UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington
      D. C. 20549





FORM
      10-Q





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





For
      the
      quarterly period ended September 30, 2008





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


For
      the
      transition period from





Commission
      file number 000-51599




OmniReliant
      Holdings, Inc.


(Exact
      name of small business issuer as specified in its charter)





Nevada
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            54-2153837
              (I.R.S.
                Employer
              Identification
                No.)





14375
      Myerlake Circle


Clearwater,
      FL 33760


(Address
      of principal executive offices)





(727)
      230-1031


(Issuer's
      telephone number)





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




Indicate
      by 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 oNon-accelerated
                filer    o
            Smaller
                reporting company x(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 o No x




The
      number of shares of the registrant's Common Stock, $0.00001 par value per share,
      outstanding as of November 14, 2008 was 14,509,225.










**Table
      of Contents**




PagePart
                I –
            Financial
                Information
            3Item
                1. Financial Statements
            3Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            53Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            57Item
                4T. Controls and Procedures
            57Part
                II –
            Other
                Information
            58Item
                1. Legal Proceedings
            58Item
                1A. Risk Factors
            58Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            58Item
                3. Defaults upon Senior Securities
            58Item
                4. Submission of Matters to a Vote of Security Holders
            58Item
                5. Other Information
            58Item
                6. Exhibits
            58Signatures
            
            59Exhibit
                IndexRule
                13a-14(a) Certification executed by Paul MorrisonSection
                1350 Certification




2


PART
      I -
      FINANCIAL INFORMATION




FORWARD-LOOKING
      STATEMENTS





This
      Form
      10-Q contains “forward-looking statements” relating to OmniReliant Holdings,
      Inc. (referred to as the “Company” or “we”, “us” or “our” in this Form 10-Q),
      which represent the Company’s current expectations or beliefs including, but not
      limited to, statements concerning the Company’s operations, performance,
      financial condition and growth. For this purpose, any statements contained
      in
      this Form 10-Q that are not statements of historical fact are forward-looking
      statements. Without limiting the generality of the foregoing, words such as
      “may”, “anticipation”, “intend”, “could”, “estimate”, or “continue” or the
      negative or other comparable terminology are intended to identify
      forward-looking statements. These statements by their nature involve substantial
      risks and uncertainties, such as credit losses, dependence on management and
      key
      personnel, variability of quarterly results, and the ability of the Company
      to
      continue its growth strategy and competition, certain of which are beyond the
      Company’s control. Should one or more of these risks or uncertainties
      materialize or should the underlying assumptions prove incorrect, actual
      outcomes and results could differ materially from those indicated in the
      forward-looking statements.





Any
      forward-looking statement speaks only as of the date on which such statement
      is
      made, and the Company undertakes no obligation to update any forward-looking
      statement or statements to reflect events or circumstances after the date on
      which such statement is made or to reflect the occurrence of unanticipated
      events. New factors emerge from time to time and it is not possible for
      management to predict all of such factors, nor can it assess the impact of
      each
      such factor on the business or the extent to which any factor, or combination
      of
      factors, may cause actual results to differ materially from those contained
      in
      any forward-looking statements.





3


**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


**CONSOLIDATED
      BALANCE SHEET**


September
                  30,
              
              June
                  30,**ASSETS**
              
              2008
              
              2008(Unaudited)Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,146,450
              
              $
              4,435,814Accounts
                  receivable
              
              
              22,301
              
              
              48,231Inventory
              
              
              256,193
              
              
              232,425Notes
                  receivable
              
              
              104,966
              
              
              2,051,714Allowance
                  for doubtful note
              
              
              --
              
              
              (2,051,714
              )Prepaid
                  expenses
              
              
              135,076
              
              
              69,200Total
                  current assets
              
              
              1,664,986
              
              
              4,785,670Property,
                  plant, and equipment, net of $40,420 accumulated
                  depreciation:
              
              
              2,710,564
              
              
              --Other
                  assets:Intangible
                  assets, net of accumulated amortization of $692,196 and $623,804
              
              
              1,310,120
              
              
              1,278,512Investments,
                  available for sale
              
              
              655,200
              
              
              426,558Investment,
                  cost
              
              
              100,000
              
              
              --Deferred
                  financing costs, net of accumulated amortization of $86,747 and
                  $30,287
              
              
              1,021,777
              
              
              1,078,237Loan
                  costs
              
              
              61,838
              
              
              --Security
                  deposits
              
              
              11,285
              
              
              --Total
                  other assets
              
              
              3,160,220
              
              
              2,783,307Total
                  assets
              
              $
              7,535,770
              
              $
              7,568,977**LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                  liabilities:Accounts
                  payable
              
