exercise price of $0.19
                per
                share, vested on September 30, 2007 and December 30, 2007 as a result
                of
                the fulfillment of performance conditions under the employment agreement.
                These conditions stated that warrants exercisable for 2,500,000 shares
                would vest, if at all, in two equal installments of 1,250,000 each,
                at an
                exercise price of $0.19 per share in the third and fourth calendar
                quarters of 2007, provided that, (A) in such second calendar quarter
                Mr.
                Osborn has brought one poultry or seafood plant as a customer to
                us and
                (B) for each of the third and fourth calendar quarters Mr. Osborn
                has
                brought two poultry and/or seafood plants as customers to us (it
                being
                understood that in the event that Mr. Osborn has brought at least
                five
                poultry and/or seafood plants as customers to us during calendar
                year
                2007, all 2,500,000 of the warrants would vest on the date on which
                Mr.
                Osborn brings the fifth poultry and/or seafood plant customer to
                us.The
                remaining warrants will vest and become exercisable, if at all, based
                on
                the following conditions: (i) warrants exercisable for 2,500,000
                shares
                will vest, at an exercise price of $0.19 per share, in the first
                and
                second calendar quarters of 2008, provided Mr. Osborn has brought
                two
                poultry and/or seafood plants as customers to us during each such
                calendar
                quarter (it being understood that in the event that Mr. Osborn has
                brought
                at least nine poultry and/or seafood plants as customers to us prior
                to
                July 1, 2008, a total of 5,000,000 warrants in aggregate will vest
                (to the
                extent not previously vested) on the date on which Mr. Osborn brings
                the
                ninth poultry and/or seafood plant customer to us) and (ii) warrants
                exercisable for 1,250,000 shares will vest, at an exercise price
                of $0.19
                per share, on September 30, 2008 provided Mr. Osborn has brought
                two
                poultry and/or seafood plants as customers to us during the third
                calendar
                quarter in 2008 (it being understood that in the event that Mr. Osborn
                has
                brought at least eleven poultry and/or seafood plants as customers
                to us
                prior to October 1, 2008, all 6,250,000 warrants subject to
                performance-based vesting will vest (to the extent not previously
                vested)
                on the date on which Mr. Osborn brings the eleventh poultry and/or
                seafood
                plant customer to us). Notwithstanding the foregoing, all of these
                warrants will vest no later than the date Mr. Osborn has brought
                his
                eleventh poultry and/or seafood plant as a customer to us. Vesting
                of
                these warrants will cease if Mr. Osborn’s employment is terminated, unless
                termination is by us other than for Cause (as described in Note 1
                to the
                table in “Employment Agreements — Greg Osborn”), by Mr. Osborn for Good
                Reason, or caused by Mr. Osborn’s death or disability. All of the then
                unvested warrants will become vested and exercisable upon the occurrence
                of a Change in Control of our company. The warrants generally have
                a
                10-year term and terminate immediately upon a termination of employment,
                except that if Mr. Osborn’s employment is terminated by us other than for
                Cause, by Mr. Osborn for Good Reason, or caused by Mr. Osborn’s death or
                disability, vested warrants are exercisable for five years from Mr.
                Osborn’s termination (but in no case after the end of the initial 10-year
                term). “Good Reason”, as defined in Mr. Osborn’s employment agreement,
                means (a) failure to remain as Executive Chairman; (b) a material
                diminution in the nature or scope of responsibilities, duties or
                authority
                or a request by us to engage in unlawful behavior; (c) a Change in
                Control; (d) failure to pay compensation and benefits; or (e) required
                relocation over 50 miles. “Change in Control”, as defined in Mr. Osborn’s
                employment agreement, means (a) shareholder approval (or the occurrence)
                of a merger that results in our shareholders holding less than a
                majority
                of the post-merger entity, (b) acquisition by a third party of 35%
                or more
                of our voting securities, (c) sale of all or substantially all of
                our
                assets, or (d) our dissolution or liquidation.




(4)
            Mr.
                Osborn was granted warrants exercisable for 2,625,000 shares of our
                common
                stock, at an exercise price of $0.19 per share as of March 14, 2007.
                328,125 of these warrants vested on June 14, 2007. Subject to Mr.
                Osborn’s
                employment by us on the vesting date, the remaining 2,296,875 warrants
                will vest in 7 equal quarterly installments of 328,125 each, ending
                on
                March 14, 2009. However, in the event Mr. Osborn’s employment is
                terminated by us other than for Cause, by Mr. Osborn for Good Reason,
                or
                caused by Mr. Osborn’s death or disability, the unvested warrants that
                would have otherwise vested in the succeeding two calendar quarters
                will
                become vested and exercisable upon termination. The warrants generally
                have a 10-year term and terminate immediately upon a termination
                of
                employment, except that if Mr. Osborn’s employment is terminated by us
                other than for Cause, by Mr. Osborn for Good Reason, or caused by
                Mr.
                Osborn’s death or disability, vested warrants are exercisable for 5 years
                from Mr. Osborn’s termination (but in no case after the end of the initial
                10-year term).




55




(5)
            Mr.
                Dacus was granted warrants exercisable for 13,222,222 shares of our
                common
                stock as of December 1, 2006. Warrants exercisable for 1,652,778
                shares,
                at an exercise price of $0.12 per share, vested on March 31, 2007.Warrants
                exercisable for 2,000,000 shares each, at an exercise price of $0.12
                per
                share, vested on June 30, 2007, September 20, 2007 and December 31,
                2007
                as a result of the fulfillment of performance conditions under the
                employment agreement. These conditions stated thatwarrants exercisable for 6,000,000 shares would vest, if at all,
                in three
                equal installments of 2,000,000 each, at an exercise price of $0.12
                per
                share in the second, third and fourth calendar quarters of 2007,
                provided
                that, (A) in such second calendar quarter Mr. Dacus has brought one
                poultry or seafood plant as a customer to us and (B) for each of
                the third
                and fourth calendar quarters Mr. Dacus has brought two poultry and/or
                seafood plants as customers to us (it being understood that in the
                event
                that Mr. Dacus has brought at least five poultry and/or seafood plants
                as
                customers to us during calendar year 2007, all 6,000,000 of the warrants
                would vest on the date on which Mr. Dacus brings the fifth poultry
                and/or
                seafood plant customer to us.The
                remaining warrants will vest and become exercisable, if at all, based
                onthe
                following performance conditions:(i) warrants exercisable for 4,000,000 shares will vest, at an exercise
                price of $0.18 per share, in the first and second calendar quarters
                of
                2008, provided Mr. Dacus has brought two poultry and/or seafood plants
                as
                customers to us during each such calendar quarter (it being understood
                that in the event that Mr. Dacus has brought at least nine poultry
                and/or
                seafood plants as customers to us prior to July 1, 2008, a total
                of
                10,000,000 warrants in aggregate will vest (to the extent not previously
                vested) on the date on which Mr. Dacus brings the ninth poultry and/or
                seafood plant customer to us) and (ii) warrants exercisable for 1,569,444
                shares will vest, at an exercise price of $0.18 per share, on September
                30, 2008 provided Mr. Dacus has brought two poultry and/or seafood
                plants
                as customers to us during the third calendar quarter in 2008 (it
                being
                understood that in the event that Mr. Dacus has brought at least
                eleven
                poultry and/or seafood plants as customers to us prior to October
                1, 2008,
                all 11,569,444 warrants subject to performance-based vesting will
                vest (to
                the extent not previously vested) on the date on which Mr. Dacus
                brings
                the eleventh poultry and/or seafood plant customer to us). Notwithstanding
                the foregoing, all of these warrants will vest no later than the
                date Mr.
                Dacus has brought his eleventh poultry and/or seafood plant as a
                customer
                to us. Vesting of these warrants will cease if Mr. Dacus’ employment is
                terminated, unless termination is by us other than for Cause (as
                described
                in Note 1 to the table in “Employment Agreements — Lanny R. Dacus”), by
                Mr. Dacus for Good Reason, or caused by Mr. Dacus death or disability.
                All
                of the then unvested warrants will become vested and exercisable
                upon the
                occurrence of a Change in Control of our company. The warrants generally
                have a 10-year term and terminate immediately upon a termination
                of
                employment, except that if Mr. Dacus employment is terminated by
                us other
                than for Cause, by Mr. Dacus for Good Reason, or caused by Mr. Dacus’
                death or disability, vested warrants are exercisable for five years
                from
                Mr. Dacus’ termination (but in no case after the end of the initial
                10-year term). Good Reason and Change in Control are defined substantially
                as in Note 3 above.




(6)
            Mr.
                Dacus was granted warrants exercisable for 4,777,778 shares of our
                common
                stock, at an exercise price of $0.11 per share as of December 1,
                2006.
                597,224 of these warrants vested on March 1, 2007. Subject to Mr.
                Dacus’
                employment by us on the vesting date, the remaining 4,180,554 warrants
                will vest in 7 equal quarterly installments of 597,222 each, ending
                on
                December 1, 2008. However, in the event Mr. Dacus’ employment is
                terminated by us other than for Cause, by Mr. Dacus for Good Reason,
                or
                caused by Mr. Dacus’ death or disability, the unvested warrants that would
                have otherwise vested in the succeeding two calendar quarters will
                become
                vested and exercisable upon termination. The warrants generally have
                a
                10-year term and terminate immediately upon a termination of employment,
                except that if Mr. Dacus employment is terminated by us other than
                for
                Cause, by Mr. Dacus for Good Reason, or caused by Mr. Dacus’ death or
                disability, vested warrants are exercisable for 5 years from Mr.
                Dacus’
                termination (but in no case after the end of the initial 10-year
                term).




(7)
            Represents
                the incremental value for the reduction in the exercise price of
                450,000
                options from $1.00 per share to $0.14 per share, effective December
                26,
                2006, as recognized under FAS 123(R). 25% of these options vested
                at the
                date of the original grant and the remaining 75% vest equally on
                a monthly
                basis over twenty-four months. See discussion under “Employment Agreements
                — Stathis Kouninis.”


56


**Outstanding
      Equity Awards at 2007 Fiscal Year End**




The
      following table sets forth information at December 31, 2007 concerning stock
      options and warrants held by the named executive officers in the Summary
      Compensation Table. No options or warrants held by such individuals were
      exercised during 2007.




**Name**
            **Exercisable
                (1)**
            **Unexercisable
                (1)**
            **Option
                Exercise**
              **Price
                ($)**
            **Option**
              **Expiration
                Date**Greg
                Osborn
            3,750,000
            3,750,000
            0.19
            03/13/2017984,375
            1,640,625
            0.19
            03/13/2017Lanny
                Dacus
            2,388,889
            2,388,889
            0.11
            11/30/20167,652,778
            —
            0.12
            11/30/2016—
            5,569,444
            0.18
            11/30/2016Stathis
                Kouninis
            421,875
            28,125
            0.14(3)
            02/07/2016343,750
            206,250
            0.14
            12/25/2016281,250
            218,750
            0.14
            02/04/201785,937
            164,063
            0.18
            09/17/2017


________




(1)
            All
                options and warrants are exercisable for shares of common stock.




(2)
            Represents
                the reprice of 450,000 options from $1.00 per share to $0.14 per
                share as
                of December 26, 2006.




**Employment
      Agreements**




*Greg
      Osborn*




In
      March
      2007, we entered into an employment agreement with Greg Osborn in connection
      with his appointment as Executive Chairman. The agreement provides for, among
      other things, a term of up to 21 months, an annual salary of $60,000, an annual
      bonus at the discretion of the board, the grant of initial warrants for the
      purchase of 2,625,000 shares of common stock exercisable on a quarterly basis
      over the term of the agreement at an exercise price of $0.19 per share, the
      grant of additional warrants exercisable for 7,500,000 shares of common stock
      at
      an exercise price of $0.19 per share with vesting contingent upon achievement
      of
      contractually specified performance goals, severance payments and a cash payment
      of $20,000 per month for a period of nine months commencing when we reach
      profitability. Mr. Osborn is the Managing Partner of an affiliate of the
      firm that served from December 2006 to December 2007 as placement agent for
      the
      offering of the First Bridge Notes, the Second Bridge Notes, the 6% Notes and
      the December 6% Notes in the Tender Offer.




57




**Executive
                Benefits and Payments**
            
            **Voluntary**
              **Resignation
                or**
              **Termination
                for**
              **Cause
                (1)**
            
            **Termination**
              **by
                Us without**
              **Cause
                or**
              **Termination
                by Employee**
              **for
                Good Reason (2)**
            
            **Death
                or**
              **Disability
                (3)**
            
            **Change
                in**
              **Control
                (without**
              **Termination)(4)**
            
            **Change
                in**
              **Control
                (with**
              **Termination)
                (5)****Compensation:**Base
                salary
            
            $
            —
            
            $
            72,500
            
            $
            72,500
            
            $
            —
            
            $
            72,500**Benefits
                & Perquisites:**Health
                & Welfare Benefits
            
            $
            —
            
            $
            27,224
            
            $
            —
            
            $
            —
            
            $
            27,224Company
                Vehicle
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Accelerated
                Vesting of Option/Warrant
                Awards
            
            $
            —
            
            $
            568,125(6
            )
            $
            568,125(6
            )
            $
            970,313
            
            $
            970,313






(1)
            ”Cause”
                is as defined in footnote 1 to the Executive Benefits and Payments
                table
                for Lanny R. Dacus below.




(2)
            Upontermination by us other than for Cause or termination by Mr. Osborn
                for
                Good Reason (as described in Note 3 to the Grants of Plan Based Awards
                table), Mr. Osborn is entitled(i)
                continued payment of base salary for a period of 24 months less one
                month
                for each month after March 14, 2007 (but in no case for less than
                12
                months) (the “Severance period”); (ii) any bonus to which he would have
                been entitled during the severance period; and (iii) continued health
                insurance coverage during the severance period at a level equivalent
                to
                that provided to Mr. Osborn by us immediately prior to the termination
                date. These payments and benefits are conditioned upon Mr. Osborn
                signing
                a mutually acceptable release of claims**.**




(3)
            Death
                or Disability - In
                the event Mr. Osborn’s employment is terminated by death,his
                beneficiary will receive, in addition to Accrued Obligations, continued
                payment of base salary through the severance period, and any bonus
                owed toMr.
                Osborn.
                In the event Mr. Osborn’s employment is terminated by disability (any
                illness, injury, accident or condition of either a physical or
                psychological nature the renders him unable to perform substantially
                all
                of his duties and responsibilities, for 120 consecutive days during
                any
                calendar year), Mr. Osborn will be entitled to the Accrued
                Obligations.




(4)
            In
                the event of a Change in Control (as defined in Note 3 to the Grants
                of
                Plan Based Awards Table), 100% of the then unvested portion of the
                warrants described in Note 4 to the Grants of Plan Based Awards Table
                become vested and exercisable**.**




(5)
            In
                the event of a Change in Control (as defined in Note 3 to the Grants
                of
                Plan Based Awards Table), Mr. Osborn may terminate his employment
                and
                receive the same benefits as if he had terminated for Good
                Reason****except
                that 100% of the then unvested portion of the warrants described
                in Note 4
                to the Grants of Plan Based Awards Table become vested and exercisable.




(6)
            This
                amount assumes that Mr. Osborn meets all performance-related goals
                for the
                first and second quarters of 2008 as set forth in Note 3 to the Grants
                of
                Plan Based Awards table above**.**




*Lanny
      R. Dacus*




In
      December 2006, Lanny R. Dacus was appointed President and Chief Executive
      Officer of our company. In connection with this appointment, we entered into
      an
      employment agreement with Mr. Dacus. Under the terms of the agreement, Mr.
      Dacus
      will receive a base salary of $60,000 per year and the right to participate
      in
      our existing benefit plans, with bonus payments to be made at the discretion
      of
      the board of directors. We will provide Mr. Dacus with a company automobile
      during the term of the employment agreement. We also granted warrants to
      purchase 4,777,778 shares of common stock at an exercise price of $0.11 per
      share to Mr. Dacus in connection with this agreement. The warrants have a ten-
      year term and vest over a two-year period from the date of grant. We granted
      additional warrants to purchase 13,222,222 shares of common stock at exercise
      prices ranging from $0.12 to $0.18 per share, with vesting terms contingent
      upon
      Mr. Dacus’ achievement of contractually specified performance goals described in
      Note 3 to the Grants in 2006 Plan Based Awards Table.


58


The
      following table shows the potential payments upon termination or Change of
      Control of our company as of December 31, 2007 for Lanny Dacus, President and
      Chief Executive Officer.




**Executive
                Benefits and Payments**
            
            **Voluntary**
              **Resignation
                or**
              **Termination
                for**
              **Cause
                (1)**
            
            **Termination**
              **by
                Us without**
              **Cause
                or**
              **Termination
                by Employee**
              **for
                Good Reason (2)**
            
            **Death
                or**
              **Disability
                (3)**
            
            **Change
                in**
              **Control
                (without**
              **Termination)(4)**
            
            **Change
                in**
              **Control
                (with**
              **Termination)
                (5)****Compensation:**Base
                salary
            
            $
            —
            
            $
            60,000
            
            $
            60,000
            
            $
            —
            
            $
            60,000**Benefits
                & Perquisites:**Health
                & Welfare Benefits
            
            $
            —
            
            $
            15,302
            
            $
            —
            
            $
            —
            
            $
            15,302Company
                Vehicle
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Accelerated
                Vesting ofWarrant
                Awards
            
            $
            —
            
            $
            939,478(6
            )
            $
            939,478(6
            )
            $
            1,436,978
            
            $
            1,436,978


__________




(1)
            ”Cause”
                for termination, as defined in Mr. Dacus’ employment agreement, includes:
                (i) Mr. Dacus’ conviction of a felony or conviction of any other crime
                involving moral turpitude (which specifically excludes all traffic
                violations); (ii) Mr. Dacus’ theft, embezzlement, misappropriation of or
                intentional and malicious infliction of material damage to our business
                or
                property; (iii) Mr. Dacus’ gross dereliction of duties or gross negligence
                if not cured by Mr. Dacus within 20 business days following notice
                from
                us; or (iv) Mr. Dacus’ breach of any material term under his employment
                agreement not cured by Mr. Dacus within 20 business days following
                notice
                from us. Upon termination for Cause or in the event of his voluntary
                resignation other than for Good Reason, Mr. Dacus is entitled only
                to (i)
                his base salary earned but not paid through the date of termination,
                (ii)
                any vacation time earned but not used through the date of termination,
                and
                (iii) any business expenses incurred but unreimbursed on the date
                of
                termination (collectively, the “Accrued Obligations”).




(2)
            Upon
                termination by us other than for Cause or termination by Mr. Dacus
                for
                Good Reason (as described in Note 5 to the Grants of Plan Based Awards
                table), Mr. Dacus is entitled to (i) continued payment of base salary
                for
                a period of 24 months less one month for each month after December
                12,
                2006 (but in no case for less than 12 months) (the “severance period”);
                (ii) any bonus to which he would have been entitled during the severance
                period; and (iii) continued health insurance coverage during the
                severance
                period at a level equivalent to that provided to Mr. Dacus by us
                immediately prior to the termination date. These payments and benefits
                are
                conditioned upon Mr. Dacus signing a mutually acceptable release
                of
                claims.




(3)
            Death
                or Disability — In the event Mr. Dacus’ employment is terminated by death,
                his beneficiary will receive, in addition to Accrued Obligations,
                continued payment of base salary through the severance period, and
                any
                bonus owed to Mr. Dacus. In the event Mr. Dacus’ employment is terminated
                by disability (any illness, injury, accident or condition of either
                a
                physical or psychological nature the renders him unable to perform
                substantially all of his duties and responsibilities, for 120 consecutive
                days during any calendar year), Mr. Dacus will be entitled to the
                Accrued
                Obligations.




(4)
            In
                the event of a Change in Control (as defined in Note 3 to the Grants
                of
                Plan Based Awards Table), 100% of the then unvested portion of the
                warrants described in Note 5 to the Grants of Plan Based Awards Table
                become vested and exercisable.




(5)
            In
                the event of a Change in Control (as defined in Note3to
                the Grants of Plan Based Awards Table), Mr. Dacus may terminate his
                employment and receive the same benefits as if he had terminated
                for Good
                Reason,
                except that 100% of the then unvested portion of the warrants described
                in
                Note 5 to the Grants of Plan Based Awards Table become vested and
                exercisable**.**




(6)
            This
                amount assumes that Mr. Dacus meets all performance-related goals
                for the
                first and second quarter of 2008 as set forth in Note 5 to the Grants
                of
                Plan Based Awards table above.




59




*Stathis
      Kouninis*




On
      February 8, 2006, we appointed Stathis Kouninis as Chief Financial Officer.
      On
      May 10, 2007, we entered into an amended and restated employment agreement,
      effective April 2, 2007, with Stathis Kouninis, which provides for: (i) a base
      salary of $185,000 per year; (ii) an annual bonus payment at the discretion
      of
      our Chief Executive Officer; (iii) a bonus in the amount of $15,000 if we
      consummate a financing in the amount of at least $3,000,000; and (iv)
      eligibility to participate in our existing benefit plans. We will provide Mr.
      Kouninis with an automobile during the term of his employment agreement and
      will
      reimburse Mr. Kouninis for all reasonable automobile expenses.  Upon
      termination for Cause, as defined in Note 1 to the Executive Benefits and
      Payments table for Lanny R. Dacus above, or in the event of his voluntary
      resignation other than for Good Reason, as defined below, Mr. Kouninis is
      entitled only to the Accrued Obligations, as defined in Note 1 to the Executive
      Benefits and Payments table for Lanny R. Dacus above, and any earned but unpaid
      bonus (the “Final Compensation”).  If Mr.
      Kouninis’ employment is terminated by us for any reason other than
      Cause ,
      or if
      he should resign for Good Reason, as defined below ,
      or in
      the event of the death or disability of Mr. Kouninis during the term of his
      employment agreement, Mr. Kouninis will ,
      in
      addition to receiving the Final Compensation, be
      entitled to a lump sum payment equal to six months of his base salary at the
      rate in effect on the date of termination of his employment, provided he
      executes a mutually agreeable release of claims against us. In the event Mr.
      Kouninis’ employment is terminated by us for any reason other than Cause or if
      he should resign for Good Reason, we will also pay the cost of Mr. Kouninis’
group family health insurance coverage for a period of six months. The
      employment agreement further provides that all stock options and warrants
      previously granted to Mr. Kouninis will fully vest upon a Change in Control,
      as
      defined in Note
      3 to
      the Grants of Plan Based Awards Table ,
      or if
      Mr. Kouninis’ employment is terminated by us for any reason other than Cause or
      if he should resign for Good Reason. The term of the employment agreement is
      for
      two years with automatic renewals for successive one year periods ,
      as
      defined in Mr. Kouninis’ employment agreement,
      means
      (a) failure to remain as Chief Financial Officer; (b) a material diminution
      in
      the nature or scope of responsibilities, duties or authority or a request by
      us
      to engage in unlawful behavior; (c) material failure to pay compensation and
      benefits; (d) required relocation over 50 miles; (e) material diminution in
      authority, duties or responsibilities of the person to whom Mr. Kouninis is
      required to report; (f) any other material breach of the employment agreement;
      and (g) notification by us that we do not intend to extend the employment
      agreement past its original 2 year term, as thereafter automatically extended
      from year-to-year.




The
      following table shows the potential payments upon termination or Change in
      Control of our company as of December 31, 2007 for Stathis Kouninis, Chief
      Financial Officer:





**Executive
                Benefits and Payments**
            
            **Voluntary**
              **Resignation
                or**
              **Termination**
              **for
                Cause**
            
            **Termination**
              **by
                Us without**
              **Cause
                or**
              **Termination
                by Employee**
              **for
                Good Reason**
            
            **Death
                or**
              **Disability**
            
            **Change
                in**
              **Control
                (without**
              **Termination)**
            
            **Upon
                Change**
              **in
                Control**
              **(with
                Good**
              **Reason**
              **Termination)****Compensation:**Base
                salary
            
            $
            —
            
            $
            92,500
            
            $
            92,500
            
            $
            —
            
            $
            92,500**Benefits
                & Perquisites:**Health
                & Welfare Benefits
            
            $
            —
            
            $
            10,679
            
            $
            —(1
            )
            $
            —
            
            $
            10,679Company
                Vehicle
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Accelerated
                Vesting of Option/Warrant
                Awards
            
            $
            —
            
            $
            111,094
            
            $
            —
            
            $
            111,094
            
            $
            111,094




(1)
            If
                termination is for disability, Mr. Kouninis will receive any amounts
                payable/owing to him under short and long term disability benefits.
                His
                lump sum base salary payment for the initial six month period will
                be
                reduced by the amount of any such benefits received.


60




**Directors’
      Compensation**




For
      2007,
      each of our non-employee directors received compensation for serving on the
      board. Each director was paid a $3,750 cash retainer for each fiscal quarter
      served on the board of directors. Additionally, at their date of appointment,
      all board members are awarded 750,000 warrants that vest immediately and have
      a
      term of ten years. Mr. Osborn and Mr. Dacus did not receive any compensation
      in
      their roles as directors.




**Name
                and Principal Position**
            
            **Fees
                Earned**
              **or
                Paid in**
              **Cash**
            
            **Stock**
              **option/warrant**
              **awards
                (1)**
            
            **Total**
              **Compensation**Joseph
                Carfora (2)
            
            $
            13,500
            
            $
            83,175
            
            $
            96,675Timothy
                Lane (3)
            
            $
            7,500
            
            $
            125,550
            
            $
            133,050Frederick
                Ledlow (4)
            
            $
            17,500
            
            $
            125,850
            
            $
            143,350William
                Miller (5)
            
            $
            17,500
            
            
            __
            
            $
            17,500Peter
                O’Gorman (6)
            
            $
            17,500
            
            $
            100,500
            
            $
            118,000




__________




(1)
            All
                options are exercisable for shares of common stock. The amounts shown
                in
                this column reflect the dollar amount recognized for financial statement
                reporting purposes for the fiscal year ended December 31, 2006 (in
                accordance with FAS 123(R)). See Note 9 to the audited consolidated
                financial statements included elsewhere in this annual report on
                Form
                10-K, for a discussion of the assumptions used to value the options
                and
                warrants. These amounts do not reflect the actual value that will
                be
                realized by the named directors.




(2)
            On
                February 5, 2007, Mr. Carfora was appointed as a director of our
                company
                and on June 29, 2007 was appointed member of the Governance Committee.
                On
                February 5, 2007 Mr. Carfora was awarded 750,000 warrants with an
                exercise
                price of $0.14 per share. All of the warrants vested on the date
                of the
                grant.




(3)
            On
                June 27, 2007, Mr. Lane was appointed as a director of our company
                and on
                June 29, 2007 was appointed member of the Audit Committee and the
                Governance Committee. On June 29, 2007 Mr. Lane was awarded 750,000
                warrants with an exercise price of $0.20 per share. All of the warrants
                vested on the date of the grant.




(4)
            On
                December 18, 2006, Mr. Ledlow was appointed as a director, a member
                of the
                Audit Committee and the Chairman of our Compensation Committee. On
                June
                29, 2007, Mr. Ledlow resigned as Chairman of the Compensation Committee
                and member of the Audit Committee and was appointed Chairman of the
                Governance Committee and member of the Compensation Committee. On
                December
                26, 2006 Mr. Ledlow was awarded 750,000 warrants with an exercise
                price of
                $0.14 per share. All of the warrants vested on the date of the grant.




(5)
            In
                May 2006, Mr. Miller was appointed as a director of our company and
                a
                member of the Audit Committee and Compensation Committee. In September
                2006, Mr. Miller was appointed Chairman of the Audit Committee. At
                the
                date of his appointment as a director of our company Mr. Miller was
                awarded 250,000 options with an exercise price of $1.00 per share
                and a
                vesting period of two years. Based on the FAS 123(R) calculation,
                the
                aggregate fair value of these options at the grant date was $133,050.
                On
                September 28, 2006, the exercise price of these options was reduced
                to
                $0.12 per share and all unvested options vested immediately. The
                amount
                reported under the “Stock option/warrant award” column includes a value of
                $21,025, which is based on the repricing of the 250,000 options and
                a
                value of $83,156, which is based on the acceleration of the vesting
                of
                156,250 unvested options. On December 26, 2006, Mr. Miller was awarded
                750,000 warrants with an exercise price of $0.14 per share. All of
                these
                warrants vested at the date of the grant.


61




(6)
            On
                January 11, 2007, Mr. O’Gorman was appointed as a director of our company
                and a member of our Compensation Committee and on June 29, 2007,
                was
                appointed Chairman of the Compensation Committee and member of the
                Audit
                Committee. On January 11, 2007 Mr. O’Gorman was awarded 750,000 warrants
                with an exercise price of $0.15 per share. All of the warrants vested
                on
                the date of the grant.




**Compensation
      Committee Interlocks and Insider Participation**




Currently,
      the members of the Compensation Committee of the board of directors are Messrs
      Ledlow, Miller and O’Gorman. Except for Lanny Dacus and Greg Osborn, no director
      of our company is a current or former officer or employee of our company or
      any
      of our subsidiaries. In addition, no employee director or other executive
      officer of our company serves as a director of a company where a non-employee
      director of our company is an executive officer. ****




**ITEM
        12.** **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED
        STOCKHOLDER MATTERS**




The
      following table sets forth certain information as of March 14, 2008 regarding
      the beneficial ownership of our common stock by (i) each executive officer
      of our company named in the Summary Compensation Table, (ii) each director
      of our company, (iii) each stockholder known by us to beneficially own 5%
      or more of our common stock and (iv) all directors and executive officers,
      as a group. An investor in the 6% Notes and Warrants and the December 6% Notes
      and December Warrants is not entitled to convert or exercise that amount of
      these notes or warrants which would result in beneficial ownership by such
      investor and its affiliates of more than 4.99% of our outstanding shares of
      common stock. An investor in the 6% Notes and Warrants and the December 6%
      Notes
      and December Warrants may increase the permitted beneficial ownership amount
      up
      to 9.99% after 61 days’ prior written notice to us. Unless such investor is a
      director or executive officer of our company, investors in these notes or
      warrants are not included in the following table. Except as otherwise indicated,
      the address of each beneficial holder of our common stock listed below is the
      same as our address.




**Name
                and Address of Beneficial Owner**
            
            **Amount
                and Nature of Beneficial Ownership (1)**
            
            **Percentage
                of Class (2)**Greg
                Osborn
            
            
            24,194,944
                (3)
            
            
            14.9Joseph
                P. Carfora
            
            
            1,225,747
                (4)
            
            
            *Lanny
                Dacus
            
            
            12,676,296
                (5)
            
            
            8.4Timothy
                M. Lane
            
            
            1,845,971
                (6)
            
            
            1.3Frederick
                G. Ledlow
            
            
            1,036,930
                (7)
            
            
            *William
                P. Miller
            
            
            1,035,000
                (8)
            
            
            *Peter
                O’Gorman
            
            
            1,323,845
                (9)
            
            
            *Stathis
                Kouninis
            
            
            1,242,187
                (10)
            
            
            *All
                directors and executive officers as a group (8 persons)
            
            
            44,580,919
                (11)
            
            
            25.4





*
            Less
                than 1%




(1)
            Except
                as indicated in the footnotes to this table and pursuant to applicable
                community property laws, the persons named in the table have sole
                voting
                and investment power with respect to all shares of common stock.
                The
                number of shares beneficially owned by each person as of March 14,
                2008
                includes shares of common stock that such person had the right to
                acquire
                on or within 60 days after March 14, 2008, including, but not limited
                to,
                upon the conversion of First Bridge Notes and the exercise of warrants
                associated with the purchase of these First Bridge Notes and the
                exercise
                of options and warrants.


62


(2)
            Holders
                of common stock are entitled to one vote per share. Percentage of
                beneficial ownership is based on 137,736,937 shares of common stock
                issued
                and outstanding as of March 14,
                2008.




(3)
            Includes
                374,234 shares of common stock issuable upon the conversion of the
                6%
                Notes which were received as result of the exchange of the First
                Bridge
                Notes purchased previously, 50,000 shares upon the exercise of Warrants
                issued in connection with the 6% Notes, 138,889 shares upon the exercise
                of warrants associated with the purchase of the First Bridge Notes
                and
                18,569,321 shares of common stock issuable upon the exercise of warrants
                issued for consulting services and placement agent warrants. Also
                includes
                5,062,500 shares of common stock issuable upon the exercise of warrants
                associated with Mr. Osborn’s employment with our
                company.




(4)
            Includes
                294,635 shares of common stock issuable upon the conversion of the
                6%
                Notes which were received as result of the exchange of the First
                Bridge
                Notes purchased previously, 40,000 shares upon the exercise of Warrants
                issued in connection with the 6% Notes and 111,111 shares upon the
                exercise of warrants associated with the purchase of the First Bridge
                Notes. Also includes 750,000 shares of common stock issuable upon
                the
                exercise of warrants issued as compensation to Mr.
                Carfora.





(5)
            Includes
                1,783,532 shares of common stock issuable upon the conversion of
                the 6%
                Notes which were received as result of the exchange of the First
                Bridge
                Notes purchased previously and December 6% Notes acquired in connection
                with the Tender Offer, 233,333 shares upon the exercise of Warrants
                issued
                in connection with the 6% Notes and the December 6% Notes, 20,542
                shares
                issued in lieu of cash interest payments on the 6% Notes and 10,638,889
                shares of common stock issuable upon the exercise of warrants issued
                as
                compensation to Mr. Dacus.




(6)
            Includes
                718,193 shares of common stock issuable upon the conversion of the
                6%
                Notes which were received as result of the exchange of the First
                Bridge
                Notes purchased previously, 277,778 shares upon the exercise of warrants
                associated with the purchase of the First Bridge Notes and 100,000
                shares
                upon the exercise of Warrants issued in connection with the 6% Notes.
                Also
                includes 750,000 shares of common stock issuable upon the exercise
                of
                warrants issued as compensation to Mr.
                Lane.




(7)
            Includes
                253,596 shares of common stock issuable upon the conversion of the
                6%
                Notes which were received as result of the exchange of the First
                Bridge
                Notes purchased previously and December 6% Notes acquired in connection
                with the Tender Offer and 33,333 shares upon the exercise of Warrants
                issued in connection with the 6% Notes and the December 6% Notes.
                Also
                includes 750,000 shares of common stock issuable upon the exercise
                of
                warrants issued as compensation to Mr.
                Ledlow.




(8)
            Includes
                shares of common stock issuable upon the exercise of options and
                warrants
                issued as compensation to Mr.
                Miller.




(9)
            Includes
                507,179 shares of common stock issuable upon the conversion of the
                6%
                Notes which were received as result of the exchange of the First
                Bridge
                Notes purchased previously and December 6% Notes acquired in connection
                with the Tender Offer and 66,667 shares issuable upon the exercise
                of
                Warrants issued in connection with the 6% Notes and the December
                6% Notes.
                Also includes 750,000 shares of common stock issuable upon the exercise
                of
                warrants issued as compensation to Mr.
                O’Gorman.




(10)
            Represents
                shares of common stock issuable upon the exercise of options and
                warrants
                issued as compensation to Mr.
                Kouninis.


63


(11)
            Includes
                3,282,379 shares of common stock issuable upon the conversion of
                the 6%
                Notes received as a result of the exchange of the First Bridge Notes
                purchased previously and 456,667 shares issuable upon the exercise
                of
                Warrants issued in connection with the 6% Notes. Also includes 527,778
                shares issuable upon the exercise of warrants associated with the
                purchase
                of the First Bridge Notes, 694,444 shares issuable upon conversion
                of the
                December 6% Notes and 83,333 shares underlying December Warrants,
                18,569,321 shares of common stock issued upon the conversion of consulting
                and placement agent warrants and 21,032,639 shares of common stock
                issuable upon the exercise of options and warrants issued as compensation
                to our directors and executive
                officers.




**Equity
      Compensation Plan Information**




The
      following table provides information as of December 31, 2007 about our common
      stock that may be issued upon the exercise of options, warrants and rights
      under
      all of our existing equity compensation plans.




**Plan
                Category**
            **Number
                of Shares**
              **of
                Common Stock**
              **To
                Be Issued upon**
              **Exercise
                of**
              **Outstanding
                Options,**
              **Warrants
                and Rights**
            **Weighted
                Average**
              **Exercise
                Price**
              **of
                Outstanding**
              **Options,
                Warrants**
              **and
                Rights**
            **Number
                of Shares**
              **of
                Common Stock**
              **Remaining**
              **Available
                for**
              **Future
                Issuance**
              **under
                Equity**
              **Compensation**
              **Plans
                (Excluding**
              **Common
                Stock**
              **Reflected
                in First**
              **Numerical
                Column)****Equity
                compensation plans approved by**
              **security
                holders:**2006
                Stock Plan
            —
            —
            2,500,000**Equity
                compensation plans not approved by security
                holders:**Stock
                Option and Warrant Agreements (1)
            69,857,460
            $0.40
            —**Total:**
            69,857,460
            $0.40
            —




__________




(1)
            We
                have entered into individual stock option and warrant agreements
                with an
                aggregate of 96 employees and consultants, including eight current
                and
                three former officers and directors. Pursuant to these agreements,
                which
                were not approved by security holders, the outstanding options and
                warrants to purchase an aggregate of 69,857,460 are held by 73 employees,
                former employees and consultants as of December 31, 2007. Of these
                options
                and warrants, 51,354,750 were exercisable as of December 31, 2007.
                These
                options and warrants have exercise prices per share ranging from
                $0.001 to
                $4.00 and expire 10 years following the grant
                date.




**ITEM
        13.** **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**




In
      2004,
      we entered into an Exclusive Field of Use License Agreement and Product Sale
      Agreement with Wynn Starr Special Products, LLC. Under the terms of this
      agreement, as amended, we have granted Wynn Starr the exclusive, worldwide
      right
      to market and distribute products used as post-harvesting processing aids for
      the poultry industry based on the pHarlo technology. In return for this license,
      Wynn Starr will purchase licensed products from us and will withhold up to
      25%
      of the net sale price per gallon sold, based on different increments of achieved
      net sale prices. The amended agreement also includes other target performance
      criteria such that, if met by Wynn Starr, we will issue to Wynn Starr a warrant
      to purchase up to 1,300,000 shares of our common stock with an exercise price
      based upon the closing price of our common stock on January 23, 2007, the date
      of the amendment. These performance criteria were not met and consequently
      we
      did not issue any warrants to Wynn Starr. As of December 31, 2007, we had paid
      $42,000 to Wynn Starr and had a receivable of approximately $6,700 from Wynn
      Starr, net of amounts owed to Wynn Starr, under this royalty arrangement. Steven
      B. Zavagli, a former member of our board of directors, is the founder, Chairman
      and the Chief Executive Officer of Wynn Starr and Wynn Starr’s ultimate parent
      company, Wynn Starr Flavors, Inc. We have recently notified Wynn Starr of our
      rescission and termination of the Wynn Starr Agreement.


64


In
      April
      2007, we entered into an employment agreement with Greg Osborn in connection
      with his appointment as Executive Chairman, effective March 14, 2007. Mr. Osborn
      is the Managing Partner of Indigo Ventures, LLC, an affiliate of Indigo
      Securities, LLC, the firm that served as the placement agent for the offerings
      of our First Bridge Notes, Second Bridge Notes, 6% Notes and our Tender Offer.
      Mr. Osborn is also a registered representative with Indigo Securities. In
      connection with its services as placement agent of the First Bridge Notes,
      Indigo Securities received a fee of $629,509 and seven-year warrants to purchase
      an aggregate of approximately 8,682,884 shares of our common stock at an
      exercise price of $0.0725 per share. In connection with its services as
      placement agent of the Second Bridge Notes, Indigo Securities received a fee
      of
      $200,000 and seven-year warrants to purchase an aggregate of 2,020,202 shares
      of
      our common stock at an exercise price of $0.099 per share. In connection with
      its services as placement agent of the 6% Notes that were issued for cash
      consideration, Indigo Securities received a fee of approximately $395,000 and
      seven-year warrants to purchase an aggregate of approximately 3,590,909 shares
      of our common stock at an exercise price of $0.11 per share. In connection
      with
      its services as placement agent in the Tender Offer, Indigo Securities received
      a cash fee of $203,254 and seven-year warrants to purchase 2,258,382 shares
      of
      our common stock at an exercise price of $0.15 per share. Indigo Securities
      is
      entitled to a placement agent’s fee with respect to any securities purchased in
      any subsequent offering by any investors introduced to us by the placement
      agent, if such subsequent offering is consummated any time within the twelve
      month period following the final closing of the offering of the 6%
      Notes.




On
      December 1, 2006, Greg Osborn, Executive Chairman and a director of our company,
      purchased First Bridge Notes in the principal amount of $25,000, which notes
      are
      convertible into 344,828 shares of common stock, and warrants to purchase
      138,888 shares of our common stock with an exercise price of $0.09 per share.
      On
      September 28, 2007, Mr. Osborn exchanged these First Bridge Notes and the
      accrued interest thereon for 6% Notes in the aggregate amount of $27,132, which
      notes are convertible into 374,234 shares of common stock, and received warrants
      to purchase 50,000 shares of common stock with an exercise price of $0.15 per
      share.




On
      December 1, 2006, January 31, 2007 and February 21, 2007, Lanny Dacus,
      President, Chief Executive Officer and a director of our company, purchased
      First Bridge Notes in the aggregate principal amount of $87,500, which notes
      are
      convertible into 1,206,897 shares of common stock, and warrants to purchase
      486,111 shares of our common stock with an exercise price of $0.09 per share.
      On
      September 28, 2007, Mr. Dacus exchanged these First Bridge Notes and the accrued
      interest thereon for 6% Notes in the aggregate amount of $94,063, which notes
      are convertible into 1,297,421 shares of common stock, and received warrants
      to
      purchase 175,000 shares of common stock with an exercise price of $0.15 per
      share. On December 20, 2007, Mr. Dacus exercised warrants to purchase 486,111
      shares of our common stock, and received a note for $43,750 convertible into
      486,111 shares of common stock, and warrants to purchase 58,333 shares of common
      stock with an exercise price of $0.15 per share. On December 31, 2007 Mr. Dacus
      elected to receive the quarterly interest due on the September 2007 6% Notes
      in
      the form of a new 6% note in lieu of cash. This note is convertible into 20,542
      shares of common stock at a conversion price of $0.0725 per share.




On
      January 25, 2007, Joseph Carfora, a director of our company, purchased First
      Bridge Notes in the principal amount of $20,000, which notes are convertible
      into 275,862 shares of common stock, and warrants to purchase 111,111 shares
      of
      our common stock with an exercise price of $0.09 per share. On September 28,
      2007, Mr. Carfora exchanged these First Bridge Notes and the accrued interest
      thereon for 6% Notes in the aggregate amount of $21,361, which notes are
      convertible into 294,634 shares of common stock, and received warrants to
      purchase 40,000 shares of common stock with an exercise price of $0.15 per
      share. On November 29, 2007, Mr. Carfora purchased an additional $5,000
      aggregate principal amount of 6% Notes for cash, which notes are convertible
      into 45,454 shares of common stock. In connection with his cash purchase, Mr.
      Carfora also received warrants to purchase 16,667 shares of common
      stock.