              $
              208,186
              
              $
              96,381Accrued
                  expenses
              
              
              122,458
              
              
              14,000Derivative
                  liabilities
              
              
              3,888,599
              
              
              6,361,100Total
                  current liabilities
              
              
              4,219,243
              
              
              6,471,481Long
                  term liabilities:Security
                  deposits on leases
              
              
              11,734
              
              
              --Total
                  long term liabilities
              
              
              11,734
              
              
              --Total
                  Liabilities
              
              
              4,230,977
              
              
              6,471,481Preferred
                  stock (mezzanine)
              
              
              35,969,634
              
              
              35,969,634Minority
                  interest
              
              
              300,009
              
              
              --Stockholders'
                  equity (deficit):Common
                  stock, $0.00001 par value; 500,000,000 shares authorized; 14,509,225
                  shares issued and outstanding
              
              
              145
              
              
              145Additional
                  paid-in capital
              
              
              32,376,137
              
              
              32,332,804Deficit
                  accumulated during development stage
              
              
              (65,341,132
              )
              
              (67,205,087
              )Total
                  shareholders' equity (deficit)
              
              
              (32,964,850
              )
              
              (34,872,138
              )Total
                  liabilities and shareholders' equity (deficit)
              
              $
              7,535,770
              
              $
              7,568,977





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.




4


**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


**UNAUDITED
      CONSOLIDATED STATEMENTS OF OPERATIONS**





Three month period ended
              September 30, 2008
            
            Three month period ended
              September 30, 2007**Product
                sales and licensing revenue:**License
                revenue
            
            $
            —
            
            $
            —Product
                sales
            
            
            103,634
            
            
            158,823Cost
                of goods sold
            
            
            44,036
            
            
            98,426Gross
                profit margin
            
            
            59,598
            
            
            60,397**Real
                estate:**Rental
                revenue
            
            
            47,696
            
            
            —Other
                real estate income
            
            
            13,740
            
            
            —Total
                real estate revenue
            
            
            61,436
            
            
            —Operating
                expenses:Sales,
                general & administrative
            
            
            496,084
            
            
            303,527Amortization
            
            
            74,887
            
            
            184,723Real
                estate expenses, excluding depreciation
            
            
            71,216
            
            
            —Depreciation
            
            
            40,420
            
            
            —Total
                operating expenses
            
            
            682,607
            
            
            488,250Operating
                loss
            
            
            (561,573
            )
            
            (427,853
            )Other
                income (expense)Derivative
                fair value adjustments
            
            
            2,472,501
            
            
            3,678,669Interest
                income
            
            
            20,947
            
            
            —Registration
                payments
            
            
            —
            
            
            (309,137
            )Interest
                expense
            
            
            (56,460
            )
            
            (215,865
            )Total
                otherincome (expense)
            
            
            2,436,988
            
            
            3,153,667Income
                (loss) before provision for income taxes and minority
                interest
            
            
            1,875,415
            
            
            2,725,814Minority
                interest
            
            
            19,990
            
            
            —Provision
                for income taxes
            
            
            —
            
            
            —Net
                income (loss)
            
            
            1,895,405
            
            
            2,725,814Reconciliation
                of net loss to loss applicable to common shareholders:Net
                income (loss)
            
            $
            1,895,405
            
            $
            2,725,814Accretion
                of preferred stock to redemption value
            
            
            —
            
            
            —Preferred
                stock dividends, in arrears
            
            
            —
            
            
            —Income
                (loss) applicable
                to common shareholders
            
            $
            1,895,405
            
            $
            2,725,814Net
                income (loss) per common share (basic)
            
            $
            0.13
            
            $
            0.19Net
                income (loss) per common share (diluted)
            
            $
            0.02
            
            $
            0.13Weighted
                average common shares outstanding Basic
            
            $
            14,485,782
            
            $
            14,000,000Diluted
            
            $
            77,277,235
            
            $
            20,225,427





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.