65




On
      May 1,
      2007, Timothy Lane, a director of our company, purchased First Bridge Notes
      in
      the principal amount of $50,000, which notes were convertible into 689,655
      shares of common stock, and warrants to purchase 69,444 shares of our common
      stock. On September 28, 207, Mr. Lane exchanged these First Bridge Notes and
      the
      accrued interest thereon for 6% Notes in the aggregate amount of $52,069, which
      notes are convertible into 718,193 shares of common stock, and received warrants
      to purchase 100,000 shares of common stock.




On
      February 14, 2007, Leonid Frenkel, who resigned as director of our company
      on
      June 1, 2007, purchased First Bridge Notes in the principal amount of $250,000,
      which notes were convertible into 3,448,276 shares of common stock, and warrants
      to purchase 1,388,888 shares of our common stock. On April 12, 2007,
      Mr. Frenkel purchased additional First Bridge Notes in the principal amount
      of $200,000, which notes were convertible into 2,758,621 shares of common stock,
      and additional warrants to purchase 1,111,111 shares of our common stock. Under
      the terms of the additional notes and the additional warrant agreements,
      Mr. Frenkel could not convert any of these additional notes or exercise any
      of these additional warrants if his ownership of our common stock exceeded
      4.99%
      or 9.99% of our outstanding stock as calculated according to Section 13(d)
      of the Exchange Act, unless all outstanding First Bridge Notes were converted.
      Either of the 4.99% or 9.99% limitations could be waived by Mr. Frenkel on
      61
      days notice. On September 28, 2007, Mr. Frenkel exchanged these First Bridge
      Notes and the accrued interest thereon for 6% Notes in the aggregate amount
      of
      $474,958, which notes are convertible into 6,551,149 shares of common stock,
      and
      received warrants to purchase 900,000 shares of common stock.




On
      January 25, 2007, Frederick Ledlow, a director of our company, purchased First
      Bridge Notes in the principal amount of $12,500, which notes are convertible
      into 172,414 shares of common stock, and warrants to purchase 69,444 shares
      of
      our common stock. On September 28, 2007, Mr. Ledlow exchanged these First Bridge
      Notes and the accrued interest thereon for 6% Notes in the aggregate amount
      of
      $13,351, which notes are convertible into 184,152 shares of common stock, and
      received warrants to purchase 25,000 shares of common stock. On December 20,
      2007, Mr. Ledlow exercised warrants to purchase 69,444 shares of our common
      stock and received a note for $6,250 convertible into 69,444 shares of common
      stock and warrants to purchase 8,333 shares of common stock with an exercise
      price of $0.15 per share.




On
      January 25, 2007, Peter O’Gorman, a director of our company, purchased First
      Bridge Notes in the principal amount of $25,000, which notes are convertible
      into 344,828 shares of common stock, and warrants to purchase 344,828 shares
      of
      our common stock. On September 28, 2007, Mr. O'Gorman exchanged these First
      Bridge Notes and the accrued interest thereon for 6% Notes in the aggregate
      amount of $26,701, which notes are convertible into 50,000 shares of common
      stock, and received warrants to purchase 25,000 shares of common stock. On
      December 20, 2007, Mr. O’Gorman exercised warrants to purchase 138,889 shares of
      our common stock and received a note for $12,500 convertible into 138,889 shares
      of common stock and warrants to purchase 16,667 shares of common stock with
      an
      exercise price of $0.15 per share.




**ITEM
      14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**




Fees
      for
      professional services provided by our independent registered public accounting
      firm in each of the last two fiscal years, in each of the following categories,
      are as follows:




**2007**
            
            **2006**Audit
                fees
            
            $
            212,000
            
            $
            210,500Audit
                related fees
            
            
            0
            
            
            0Tax
                fees
            
            
            0
            
            
            0All
                other fees
            
            
            0
            
            
            0Total
            
            $
            212,000
            
            $
            210,500


66


Fees
      for
      audit services included fees associated with the audit of our financial
      statements for the fiscal year indicated, reviews of the financial statements
      included in each of our quarterly reports on Form 10-Q during the fiscal year
      indicated, and services performed in connection with certain registration
      statements we filed.




Audit-related
      fees principally consisted of assurance advisory services related to the review
      of the financial statements related to the July 2005 acquisition, acquisition
      accounting and review of the conclusions of the internal investigation.




The
      Audit
      Committee has adopted a policy that requires pre-approval of all audit,
      audit-related, tax services, and other services performed by our independent
      auditor. The policy provides for pre-approval by the Audit Committee of
      specifically defined audit and non-audit services. Unless the specific service
      has been previously pre-approved with respect to that year, the Audit Committee
      must approve the permitted service before the independent auditor is engaged
      to
      perform it.




**PART
      IV**




**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**




(a) *Financial
      Statements, Financial Statement Schedule and Exhibits*




(1) 
      Financial Statement Schedule for the Years Ended December 31, 2007, 2006 and
      2005: Schedule II — Valuation and Qualifying Accounts




**SCHEDULE
      II — VALUATION AND QUALIFYING ACCOUNTS**




**ALLOWANCE
      FOR DOUBTFUL ACCOUNTS AND RETURNS**




**Years
      Ended, 2006, 2005 and 2004**


**Additions****Year
                Ended**
            
            **Balance
                at**
              **Beginning**
              **of
                Year**
            
            **(Charged
                to**
              **Costs
                and**
              **Expenses)**
            
            **Recoveries**
            
            **Deductions**
            
            **Balance
                at**
              **End
                of**
              **Year****(in
                thousands)**December
                31, 2007
            
            $
            24
            
            
            22
            
            
            —
            
            
            (7
            )
            $
            39December
                31, 2006
            
            $
            80
            
            
            48
            
            
            —
            
            
            (104
            )
            $
            24December
                31, 2005
            
            $
            —
            
            
            80
            
            
            —
            
            
            —
            
            
            80




Financial
      statement schedules not included have been omitted because of the absence of
      conditions under which they are required or because the required information,
      where material, is shown in the financial statements or notes.




(2)    
      Financial Statements — see “Index to Financial Statements”




(3)    
      Exhibits:




**EXHIBIT**
              **NUMBER**
            **DESCRIPTION
                OF EXHIBIT**2.1
            Asset
                Purchase Agreement by and among the Registrant and Tasker Products
                IP
                Holdings Corp. (as “Buyers”) and Indian River Labs, L.L.C., pHarlo Citrus
                Technologies, Inc., pHarlo Citrus Properties Partnership, LLLP and
                Coast
                to Coast Laboratories, LLC (as “Sellers”) dated July 15, 2005
                (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K
                filed on July 21, 2005)3.1
            Articles
                of Incorporation of the Registrant, as amended (incorporated by reference
                to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8
                filed July 20, 2006)3.2
            By-Laws
                of the Registrant (incorporated by reference to Exhibit 2.2 to the
                Registrant’s Registration Statement on Form 10-SB filed with the SEC on
                November 27, 2000)


67


4.1
            Cummins
                Lock-Up Agreement dated July 15, 2005 (incorporated by reference
                to
                Exhibit 4.1 to the Registrant’s Form 8-K filed on July 21, 2005)4.2
            Creasey
                Lock-Up Agreement dated July 15, 2005 (incorporated by reference
                to
                Exhibit 4.2 to the Registrant’s Form 8-K filed on July 21, 2005)4.3
            Dickinson
                Lock-Up Agreement dated July 15, 2005 (incorporated by reference
                to
                Exhibit 4.3 to the Registrant’s Form 8-K filed on July 21, 2005)4.4
            Smith
                Lock-Up Agreement dated July 15, 2005 (incorporated by reference
                to
                Exhibit 4.4 to the Registrant’s Form 8-K filed on July 21, 2005)4.5
            Form
                of Warrant from the September 2005 Private Placement (incorporated
                by
                reference to
              Exhibit
                4.01 to the Registrant’s Form 8-K filed on September 26, 2005)10.1(1)
            April
                5, 2004 Non-qualified Stock Option Grant Agreement with Robert Appleby
                (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-KSB
                filed on April 15, 2005)10.2(1)
            April
                5, 2004 Non-qualified Stock Option Grant Agreement with James Burns
                (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-KSB
                filed on April 15, 2005)10.3(1)
            May
                11, 2004 Non-qualified Stock Option Grant Agreement with Robert Appleby
                (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-KSB
                filed on April 15, 2005)10.4(1)
            May
                11, 2004 Non-qualified Stock Option Grant Agreement with James Burns
                (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-KSB
                filed on April 15, 2005)10.5(1)
            May
                31, 2004 Employee Non-Statutory Stock Option Agreement with Barbara
                Longchamp (incorporated by reference to Exhibit 10.5 to the Registrant’s
                Form 10-KSB filed on April 15, 2005)10.6(1)
            May
                31, 2004 Employee Non-Statutory Stock Option Agreement with Gordon
                Davis
                (incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-KSB
                filed on April 15, 2005)10.7(1)
            August
                25, 2004 Employee Non-Statutory Stock Option Agreement with Robert
                Appleby
                (incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-KSB
                filed on April 15, 2005)10.8(1)
            August
                25, 2004 Employee Non-Statutory Stock Option Agreement with James
                Burns
                (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-KSB
                filed on April 15, 2005)10.9
            Exclusive
                Field of Use License Agreement with pHarlo Citrus Technologies, Inc.
                dated
                September 16, 2004 (incorporated by reference to Exhibit 10.17 to
                the
                Registrant’s Form 10-KSB filed on April 15, 2005)10.10
            Exclusive
                Field of Use License Agreement with pHarlo Citrus Technologies, Inc.
                dated
                September 20, 2004 (incorporated by reference to Exhibit 10.18 to
                the
                Registrant’s Form 10-KSB filed on April 15, 2005)10.11
            Exclusive
                Field of Use License Agreement & Product Sale Agreement between Wynn
                Starr Special Products LLC and the Registrant, dated September 16,
                2004
                (incorporated by reference to Exhibit 10.19 to the Registrant’s Form
                10-KSB filed on April 15, 2005)10.12
            Promissory
                Note by David Creasey to Tasker Products Corp., dated March 28, 2005
                (incorporated by reference to Exhibit 10.40 to the Registrant’s Form
                10-QSB filed on May 16, 2005)10.13
            Amendment
                to Exclusive Field of Use License Agreement and Product Sale Agreement
                by
                and between the Registrant, Wynn Starr Special Products, LLC, Pharlo
                Citrus Technologies, Inc., and Indian River Labs, LLC, retroactively
                effective to March 18, 2005 (incorporated by reference to Exhibit
                10.66 to
                the Registrant’s Form 10-QSB filed on November 14, 2005).10.14
            Form
                of Stock Purchase Warrant, dated as of January 26, 2006, among the
                Registrant and the Purchaser parties thereto (incorporated by reference
                to
                Exhibit 4.1 to the Registrant’s Form 8-K filed on February 1, 2006).10.15
            Consultant
                Agreement, dated as of February 2, 2006, between the Registrant and
                Gordon
                Davis (incorporated by reference to Exhibit 10.74 to Amendment 1
                to the
                Registrant’s Form S-1 filed on July 11, 2006).10.16(1)*
            Amended
                and restated Employment Agreement, dated as of April 2, 2007, between
                the
                Registrant and Stathis Kouninis.10.17(1)*
            Employment
                Agreement, dated as of March 14, 2007, between the Registrant and
                Greg
                Osborn.10.18
            Termination
                Agreement, dated as of August 1, 2006, between the Registrant and
                James
                Burns (incorporated by reference to Exhibit 10.1 of the Registrant’s Form
                10-Q filed on August 14, 2006).10.19
            2006
                Stock Plan (incorporated by reference to Annex B to the Registrant’s
                amended definitive proxy statement filed on May 12, 2006)10.20
            Agreement,
                dated as of December 14, 2006, between the Registrant and Richard
                Falcone
                (incorporated by reference to Exhibit 10.78 to the Registrant’s annual
                report on Form 10-K for the year ended December 31,
                2006)10.21(1)
            Employment
                Agreement, dated as of December 12, 2006, between the Registrant
                and Lanny
                Dacus (incorporated by reference to Exhibit 10.79 to the Registrant’s
                annual report on Form 10-K for the year ended December 31,
                2006)10.22
            Settlement
                Agreement and General Release, dated as of February 16, 2007, between
                the
                Registrant and James Collins (incorporated by reference to Exhibit
                10.80
                to the Registrant’s annual report on Form 10-K for the year ended December
                31, 2006)10.23
            Form
                of 10% Secured Convertible Bridge Note (incorporated by reference
                to
                Exhibit 10.81 to the Registrant’s annual report on Form 10-K for the year
                ended December 31, 2006)10.24
            Form
                of Warrant between Registrant and Purchasers of 10% Secured Convertible
                Bridge Notes (incorporated by reference to Exhibit 10.82 to the
                Registrant’s annual report on Form 10-K for the year ended December 31,
                2006)10.25
            Form
                of Warrant between Registrant and Placement Agent of the 10% Secured
                Convertible Bridge Notes (incorporated by reference to Exhibit 10.83
                to
                the Registrant’s annual report on Form 10-K for the year ended December
                31, 2006)


68


10.26
            Form
                of 6% Secured Convertible Promissory Note due September 27, 2010
                (incorporated by reference to Exhibit 10.84 to the Registrant’s
                Registration Statement on Form S-1 (File No. 333-133549 filed on
                November 5, 2007)10.27
            Form
                of Warrant between Registrant and Purchasers of the 6% Secured Convertible
                Promissory Notes due September 27, 2010 (incorporated by reference
                to
                Exhibit 10.85 to the Registrant’s Registration Statement on
                Form S-1 (File No. 333-133549 filed on November 5,
                2007)10.28
            Form
                of Warrant between Registrant and Placement Agent of the 6% Secured
                Convertible Promissory Notes (incorporated by reference to
                Exhibit 10.86 to the Registrant’s Registration Statement on
                Form S-1 (File No. 333-133549 filed on November 5,
                2007)10.29
            Form
                of 6% Secured Convertible Promissory Note due December 20, 2010
                (incorporated by reference to Exhibit 99(d)(2) to the Registrant’s
                Tender Offer Statement on Schedule TO (File No. 005-78706 filed on
                November 21, 2007)10.30
            Form
                of Warrant issued to Purchasers of the 6% Secured Convertible Promissory
                Notes due December 20, 2010 (incorporated by reference to
                Exhibit 99(d)(3) to the Registrant’s Tender Offer Statement on
                Schedule TO (File No. 005-78706 filed on November 21,
                2007)21.1
            Subsidiaries
                of the Registrant (incorporated by reference to Exhibit 21.1 to the
                Registrant’s Registration Statement on Form SB-2 filed on August 30, 2005)23.1*
            Consent
                of Rothstein, Kass & Company, P.C.31.1*
            Rule
                13a-14(a)/15d-14(a) Certification of Principal Executive Officer31.2*
            Rule
                13a-14(a)/15d-14(a) Certification of Principal Financial Officer32*
            Section
                1350 Certification of Principal Executive Officer and Principal Financial
                Officer





*  Filed
      herewith




(1)  Management
      contract or compensatory plan or arrangement




69




**INDEX
      TO FINANCIAL STATEMENTS**


**Page**Report
                of Independent Registered Public Accounting Firm (Rothstein, Kass
&
                Company, P.C.)
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit) for the years ended December
                31, 2007, 2006 and 2005
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            F-6Notes
                to Consolidated Financial Statements
            F-7




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of




Tasker
      Products Corp. and Subsidiaries




We
      have
      audited the accompanying consolidated balance sheets of Tasker Products Corp.
      and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated
      statements of operations, stockholders’ equity (deficit), and cash flows for
      each of the years in the three-year period ended December 31, 2007. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Tasker Products Corp. and
      Subsidiaries as of December 31, 2007 and 2006, and the results of their
      operations and their cash flows for each of the years in the three-year period
      ended December 31, 2007, in conformity with accounting principles generally
      accepted in the United States of America.




The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, the Company has incurred negative cash flow
      from operations and net losses since inception and has a working capital
      deficiency. These conditions, among others, raise substantial doubt about its
      ability to continue as a going concern. Management’s plans in regard to these
      matters are also described in Note 2. The accompanying consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




/s/
      Rothstein, Kass & Company, P.C.




Roseland,
      New Jersey


March
      27,
      2008




F-2




**TASKER
      PRODUCTS CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


(in
      thousands, except per share data)


**December
                31,****2007**
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            2,671
            
            $
            932Accounts
                receivable, net of allowance for doubtful accounts of approximately
                $39
                and $24, respectively
            
            
            283
            
            
            176Notes
                receivable
            
            
            84
            
            
            50Inventories.
            
            
            285
            
            
            300Prepaid
                expenses
            
            
            95
            
            
            268Deferred
                financing costs
            
            
            —
            
            
            501Total
                current assets
            
            
            3,418
            
            
            2,227Notes
                receivable, net of current portion
            
            
            707
            
            
            669Property
                and equipment, net
            
            
            998
            
            
            1,311Intangible
                assets, net
            
            
            7,084
            
            
            7,887Goodwill
            
            
            9,835
            
            
            9,835Deferred
                financing costs
            
            
            1,866
            
            
            —Deposit,
                net
            
            
            19
            
            
            38Total
                assets
            
            $
            23,927
            
            $
            21,967**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            780
            
            $
            1,227Other
                accrued liabilities
            
            
            1,663
            
            
            2,509Notes
                payable — acquisition of IRL
            
            
            —
            
            
            679Notes
                payable — first bridge note, net of discount
            
            
            40
            
            
            320Derivative
                liabilities
            
            
            31,656
            
            
            —Warrants
                payable — placement agent
            
            
            1,501
            
            
            409Notes
                payable — shareholders
            
            
            —
            
            
            564Total
                current liabilities
            
            
            35,640
            
            
            5,708Long-term
                liabilities:Notes
                payable - 6% Notes
            
            
            965
            
            
            —Other
                long-term liabilities
            
            
            19
            
            
            30Total
                long-term liabilities
            
            
            984
            
            
            30Total
                liabilities
            
            
            36,624
            
            
            5,738Stockholders’
                equityPreferred
                Stock, $0.001 par value; 15,000 shares authorized; none issued and
                outstanding
            
            
            —
            
            
            —Common
                stock, $0.001 par value; 450,000 shares authorized; 121,456 and 106,340
                shares issued and outstanding, respectively
            
            
            121
            
            
            106Additional
                paid-in capital
            
            
            117,584
            
            
            105,131Accumulated
                deficit
            
            
            (130,402
            )
            
            (89,008
            )Total
                stockholders’ (deficit) equity
            
            
            (12,697
            )
            
            16,229Total
                liabilities and stockholders’ equity
            
            $
            23,927
            
            $
            21,967




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-3




**TASKER
      PRODUCTS CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(in
      thousands, except per share data)


**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005**Revenues
            
            $
            2,601
            
            $
            1,486
            
            $
            705Cost
                of revenues
            
            
            620
            
            
            937
            
            
            1,308Gross
                margin
            
            
            1,981
            
            
            549
            
            
            (603
            )Operating
                expenses:Selling,
                general & administrative (1)
            
            
            13,353
            
            
            13,751
            
            
            11,905Product
                development (1)
            
            
            1,438
            
            
            1,803
            
            
            3,356Depreciation
                and amortization
            
            
            1,113
            
            
            1,703
            
            
            1,100Impairment
                of goodwill and intangible assets
            
            
            —
            
            
            44,081
            
            
            —Write-off
                of raw materials
            
            
            129
            
            
            839
            
            
            —Litigation
                settlement
            
            
            —
            
            
            423
            
            
            —Total
                operating expenses
            
            
            16,033
            
            
            62,600
            
            
            16,361Loss
                from operations
            
            
            (14,052
            )
            
            (62,051
            )
            
            (16,964
            )Other
                income (expense):Interest
                expense
            
            
            (704
            )
            
            (180
            )
            
            (220
            )Interest
                income
            
            
            82
            
            
            215
            
            
            135Finance
                costs related to long-term debt
            
            
            (8,326
            )
            
            —
            
            
            —Amortization
                of debt discount
            
            
            (8,558
            )
            
            (320
            )
            
            —Amortization
                of deferred financing costs
            
            
            (2,756
            )
            
            (107
            )
            
            —Loss
                on equity investee
            
            
            —
            
            
            (665
            )
            
            (53
            )Liquidated
                damages
            
            
            —
            
            
            (178
            )
            
            (286
            )Gain
                (loss) on extinguishment of obligations
            
            
            (17,075
            )
            
            175
            
            
            —Gain
                on change in value of derivatives
            
            
            10,096
            
            
            —
            
            
            —Other
                .
            
            
            (90
            )
            
            168
            
            
            (881
            )Other
                income (expense), net
            
            
            (27,331
            )
            
            (892
            )
            
            (1,305
            )Net
                loss before taxes
            
            $
            (41,383
            )
            $
            (62,943
            )
            $
            (18,269
            )Provision
                for income tax
            
            
            (11
            )
            
            —
            
            
            —Net
                loss
            
            $
            (41,394
            )
            $
            (62,943
            )
            $
            (18,269
            )Net
                loss per common share, basic and diluted
            
            $
            (0.38
            )
            $
            (0.60
            )
            $
            (0.25
            )Weighted
                average common shares outstanding, basic and diluted
            
            
            109,890
            
            
            104,081
            
            
            73,549






**Fiscal
                Year Ended December 31,****2007**
            
            **2006**
            
            **2005**(1)
                Stock-based compensation is allocated as follows:Selling,
                general & administrative
            
            $
            4,301
            
            $
            4,625
            
            $
            485Product
                development
            
            
            194
            
            
            239
            
            
            —Total
            
            $
            4,495
            
            $
            4,864
            
            $
            485




The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-4




**TASKER
      PRODUCTS CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**


(in
      thousands)


**COMMON
                STOCK****NUMBER
                OF**
              **SHARES**
            
            **AMOUNT**
            
            **ADDITIONAL**
              **PAID-IN**
              **CAPITAL**
            
            **COMMON**
              **STOCK**
              **SUBSCRIBED**
            
            **ACCUMULATED**
              **DEFICIT**
            
            **TOTAL****Balance,
                January 1, 2005**
            
            
            48,864
            
            $
            49
            
            $
            8,115
            
            $
            13,877
            
            $
            (7,796
            )
            $
            14,245Shares
                issued for prior year private placement
            
            
            9,406
            
            
            9
            
            
            13,918
            
            
            (13,877
            )
            
            —
            
            
            50Private
                placement, net of costs
            
            
            2,948
            
            
            3
            
            
            6,431
            
            
            —
            
            
            —
            
            
            6,434Debentures
                and accrued interest converted to common stock
            
            
            4,090
            
            
            4
            
            
            239
            
            
            —
            
            
            —
            
            
            243Note
                payable and accrued interest converted to common stock
            
            
            32
            
            
            —
            
            
            32
            
            
            —
            
            
            —
            
            
            32Exercise
                of warrants and stock options
            
            
            4,835
            
            
            5
            
            
            230
            
            
            —
            
            
            —
            
            
            235Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            485
            
            
            —
            
            
            —
            
            
            485Common
                stock, warrants and options issued for services
            
            
            —
            
            
            —
            
            
            3,101
            
            
            —
            
            
            —
            
            
            3,101Shares
                issued as part consideration for assets acquired
            
            
            18,992
            
            
            19
            
            
            56,958
            
            
            —
            
            
            —
            
            
            56,977Registration
                rights derivative liability
            
            
            —
            
            
            —
            
            
            (244
            )
            
            —
            
            
            —
            
            
            (244
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            (18,269
            )
            
            (18,269
            )**Balance,
                December 31, 2005**
            
            
            89,167
            
            $
            89
            
            $
            89,265
            
            $
            —
            
            $
            (26,065
            )
            $
            63,289Private
                placement, net of costs
            
            
            13,336
            
            
            13
            
            
            8,729
            
            
            —
            
            
            —
            
            
            8,742Debentures
                and accrued interest converted to common stock
            
            
            2,095
            
            
            2
            
            
            192
            
            
            —
            
            
            —
            
            
            194Share
                subscriptions
            
            
            —
            
            
            —
            
            
            —
            
            
            6
            
            
            —
            
            
            6Exercise
                of warrants and stock options
            
            
            1,613
            
            
            2
            
            
            71
            
            
            (6
            )
            
            —
            
            
            67Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            4,864
            
            
            —
            
            
            —
            
            
            4,864Common
                stock, warrants and options issued for services
            
            
            129
            
            
            —
            
            
            90
            
            
            —
            
            
            —
            
            
            90Fair
                value of warrants issued with Dec 06 private placement
            
            
            —
            
            
            —
            
            
            539
            
            
            —
            
            
            —
            
            
            539Beneficial
                conversion of notes issued Dec 06 private placement
            
            
            —
            
            
            —
            
            
            1,381
            
            
            —
            
            
            —
            
            
            1,381Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (62,943
            )
            
            (62,943
            )**Balance,
                December 31, 2006**
            
            
            106,340
            
            $
            106
            
            $
            105,131
            
            $
            —
            
            $
            (89,008
            )
            $
            16,229Shareholder
                note payable and accrued interest converted to common
                stock
            
            
            3,298
            
            
            3
            
            
            723
            
            
            —
            
            
            —
            
            
            726Debentures
                and accrued interest converted to common stock
            
            
            7,961
            
            
            8
            
            
            1,716
            
            
            —
            
            
            —
            
            
            1,724Note
                payable to IRL converted to common stock
            
            
            762
            
            
            1
            
            
            75
            
            
            —
            
            
            —
            
            
            76Exercise
                of warrants and stock options
            
            
            2,760
            
            
            3
            
            
            112
            
            
            —
            
            
            —
            
            
            115Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            4,518
            
            
            —
            
            
            —
            
            
            4,518Common
                stock, warrants and options issued for services
            
            
            334
            
            
            —
            
            
            934
            
            
            —
            
            
            —
            
            
            934Fair
                value of warrants issued with Dec 06 private placement
            
            
            —
            
            
            —
            
            
            1,127
            
            
            
            
            
            
            
            
            1,127Beneficial
                conversion of notes issued Dec 06 private placement
            
            
            —
            
            
            —
            
            
            3,248
            
            
            
            
            
            
            
            
            3,248Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            (41,394
            )
            
            (41,394
            )**Balance,
                December 31, 2007**
            
            
            121,455
            
            $
            121
            
            $
            117,584
            
            $
            —
            
            $
            (130,402
            )
            $
            (12,697
            )




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-5


**TASKER
      PRODUCTS CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(in
      thousands)


**December
                31,****2007**
            
            **2006**
            
            **2005****Cash
                flows from operating activities:**Net
                loss
            
            $
            (41,394
            )
            $
            (62,943
            )
            $
            (18,269
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            1,113
            
            
            1,703
            
            
            1,100Liquidated
                damages
            
            
            —
            
            
            178
            
            
            286Noncash
                financing costs
            
            
            8,864
            
            
            151
            
            
            85Impairment
                of goodwill and intangibles
            
            
            —
            
            
            44,081
            
            
            —Loss
                on disposal of assets
            
            
            90
            
            
            70
            
            
            —Write-down
                of raw materials and finished goods
            
            
            129
            
            
            997
            
            
            —Stock-based
                compensation
            
            
            4,495
            
            
            4,864
            
            
            484Allowance
                for uncollectible accounts receivable
            
            
            14
            
            
            55
            
            
            80Allowance
                for uncollectible note receivable
            
            
            —
            
            
            —
            
            
            890Noncash
                interest income on note receivable
            
            
            (48
            )
            
            (65
            )
            
            —Gain
                on settlement of vendor obligation
            
            
            (55
            )
            
            (63
            )
            
            —Loss
                on equity investee
            
            
            —
            
            
            665
            
            
            53Inventory
                reserve
            
            
            —
            
            
            75
            
            
            —Litigation
                settlement
            
            
            —
            
            
            489
            
            
            —Amortization
                of debt discount
            
            
            8,558
            
            
            320
            
            
            —Gain
                on change in fair value of derivative liabilities
            
            
            (10,096
            )
            
            —
            
            
            (9
            )Loss
                on extinguishment of debt
            
            
            17,130
            
            
            —
            
            
            —Common
                stock, warrants and options for services
            
            
            537
            
            
            90
            
            
            3,080Amortization
                of deferred financing cost
            
            
            2,756
            
            
            100
            
            
            —Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (121
            )
            
            (76
            )
            
            (227
            )Inventories
            
            
            (114
            )
            
            (21
            )
            
            (1,210
            )Prepaid
                expenses
            
            
            167
            
            
            (79
            )
            
            (276
            )Accounts
                payable
            
            
            (400
            )
            
            (450
            )
            
            1,592Other
                accrued liabilities
            
            
            44
            
            
            189
            
            
            495**Net
                cash used in operating activities**
            
            
            (8,331
            )
            
            (9,670
            )
            
            (11,846
            )**Cash
                flows from investing activities:**Purchases
                of property and equipment and intangibles
            
            
            (112
            )
            
            (123
            )
            
            (3,425
            )Proceeds
                from sale of property and equipment
            
            
            25
            
            
            —
            
            
            —Advances
                pursuant to notes
            
            
            —
            
            
            —
            
            
            (3,511
            )Investment
                in equity investee
            
            
            —
            
            
            —
            
            
            (718
            )**Net
                cash used in investing activities**
            
            
            (87
            )
            
            (123
            )
            
            (7,654
            )**Cash
                flows from financing activities:**Proceeds
                from private placements, net of issue costs
            
            
            12,358
            
            
            10,560
            
            
            6,435Deferred
                financing costs
            
            
            (1,588
            )
            
            (90
            )
            
            —Exercise
                of warrants/options
            
            
            3
            
            
            73
            
            
            286Repayments
                on notes payable
            
            
            (616
            )
            
            (855
            )
            
            (409
            )**Net
                cash provided by financing activities**
            
            
            10,157
            
            
            9,688
            
            
            6,312**Net
                increase (decrease) in cash and cash equivalents**
            
            
            1,739
            
            
            (105
            )
            
            (13,188
            )**Cash
                and cash equivalents, beginning of year**
            
            
            932
            
            
            1,037
            
            
            14,225**Cash
                and cash equivalents, end of year**
            
            $
            2,671
            
            $
            932
            
            $
            1,037Supplemental
                disclosures of cash flow information:Interest
                paid
            
            $
            166
            
            $
            38
            
            $
            186Taxes
                paid
            
            $
            11
            
            $
            —
            
            $
            —Supplemental
                disclosures of noncash investing and financing activities:Conversion
                of debt and accrued interest into common stock
            
            $
            1,724
            
            $
            194
            
            $
            29Recognition
                of debt discount related to warrants, beneficial conversion and
                derivatives
            
            $
            19,000
            
            $
            1,381
            
            $
            —Conversion
                of debt and accrued interest into long-term debt
            
            $
            8,769
            
            $
            —
            
            $
            —Fair
                value of warrants issued as private placement fees
            
            $
            2,545
            
            $
            539
            
            $
            —Conversion
                of note payable, accrued expenses and accounts payable into common
                stock
                .
            
            $
            1,653
            
            $
            —
            
            $
            —Warrants
                payable — placement agent
            
            $
            —
            
            $
            409
            
            $
            —Vehicle
                purchased via note payable
            
            $
            —
            
            $
            —
            
            $
            57




The
        accompanying notes are an integral part of these consolidated financial
        statements.
 F-6




**TASKER
      PRODUCTS CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.
      NATURE OF OPERATIONS**




Tasker
      Products Corp. (formerly known as Tasker Capital Corp.) and its subsidiaries
      (collectively, “the Company” or “Tasker”) was formed on May 13, 1996 and was in
      the development stage through December 31, 2005. The quarterly period ended
      March 31, 2006 is the first period during which Tasker is considered an
      operating company. The Company manufactures, distributes and markets products
      using pHarlo technology, a process that enables copper sulfate, a compound
      with
      bacteriostatic properties, to remain active throughout a wide range of pH
      values. The Company currently markets, Unifresh(R) Footbath, a grooming aid
      for
      dairy cows; Tasker Blue, an antimicrobial aid in the scalder (which is a method
      of loosening feathers so that they can be picked and removed mechanically)
      and
      post-feather picker process (the method used in chicken processing that receives
      chickens immediately after the scalder and mechanically removes feathers)
      sections of poultry processing; and Tasker Pacific Blue(TM) Seafood Wash, a
      product used in commercial and retail seafood processing to extend shelf life
      and reduce odors. In August 2005, we began the in-plant commercial verification
      process for United States Department of Agriculture (USDA) approval to use
      the
      pHarlo technology in the scalder process of poultry processing.




As
      a
      result of the acquisition (the “2005 Acquisition”) by the Company of certain
      assets of pHarlo Citrus Technologies, Inc. (“PCTI”), Indian River Labs, LLC
      (“IRL”), pHarlo Citrus Properties Partnership, LLLP (“PCPP”), and Coast to Coast
      Laboratories, LLC (“C2C,” and together with PCTI, PCPP and IRL, the “Selling
      Entities”) in July 2005 (see Note 13), the Company now owns the utility patent
      applications and provisional patent applications associated with the pHarlo
      technology in the Company’s field of use, and has entered into a new sub-license
      agreement for the base patents associated with the pHarlo technology.




In
      June
      2006 the shareholders of Tasker approved an amendment to Tasker’s articles of
      incorporation to change Tasker’s name to Tasker Products Corp. The name change
      became effective on June 28, 2006.




**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Principles
      of Consolidation** :




The
      consolidated financial statements include the accounts of Tasker and its
      subsidiaries. All significant intercompany balances and transactions have been
      eliminated in consolidation.




**Use
      of Estimates:**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements as well as the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates.




**Fair
      Value of Financial instruments** :




The
      carrying amounts of the Company’s financial instruments, including cash and cash
      equivalents, accounts receivable, accounts payable and accrued liabilities,
      approximate their fair values because of their short-term nature.




**Cash
      and Cash Equivalents:**




The
      Company considers all highly liquid investments with maturity of three months
      or
      less at date of purchase to be cash equivalents. The Company maintains its
      cash
      primarily in one financial institution which, at times, exceeds Federal Deposit
      Insurance Corporation (“FDIC”) insured limits. The Company has not incurred any
      losses in such accounts and believes it is not exposed to any significant credit
      risk on cash.


F-7


**Going
      Concern and Management’s Response:**




The
      Company has continued to sustain losses from operations and for the years ended
      December 31, 2007, 2006 and 2005; it has incurred losses of approximately
      $41,394,000, $62,943,000, and $18,269,000 respectively. In addition, the Company
      has not generated positive cash flows from operations for the years ended
      December 31, 2007, 2006 and 2005.




On
      September 28, 2007, November 29, 2007 and December 14, 2007, the Company issued
      6% Secured Convertible Promissory Notes (the “6% Notes”) to accredited investors
      in the aggregate principal amount of $12,684,597. The aggregate consideration
      of
      $12,684,597, was in the form of cash ($3,950,000), the exchange of notes issued
      by the Company between December 1, 2006 and April 23, 2007 (aggregate principal
      amount of $6,255,091 (the “First Bridge Notes”) and the accrued interest thereon
      of $415,617) and the exchange of notes issued by it on June 4, 2007 (aggregate
      principal amount of $2,000,000 (the “Second Bridge Notes”) and the accrued
      interest thereon of $63,889). The 6% Notes mature on September 27, 2010. Each
      investor of the 6% Notes also received four-year warrants (the “Warrants”) to
      purchase a certain number of shares of the Company common stock with such number
      based on the form of consideration used to purchase the 6% Notes. The 6% Notes
      in the aggregate are convertible into approximately 141,190,915 shares of the
      Company common stock. The Warrants entitle the holders thereof to purchase
      an
      aggregate of approximately 35,010,182 shares of the Company common stock.




As
      of
      December 20, 2007, the Company issued 6% Secured Convertible Promissory Notes
      due December 2010 (the “December 6% Notes”) in an aggregate principal amount of
      $2,032,546 and warrants to purchase an aggregate of 2,710,061 shares of the
      Company common stock at an exercise price of $0.15 per share (the “December
      Warrants”). The Company issued these securities in lieu of common stock in
      connection with its solicitation of the exercise of warrants to purchase common
      stock at an exercise price of $0.09 per share (the “Tender Offer”). The gross
      proceeds from the warrant exercise (approximately $2.0 million) were released
      from escrow on December 31, 2007.




Based
      upon the Company’s forecast of future revenues from its products in conjunction
      with the cash on hand, cash expected to be generated from operations will not
      provide adequate funding for the Company’s working capital over the next twelve
      months. The Company’s cash resources and its ability to continue to operate and
      grow its business are dependent upon obtaining additional financing from the
      exercise of outstanding warrants, obtaining the proposed credit facility and/or
      generating revenue growth from operations. While the Company has been in the
      process of aggressively developing, marketing and selling its products, there
      can be no assurance that those efforts will be met with success in the
      marketplace or that the timing of the Company’s efforts will be consistent with
      its cash availability and burn rate. If the Company is unable to arrange new
      financing, obtain sufficient cash from the exercise of outstanding warrants
      and/or generate sufficient revenue growth from existing and new business
      arrangements, the Company will not have sufficient cash to support its
      operations and meet its obligations. The Company anticipates that it will need
      approximately an additional $4 million to support its operations and meet its
      obligations over the next twelve months.




In
      view
      of the matters described above, recoverability of a major portion of the
      recorded asset amounts shown in the accompanying balance sheet is dependent
      upon
      continued operations of the Company, which in turn is dependent upon the
      Company’s ability to obtain financing and to succeed in its future operations.
      The financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or amounts and
      classification of liabilities that might be necessary should the company be
      unable to continue as a going concern.


F-8


**Allowance
      for Doubtful Accounts:**




Estimates
      are used to determine the amount of the allowance for doubtful accounts
      necessary to reduce accounts receivable to the estimated net realizable value.
      These estimates are made by analyzing the status of significant past-due
      receivables and by establishing general provisions for estimated losses by
      analyzing current and historical bad debt trends. Actual collection experience
      has not varied significantly from estimates. Receivables that are ultimately
      deemed uncollectible are charged off as a reduction of receivables and the
      allowance for doubtful accounts. Accounts receivable balances are not
      collateralized.




**Inventories:**




Inventories
      are stated at the lower of cost or market. Cost is determined using the
      first-in, first-out (FIFO) method.




**Property
      and Equipment and Other Assets:**




Property
      and equipment are stated at cost, net of accumulated depreciation. Depreciation
      is computed using the straight-line method over the estimated useful lives
      of
      the assets, generally three to ten years. Repairs and maintenance costs are
      charged to expense as incurred. When assets are retired or otherwise disposed
      of, the asset and related accumulated depreciation are eliminated from the
      accounts and any resulting gain or loss is recorded in operations.




**Goodwill
      and Other Intangible Assets:**




In
      accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      No. 142”), the Company does not amortize goodwill, but instead tests goodwill
      for impairment at least annually or whenever events or changes in circumstances
      indicate that impairment may have occurred. In accordance with SFAS No. 142,
      the
      Company tests for potential impairment of goodwill by comparing the carrying
      amount of the reporting unit to its fair value. If the carrying amount of the
      reporting unit is greater than the fair value, goodwill impairment may be
      present. The Company measures the goodwill impairment, if any, based upon the
      fair value of the underlying assets and liabilities of the reporting unit,
      including any unrecognized intangible assets, and estimates the implied fair
      value of goodwill. An impairment charge is recognized to the extent the recorded
      goodwill exceeds the implied fair value of goodwill.




In
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* (“SFAS”
No. 144), long-lived assets, including intangible assets, are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be fully recoverable. If an impairment
      indicator is present, the Company evaluates recoverability by a comparison
      of
      the carrying amount of the assets to future undiscounted net cash flows expected
      to be generated by the assets. If the assets are impaired, the impairment
      recognized is measured by the amount by which the carrying amount exceeds the
      estimated fair value of the assets.




In
      the
      second quarter of 2006, the Company tested for impairment of its intangible
      assets and its goodwill in accordance with SFAS No. 144 “Accounting for the
      Impairment or Disposal of Long-Lived Assets” and SFAS No. 142 “Goodwill and
      Other Intangible Assets” respectively. Upon completion of the impairment tests,
      the Company recorded non-cash impairment charges to intangible assets and
      goodwill of $12.2 million and $17.9 million, respectively.




Also,
      in
      the fourth quarter of 2006, the Company tested for impairment of its intangible
      assets and its goodwill. The Company goodwill review was performed as part
      of
      its annual goodwill impairment review. Upon completion of the impairment tests,
      the Company recorded non-cash impairment charges to goodwill of $13.9 million.
      There was no further impairment of our intangible assets.




As
      discussed more fully in Note 6, the Company tested goodwill and intangible
      assets for impairment at December 31, 2007, and recorded no impairment charges
      for goodwill and intangible assets for the year ended December 31, 2007. There
      can be no assurance that there will not be impairment charges in subsequent
      periods as a result of the Company’s future periodic impairment reviews. To the
      extent that future impairment charges occur, they will likely have a material
      impact on the Company’s financial results.


F-9


**Income
      Taxes:**




The
      Company accounts for income taxes pursuant to SFAS No. 109, “Accounting for
      Income Taxes,” (“SFAS No. 109”) which requires recognition of deferred tax
      assets and liabilities for the expected future income tax consequences of
      transactions that have been included in the financial statements or tax returns.
      Under this method, deferred tax assets and liabilities are determined based
      on
      the differences between the financial statement and tax basis of assets and
      liabilities using enacted tax rates in effect for the year in which the
      differences are expected to reverse. SFAS No. 109 requires that a valuation
      allowance be established against recorded deferred tax assets if, based on
      the
      weight of available evidence, it is more likely than not that some portion
      or
      all of the deferred tax assets will not be realized. The Company has concluded
      that it is more likely than not that it will not be able to realize its deferred
      tax assets as of December 31, 2007 and, accordingly, a valuation allowance
      has
      been recorded against those assets.




In
      September 2005, the FASB ratified Emerging Issue Task Force (EITF) Issue No.
      05-8, “Income Tax Consequences of Issuing Convertible Debt with a Beneficial
      Conversion Feature” (“EITF No. 05-8”), which addresses tax consequences of the
      accounting treatment of convertible debt issued with a beneficial conversion
      feature. As a result, a deferred tax liability should be recognized for the
      temporary difference between the carrying value of debt with a beneficial
      conversion feature for book and tax reporting purposes. The tax-effected
      difference should be recognized as an adjustment of additional paid-in capital.
      We were required to apply the guidance in EITF No. 05-8 in the first interim
      reporting period that began after December 15, 2005. The provisions were applied
      retrospectively under the guidance in SFAS 154 to all convertible debt
      instruments with a beneficial conversion feature accounted for under the
      guidance in EITF No. 00-27 “Application of EITF Issue No. 98-5 `Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios.'“ We applied the requirements of EITF No. 05-8 to
      all previously existing convertible debt instruments with a beneficial
      conversion feature and will continue to apply the requirements of EITF No.
      05-8
      to all new convertible debt instruments with a beneficial conversion feature.
      Because we have recorded a valuation allowance against our deferred tax assets,
      the adoption of this pronouncement for convertible debt instruments with a
      beneficial conversion feature did not have an impact on our consolidated
      financial position, results of operations or cash flows.