5


**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


**UNAUDITED
      CONSOLIDATED STATEMENTS OF OPERATIONS**





Period August 21, 2006
              (inception) to
              September 30, 2008Revenue
            
            $
            1,135,440Cost
                of goods sold
            
            
            332,394Gross
                profit margin
            
            
            803,046Operating
                expenses:Sales,
                general & administrative
            
            
            7,966,184Amortization
            
            
            1,168,468Real
                estate expenses, excluding depreciation
            
            
            71,216Depreciation
            
            
            40,420Total
                operating expenses
            
            
            9,246,288Operating
                loss
            
            
            (8,443,242
            )Other
                income (expense)Derivative
                fair value adjustments
            
            
            4,010,658Interest
                income
            
            
            54,128Extinguishment
                of other liabilities
            
            
            (271,109
            )Interest
                expense
            
            
            (476,709
            )Registration
                payments
            
            
            (542,080
            )Impairment
                in investment in ResponzeTV
            
            
            (5,776,917
            )Extinguishment
                of redeemable preferred
            
            
            (26,247,007
            )Total
                otherincome (expense)
            
            
            (29,249,036
            )Income
                (loss) before provision for income taxes and minority
                interestMinority
                interest
            
            
            19,990Provision
                for income taxes
            
            
            —Net
                income (loss)
            
            $
            (37,672,288
            )Reconciliation
                of net loss to loss applicable to common shareholders:Net
                income (loss)
            
            $
            (37,672,288
            )Accretion
                of preferred stock to redemption value
            
            
            (25,913,272
            )Preferred
                stock dividends, in arrears
            
            
            (194,468
            )Income
                (loss) applicable
                to common shareholders
            
            $
            (63,780,028
            )





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.




6


**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


**UNAUDITED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





Three month period ended
              September 30, 2008
            
            Three month period ended
              September 30, 2007Cash
                flows from operating activities:Net
                income
            
            $
            1,895,405
            
            $
            2,725,814Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Amortization
                of intangible assets & loan costs
            
            
            74,887
            
            
            184,723Amortization
                of deferred finance costs
            
            
            56,460
            
            
            215,865Depreciation
            
            
            40,420
            
            
            —Minority
                interest
            
            
            (19,990
            )
            
            —Derivative
                fair value adjustments
            
            
            (2,472,501
            )
            
            (3,678,669
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            25,930
            
            
            (160,661
            )Inventory
            
            
            (23,768
            )
            
            (92,304
            )Prepaid
                expenses
            
            
            (65,877
            )
            
            (394
            )Accounts
                payable
            
            
            111,805
            
            
            193,650Accrued
                expenses
            
            
            108,460
            
            
            —Accrued
                registration payments
            
            
            —
            
            
            309,137Accrued
                interest on loans
            
            
            (10,093
            )
            
            —Net
                cash used for operating activities
            
            
            (278,862
            )
            
            (302,839
            )Cash
                flows from investing activities:Payments
                for patents
            
            
            —
            
            
            (3,335
            )Security
                deposits
            
            
            (11,285
            )
            
            —Payments
                for licenses
            
            
            (100,000
            )
            
            —Loan
                receivable
            
            
            (104,966
            )
            
            —Investment
                in securities
            
            
            (375,000
            )
            
            —Investment
                in building and equipment
            
            
            (2,750,984
            )
            
            —Net
                cash flow from investing activities
            
            
            (3,342,235
            )
            
            (3,335
            )Cash
                flows from financing activities:Minority
                interest
            
            
            320,000
            
            
            —Security
                deposits on leases
            
            
            11,734
            
            
            —Net
                cash flow from financing activities
            
            
            331,734
            
            
            —Net
                decrease in cash and cash equivalents
            
            
            (3,289,363
            )
            
            (306,174
            )Cash
                and cash equivalents at beginning of year
            
            
            4,435,814
            
            
            711,484Cash
                and cash equivalents at end of year
            
            $
            1,146,451
            
            $
            405,310Supplemental
                cash flow information:Common
                stock issued for loan, at fair value
            
            $
            43,333
            
            $
            —





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.




7


**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


**UNAUDITED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





Period August 21, 2006
              (inception) to
              September 30, 2008Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (37,672,288
            )Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Loss
                on exchange of preferred stock
            
            
            26,247,007Impairment
                on investment in ResponzeTV
            
            
            5,776,917Share-based
                payments
            
            
            3,650,606Allowance
                on Note Receivable-ResponzeTV
            
            
            2,051,714Amortization
                of intangible assets & loan costs
            
            
            1,387,223Amortization
                of deferred finance costs
            
            
            476,709Extinguishment
                of liabilities
            
            
            271,109Depreciation
            
            
            40,420Minority
                interest
            
            
            (19,990
            )Derivative
                fair value adjustments
            
            
            (4,010,658
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (22,301
            )Inventory
            