In
      July
      2006, the Financial Accounting Standards Board issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of
      FASB Statement No. 109” (FIN 48). FIN 48 creates a single accounting and
      disclosure model for uncertain tax positions, provides guidance on the minimum
      threshold that a tax uncertainty is required to meet before it can be recognized
      in the financial statements and applies to all tax positions taken by a company,
      both those deemed to be routine as well as those for which there may be a high
      degree of uncertainty.




FIN
      48
      establishes a two-step approach for evaluating tax positions. The first step,
      recognition, occurs when a company concludes (based solely on the technical
      aspects of the tax matter) that a tax position is more likely than not to be
      sustained on examination by a taxing authority. The second step, measurement,
      is
      only considered after step one has been satisfied and measures any tax benefit
      at the largest amount that is deemed more likely than not to be realized upon
      ultimate settlement of the uncertainty. Tax positions that fail to qualify
      for
      initial recognition are recognized in the first subsequent interim period that
      they meet the more likely than not standard, when they are resolved through
      negotiation or litigation with the taxing authority or upon the expiration
      of
      the statute of limitations. Derecognition of a tax position previously
      recognized would occur when a company subsequently concludes that a tax position
      no longer meets the more likely than not threshold of being sustained. To the
      extent the company prevails in matters for which a liability for an unrecognized
      tax benefit is established or is required to pay amounts in excess of the
      liability, the Company’s effective tax rate in a given financial statement
      period may be affected. Interest costs and penalties, if any, related to
      unrecognized tax benefits will be classified as a component of our provision
      for
      income taxes in the accompanying consolidated statements of operations. FIN
      48
      also significantly expands the financial statement disclosure requirements
      relating to uncertain tax positions. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The adoption of the provisions of FIN 48
      did not have a material impact on the Company’s financial position, results of
      operations and cash flows. During the year ended December 31, 2007, the Company
      recognized no adjustments for uncertain tax provisions.


F-10


**Share-Based
      Compensation:**




Effective
      January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,”
(“SFAS 123R”) requiring the expense recognition of the estimated fair value of
      all share-based payments issued to employees. Prior to this, the estimated
      fair
      value associated with such awards was not recorded as an expense, but rather
      was
      disclosed in a footnote to the Company’s financial statements. For the year
      ended December 31, 2007, the Company recorded approximately $4.5 million of
      stock based compensation expense, of which approximately $2.8 million was
      attributable to employees’, employee board members’ and officers’ stock options
      and warrants and the remainder, approximately $1.7 million was attributable
      to
      stock options and warrants awarded to consultants and non-employee board
      members. For the year ended December 31, 2006, the Company recorded
      approximately $4.9 million of stock based compensation expense, of which
      approximately $3.7 million was attributable to employees’, employee board
      members’ and officers’ stock options and warrants and the remainder,
      approximately $1.2 million, was attributable to stock options and warrants
      awarded to consultants and non-employee board members. The compensation cost
      associated with these awards is recorded as an expense within the same
      functional expense category as cash compensation for the respective grantee.
      No
      tax benefit has been recognized with respect to this expense .




The
      valuation of employee stock options and warrants is an inherently subjective
      process since market values are generally not available for long-term,
      non-transferable employee stock options and warrants. Accordingly, an option
      pricing model is utilized to derive an estimated fair value. In calculating
      the
      estimated fair value of its stock options and warrants, the Company used a
      Black-Scholes pricing model which requires the consideration of the following
      seven variables for purposes of estimating fair value:




·
            the
                stock option or warrant exercise
                price,




·
            the
                expected term of the option or
                warrant,




·
            the
                grant date fair value of our common stock, which is issuable upon
                exercise
                of the option or warrant,




·
            the
                expected volatility of our common
                stock,




·
            expected
                dividends on our common stock (we do not anticipate paying dividends
                for
                the foreseeable future),


·
              the
                  risk free interest rate for the expected option or arrant term,
                  and
 ·
                the
                    expected forfeiture rate


Of
      the
      variables above, the selection of an expected term and expected stock price
      volatility are the most subjective. Our estimate of the expected term for
      options and warrants awarded in the year ended December 31, 2007 was between
      4
      and 6 years and was derived based on the weighted average of the sum of the
      vesting term and the original contract term at the date of issuance. In
      estimating its stock price volatility, the Company analyzed its historic
      volatility for a period equal to the expected term of its stock options and
      warrants awarded for the year ended December 31, 2007, by reference to actual
      stock prices during this period and calculated an estimated volatility between
      129% to 141%. The stock options and warrants were valued taking into
      consideration the average forfeiture since adoption of SFAS 123R of rates 4.8%.
      The estimated forfeiture rate is determined quarterly for unvested options
      and
      warrants based on the historical rates of forfeiture. Due to the variety of
      grant transactions, setting an estimated forfeiture rate by grant is deemed
      impractical. The Company believes that each of these estimates, including both
      expected term and volatility, is reasonable in light of the data it has
      analyzed. However, as with any estimate, the ultimate accuracy of these
      estimates is only verifiable over time.




The
      specific valuation assumptions noted above were applied to stock options and
      warrants that the Company granted subsequent to its adoption of SFAS 123R.
      The
      Company expects that share-based compensation expense will continue to have
      a
      material impact on its financial results for all subsequent fiscal years.




F-11




**Derivative
      Instruments:**




Since
      inception, the Company has entered into several debt and equity transactions
      to
      fund its operations. A number of these transactions involved the issuance of
      convertible debt and warrants. These transactions also included registration
      rights agreements that impose significant penalties on the Company if certain
      conditions are not met. As a result of these registration rights agreements
      the
      Company faces a number of unique and complex accounting issues such as the
      ones
      discussed below.




The
      Company has issued and outstanding several financial instruments with
      embedded-derivative features, consisting of convertible debt and warrants.
      The
      Company analyzes these financial instruments in accordance with SFAS No. 133
      “Accounting for Derivative Instruments and Hedging Activities”, EITF No. 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company’s Own Stock” (EITF No. 00-19) and EITF No. 05-2 “The
      Meaning of ‘Conventional Convertible Debt Instruments’ in Issue No. 00-19” (EITF
      No. 05-2) to determine if these hybrid contracts have embedded derivatives
      that
      must be bifurcated and accounted for at fair value. In addition, free standing
      warrants are accounted for as either equity or liabilities in accordance with
      the provisions of EITF No. 00-19.




EITF
      No.
      05-4 “The Effect of a Liquidated Damages Clause on a Freestanding Financial
      Instrument Subject to EITF No. 00-19, ‘Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock’”
(EITF No. 05-4) addresses financial instruments, such as convertible notes
      and
      stock purchase warrants, which are accounted for under EITF No. 00-19, that
      are
      issued with a corresponding right to have these securities registered pursuant
      to a registration rights agreement and that includes a liquidated damages
      clause. We have adopted View C as described in the EITF No. 05-4 Issue Summary
      No. 1. Under View C, registration rights agreements and the associated financial
      instruments are accounted for as separate instruments. Accordingly, we have
      given only prospective application to this guidance. On December 21, 2006,
      the
      Financial Accounting Standards Board issued FASB Staff Position (FSP) EITF
      No.
      00-19-2 which is effective for fiscal years beginning after December 15, 2006.
      This FSP specifies that the contingent obligation to make future payments or
      otherwise transfer consideration under a registration rights agreement, whether
      issued as a separate agreement or included as a provision of a financial
      instrument or other agreement, should be separately recognized and measured
      in
      accordance with FASB Statement No. 5, *Accounting
      for Contingencies* . Our
      treatment of the registration rights agreement as separate instruments is
      consistent with this FSP.




In
      connection with its examination of past transactions for application of EITF
      No.
      05-4, the Company noted that for the period from entering into the April 2004
      Securities Purchase Agreement until it increased its authorized shares in August
      2004, it had insufficient shares to meet all potential obligations to issue
      shares under its convertible notes and exercisable warrants and options. Under
      EITF No. 00-19, a liability should be recognized for those financial instruments
      for that period, with any changes in the fair value of such liabilities
      recognized in our consolidated statement of operations. Based on the analysis
      of
      such liabilities, the Company determined the effect of any such amounts to
      be
      immaterial.




In
      April
      2004 and July 2004, the Company entered into private placement agreements,
      and
      registration rights agreements for convertible debentures and warrants. Based
      on
      the interpretive guidance in EITF No. 05−4 due to an uncapped liquidated damages
      provision in the registration rights agreements, the Company determined that
      the
      registration rights are derivative liabilities that should be bifurcated from
      the related financial instruments. Accordingly, the estimated fair value of
      the
      registration rights derivative of $244,000 was recorded as a liability as of
      October 1, 2005, the beginning of the first fiscal period after September 15,
      2005, the date that EITF postponed further deliberations. As of December 31,
      2006, the full amount of the derivative liability balance was reversed since
      the
      shares purchased under the April 2004 and July 2004 private placements could
      be
      sold under former Rule 144(k) of the Securities Act of 1933 and the Company
      had
      recorded the full and maximum amount of the actual incurred liquidated damages
      of approximately $442,000, associated with these registration rights agreements.
      Additionally, the Company recorded approximately $141,000 of interest and late
      fees related to the April 2004 and July 2004 convertible debentures. Both of
      these amounts are included in the other accrued liabilities.


F-12


In
      connection with the December 2004 and January 2006 private placements, the
      Company estimated fair value of the related registration rights derivative
      was
      immaterial at the inception and at each reporting date since and, consequently,
      it has not recorded a liability. At each reporting period, it calculates the
      estimated fair value of the registration rights derivatives. If the underlying
      assumptions of the calculation changed such that the estimated fair value is
      not
      immaterial, the Company will record a liability at that time.




In
      connection with its September 2005 private placement, the Company’s estimated
      fair value of the related registration rights derivative at its inception was
      immaterial and it did not record a liability. Subsequently, in connection with
      the January 2006 private placement, it amended its September 2005 agreement
      with
      the rights holder to waive the liquidated damages relating to its inability
      to
      have such registration statement declared effective by May 23, 2006. On April
      26, 2006, it filed a registration statement registering resale of securities
      purchased in the September 2005 and January 2006 private placements. The Company
      believes, that as it relates to the September 2005 private placement, it has
      used its best efforts to cause the registration statement to be declared
      effective and, therefore, pursuant to the terms of the September 2005
      registration rights agreement, the Company is not currently liable for
      liquidated damages as a result of the registration statement not being declared
      effective by May 23, 2006. Should the rights holders dispute that the Company’s
      best efforts were used, and it either accedes to the assertion or is found
      to
      not have used its best efforts, the estimated maximum amount of liquidated
      damages for which it would be liable, assuming
       ineffectiveness from May 23, 2006 to October 31, 2006, is
      approximately $43,000.




As
      it
      relates to the January 2006 private placement, the Company, despite using its
      best efforts, failed to have the registration statement declared effective
      by
      the SEC on or before October 26, 2006. Consequently, as of December 31, 2006
      the
      Company is required to issue to each holder of the January 2006 private
      placement, shares and warrants equal to one percent of the respective number
      of
      shares and warrants purchased by each holder or an aggregate of 138,859 shares
      of common stock and warrants to purchase 138,859 shares of common stock.




The
      Company is required to file a series of registration statements covering the
      resale of the shares of common stock underlying the 6% Notes, the Warrants,
      the
      December 6% Notes and the December Warrants as well as the warrants issued
      to
      the placement agent in connection with the 6% Notes and Warrants transactions.
      In the event the Company fails to file or cause these registration statements
      to
      become effective within specified time periods, it will be required to pay
      liquidated damages equal to 1% of the principal amount of the affected notes
      and
      the purchase price of shares of common stock issued on conversion of these
      notes
      and exercise of related warrants for each 30-day delay in the filing or
      effectiveness of such registration statement (or such lesser pro-rata amount
      for
      any period of less than 30 days). The Company has assessed the probability
      of
      incurring liquidated damages as remote and has, accordingly, not recorded any
      liability.




The
      Company has not incurred any liquidated damages liabilities related to any
      of
      its other registration rights agreements.




**Revenue
      Recognition:**




The
      Company recognizes revenues from the sale of its products based on the
      provisions of SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”. The
      Company recognizes revenue when all of the following conditions are met:




•
            there
                is persuasive evidence of an arrangement;




•
            the
                risk of loss and title to the product transfers to the customer;




•
            the
                collection of the fees receivable is reasonably assured and,




•
            the
                amount of revenues to be paid by the customer is fixed or determinable.


F-13




The
      Company’s arrangements do not contain general rights of return or warranty
      provisions.




**Advertising
      Costs:**




Advertising
      costs are charged to operations as incurred and were $16,000, $111,000 and
      $177,000 for the years ended December 31, 2007, 2006 and 2005, respectively.




**Product
      Development:**




Product
      development expenditures are expensed as incurred.




**Basic
      and Diluted Net Loss Per Common Share:**




Basic
      and
      diluted earnings per common share are computed in accordance with SFAS No.
      128,
“Earnings per Share”. Basic loss per common share is computed by dividing net
      loss attributable to common stockholders by the weighted average number of
      common shares outstanding. Diluted net loss per common share is computed
      similarly to basic loss per common share except that the denominator is
      increased to include common share equivalents. Diluted net loss per common
      share
      does not differ from basic net loss per common share since potential common
      shares from the exercises of stock options and warrants and the conversion
      of
      debt are anti-dilutive for all periods presented. The following common share
      equivalents were excluded from the calculation of net loss per common share
      at
      December 31, (in thousands):




**2007**
            **2006**
            **2005**Stock
                Options
            17,647
            20,611
            16,541Warrants
            134,731
            54,842
            7,361Convertible
                Debentures
            —
            —
            2,095Bridge
                Notes
            575
            26,483
            —6%
                Notes
            141,248
            —
            —December
                6% Notes
            22,584
            —
            —316,725
            101,936
            25,997




**Reclassifications:**




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




**Recent
      Accounting Pronouncements:**




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Instruments,” which amends SFAS No. 133, “Accounting for Derivative Instruments
      and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155
      allows financial instruments that have embedded derivatives to be accounted
      for
      as a whole (eliminating the need to bifurcate the derivative from its host)
      if
      the holder elects to account for the whole instrument on a fair value basis.
      SFAS No. 155 also clarifies and amends certain other provisions of SFAS No.
      133
      and SFAS No. 140. This statement is effective for all financial instruments
      acquired or issued in fiscal years beginning after September 15, 2006. The
      Company has not elected to apply the provisions of SFAS No. 155 to its financial
      statements.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
      defines fair value, establishes a framework for measuring fair value and
      requires additional disclosures about fair value measurements. SFAS No. 157
      is
      effective for fiscal years beginning after November 15, 2007. The adoption
      of
      SFAS No. 157 did not have a material effect on the Company’s consolidated
      financial statements.


F-14




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to
      choose to measure many financial instruments, and certain other items, at fair
      value. SFAS No. 159 applies to reporting periods beginning after November 15,
      2007. The Company is currently evaluating the effect, if any, the adoption
      of
      SFAS No. 159 will have on its consolidated financial statements.




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007) “ *Business
      Combinations* ”
(“SFAS
      141R”), which requires the acquiring entity in a business combination to
      recognize all (and only) the assets acquired and liabilities assumed in the
      transaction; establishes the acquisition-date fair value as the measurement
      objective for all assets acquired and liabilities assumed; and requires the
      acquirer to disclose to investors, and other users, all of the information
      they
      need to evaluate and understand the nature and financial effect of the business
      combination. SFAS 141R will be effective for acquisitions with a date on or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. The Company will apply SFAS 141R for any of the Company’s
      applicable acquisitions beginning January 1, 2009.




In
      December 2007, the FASB issued SFAS No. 160 “ *Noncontrolling
      Interests in Consolidated Financial*  *Statements-an
      amendment of ARB No. 51* ”
(“SFAS
      160”), which requires the recognition of a noncontrolling interest (minority
      interest) as equity in the consolidated financial statements and separate from
      the parent’s equity; the inclusion of the amount of net income attributable to
      the noncontrolling interest in consolidated income on the face of the income
      statement; and a parent recognize a gain or loss in net income when a subsidiary
      is deconsolidated. SFAS 160 will be effective for the fiscal years beginning
      on
      or after December 15, 2008. The Company will apply SFAS 160 to any applicable
      transactions beginning January 1, 2009.




**3. INVENTORIES**




Inventories
      consisted of the following (in thousands) at:




**December
                31,****2007**
            
            **2006**Raw
                materials
            
            $
            101
            
            $
            89Finished
                goods
            
            
            184
            
            
            211$
            285
            
            $
            300




**4. PROPERTY
      AND EQUIPMENT, NET**




Property
      and equipment consisted of the following (in thousands):




**December
                31,****Estimated**
              **Useful
                Life**
            
            **2007**
            **2006**Machinery
                and equipment
            5-10
                years
            
            $1,000
            $1,114Office
                furniture, fixtures and capitalized software
            1-5
                years
            
            590
            541Vehicles
            5
                years
            
            62
            621,652
            1,717Less
                Accumulated depreciation
            
            
            (654)
            (406)$998
            $1,311




Depreciation
      expense for the years ended December 31, 2007, 2006 and 2005 was approximately
      $285,000, $267,000 and $157,000 respectively.


F-15


**5. NOTES
      RECEIVABLE**




On
      March
      28, 2005, pursuant to the 2005 acquisition we issued a loan to David Creasey,
      a
      principal of pHarlo Citrus Technologies and Indian River Labs, in the amount
      of
      $625,000. This loan is evidenced by a promissory note and secured by options
      and
      stock that Mr. Creasey holds in our company. As of December 31, 2007 and 2006,
      the balance of this note is approximately $767,000 and $719,000 including
      accrued interest of approximately $142,000 and $94,000 respectively.




**6. GOODWILL
      AND INTANGIBLE ASSETS**




The
      Company accounts for goodwill and other intangible assets at their estimated
      fair values in accordance with SFAS No. 142, “Goodwill and Other Intangible
      Assets”. Goodwill is tested annually for impairment, or more frequently when
      indicators of impairment are present. The impairment test for goodwill involves
      a two-step process. The first step compares the fair value of a reporting unit
      with its carrying amount, including the goodwill allocated to each reporting
      unit. If the carrying amount is in excess of the fair value, SFAS No. 142
      requires performance of the second step of the impairment testing for the
      reporting unit. The second step requires the comparison of the implied fair
      value of the reporting unit goodwill with the carrying value of the reporting
      unit goodwill. Any excess of the carrying value of the goodwill over the implied
      fair value will be recorded as an impairment loss. The implied fair value of
      goodwill is determined in the same manner as would occur in a purchase
      transaction, treating the fair value of the reporting unit as the equivalent
      of
      the purchase price and deducting from that amount, the fair value of the net
      assets assigned to the reporting unit. The Company, in its entirety, comprises
      a
      single reporting unit for the purpose of this impairment calculation.




In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”, long-lived assets, including intangible assets, are reviewed
      for impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be fully recoverable. If an impairment
      indicator is present, the Company evaluates recoverability by a comparison
      of
      the carrying amount of the assets to future undiscounted net cash flows expected
      to be generated by the assets. If the assets are impaired, the impairment
      recognized is measured by the amount by which the carrying amount exceeds the
      estimated fair value of the assets.




In
      June
      2006 and again in December 2006, based on the following impairment indicators,
      the Company tested goodwill and intangible assets for impairment:




•
            an
                expectation that third and fourth quarter 2006 revenue projections
                would
                not be attained;




•
            a
                decrease in expected future cash flows; and




•
            a
                decline in the market price of the Company’s common stock




The
      Company considered these impairment indicators and, determined the fair value
      of
      the Company’s single reporting unit utilizing the discounted cash flow method in
      June 2006 and a weighted average income approach in December 2006. The analysis
      indicated that the carrying amount of the reporting unit exceeded its fair
      value. Accordingly, the second step was performed. The combined results of
      the
      June and December impairment tests resulted in the recognition of non-cash
      impairment charges to identifiable intangible assets and goodwill of $12.2
      million and $31.8 million, respectively.




The
      Company’s specifically identifiable intangible assets, which consist exclusively
      of utility patents, are reported at cost, net of accumulated amortization.
      These
      intangible assets are being amortized using the straight-line method over their
      estimated useful lives of 10.5 years.


F-16


The
      net
      carrying values of goodwill and other intangible assets at December 31, 2007
      were as follows (in thousands):




**Gross**
              **Carrying
                Amount**
            
            **Additions**
            
            **Accumulated**
              **Amortization**
            
            **Net
                Carrying**
              **Amount/**
              **Adjusted
                Basis**Amortizable
                utility patents
            
            $
            7,887
            
            $
            25
            
            $
            828
            
            $
            7,084Goodwill
            
            $
            9,835
            
            $
            —
            
            $
            —
            
            $
            9,835




The
      net
      carrying values of goodwill and other intangible assets at December 31, 2006
      were as follows (in thousands ):




**Gross**
              **Carrying
                Amount**
            
            **Impairment**
              **Charges**
            
            **Accumulated**
              **Amortization**
            
            **Net
                Carrying**
              **Amount/**
              **Adjusted
                Basis**Amortizable
                utility patents
            
            $
            22,500
            
            $
            12,239
            
            $
            2,374
            
            $
            7,887Goodwill
            
            $
            41,677
            
            $
            31,842
            
            $
            —
            
            $
            9,835




The
      Company recorded amortization expense of $ 828,000, $1,436,000 and $938,000
      related to the other intangible assets for the years ended December 31, 2007,
      2006 and 2005 respectively.