            
            (386,193
            )Prepaid
                expenses
            
            
            (135,077
            )Accrued
                interest on loans
            
            
            (69,501
            )Accounts
                payable
            
            
            208,186Accrued
                expenses
            
            
            122,460Accrued
                registration payments
            
            
            542,080Deferred
                revenue
            
            
            (546,917
            )Net
                cash used for operating activities
            
            
            (2,088,494
            )Cash
                flows from investing activities:Security
                deposits
            
            
            (11,285
            )Payments
                for patents
            
            
            (56,811
            )Investment
                in securities
            
            
            (825,000
            )Payments
                for licenses
            
            
            (1,106,100
            )Loan
                receivable
            
            
            (2,104,966
            )Investment
                in building and equipment
            
            
            (2,750,984
            )Investment
                in ResponzeTV
            
            
            (5,100,000
            )Net
                cash flow from investing activities
            
            
            (11,955,146
            )Cash
                flows from financing activities:Proceeds
                from sale of preferred stock, net
            
            
            15,334,078Minority
                interest
            
            
            320,000Security
                deposits on leases
            
            
            11,734Purchase
                and retirement of common stock
            
            
            (475,722
            )Net
                cash flow from financing activities
            
            
            15,190,090





8





**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


**UNAUDITED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





Net
                increase in cash and cash equivalents
            
            
            1,146,450Cash
                and cash equivalents at beginning of year
            
            
            —Cash
                and cash equivalents at end of year
            
            $
            1,146,450Supplemental
                cash flow information:Series
                C Preferred and warrants issued in exchange
            
            $
            33,404,543Investment
                in ResponzeTV
            
            $
            (330,744
            )Transfer
                of inventory as part of investment in securities
            
            $
            130,000Transfer
                of sublicense as part of investment in securities
            
            $
            198,914Dividends
                paid in the form of Series C Preferred
            
            $
            309,564Common
                stock issued for patent, at fair value
            
            $
            1,140,000Common
                stock issued for license, at fair value
            
            $
            352,500Series
                D Preferred and warrants issued in exchange
            
            $
            14,047,580Common
                stock issued for loan, at fair value
            
            $
            43,333





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.





9




**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


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


**Period
      from August 21, 2006 (inception) to** **September
      30, 2008**





OtherCommon Stock
            
            Paid-in
            
            Comprehensive
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Income (Loss)
            
            Deficit
            
            TotalBalance,
                November 22, 2006 (unaudited)
            
            
            6,485,000
            
            $
            65
            
            $
            254,264
            
            $
            —
            
            $
            (254,329
            )
            $
            —Recapitalization
            
            
            7,300,000
            
            
            73
            
            
            (400,215
            )
            
            —
            
            
            254,329
            
            
            (145,813
            )Beneficial
                conversion on Series A Preferred offering (1)
            
            
            —
            
            
            —
            
            
            1,173,510
            
            
            —
            
            
            —
            
            
            1,173,510Allocation
                of deferred finance costs (2), (1)
            
            
            —
            
            
            —
            
            
            (911,135
            )
            
            —
            
            
            (157,303
            )
            
            (1,068,438
            )Placement
                agent warrants (1)
            
            
            —
            
            
            —
            
            
            2,492,312
            
            
            —
            
            
            —
            
            
            2,492,312Accretion
                to redemption value (1)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,000,000
            )
            
            (3,000,000
            )Accrual
                of dividends on Series A Preferred
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (34,167
            )
            
            (34,167
            )Net
                loss for the three months ended December 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (17,857,636
            )
            
            (17,857,636
            )Balance,
                December 31, 2006
            
            
            13,785,000
            
            $
            138
            
            $
            2,608,736
            
            $
            —
            
            $
            (21,049,106
            )
            $
            (18,440,232
            )Issuance
                related to license agreement
            
            
            15,000
            
            
            -
            
            
            52,500
            
            
            —
            
            
            —
            
            
            52,500Accrual
                of Series A Preferred dividends
            
            
            —
            
            
            -
            
            
            —
            
            
            —
            
            
            (41,687
            )
            
            (41,687
            )Net
                income for the three months ended March 31, 2007
            
            
            —
            
            
            -
            
            
            —
            
            
            —
            
            
            1,884,327
            
            
            1,884,327Balance,
                March 31, 2007
            
            
            13,800,000
            
            $
            138
            
            $
            2,661,236
            
            $
            —
            
            $
            (19,206,466
            )
            $
            (16,545,092
            )Reclassification
                of amount out additional paid in capital
            
            
            —
            
            
            —
            
            
            (49,999
            )
            