Future
      expected amortization of intangible assets at December 31, 2007 was as follows
      (in thousands):




2008
            
            $
            8292009
            
            
            8292010
            
            
            8292011
            
            
            8292012
            
            
            8292012
                and thereafter
            
            $
            2,939




**7. OTHER
      ACCRUED LIABILITIES**




Other
      accrued liabilities consisted of the following (in thousands):




**December
                31,****2007**
            
            **2006**Accrued
                wages ..
            
            $
            132
            
            $
            90Accrued
                interest ..
            
            
            141
            
            
            148Liquidated
                damages ..
            
            
            464
            
            
            464Accrued
                legal and accounting fees ..
            
            
            342
            
            
            240Accrued
                consulting ..
            
            
            139
            
            
            198Litigation
                settlement ..
            
            
            —
            
            
            423Accrued
                rent (net)
            
            
            227
            
            
            —Accrued
                purchases ..
            
            
            7
            
            
            99Other
                ..
            
            
            211
            
            
            847$
            1,663
            
            $
            2,509




**8. STOCKHOLDERS’
      EQUITY:**




In
      February 2005, a secured promissory note holder exchanged his note in the amount
      of $49,950, plus interest and services rendered over the past two years, for
      32,272 restricted common shares at $1.65, or $2.30 less than the market value
      of
      the stock on the date of the exchange. In connection with the exchange, the
      Company recognized approximately $74,000 of consulting fees during the year
      ended December 31, 2005.


F-17






In
      July
      2005, the Company executed an Asset Purchase Agreement whereby the Company
      issued 18,992,388 shares of its common stock valued at $56,977,164 (see Note
      13).




In
      September 2005, the Company completed the private placement of 2,947,545 shares
      of its common stock with several accredited investors for an aggregate purchase
      price of approximately $6,485,000 or $2.20 per share. As part of the private
      placement, the Company also (i) issued 1,473,769 warrants to purchase the
      Company’s common stock at $3.00 per share and (ii) entered into a Registration
      Rights Agreement (as discussed in more detail in Note 2).




During
      the year ended December 31, 2005, stockholders’ equity was also increased as a
      result of (i) the issuance of options for vendor services of approximately
      $3.1
      million, (ii) employee stock-based compensation of approximately $484,000,
      (iii)
      the conversion of approximately $243,000 of convertible debentures and accrued
      interest into approximately 4,090,000 shares of common stock and (iv) the
      exercise of approximately 4.8 million options and warrants generating cash
      proceeds of approximately $285,000.




On
      January 26, 2006, the Company issued to accredited investors 13,335,925 units
      consisting of one share of common stock and one warrant to purchase one share
      of
      common stock at an exercise price of $1.00 per share for $0.70 per unit, with
      net proceeds of $8.7 million. In connection with this private placement, the
      Company entered into a Registration Rights Agreement with the investors pursuant
      to which the Company agreed to register common shares issued, as well as the
      shares underlying the warrants. The Company filed the registration statement
      in
      April 2006. The Company incurred issuance costs of approximately $4.6 million,
      including cash payments and warrants issued to the placement agent.




During
      the year ended December 31, 2006, stockholders’ equity was also increased as a
      result of (i) the issuance of options for vendor services of approximately
      $90,000, (ii) the recording of employee stock-based compensation of
      approximately $4.9 million, (iii) the conversion of approximately $194,000
      of
      convertible debentures and accrued interest into approximately 2,095,000 shares
      of common stock, (iv) the exercise of warrants and stock options for
      approximately 1,613,000 shares of common stock generating cash proceeds of
      approximately $73,000, and (v) the allocation of value to warrants to purchase
      approximately 13,315,000 shares of common stock and the recording of beneficial
      conversion features associated with the December 2006 convertible debt offering.




On
      March
      6, 2007, the Company issued 2,000,000 shares of common stock to Indigo
      Securities, LLC pursuant to the cashless exercise of warrants to purchase
      2,983,051 of common stock, which warrants were issued to the placement agent
      pursuant to the immediately prior paragraph. The aforementioned securities
      were
      issued by the Company in transactions exempt from the registration requirements
      under the Securities Act, by reason of Section 3(a)(9) of the Securities
      Act.




On
      April
      16, 2007, the Company issued 334,067 shares of common stock to a vendor for
      approximately $123,000 for services previously provided to the Company. On
      May
      22, 2007, the Company issued 761,963 shares of common stock in lieu of cash
      payment on two installments of a note payable. The April 16 and May 22, 2007
      issuances of shares of common stock were not registered under the Securities
      Act
      because such issuances were exempt from registration pursuant to
      Section 4(2) of the Securities Act of 1933, as they were transactions by an
      issuer that did not involve a public offering of securities.




On
      June
      1, 2007, an option holder exercised her option for 10,000 shares of common
      stock
      at a price of $0.25 per a share.




On
      November 16, 2007 and November 29, 2007, the Company issued 3,020,212 and
      278,230, respectively, restricted shares of common stock in lieu of cash payment
      to pay off the shareholder note plus accrued interest of $593,719.


F-18


In
      November 2007, several investors in the 6% Notes, converted $390,000 of
      principal and accrued interest into 5,379,310 restricted shares of common stock.
      In December 2007, several investors in the 6% Notes, converted $187,208 of
      principal and accrued interest into 2,582,179 restricted shares of common stock.
      These shares were not registered under the Securities Act because such issuances
      were exempt from registration pursuant to Section 4(2) of the Securities
      Act of 1933, as they were transactions by an issuer that did not involve a
      public offering of securities.




On
      December 27, 2007, a vendor exercised a warrant that was issued in lieu of
      a
      cash payment for consulting services for 750,000 shares of restricted common
      stock. These shares were not registered under the Securities Act because such
      issuances were exempt from registration pursuant to Section 4(2) of the
      Securities Act of 1933, as they were transactions by an issuer that did not
      involve a public offering of securities.




**9. WARRANTS
      AND STOCK OPTIONS**




**Warrants** :




Outstanding
      warrants (excluding warrants issued for compensation subsequent to adoption
      of
      SFAS 123R included below under share-based payments) at December 31, 2007,
      were
      as follows:





·
            Warrants
                to purchase 1,270,000 shares of common stock issued to consultants
                in
                November 2002. The warrants had an original five-year term, but were
                extended for one year in November 2007. These warrants have an exercise
                price of $0.25 per share.




·
            Warrants
                to purchase 400,000 shares of common stock issued to a consultant
                in May
                2004. The warrants have a five-year term and were issued with an
                exercise
                price of $0.25 per share.




·
            Warrants
                to purchase 562,500 shares of common stock issued to a placement
                agent in
                connection with the December 2004 private placement. The warrants
                have a
                five-year term and were issued with an exercise price of $2.00 per
                share.




·
            Warrants
                to purchase 1,473,770 shares of common stock issued to investors
                in
                connection with the September 2005 private placement. The warrants
                have a
                five-year term and were issued with an exercise price of $1.00 per
                share.




·
            Warrants
                to purchase 13,335,925 shares of common stock issued to investors
                in
                connection with the January 2006 private placement. The warrants
                have a
                five-year term and were issued with an exercise price of $1.00 per
                share.




·
            Warrants
                to purchase 800,155 shares of common stock issued to a placement
                agent in
                connection with the January 2006 private placement. The warrants
                have a
                five-year term and were issued with an exercise price of $1.00 per
                share.




·
            Warrants
                to purchase 12,388,891 shares of common stock issued to lenders in
                connection with the sale of the First Bridge Notes between December
                1,
                2006 and May 1, 2007. The warrants have a four-year term and were
                issued
                with an exercise price of $0.09 per
                share.




·
            Warrants
                to purchase 8,682,894 shares of common stock issuable to a placement
                agent
                in connection with the sale of the First Bridge Notes between December
                1,
                2006 and May 1, 2007. The warrants have a seven-year term and were
                issuable with an exercise price of $0.0725 per share. On March 6,
                2007, we
                issued 2,000,000 shares of our common stock to our placement agent
                pursuant to the cashless exercise of 2,983,051 of these
                warrants.


F-19


·
            Warrants
                to purchase 1,000,000 shares of common stock issued to a lender in
                connection with the sale of the Second Bridge Notes on June 4, 2007.
                The
                warrants have a four-year term and were issued with an exercise price
                of
                $0.20 per share.




·
            Warrants
                to purchase 2,020,202 shares of common stock issuable to a placement
                agent
                in connection with the sale of the Second Bridge Notes on June 4,
                2007.
                The warrants have a seven-year term, were issuable with an exercise
                price
                of $0.099 and contain a "cashless exercise" option.




·
            Warrants
                to purchase 32,343,515 shares of our common stock issued to lenders
                in
                connection with the sale of the 6% Notes on September 28, 2007. The
                warrants have a four-year term and were issued with an exercise price
                of
                $0.15.





·
            Warrants
                to purchase 3,136,364 shares of our common stock were issuable to
                a
                placement agent in connection with the sale of the 6% Notes. The
                warrants
                have a seven- year term, were issuable with an exercise price of
                $0.11 per
                share and contain a "cashless exercise" option.




·
            Warrants
                to purchase 2,666,669 shares of our common stock issued to lenders
                in
                November and December 2007 in connection with the sale of 6% Notes.
                The
                warrants have a four-year term and were issued with an exercise price
                of
                $0.15.




·
            Warrants
                to purchase 454,545 shares of our common stock issuable to a placement
                agent in November in connection with the sale of 6% Notes. The warrants
                have a seven-year term, were issuable with an exercise price of $0.11
                and
                contain a "cashless exercise" option.




·
            Warrants
                to purchase 2,710,061 shares of common stock issued to lenders in
                connection with the December 20, 2007 Tender Offer. The warrants
                have a
                four-year term and were issued with an exercise price of $0.15 per
                share.




·
            Warrants
                to purchase 2,258,382 shares of our common stock were issuable to
                a
                placement agent in connection with the Tender Offer. The warrants
                have a
                seven-year term, were issuable with an exercise price of $0.09 per
                share.






The
      following table summarizes the Company’s warrant activity (excluding warrants
      issued for compensation subsequent to adoption of SFAS 123R included below
      under
      share-based payments) for the years ended December 31, 2005, 2006 and 2007:





**Number**
              **of
                shares**
            
            **Exercise
                Price**
              **per
                share**
            
            **Weighted
                average**
              **exercise
                price**
              **per
                share**Outstanding,
                January 31, 2005
            
            
            10,242,350
            
            
            0.05
                - $2.00
            
            $
            0.37Granted
            
            
            1,473,770
            
            
            1.00
            
            $
            1.00Exercised
            
            
            (4,355,000
            )
            
            0.01
                - $0.25
            
            $
            0.07Outstanding,
                December 31, 2005
            
            
            7,361,120
            
            $
            0.01-$2.00
            
            $
            0.63Granted
            
            
            27,451,013
            
            $
            0.0725-$1.00
            
            $
            0.56Exercised
            
            
            (1,000,000
            )
            $
            0.01
            
            $
            0.01Outstanding,
                December 31, 2006
            
            
            33,812,133
            
            $
            0.0725-$2.00
            
            $
            0.59Granted
            
            
            76,930,435
            
            $
            0.001-$0.20
            
            $
            0.12Converted
                to Note Payable
            
            
            (22,583,444
            )
            $
            0.09
            
            $
            0.09Canceled
                - Cashless exercise
            
            
            (983,051
            )
            $
            0.0725
            
            $
            0.0725Expired
            
            
            (2,654,850
            )
            $
            0.25
                - $2.00
            
            $
            0.60Exercised
            
            
            (2,000,000
            )
            $
            0.0725
            
            $
            0.0725Outstanding,
                December 31, 2007
            
            
            82,520,823
            
            $
            0.0725-$2.00
            
            $
            0.32




The
      Warrants granted pursuant to the April 2004 Private Placement originally had
      exercise prices of $0.10 and $0.20. However, in accordance with the terms of
      the
      agreement and upon specified events the exercise price of all warrants issued
      in
      this placement were modified to $0.05 per share in September 2004 and further
      modified to $0.01 per share in May 2005. All of the warrants issued in
      connection to the April 2004 Private Placement were exercised during 2006.


F-20




The
      Warrants granted pursuant to the July 2004 Private Placement originally had
      an
      exercise price of $0.25. However, in accordance with the terms of the agreement
      and upon specified events the exercise price of all warrants issued in this
      placement were modified to $0.05 per share in September 2004 and further
      modified to $0.01 per share in May 2005. All of the warrants issued in
      connection to the July 2004 Private Placement were exercised during 2006.




The
      Warrants granted pursuant to the September 2005 Private Placement originally
      had
      an exercise price of $3.00. In January 2006, in connection with an amendment
      to
      the agreement the exercise price of the warrants was reduced from $3.00 to
      $1.00
      per share.




In
      September 2007 we modified the expiration period of certain warrants and
      recorded a compensation expense of approximately $84,000 related to the
      modification of these warrants.




As
      of
      December 31, 2007, the weighted average contractual life of warrants outstanding
      (excluding warrants issued for compensation subsequent to adoption of SFAS
      123R
      included below under share-based payments) is approximately 3.8
      years.





**Share-based
      payments:**





Prior
      to
      January 1, 2006, the Company accounted for its stock-based compensation
      using the intrinsic value method of accounting under the provisions of
      Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (APB
      No. 25). The Company’s stock-based compensation awards have generally been
      granted with an exercise price equal to the estimated fair value of the
      underlying common stock on the grant date, and accordingly, any stock-based
      compensation related to stock option grants was not material under APB
      No. 25. The Company applied the disclosure provisions under SFAS
      No. 123, *Accounting
      for Stock-Based Compensation* and
      related interpretations (SFAS No. 123) as if the fair value had
      been applied in measuring compensation expense. As a result, stock-based
      compensation expense, based upon the fair value method is included as a pro
      forma disclosure in the notes to the Company’s financial
      statements.





The
      following illustrates the effect on the Company’s net loss as if the Company had
      applied the fair value recognition provisions of SFAS No. 123 to
      stock-based compensation during 2005 (in thousands, except per share data):





**2005**Net
                loss, as reported
            
            $
            (18,269
            )Add:
                Stock -based compensation included in net loss, as
                reported
            
            
            484Less:
                Stock -based compensation expense determined under the fair value
                method
            
            
            (6,252
            )Net
                loss, pro-forma
            
            $
            (24,037
            )Basic
                and diluted loss per share, as reported
            
            $
            (0.25
            )Basic
                and diluted loss per share, pro-forma
            
            $
            (0.33
            )





On
      January 1, 2006, the Company adopted the provisions of SFAS 123R using the
      modified prospective transition method. The total expense associated with
      non-plan warrant and stock option based employee compensation was approximately
      $4,495,000 and $4,864,000 for the years ended December 31, 2007 and 2006,
      respectively.





The
      aggregate intrinsic value in the tables below represent the total intrinsic
      value (the difference between the closing stock price on the last trading day
      of
      the years ended December 31, 2007 and 2006 and the exercise price, multiplied
      by
      the number of in-the-money options and warrants) that holders would have
      received had all such holders exercised their options and warrants on December
      31, 2007 and 2006. This amount changes each reporting period based on changes
      in
      the fair market value of the Company’s common stock. Total intrinsic value of
      options exercised for the year ended December 31, 2007, 2006 and 2005 was
      $127,000, $168,000 and $1,532,000 respectively.


F-21


At
      December 31, 2007, future compensation cost related to non-vested stock options
      and warrants, less estimated forfeitures, is approximately $2,971,000 and will
      be recognized over an estimated weighted average period of 3 years.





A
      summary
      of compensatory stock option and warrants activity is as follows:




**Number
                  of options and warrants**
              
              **Weighted
                  Average Exercise Price per option and warrant**
              
              **Weighted
                  Average Remaining Contractual Term (years)**
              
              **Aggregate
                  Intrinsic Value**Outstanding,
                  January 1, 2005
              
              
              15,650,000
              
              $
              0.53Granted
              
              
              4,084,999
              
              $
              2.30Exercised
              
              
              (480,000
              
              $
              0.25Cancelled
              
              
              (2,714,222
              
              $
              0.97Outstanding,
                  December 31, 2005
              
              
              16,540,777
              
              $
              0.91Granted
              
              
              27,455,000
              
              $
              0.33Exercised
              
              
              (883,333
              
              $
              0.25Cancelled/forfeited
              
              
              (1,471,743
              
              $
              1.37Outstanding,
                  December 31, 2006
              
              
              41,640,701
              
              $
              0.39
              
              
              8.89
              
              $
              2,225,000Granted
              
              
              32,395,000
              
              $
              0.17Exercised
              
              
              (760,000
              
              $
              0.004Cancelled/forfeited
              
              
              (3,418,241
              
              $
              1.23Outstanding,
                  December 31, 2007
              
              
              69,857,460
              
              $
              0.25
              
              
              8.51
              
              $
              1,815,000Options
                  and warrants exercisable at December 31, 2007
              
              
              51,354,750
              
              $
              0.23
              
              
              8.28
              
              $
              1,550,000





The
      following table summarizes additional information about stock options and
      warrants granted during the year ended December 31:





**2007**
            
            **2006**Weighted-average
                fair value of grants
            
            
            $0.17
            
            
            $0.33Risk-free
                interest rate
            
            
            3.81%-5.17%
            
            
            4.43%-5.04%Expected
                option term
            
            
            4.0
                - 6.1 years
            
            
            2.3
                - 6.1 yearsStock
                price volatility
            
            
            129%-141%
            
            
            132%-139%Dividend
                yield
            
            
            —
            
            
            —





Outstanding
      compensatory stock options and warrants at December 31, 2007, included the
      following warrants:





·
            Warrants
                to purchase 18,000,000 shares of common stock issuable to our President
                and Chief Executive Officer on December 1, 2006, as part of his
                compensation. The warrants have a ten-year term and were issued with
                exercise prices ranging from $0.11 to $0.18 per
                share.


F-22


·
            Warrants
                to purchase 3,030,000 shares of common stock issued to employees,
                directors and consultants on December 26, 2006, as part of their
                compensation. The warrants have a ten-year term and were issued with
                an
                exercise price of $0.14 per share.




·
            Warrants
                to purchase 750,000 shares of common stock issued to a director on
                January
                11, 2007, as part of his compensation. The warrants have a ten-year
                term
                and were issued with an exercise price of $0.15 per
                share.




·
            Warrants
                to purchase 9,010,000 shares of common stock issued to employees,
                directors and consultants on February 5, 2007, as part of their
                compensation. The warrants have a ten-year term and were issued with
                an
                exercise price of $0.14 per share.




·
            Warrants
                to purchase 870,000 shares of common stock issued to employees, directors
                and consultants on March 14, 2007, as part of their compensation.
                The
                warrants have a ten -year term and were issued with an exercise price
                of
                $0.19 per share.




·
            Warrants
                to purchase 50,000 shares of common stock issued to a former consultant
                to
                settle a pending litigation matter on March 14, 2007. The warrants
                have a
                five -year term and were issued with an exercise price of $0.15 per
                share.




·
            Warrants
                to purchase 10,125,000 shares of common stock issued to our Executive
                Chairman on March 14, 2007, as part of his compensation. The warrants
                have
                a ten-year term and were issued with exercise prices of $0.19 per
                share.




·
            Warrants
                to purchase 200,000 shares of common stock issued to two consultants
                on
                April 13, 2007, as part of their compensation. The warrants have
                a
                ten-year term and were issued with exercise prices of $0.33 per
                share.




·
            Warrants
                to purchase 1,420,000 shares of common stock issued to employees,
                directors and consultants on June 29, 2007, as part of their compensation.
                The warrants have a ten -year term and were issued with an exercise
                price
                of $0.20 per share.




·
            Warrants
                to purchase 5,000,000 shares of common stock issued to the placement
                agent
                on June 29, 2007, as a fee for various consulting services provided.
                The
                warrants have a ten-year term and were issued with an exercise price
                of
                $0.19 per share.




·
            Warrants
                to purchase 2,120,000 shares of common stock issued to employees,
                directors and consultants on September 19, 2007, as part of their
                compensation. The warrants have a ten-year term and were issued with
                an
                exercise price of $0.18 per share.




·
            Warrants
                to purchase 1,750,000 shares of common stock issued to consultants,
                on November 8, 2007, as part of their compensation. The warrants
                have a
                four-year term and were issued with an exercise price of $0.001 per
                share.




·
            Warrants
                to purchase 1,100,000 shares of common stock issued to employees, on
                November 8, 2007, as part of their compensation. The warrants have
                a
                ten-year term and were issued with an exercise price of $0.26 per
                share.


F-23




**10.**  **NET
      LOSS PER COMMON SHARE**




The
      following tables set forth the computation of basic and diluted net loss per
      common share for the years ended December 31, 2007 and 2006,
      respectively:




**December
                31,****2007**
            
            **2006****(in thousands)****Numerator
                for basic and diluted net loss per share:**Net
                loss
            
            $
            (41,394
            )
            $
            (62,943
            )**Denominator:**Denominator
                for basic and diluted net loss per share - weighted-average
                shares
            
            109,890
            
            104,081**Basic
                and diluted net loss per common share:**
            
            $
            (0.38
            )
            $
            (0.60
            )




As
      December 31, 2007 17,647,148 compensatory options, 52,210,312 compensatory
      warrants, 38,951,286 non-compensatory warrants issued in connection with the
      First and Second Bridge Notes, 38,601,094 warrants issued in connection with
      the
      6% Notes, 4,968,443 warrants issued in connection with the December 6% Notes,
      551,724 shares
      of
      common stock issuable upon the conversion of outstanding First Bridge Notes
      and
      141,248,310 shares of common stock issuable upon the conversion of the 6% Notes
      and related notes, and 22,583,844 shares of common stock issuable upon
      conversion of the December 6% Notes were
      excluded from the computation of net loss per share because their effect would
      be anti-dilutive. As of December 31, 2006, 20,610,701 compensatory options
      and 21,030,000 compensatory warrants
      and 33,812,133 non-compensatory warrants issued in connection with the First
      and
      Second Bridge Notes were excluded from the computation of net loss per share
      because the effect would be anti-dilutive.