            —
            
            
            —
            
            
            (49,999
            )Reclassification
                of Series A to a liability (3), (1)
            
            
            —
            
            
            —
            
            
            (1,600,270
            )
            
            —
            
            
            —
            
            
            (1,600,270
            )Reclassification
                of warrants to liability-Series A (4)
            
            
            —
            
            
            —
            
            
            (4,202,366
            )
            
            —
            
            
            (909,504
            )
            
            (5,111,870
            )Accrual
                of Series A Preferred dividends
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (112,781
            )
            
            (112,781
            )Accrual
                of Series B Preferred dividends
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,833
            )
            
            (5,833
            )Issuance
                of 1,000,000 warrants to consultant
            
            
            —
            
            
            —
            
            
            2,471,401
            
            
            —
            
            
            —
            
            
            2,471,401Issuance
                related to patent agreement
            
            
            200,000
            
            
            2
            
            
            719,998
            
            
            —
            
            
            —
            
            
            720,000Net
                loss for the three months ended June 30, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (8,190,594
            )
            
            (8,190,594
            )Balance,
                June 30, 2007
            
            
            14,000,000
            
            $
            140
            
            $
            —
            
            $
            —
            
            $
            (28,425,178
            )
            $
            (28,425,038
            )Net
                income for the three month period ended September 30, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,725,814
            
            
            2,725,814Balance,
                September 30, 2007
            
            
            14,000,000
            
            $
            140
            
            $
            —
            
            $
            —
            
            $
            (25,699,364
            )
            $
            (25,699,224
            )





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.




10


**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


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


**Period
      from August 21, 2006 (inception) to September 30, 2008**





Beneficial
                conversion on Series C Preferred-Stock Financing (5)
            
            
            —
            
            
            —
            
            
            2,766,833
            
            
            —
            
            
            —
            
            
            2,766,833Allocation
                of deferred finance costs associated with Series C Preferred-Stock
                Financing (6), (5)
            
            
            —
            
            
            —
            
            
            (5,231,442
            )
            
            —
            
            
            —
            
            
            (5,231,442
            )Placement
                agent warrants on Series C Preferred-Stock Financing (5)
            
            
            —
            
            
            —
            
            
            5,198,797
            
            
            —
            
            
            —
            
            
            5,198,797Investor
                warrants on Series C Preferred-Stock Financing (5)
            
            
            —
            
            
            —
            
            
            3,633,167
            
            
            —
            
            
            —
            
            
            3,633,167Accretion
                to redemption value on Series C Preferred-Stock Exchange
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (6,400,000
            )
            
            (6,400,000
            )Investor
                warrants-Stock Exchange
            
            
            —
            
            
            —
            
            
            17,796,834
            
            
            —
            
            
            —
            
            
            17,796,834Registration
                payments net of dividends rolled into financing
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Reclassification
                of warrants to equity (7)
            
            
            —
            
            
            —
            
            
            4,008,912
            
            
            —
            
            
            —
            
            
            4,008,912Employee
                stock compensation
            
            
            —
            
            
            —
            
            
            450,000
            
            
            —
            
            
            —
            
            
            450,000Employee
                stock option compensation
            
            
            —
            
            
            —
            
            
            607,705
            
            
            —
            
            
            —
            
            
            607,705Employee
                exercise of stock options
            
            
            27,778
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Stock
                issued for legal work associated with Preferred C and SB-2
            
            
            35,334
            
            
            —
            
            
            77,000
            
            
            —
            
            
            —
            
            
            77,000Net
                loss for the three month period ended December 31, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (38,392,805
            )
            
            (38,392,805
            )Balance,
                December 31, 2007
            
            
            14,063,112
            
            $
            140
            
            $
            29,307,806
            
            $
            —
            
            $
            (70,492,169
            )
            $
            (41,184,223
            )Cashless
                exercise of warrants
            
            
            38,400
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Stock
                issued for patent
            
            
            200,000
            
            
            2
            
            
            419,998
            
            
            —
            
            
            —
            
            
            420,000Net
                loss for the three month period ended March 31, 2008
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            11,802,971
            
            
            11,802,971Balance,
                March 31, 2008
            
            
            14,301,512
            
            $
            142
            
            $
            29,727,804
            
            $
            —
            
            $
            (58,689,198
            )
            $
            (28,961,252
            )Preferred
                Series D issuance
            
            
            —
            
            
            —
            
            
            2,553,378
            
            
            —
            
            
            (316,615
            )
            
            2,236,763Accretion
                of Series C Preferred
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,513,273
            )
            