**11. EQUITY
      INVESTMENT**




In
      April
      2005, the Company purchased a 27% equity interest in Biofilm Strategies
      Corporation (“Biofilm”) from Electric Aquagenics Unlimited, Inc. The Company
      concluded that the 27% equity interest in Biofilm was a significant variable
      interest, as defined by FIN No. 46(R) “Consolidation of Variable Interest
      Entities”; however, since the Company is not the primary beneficiary of Biofilm,
      the Company was not required to consolidate the accounts of Biofilm.
      Accordingly, the 27% interest was accounted for under the equity method. In
      the
      fourth quarter of 2006, negotiations to license the Biofilm product from the
      owner and inventor of the product failed and the Company is currently exploring
      all legal remedies. The value assigned to the Biofilm investment was based
      on
      the commercialization potential of the Biofilm product. In absence of this
      license and in absence of any revenues expected to be realized by Biofilm from
      other sources, the Company concluded that the investment in Biofilm is other
      than temporarily impaired. Consequently, during 2006, the Company wrote-off
      the
      balance of the investment in Biofilm of approximately $665,000.




**12. NOTES
      PAYABLE**




*Notes
      Payable to Shareholders:*




During
      the year ended December 31, 2002, the Company completed a private placement
      offering for cash proceeds of $524,850. The Company issued 524,850 shares of
      common stock, issued warrants to purchase 524,850 shares of common stock at
      a
      price of $2.00 per share and issued 5% promissory notes with a face value of
      $524,325, to the investors. The principal amount and accrued interest were
      due
      on November 26, 2007. The principal and accrued interest of $593,719 was
      converted to 3,298,442 shares of common stock upon maturity.




F-24




**December
                31,****2007**
            
            **2006**(in
                thousands)Notes
                payable, with interest at 5%, fair value
            
            $
            524
            
            $
            524Less:
                Discount to record note at fair value
            
            
            (224
            )
            
            (224
            )300
            
            
            300Less:
                Notes converted into equity
            
            
            (524
            )
            
            (50
            )Amortization
                of discount to December 31, 2007
            
            
            224
            
            
            217$
            —
            
            $
            467




The
      fair
      value attributed to the notes is based upon the fair value of the underlying
      financial instruments. The discount resulting from recording the notes at fair
      value is being amortized using the effective interest method over the five-year
      term of the notes. As of December 31, 2007 and 2006, accrued interest related
      to
      these notes was $0 and $97,000 respectively. Interest expense from these notes
      for the years ended December 31, 2007, 2006 and 2005 were $29,000, $24,000
      and
      $24,000 respectively.




*Note
      Payable IRL:*




As
      partial consideration for the purchase of the pHarlo assets (see Note 12),
      Tasker issued a promissory note in the amount of $1,931,973 to IRL. The
      promissory note bears interest of 3.4% per annum and is payable in equal
      bi-weekly principal installments of $37,153, plus interest, through July 2007.
      The following schedule outlines the activity for this note during 2007 and
      2006:





**December
                31,****2007**
            
            **2006**(in
                thousands)Note
                payable, with interest at 3.4%, fair value
            
            $
            1,932
            
            $
            1,932Principal
                repayments
            
            
            (1,932
            )
            
            (1,253
            )$
            —
            
            
            679Current
                portion — Note payable — Acquisition of IRC
            
            
            —
            
            
            679Non-current
                portion — Note payable — Acquisition of IRC
            
            
            —
            
            
            —$
            —
            
            $
            679




*Short
      Term Convertible Bridge Notes:*




Between
      December 1, 2006 and May 1, 2007 the Company issued 10% Convertible Promissory
      Notes (“First Bridge Notes”) and received cash in the amount of $6,295,091. The
      First Bridge Notes had maturities six months from issuance and had various
      maturity dates starting June 1, 2007, incurred interest at 10% per annum and
      were convertible into shares of common stock at a price of $0.0725 per share,
      including interest, or other securities pursuant to the terms of the First
      Bridge Notes.  The
      related discounts and deferred financing fees were fully amortized through
      the
      maturity dates and interest continued to accrue at an annual interest rate
      of
      10%.





As
      discussed below, First Bridge Notes in the aggregate principal amount of
      $6,255,091, as well as interest thereon of $415,617, were exchanged for 6%
      Notes
      which are convertible into 92,009,765 shares of common stock at a conversion
      price of $0.0725 per share. As of December 31, 2007, First Bridge Notes in
      the
      aggregate principal amount of $40,000 had matured and remained outstanding,
      but
      no demand for payment has been made by the holders. These outstanding notes
      are
      convertible into 551,724 shares of common stock at a conversion price of $0.0725
      per share. The Company is in discussions with the note holders of the remaining
      First Bridge Notes to convert these notes and accrued interest into new notes
      and/or equity.





In
      connection with the sale of the First Bridge Notes, the Company had also issued
      to these investors four-year warrants with an exercise price of $0.09 per share.
      These warrants entitle the investors to purchase an aggregate of 34,972,733
      shares of common stock, which number of shares is based on 50% of the principal
      amount of the notes purchased by the investor and divided by the per share
      exercise price of $0.09.


F-25





All
      of
      the proceeds of the First Bridge Notes were allocated to the warrants and
      embedded beneficial conversion feature. The resulting debt discount was
      amortized as additional (noncash) interest expense with a corresponding increase
      to the First Bridge Notes over the six-month term of the notes using the
      effective interest method. As of December 31, 2007, the Company had fully
      amortized the debt discount to interest expense.





In
      recording the First Bridge Notes, the Company first allocated the proceeds
      from
      the sale of the First Bridge Notes between the First Bridge Notes and the
      warrants based upon their relative fair values, resulting in the recognition
      of
      a debt discount of approximately $1,666,000. The value of the warrants was
      computed using the Black-Scholes option pricing model. Second, in accordance
      with EITF No. 00-27, “Application of Issue 98 **-** 5 to
      Certain Convertible Instruments” after allocating a portion of the First Bridge
      Note proceeds to the warrants, the Company calculated the value of the embedded
      beneficial conversion feature in the note by comparing the carrying value of
      the
      proceeds, net of the initial debt discount, to the fair value of the shares
      issuable upon conversion of the debentures. If there is a beneficial conversion,
      it is recognized, as an additional debt discount to the extent of the remaining
      proceeds. The Company recognized an additional debt discount of $4,629,000
      for
      the embedded beneficial conversion feature.





As
      compensation for its services as placement agent for the First Bridge Notes,
      Indigo Securities, LLC received cash in the amount of approximately $629,500
      and
      seven-year warrants to purchase an aggregate of approximately 8,682,894 shares
      of the Company’s common stock at an exercise price of $0.0725 per share. These
      warrants contain a "cashless exercise" option. The total fee of $1,721,000,
      including the fair value of the warrants issued, has been recorded as deferred
      financing costs and was amortized as additional (noncash) interest expense
      over
      the life of the notes using the effective interest method. On March 6, 2007,
      the
      Company issued 2,000,000 shares of its common stock to this placement agent
      pursuant to the cashless exercise of 2,983,051 of these warrants.





In
      June
      2007, the Company received cash in the amount of $2,000,000 from one investor.
      In exchange for the cash received, the Company issued to the investor 10%
      Convertible Promissory Notes (the “Second Bridge Note”), which were convertible
      into shares of common stock at a conversion price of the lower of $0.16 per
      share or 90% of the per share amount of a subsequent private placement or if
      such private placement was not completed by July 4, 2007, the lower of $0.16
      per
      share or 80% of the per share amount of a subsequent private placement. In
      conjunction with the Second Bridge Note, the Company issued to the investor
      four-year warrants to purchase 1,000,000 shares of common stock at an exercise
      price of $0.20 per share. These warrants were valued at $155,000. The
      subsequent private placement was completed on September 28, 2007 with the
      issuance of the 6% Notes and the related warrants.  Even though the Company
      did not complete the subsequent private placement before July 4, 2007, the
      Company did not issue to the holder of the Second Bridge Note additional
      warrants and did not issue to such holder in exchange for the Second Bridge
      Note a 6% Note at a conversion price of 80% of the per share
      amount of the subsequent private placement but issued such
      6% Note at a conversion price of 90% of the per share amount of
      the subsequent private placement. In exchange for these concessions by the
      investor, the Company issued to the investor additional warrants
      in connection with this investor’s participation in the subsequent private
      placement as compared to warrants issued to other investors.





As
      compensation for its services as placement agent for the Second Bridge Note,
      Indigo Securities, LLC received cash in the amount of $200,000 and will receive
      seven-year warrants to purchase 2,020,202 shares of common stock at an exercise
      price of $0.099 valued at $214,000. The placement agent warrants also contain
      a
“cashless exercise” option.





Because
      the terms of the warrants issued to the holder of the Second Bridge Note and
      the
      placement agent may cause the potential number of shares issuable on conversion
      to be indeterminable (due to an anti-dilution provision in the event the Company
      does a subsequent financing which event the Company cannot assert is
      improbable), the conversion option and warrants are required to be recorded
      as
      derivative liabilities (See Note 2). At December 31, 2007 the investor and
      the
      placement agent warrants were valued at $263,000 and $568,000 and include in
      the
      caption derivative liabilities on the accompanying consolidated balance sheet.
      As discussed below, the Second Bridge Note, as well as interest thereon, was
      exchanged for 6% Notes. Therefore, as of December 31, 2007, no derivative
      conversion liability related to the Second Bridge Note remained
      outstanding.


F-26




**December
                31,****2007**
            
            
            **2006****(in
                thousands)**First
                and Second Bridge Notes, with interest at 10%
            
            $
            8,295
            
            $
            1,920Less:
                Discount to warrants and beneficial conversion features
            
            
            (7,011
            )
            
            (1,920
            )1,284
            
            
            —Amortization
                of discount to December 31, 2007
            
            
            7,011
            
            
            320Less
                Bridge Notes exchanged for 6% Notes
            
            
            (8,255
            )
            
            —$
            40
            
            $
            320




*Long-term
      6% Convertible Notes:*




On
      September 28, 2007, the Company issued 6% Secured Convertible Promissory Notes
      (the “6% Notes”) to accredited investors in the aggregate principal amount of
      $11,643,624. The aggregate consideration of $11,643,624 was in the form of
      cash
      of $3,450,000, convertible at $0.11 per share, the exchange of First Bridge
      Notes with an aggregate principal amount of $5,755,000, net of unamortized
      debt
      discount of $164,000 and the accrued interest thereon of $375,000 convertible
      at
      $0.0725 per share and the exchange of Second Bridge Notes with an aggregate
      principal amount of $2,000,000 and the accrued interest thereon of $64,000,
      convertible at $0.099 per share. Through December 31, 2007, additional 6% Notes
      were issued to accredited investors in the aggregate principal amount of
      $1,040,972. The aggregate consideration of $1,040,972 was in the form of cash
      of
      $500,000, convertible at $0.11 per share and the exchange of First Bridge Notes
      with an aggregate principal amount of $500,000 and the accrued interest thereon
      of $40,972 convertible at $0.0725 per share. The principal amount of the 6%
      Notes is due three years from the date of initial issuance, maturing on
      September 27, 2010. Interest is payable quarterly in cash or by issuance of
      new
      notes. Each investor of the 6% Notes received four-year warrants at an exercise
      price of $0.15 per share (the “Warrants”) to purchase shares of the Company
      common stock; the number of which is based on the form of consideration used
      to
      purchase the 6% Notes. The 6% Notes in the aggregate are convertible at
      conversion prices as noted above into approximately 148,766,219 shares of the
      Company common stock. The Warrants entitle the holders thereof to purchase
      an
      aggregate of approximately 35,010,182 shares of the Company common stock. The
      placement agent of the 6% Notes which were issued for cash consideration
      received, in the aggregate, a cash fee of approximately $395,000 and seven-year
      warrants to purchase an aggregate of approximately 3,590,909 shares of the
      Company common stock at an exercise price of $0.11 per share.




Because
      the terms of the instruments cause the potential number of shares issuable
      on
      conversion to be indeterminable (due to an anti-dilution provision in the event
      the Company does a subsequent financing which event the Company cannot assert
      is
      improbable) which is not limited by the terms of the agreement, and the Company
      is unable to assure it will have sufficient available shares to issue upon
      conversion of all convertible instruments, the conversion option and warrants
      are required to be recorded as derivative liabilities (See Note 2). The initial
      amounts recorded for these derivative liabilities are approximately $8,476,000
      for the warrants and approximately $35,965,000 for the conversion option, which
      result in a debt discount of $12,684,000, extinguishment of a derivative
      conversion liability related to the Second Bridge Notes of approximately
      $8,002,000, remaining unamortized deferred financing costs of approximately
      $3,000, resulting expenses recorded as a financing cost of approximately
      $7,427,000 and a loss on refinancing of existing debt of approximately
      $16,540,000.




As
      of
      December 31, 2007, consistent with the terms of the original 6% Notes, we issued
      additional 6% Notes in the aggregate principal amount of $34,859 to eleven
      holders of such original 6% Notes in lieu of a cash interest payment (the
“Interest Notes”). The Interest Notes, which are materially identical in their
      terms to the original 6% Notes issued in exchange for First Bridge Notes, are
      convertible into an aggregate of 371,612 and 71,970 shares of our common stock
      at conversion prices of $0.0725 and $0.11 per share respectively. A debt
      discount of $35,000, a financing cost of $37,000 and a derivative conversion
      liability of $72,000 were recorded in connection with the issuance of the
      Interest Notes. The net carrying amount of all of the 6% Notes at December
      31,
      2007 is $945,000.


F-27




**December
                31,****2007**
            
            
            **2006****(in
                thousands)**Convertible
                Notes, with interest at 6%
            
            $
            12,719
            
            $
            —Less:
                Discount to warrants and beneficial conversion features
            
            
            (12,719
            )
            
            —$
            —
            
            $
            —Amortization
                of discount to December 31, 2007
            
            
            1,522
            
            
            —Less
                Notes Converted to Common Stock
            
            
            (577
            )
            
            —$
            945
            
            $
            —




As
      of
      December 20, 2007, the Company issued 6% Secured Convertible Promissory Notes
      due December 2010 (the “December 6% Notes”) in an aggregate principal amount of
      $2,032,546 and warrants to purchase an aggregate of 2,710,061 shares of our
      common stock at an exercise price of $0.15 per share (the “December Warrants”).
      The Company issued these securities in lieu of common stock in connection with
      its solicitation of the exercise of warrants to purchase common stock at an
      exercise price of $0.09 per share (the “Tender Offer”). The gross proceeds from
      the warrant exercise (approximately $2.0 million) were released from escrow
      on
      December 31, 2007. A Tender Offer Statement on Schedule TO relating to the
      solicitation of the exercise of the warrants was filed with the Securities
      and
      Exchange Commission on November 21, 2007 (File Number 005-78706), as amended
      on
      January 4, 2008. The placement agent received a cash fee of $203,254 and
      seven-year warrants to purchase 2,258,382 shares of our common stock in
      connection with the Tender Offer.




Because
      the terms of the instruments cause the potential number of shares issuable
      on
      conversion to be indeterminable (due to an anti-dilution provision in the event
      the Company does a subsequent financing which event the Company cannot assert
      is
      improbable) which is not limited by the terms of the agreement, and the Company
      is unable to assure it will have sufficient available shares to issue upon
      conversion of all convertible instruments, the conversion option and warrants
      are required to be recorded as derivative liabilities (See Note 2). The initial
      amounts recorded for these derivative liabilities are approximately $337,000
      for
      the warrants and approximately $2,732,000 for the conversion option, which
      results in a debt discount of $2,033,000 and a financing cost of $1,036,000.
      The
      net carrying amount of the December 6% Notes at December 31, 2007 is
      $20,000.




**December
                    31,****2007**
                
                **2006****(in
                    thousands)**December
                    Convertible Notes, with interest at 6%
                
                $
                2,033
                
                $
                —Less:
                    Discount to warrants and beneficial conversion features
                
                
                (2,033
                )
                
                —$
                —
                
                $
                —Amortization
                    of discount to December 31, 2007
                
                
                20
                
                
                —$
                20
                
                $
                —




F-28


*6%
      Notes purchased by related parties*




On
      December 1, 2006, Greg Osborn, Executive Chairman and a director of the Company,
      purchased First Bridge Notes in the principal amount of $25,000, which notes
      are
      convertible into 344,828 shares of common stock, and warrants to purchase
      138,888 shares of our common stock with an exercise price of $0.09 per share.
      On
      September 28, 2007, Mr. Osborn exchanged these First Bridge Notes and the
      accrued interest thereon for 6% Notes in the aggregate amount of $27,132, which
      notes are convertible into 374,234 shares of common stock, and received warrants
      to purchase 50,000 shares of common stock with an exercise price of $0.15 per
      share.






On
      December 1, 2006, January 31, 2007 and February 21, 2007, Lanny Dacus,
      President, Chief Executive Officer and a director of the Company, purchased
      First Bridge Notes in the aggregate principal amount of $87,500, which notes
      are
      convertible into 1,206,897 shares of common stock, and warrants to purchase
      486,111 shares of our common stock with an exercise price of $0.09 per share.
      On
      September 28, 2007, Mr. Dacus exchanged these First Bridge Notes and the accrued
      interest thereon for 6% Notes in the aggregate amount of $94,063, which notes
      are convertible into 1,297,421 shares of common stock, and received warrants
      to
      purchase 175,000 shares of common stock with an exercise price of $0.15 per
      share. On December 20, 2007, Mr. Dacus exercised warrants to purchase 486,111
      shares of our common stock, and received a note for $43,750 convertible into
      486,111 shares of common stock, and warrants to purchase 58,333 shares of common
      stock with an exercise price of $0.15 per share. On December 31, 2007 Mr. Dacus
      elected to receive the quarterly interest due on the September 2007 6% Notes
      in
      the form of a new 6% note in lieu of cash. This note is convertible into 20,542
      shares of common stock at a conversion price of $0.0725 per share.






On
      January 25, 2007, Joseph Carfora, a director of the Company, purchased First
      Bridge Notes in the principal amount of $20,000, which notes are convertible
      into 275,862 shares of common stock, and warrants to purchase 111,111 shares
      of
      our common stock with an exercise price of $0.09 per share. On September 28,
      2007, Mr. Carfora exchanged these First Bridge Notes and the accrued interest
      thereon for 6% Notes in the aggregate amount of $21,361, which notes are
      convertible into 294,634 shares of common stock, and received warrants to
      purchase 40,000 shares of common stock with an exercise price of $0.15 per
      share. On November 29, 2007, Mr. Carfora purchased an additional $5,000
      aggregate principal amount of 6% Notes for cash, which notes are convertible
      into 45,454 shares of common stock. In connection with his cash purchase, Mr.
      Carfora also received warrants to purchase 16,667 shares of common
      stock.




On
      May 1,
      2007, Timothy Lane, a director of the Company, purchased First Bridge Notes
      in
      the principal amount of $50,000, which notes were convertible into 689,655
      shares of common stock, and warrants to purchase 69,444 shares of our common
      stock. On September 28, 207, Mr. Lane exchanged these First Bridge Notes and
      the
      accrued interest thereon for 6% Notes in the aggregate amount of $52,069, which
      notes are convertible into 718,193 shares of common stock, and received warrants
      to purchase 100,000 shares of common stock.




On
      February 14, 2007, Leonid Frenkel, who resigned as director of the Company
      on
      June 1, 2007, purchased First Bridge Notes in the principal amount of $250,000,
      which notes were convertible into 3,448,276 shares of common stock, and warrants
      to purchase 1,388,888 shares of our common stock. On April 12, 2007,
      Mr. Frenkel purchased additional First Bridge Notes in the principal amount
      of $200,000, which notes were convertible into 2,758,621 shares of common stock,
      and additional warrants to purchase 1,111,111 shares of our common stock. Under
      the terms of the additional notes and the additional warrant agreements,
      Mr. Frenkel could not convert any of these additional notes or exercise any
      of these additional warrants if his ownership of our common stock exceeded
      4.99%
      or 9.99% of our outstanding stock as calculated according to Section 13(d)
      of the Exchange Act, unless all outstanding First Bridge Notes were converted.
      Either of the 4.99% or 9.99% limitations could be waived by Mr. Frenkel on
      61
      days notice. On September 28, 2007, Mr. Frenkel exchanged these First Bridge
      Notes and the accrued interest thereon for 6% Notes in the aggregate amount
      of
      $474,958, which notes are convertible into 6,551,149 shares of common stock,
      and
      received warrants to purchase 900,000 shares of common stock.


F-29


On
      January 25, 2007, Frederick Ledlow, a director of the Company, purchased First
      Bridge Notes in the principal amount of $12,500, which notes are convertible
      into 172,414 shares of common stock, and warrants to purchase 69,444 shares
      of
      our common stock. On September 28, 2007, Mr. Ledlow exchanged these First Bridge
      Notes and the accrued interest thereon for 6% Notes in the aggregate amount
      of
      $13,351, which notes are convertible into 184,152 shares of common stock, and
      received warrants to purchase 25,000 shares of common stock. On December 20,
      2007, Mr. Ledlow exercised warrants to purchase 69,444 shares of our common
      stock and received a note for $6,250 convertible into 69,444 shares of common
      stock and warrants to purchase 8,333 shares of common stock with an exercise
      price of $0.15 per share.