            (9,513,273
            )Accretion
                of Series D Preferred
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,000,000
            )
            
            (7,000,000
            )Cashless
                exercise of warrants
            
            
            131,880
            
            
            2
            
            
            (2
            )
            
            —
            
            
            —
            
            
            —Stock
                issued as compensation for services
            
            
            42,500
            
            
            1
            
            
            51,624
            
            
            —
            
            
            —
            
            
            51,625Fair
                value adjustment on available for sale securities
            
            
            —
            
            
            —
            
            
            —
            
            $
            (31,135
            )
            
            —
            
            
            (31,135
            )Net
                income for the three month period ended June 30, 2008
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            8,345,134
            
            
            8,345,134Balance,
                June 30, 2008
            
            
            14,475,892
            
            $
            145
            
            $
            32,332,804
            
            $
            (31,135
            )
            $
            (67,173,952
            )
            $
            (34,872,138
            )Stock
                issued as compensation for services
            
            
            33,333
            
            
            —
            
            
            43,333
            
            
            —
            
            
            —
            
            
            43,333Fair
                value adjustment on available for sale securities
            
            
            —
            
            
            —
            
            
            —
            
            
            (31,450
            )
            
            —
            
            
            (31,450
            )Net
                income for the three month period ended September 30, 2008
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,895,405
            
            
            1,895,405Balance,
                September 30, 2008 (Unaudited)
            
            
            14,509,225
            
            $
            145
            
            $
            32,376,137
            
            $
            (62,585
            )
            $
            (65,278,547
            )
            $
            (32,964,850
            )





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.




11


**OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY**


**(A
      Development Stage Company)**


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


**Period
      from August 21, 2006 (inception) to September 30, 2008**





Explanatory
      Notes:


(1)
            The
                initial classification of the Series A Preferred Stock was in the
                mezzanine section of the balance sheet, outside of stockholders’ equity.
                These amounts reflect the effects of the financing on stockholders’
                equity. See Note 10 for details of the
                allocation.


(2)
            Aggregate
                financing costs were allocated to deferred financing costs and paid-in
                capital based upon the relative fair values of the financial instruments
                issued in the financing. Since, as discussed in Note 10, no amount
                was
                initially allocated to the mezzanine classification, the amount associated
                with that financial instrument was recorded as a deemed
                dividend.


(3)
            As
                discussed in Note 10, the Series A Preferred fell within the scope
                of
                Statement 150 on May 22, 2007 and was re-classed to liabilities
                accordingly.


(4)
            Also,
                as discussed in Note 10, share settlement of share-indexed financial
                instruments was no longer within the Company’s control as a result of the
                variable-conversion rate in the Series A Preferred triggered on May
                22,
                2007. Warrants previously classified in stockholders’ equity required
                reclassification to derivative liabilities on that date, based upon
                their
                fair value. Amounts in excess of paid-in capital were classified
                as
                charges to accumulated deficit.


(5)
            The
                classification of the Series C Preferred Stock is in the Mezzanine
                section
                of the balance sheet outside of stockholders’ equity.


(6)
            Aggregate
                financing costs were allocated to deferred financing costs, paid
                in
                capital and Series C Preferred (Mezzanine) based upon the relative
                fair
                values of the financial instruments issued in the financing.


(7)
            Upon
                the exchange of the Series A and B Preferred Stock for Series C Preferred
                stock, there was no longer a variable conversion rate associated
                with the
                Preferred stock financings. Accordingly, share settlement was once
                again
                determined to be within the Company’s control and the warrants were
                reclassified from liabilities to stockholders’ equity.





The
      Accountant’s Report and accompanying notes are an integral part of these
      Consolidated Financial Statements.




12


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1 -
      ORGANIZATION AND NATURE OF BUSINESS:





*Organization*





Willowtree
      Advisor, Inc. ("the Company" or “OmniReliant Holdings, Inc”) was incorporated on
      June 16, 2004 under the laws of the State of Nevada to offer landscape advisory
      services. On November 22, 2006, Willowtree Advisor, Inc. entered into a
      Securities Purchase Agreement with OmniReliant Corporation (“OmniReliant”) and
      Cynthia Allison, pursuant to which OmniReliant purchased 5,000,000 shares of
      the
      Company's common stock from Ms. Allison for $475,813. Pursuant to the Common
      Stock Purchase Agreement, OmniReliant transferred the 5,000,000 shares to the
      Company for cancellation. The transaction with Ms. Allison was accounted for
      as
      a reduction of additional paid in capital.





Also
      on
      November 22, 2006, Willowtree entered into an exchange agreement pursuant to
      which the Company acquired one hundred percent (100%) of the equity of
      OmniReliant from, the stockholders of OmniReliant. Contemporaneously, the
      Company entered into to a securities purchase agreement with an accredited
      investor for the sale of convertible preferred stock and warrants for an
      aggregate purchase price of $3,000,000. As a result of the Exchange Agreement,
      OmniReliant became a wholly-owned subsidiary of the Company and the Company
      succeeded to the business of OmniReliant as its sole business.





The
      Exchange Transaction is deemed to be a reverse acquisition. In accordance with
      the Accounting and Financial Reporting Interpretations and Guidance provided
      by
      the staff of the U.S. Securities and Exchange Commission, WillowTree (the legal
      acquirer) is considered the accounting acquiree and OmniReliant (the legal
      acquiree) is considered the accounting acquirer. A reverse merger is accounted
      for as the issuance of shares of the accounting acquirer for the net-monetary
      assets or liabilities of the accounting acquiree, accompanied by a
      recapitalization of stockholders’ equity. The consolidated financial statements
      of the combined entity will, in substance, be those of the accounting acquiree,
      OmniReliant, which, as discussed below, was organized on August 21, 2006.





Effective
      December 29, 2006, the Registrant’s name changed from Willowtree Advisor, Inc.
      to OmniReliant Holdings, Inc. ("the Company").





*Nature
      of Business*





OmniReliant
      Corporation was incorporated on August 21, 2006 under the laws of the State
      of
      Florida. The Company is in the development stage and has realized only minor
      revenues from its planned operations. OmniReliant Corporation (“OmniReliant”)
      engages in the creation, design, distribution, and sale of affordable luxury
      products. OmniReliant plans to make these products available to U.S. and
      international consumers through direct response infomercials, live shopping
      networks, ecommerce, direct mail and traditional retail
      channels. OmniReliant will first focus on bringing the Kathy Hilton
“Private Beauty Spa” product line to market, after which OmniReliant plans to
      develop other personalities and designer licenses. Ms. Hilton, who is the wife
      of Rick Hilton, the grandson of the Hilton Hotel founder, has agreed to appear
      in television segments and infomercials.





Until
      the
      Company’s products are successfully marketed on a live shopping network or via
      infomercials, we will not generate significant revenues and may not be
      successful. If we cannot generate sufficient revenues to continue operations,
      we
      will be forced to suspend or cease operations.


13


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      1 -
      ORGANIZATION AND NATURE OF BUSINESS (CONTINUED):





*Going* *Concern*





The
      Company is in its development stage and has incurred losses and has used cash
      in
      its operating activities while devoting substantially all of its efforts to
      raising capital and identifying and pursuing businesses opportunities. The
      Company's total liabilities exceed its total assets and the Company's liquidity
      is substantially dependent on raising capital. These factors raise substantial
      doubt about the Company's ability to continue as a going concern.
      The accompanying consolidated financial statements have been prepared on a going concern
      basis, which contemplates continuing operations, realization of assets and
      liquidation of liabilities in the ordinary course of business. The Company's
      ability to continue as a going concern
      is dependent upon its ability to raise sufficient capital to implement a
      successful business plan and to generate profits sufficient to become
      financially viable. The consolidated financial statements do not include
      adjustments relating to the recoverability of recorded assets or liabilities
      that might be necessary should the Company be unable to continue as a going concern.





NOTE
      2 -
      BASIS OF PRESENTATION





The
      accompanying unaudited consolidated financial statements for the three month
      period ended September 30, 2008, the three month period ended September 30,
      2007, and the period from August 21, 2006 (inception) to September 30, 2008
      have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States of America for interim financial information and pursuant to
      the
      rules and regulations of the Securities and Exchange Commission for Form 10Q.
      Accordingly, they do not include all the information and footnotes required
      by
      accounting principles generally accepted in the United States of America for
      complete financial statements.





The
      unaudited financial information included in this report includes all adjustments
      which are, in the opinion of management, necessary to reflect a fair statement
      of the results for the interim periods. The operations for the three month
      period ended September 30, 2008, the three month period ended September 30,
      2007, and the period from August 21, 2006 (inception) to September 30, 2008
      are
      not necessarily indicative of the results of the full fiscal year.





The
      condensed consolidated financial statements included in this report should
      be
      read in conjunction with the financial statements and notes thereto included
      in
      the Registrant's June 30, 2008 Annual Report on Form 10-KSB and subsequent
      filings on Form 8-K.