On
      January 25, 2007, Peter O’Gorman, a director of the Company, purchased First
      Bridge Notes in the principal amount of $25,000, which notes are convertible
      into 344,828 shares of common stock, and warrants to purchase 344,828 shares
      of
      our common stock. On September 28, 2007, Mr. O'Gorman exchanged these First
      Bridge Notes and the accrued interest thereon for 6% Notes in the aggregate
      amount of $26,701, which notes are convertible into 50,000 shares of common
      stock, and received warrants to purchase 25,000 shares of common stock. On
      December 20, 2007, Mr. O’Gorman exercised warrants to purchase 138,889 shares of
      our common stock and received a note for $12,500 convertible into 138,889 shares
      of common stock and warrants to purchase 16,667 shares of common stock with
      an
      exercise price of $0.15 per share.




**13. ACQUISITION
      OF PHARLO ASSETS**




On
      July
      15, 2005, the Company executed an asset purchase agreement (the “Asset Purchase
      Agreement”) whereby the Company purchased all of the assets that relate to the
      Company’s product applications and fields of use (the “pHarlo assets”) from the
      Selling Entities, including, but not limited to, utility patent applications,
      equipment, inventories and existing contracts for a purchase price of $64.3
      million. In consideration of the purchase price the Company issued 18,992,388
      shares of common stock valued at approximately $56.98 million, issued a
      promissory note in the approximate amount of $1,932,000, cancelled notes
      receivable totaling $2,543,000, paid cash of $1,428,000 and incurred acquisition
      costs of approximately $1,421,000.




The
      results of operations of the Selling Entities have been included in the
      Company’s Consolidated Statements of Operations since July 15, 2005, the
      acquisition date.




The
      following unaudited proforma information gives effect to the acquisition as
      if
      it had occurred on the first day of the period ended:




**December
                31, 2005**Total
                revenues
            
            $
            705Net
                loss
            
            
            (20,033
            )Loss
                per share, basic and diluted
            
            $
            (0.24
            )


F-30




**14.**  **INCOME
      TAXES**




A
      reconciliation of income tax expense to the benefit computed at the statutory
      rate of 34% for the years ended December 31, 2007, 2006 and 2005 is
      approximately as follows:




**2007**
            
            **2006**
            
            **2005**Benefit
                at statutory rate
            
            $
            (14,074
            )
            $
            (21,400
            )
            $
            (6,211
            )Non-cash
                interest and losses attributable to derivative conversion
                liabilities
            
            
            8,517
            
            
            —
            
            
            —Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            165Beneficial
                conversion feature
            
            
            —
            
            
            92
            
            
            —State
                and local taxes, net of federal benefit
            
            
            (2,484
            )
            
            (3,777
            )
            
            (1,096
            )Adjustment
                of prior year accrual
            
            
            (23
            )
            
            (324)
            
            
            —Change
                in valuation allowance
            
            
            8,041
            
            
            25,390
            
            
            (367
            )Other
            
            
            23
            
            
            19
            
            
            (36
            )$
            —
            
            $
            —
            
            $
            —





Significant
      components of the Company’s deferred income tax assets and liabilities at
      December 31, 2007 and 2006 are approximately as follows:





**2007**
            
            **2006**Deferred
                tax assets:Net
                operating losses
            
            $
            20,086
            
            $
            13,355Intangible
                assets and goodwill
            
            
            14,654
            
            
            16,038Stock
                -based compensation
            
            
            5,931
            
            
            3,409Reserves
            
            
            936
            
            
            1,236Valuation
                allowance
            
            
            (41,607
            )
            
            (33,566
            )Net
                deferred tax assets
            
            $
            —
            
            $
            472Deferred
                tax liabilities:Depreciation
                & Amortization
            
            $
            —
            
            
            (12
            )Beneficial
                Conversion
            
            
            —
            
            
            (460)Total
                deferred tax liabilities
            
            
            —
            
            
            (472
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —





As
      of
      December 31, 2007, the Company has a U.S. Federal net operating loss carry
      forward of approximately $50.0 million, which will expire commencing 2019
      through 2027, if not utilized. Under Internal Revenue Code Section 382, the
      amounts of and benefits from net operating loss carry forwards may be impaired
      or limited in certain circumstances. Events that cause limitations in the amount
      of net operating losses that the Company may utilize in any one year include,
      but are not limited to, a cumulative ownership change of more than 50%, as
      defined over a three year period. The amount of such limitation, if any, has
      not
      been determined.




Management
      of the Company has decided to record a valuation allowance for its full net
      deferred tax asset, as it is more likely than not that the Company will not
      be
      able to utilize these deferred tax assets against future income, in addition
      to
      possible limitations of the net operating losses due to various changes in
      ownership over the past year. Our valuation allowance increased $8,041,000
      and
      $24,929,000 during the years ended December 31, 2007 and 2006,
      respectively.


F-31




**15. COMMITMENTS
      AND CONTINGENCIES**




*Patent
      and Technology Sub-License Agreement with pHarlo IP*




In
      connection with the 2005 Acquisition, the Company entered into a Patent and
      Technology Sub-License Agreement with pHarlo IP, LLC (“pHarlo IP”), in which
      pHarlo IP has agreed to provide to the Company technical assistance necessary
      to
      implement, refine and exploit the base patents to the pHarlo technology in
      the
      Company’s fields of use. In consideration for the technical assistance, the
      Company agreed to pay to pHarlo IP certain research and development fees
      (“R&D Fees”). The R&D Fees may be subject to recovery by the Company in
      certain circumstances described below.




On
      January 26, 2006 the Patent and Technology Sub-License Agreement was amended
      to
      restructure the R&D Fees payable to pHarlo IP, eliminating the requirement
      for advance payments of contractually specified amounts in lieu of quarterly
      payments in arrears based on actual sales of products using the pHarlo
      technology. The amended Sub-License Agreement provided for minimum fees of
      $150,000, capped at $500,000, for fiscal 2006. There are no other minimum
      R&D Fees payable after 2006, although R&D Fees for all subsequent years
      are capped at specified rates. In the fiscal year 2007 the Company paid $84,478
      and accrued $39,819 under this agreement.




*Wynn
      Starr Agreement*




In
      2004
      the Company entered into an Exclusive Field of Use License Agreement and Product
      Sale Agreement with Wynn Starr Special Products, LLC. Under the terms of this
      agreement, as amended through January 23, 2007, the Company has granted Wynn
      Starr the exclusive, worldwide right to market and distribute products used
      as
      post-harvesting processing aids for the poultry industry based on the pHarlo
      technology. In return for this license, Wynn Starr will purchase licensed
      products from the Company and will withhold up to 25% of the net sale price
      per
      gallon sold, based on different increments of achieved net sale prices. The
      Amended agreement also includes other target performance criteria such that,
      if
      met by Wynn Starr, the Company will issue to Wynn Starr a warrant to purchase
      up
      to 1,300,000 shares of our common stock with an exercise price based upon the
      closing price of our common stock on January 23, 2007, the date of the
      amendment. These performance criteria were not met and the Company did not
      issue
      any warrants to Wynn Starr. As of December 31, 2007, the Company had paid
      $42,000 to Wynn Starr and had
      a
      receivable of approximately $6,700 from Wynn Starr, net of amounts owed to
      Wynn
      Starr ,
      under
      this royalty arrangement. Steven B. Zavagli, a former member of our board of
      directors, is the founder, Chairman and the Chief Executive Officer of Wynn
      Starr and Wynn Starr’s ultimate parent company, Wynn Starr Flavors, Inc. We have
      recently notified Wynn Starr of our rescission and termination of the Wynn
      Starr
      Agreement.




*Litigation
      and Claims*




The
      Company is involved in certain legal proceedings and is subject to certain
      lawsuits, alleged claims and regulations in the ordinary course of its business.
      Although the ultimate effect of these matters is often difficult to predict,
      the
      Company believes that their resolution will not have a material adverse effect
      on the Company’s financial statements.




*Employment
      Agreements*




In
      December 2006, Lanny R. Dacus was appointed President and Chief Executive
      Officer of the Company. In connection with this appointment, the Company entered
      into an employment agreement with Mr. Dacus. Under the terms of the agreement,
      Mr. Dacus will receive a base salary of $60,000 per year and the right to
      participate in the Company’s existing benefit plans, with bonus payments to be
      made at the discretion of the Board of Directors. The Company will provide
      Mr.
      Dacus with a Company automobile during the term of the employment agreement.
      The
      Company also granted warrants to purchase 4,777,778 shares of common stock
      at an
      exercise price of $0.11 per share and 1,652,778 shares of common stock at an
      exercise price of $0.12 per share to Mr. Dacus in connection with this
      agreement. The warrants have a ten- year term and vest over a two-year period
      ($0.11per share options) and on March 31, 2007 ($0.12 per share options) from
      the date of grant. The Company granted additional warrants to purchase
      11,569,444 shares of common stock, with exercise prices of $0.12 to $0.18 and
      vesting terms contingent upon Mr. Dacus’ achievement of contractually specified
      performance goals.


F-32


In
      April
      2007, the Company entered into an employment agreement with Greg Osborn in
      connection with his appointment as Executive Chairman. The agreement provides
      for, among other things, a term of up to 21 months, an annual salary of $60,000,
      an annual bonus at the discretion of the board, the grant of initial warrants
      for the purchase of 2,625,000 shares of common stock exercisable on a quarterly
      basis over the term of the agreement at an exercise price of $0.19 per share,
      the grant of additional warrants exercisable for 7,500,000 shares of common
      stock at an exercise price of $0.19 per share with vesting contingent upon
      achievement of contractually specified performance goals, severance payments
      and
      a cash payment of $20,000 per month for a period of nine months commencing
      when
      the Company reaches profitability. Mr. Osborn is the Managing Partner of
      the firm that served from December 2006 to December 2007 as placement agent
      for
      the offering of the First Bridge Notes, the Second Bridge Notes, the 6% Notes
      and the December 6% Notes in the Tender Offer.




On
      February 8, 2006, the Company appointed Stathis Kouninis as Chief Financial
      Officer. On May 10, 2007, the Company entered into an amended and restated
      employment agreement, effective April 2, 2007, with Stathis Kouninis, the
      Company’s Chief Financial Officer, which provides for: (i) a base salary of
      $185,000 per year; (ii) an annual bonus payment at the discretion of the Chief
      Executive Officer; (iii) a bonus in the amount of $15,000 if the Company
      consummate a financing in the amount of at least $3,000,000; and (iv)
      eligibility to participate in the Company existing benefit plans. The Company
      will provide Mr. Kouninis with an automobile during the term of his employment
      agreement and will reimburse Mr. Kouninis for all reasonable automobile
      expenses. If Mr. Kouninis’ employment is terminated by us for any reason other
      than Cause, as defined in his employment agreement, or if he should resign
      for
      Good Reason, as defined in his employment agreement, or in the event of the
      death or disability of Mr. Kouninis during the term of his employment agreement,
      Mr. Kouninis will be entitled to a lump sum payment equal to six months of
      his
      base salary at the rate in effect on the date of termination of his employment,
      provided he executes a mutually agreeable release of claims against us. In
      the
      event Mr. Kouninis’ employment is terminated by the Company for any reason other
      than Cause or if he should resign for Good Reason, the Company will also pay
      the
      cost of Mr. Kouninis’ group family health insurance coverage for a period of six
      months. The employment agreement further provides that all stock options and
      warrants previously granted to Mr. Kouninis will fully vest upon a Change in
      Control, as defined in the employment agreement, or if Mr. Kouninis’ employment
      is terminated by the Company for any reason other than Cause or if he should
      resign for Good Reason. The term of the employment agreement is for two years
      with automatic renewals for successive one year periods. “Cause,” “Good Reason”
and “Change of Control” as defined in Mr. Kouninis’ employment agreement have
      substantially the same meanings as such terms are defined in Mr. Dacus’
employment agreement. See Note 3 to the Grants in 2006 of Plan Based Awards
      Table and Note 1 to the table in “Employment Agreements — Lanny R.
      Dacus.”




*Severance
      payments*




As
      of
      December 14, 2006, Richard Falcone resigned as Chief Executive Officer and
      a
      director of the Company. In connection with his resignation Mr. Falcone entered
      into an agreement with the Company pursuant to which the Company agreed to
      pay
      Mr. Falcone a settlement payment of $150,000. Also under the Agreement Mr.
      Falcone retained stock options to purchase 2,600,000 shares of the Company’s
      common stock, the terms of which were amended to accelerate the vesting, allow
      for cashless exercise and reduce the exercise price to $0.11 per share. Mr.
      Falcone was also granted the continued use of an automobile leased by the
      Company and is entitled to reimbursement of medical insurance costs through
      December 31, 2007.




*Operating
      leases*




On
      April
      19, 2005, the Company entered into a five -year lease effective May 1, 2005,
      for
      corporate offices in Danbury, Connecticut, at an annual base rent of $173,660,
      subject to modest annual increases thereafter. Effective October 1, 2007, the
      Company relocated its Corporate Office from Danbury, Connecticut, to Fairlawn,
      New Jersey. As a result of this relocation, the Company leased in Fair Lawn,
      New
      Jersey 2,000 square feet of office space under a lease that expires in October
      2010 at an annual base rent of $36,000. Also in connection with this relocation,
      the company is pursuing alternatives of restructuring its Danbury, Connecticut
      office lease and has accrued $249,000
      of office lease exit costs, net of estimated sublease income, related to this
      lease. As
      part
      of the 2005 Acquisition, the Company assumed a five-year lease for
      manufacturing, warehousing and office space at an annual base rent of $114,000.


F-33




Future
      aggregate minimum annual rental payment for these facility leases, for the
      next
      five years, is shown in the schedule below. In addition, the annual lease
      expense for leased vehicles is approximately, $16,000, $5,000 and $3,000 for
      the
      years ended December 31, 2007, 2008 and 2009, respectively.


**Future
                    Minimum Facility Lease Payments**2008
                
                $
                3362009
                
                
                3132010
                
                
                962011
                
                
                —Total
                
                $
                745




Rent
      expense for the years ended December 31, 2007, 2006 and 2005 was approximately
      $255,000, $304,000 and $340,000, respectively.




In
      March
      2007, the Company’s board of directors approved that the Company enter into an
      employment agreement with Mr. Greg Osborn in connection with his appointment
      as
      Director and Chairman of the Board of Directors. Mr. Osborn is the Managing
      Partner of the placement agent for the First Bridge Notes, the Second Bridge
      Notes, the 6% Notes and the December 6% Notes in the Tender Offer. (See Note
      12)




**16. SEGMENTS
      — ENTERPRISE WIDE DISCLOSURES**




The
      Company owns several utility patents that allow it to produce, market and
      distribute certain product applications related to these utility patents. In
      2005, the Company began selling two product applications, Unifresh(R) Footbath
      and Close Call(R) and then added Tasker Pacific Blue(TM) Seafood Wash and
      Unifresh(R) Pen Spray products. The Chief Operating Decision Maker (CODM) of
      the
      Company is the President and CEO. The operating results of each product
      application, other than for revenues, are not separately tracked or reported.
      Operating results by product application are not reviewed by the CODM because
      discrete financial information is not available. Consequently, as permitted
      by
      the provisions of SFAS No. 131, “Disclosure About Segments of an Enterprise and
      Related Information,” the Company has one reportable segment for financial
      statement purposes.




*Revenue
      by Product*




The
      Company’s revenue by product is as follows for each of the years ended (in
      thousands):




**December
                31,****2007**
            
            **2006**Unifresh(R)
                Footbath
            
            $
            1,393
            
            $
            1,147Close
                Call(R)
            
            
            1
            
            
            174Tasker
                Pacific Blue(TM) Seafood Wash
            
            
            25
            
            
            5Tasker
                Blue Poultry Processing
            
            
            1,182
            
            
            160$
            2,601
            
            $
            1,486


F-34




*Dependence
      on Certain Customers*




For
      the
      years ended December 31, 2007 and 2006, there were three customers in each
      year
      that accounted for 10% or more of the Company’s consolidated revenue. The
      Company’s dependence on those customers as a percentage of total revenues is as
      follows:







**December
                31,****2007**
            
            **2006**Customer
                A
            
            —
            
            28
            %Customer
                B
            
            
            12
            %
            
            12
            %Customer
                C
            
            
            27
            %
            
            11
            %Customer
                D
            
            
            14
            %
            
            —







*Accounts
      Receivable Concentration*




Balances
      due to these customers as a percentage of accounts receivable for the respective
      years at December 31, 2007 and 2006 were as follows:




**December
                31,****2007**
            
            **2006**Customer
                A
            
            
            —
            
            
            7
            %Customer
                B
            
            
            —
            
            
            —Customer
                C
            
            
            13
            %
            
            68
            %Customer
                D
            
            
            21
            %
            
            —




**17. QUARTERLY
      RESULTS OF OPERATIONS (UNAUDITED)**




The
      following is a summary of the unaudited quarterly results of operations:




**Quarter
                Ended****(in
                thousands, except per share amounts)**
            
            **March
                31,**
              **2007**
            
            **June
                30,**
              **2007**
            
            **September
                30,**
              **2007**
            
            **December
                31,**
              **2007**Revenues
            
            $
            426
            
            $
            632
            
            $
            693
            
            $
            850Gross
                margin
            
            
            331
            
            
            559
            
            
            469
            
            
            622Net
                Income (loss)
            
            
            (5,881
            )
            
            (8,047
            )
            
            (38,311
            )
            
            10,845Net
                Income ( loss) per share — basic and dilutive
            
            $
            (0.06
            )
            $
            (0.07
            )
            $
            (0.35
            )
            $
            0.09





**Quarter
                Ended****March
                31,**
              **2006**
            
            **June
                30,**
              **2006**
            
            **September
                30,**
              **2006**
            
            **December
                31,**
              **2006**Revenues
            
            $
            221
            
            $
            537
            
            $
            531
            
            $
            197Gross
                margin
            
            
            153
            
            
            392
            
            
            297
            
            
            (293
            )Net
                loss
            
            
            (4,925
            )
            
            (33,688
            )
            
            (3,651
            )
            
            (20,679
            )Net
                loss per share — basic and dilutive
            
            $
            (0.05
            )
            $
            (0.32
            )
            $
            (0.03
            )
            $
            (0.20
            )




**18. SUBSEQUENT
      EVENTS**




*6%
      Notes*





On
      January 4, 2008, the Company issued an additional December 6% Note in the
      aggregate principal amount of $100,000 (convertible into 1,111,111 shares of
      our
      common stock at an initial conversion price of $0.09 per share) and December
      Warrants to purchase an aggregate of 133,333 shares of its common stock at
      an
      exercise price of $0.15 per share. The Company issued these securities in lieu
      of common stock to an accredited investor in connection with that investor's
      exercise of its warrants to purchase common stock at an exercise price of $0.09
      per share. The Company received proceeds of $90,000 in connection with this
      transaction.




F-35




*Warrant
      and Common stock issuances*




In
      January 2008, several investors in the 6% Notes, converted $519,018 of principal
      and accrued interest into 7,158,863 restricted shares of common stock. These
      shares were not registered under the Securities Act because such issuances
      were
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933, as they were transactions by an issuer that did not involve a public
      offering of securities.




On
      January 29, 2008, an investor in a 6% Note, converted $11,000 of principal
      and
      accrued interest into 100,000 restricted shares of common stock. These shares
      were not registered under the Securities Act because such issuances were exempt
      from registration pursuant to Section 4(2) of the Securities Act of 1933,
      as they were transactions by an issuer that did not involve a public offering
      of
      securities.




In
      February 2008, several investors in the 6% Notes, converted $207,965 of
      principal and accrued interest into 2,868,478 restricted shares of common stock.
      These shares were not registered under the Securities Act because such issuances
      were exempt from registration pursuant to Section 4(2) of the Securities
      Act of 1933, as they were transactions by an issuer that did not involve a
      public offering of securities.




In
      February 2008, several investors in the 6% Notes, converted $125,012 of
      principal and accrued interest into 1,724,310 shares of common stock out of
      the
      authorized, but unissued, shares.





In
      March
      2008, several investors in the 6% Notes, converted $321,089 of principal and
      accrued interest into 4,428,810 shares of common stock out of the authorized,
      but unissued, shares.




F-36




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




TASKER
              PRODUCTS
              CORP.By:
            /s/ Stathis
              KouninisStathis
                Kouninis
              Chief
                Financial OfficerDate:
              March 31, 2008




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.


**SIGNATURE**
              
              **TITLE**
              
              **DATE**/s/
                  Greg Osborn
              
              Chairman
                of the Board
              
              March
                31, 2008Greg
                  Osborn/s/
                  Lanny Dacus
              
              President
                  and Chief Executive Officer
              
              March
                  31, 2008Lanny
                  Dacus
              
              (Principal
                  Executive Officer)/s/
                  Stathis Kouninis
              
              Chief
                  Financial Officer
              
              March
                  31, 2008Stathis
                  Kouninis
              
              (Principal
                  Financial and Accounting Officer)/s/
                  Joseph Carfora
              
              Director
              
              March
                  31, 2008Joseph
                  P. Carfora/s/
                  Timothy Lane
              
              Director
              
              March
                  31, 2008Timothy
                  Lane/s/
                  Frederick Ledlow
              
              Director
              
              March
                  31, 2008Frederick
                  G. Ledlow/s/
                  William Miller
              
              Director
              
              March
                  31, 2008William
                  P. Miller/s/
                  Peter O’Gorman
              
              Director
              
              March
                  31, 2008Peter
                  O’Gorman