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:





*Revenue
      Recognition -* Revenue
      is recognized when the product is shipped to a customer, or in the limited
      circumstances, at destination, when terms provide that title passes at
      destination. Estimated amounts for sales returns and allowances are recorded
      at
      the time of sale. License revenue is recorded over the term of the license
      arrangement, as it is earned.





*Principles
      of Consolidation* - The
      Consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiary. All significant intercompany accounts, profits and
      transactions have been eliminated in consolidation. Entities where the Company
      does not have voting control but has significant influence over its operations
      are accounted for under the equity method.


14


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





*Use
      of Estimates* - The
      process of preparing financial statements in conformity with accounting
      principles generally accepted in the United States of America requires the
      use
      of estimates and assumptions regarding certain types of assets, liabilities,
      revenues, and expenses. Such estimates primarily relate to unsettled
      transactions and events as of the date of the financial statements. Accordingly,
      upon settlement, actual results may differ from estimated amounts.





*Investments
      in Debt Securities* ****** **-** ****** The
      Company accounts for its investment in debt securities in accordance with SFAS
      115, “Accounting for Certain Investments in Debt and Equity Securities,” and
      accordingly, classifies them as held-to-maturity, available-for-sale, or
      trading. Currently, the Company holds available-for-sale debt securities which
      are recorded at fair value.  Interest income is recognized when
      earned. Changes in Fair Value of an available-for-sale security are recorded
      as
      unrealized gains and losses as a component of stockholders equity.





*Merchandise
      Inventories -* Merchandise
      inventories are recorded at the lower of average cost or market. In-bound
      freight-related costs from our vendors are included as part of the net cost
      of
      merchandise inventories. Other costs associated with acquiring, storing and
      transporting merchandise inventories are expensed as incurred and included
      in
      cost of goods sold.





*Intangible
      assets-* Trademarks and licenses are recorded at cost and those with finite lives are
      amortized over the estimated periods of benefit. Amortization expense for the
      three month period ended September 30, 2008, the three month period ended
      September 30, 2007, and the period from August 21, 2006 (inception) to September
      30 2008 was $74,887, $184,723, and $1,168,468, respectively.





*Stock
      Based Compensation -* In
      December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
      Payment". SFAS 123(R) will provide investors and other users of financial
      statements with more complete and neutral financial information by requiring
      that the compensation cost relating to share-based payment transactions be
      recognized in financial statements. That cost will be measured based on the
      fair
      value of the equity or liability instruments issued. SFAS 123(R) covers a wide
      range of share-based compensation arrangements including share options,
      restricted share plans, performance-based awards, share appreciation rights,
      and
      employee share purchase plans. SFAS 123(R) replaces FASB Statement No. 123,
      "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25,
      "Accounting for Stock Issued to Employees". SFAS 123, as originally issued
      in
      1995, established as preferable a fair-value-based method of accounting for
      share-based payment transactions with employees. However, that statement
      permitted entities the option of continuing to apply the guidance in Opinion 25,
      as long as the footnotes to financial statements disclosed what net income
      would
      have been had the preferable fair-value-based method been used. Public entities
      (other than those filing as small business issuers) were required to apply
      SFAS
      123(R) as of the first interim or annual reporting period that begins after
      June
      15, 2005. For public entities that file as small business issuers, SFAS 123(R)
      was applicable as of the beginning of the first interim or annual reporting
      period that begins after December 15, 2005.




15




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





*2007
      Long Term Incentive Plan*





On
      November 21, 2007 the Company established a Long Term Incentive Plan (the “2007
      Incentive Plan”) for the purposes of advancing the interests of the Company and
      our shareholders by providing incentives to certain of our employees and other
      key individuals who perform services for us, including those who contribute
      significantly to the strategic and long-term performance objectives and growth
      of the Company. The 2007 Incentive Plan is administered by a committee (the
      “Committee”) appointed by the Board of Directors. Currently, the Committee is
      comprised of all members of the Board of Directors acting as a group. The
      Committee has the power to interpret the 2007 Incentive Plan and to prescribe
      rules, regulations and procedures in connection with the operations of the
      2007
      Incentive Plan. The Committee may delegate administrative responsibilities
      under
      the 2007 Incentive Plan to any one or more of its members or other persons,
      except as may otherwise be required under applicable law or listing standards
      for an exchange on which the Company’s common stock may be listed. The 2007
      Incentive Plan provides for the granting of several types of awards, including
      stock options, performance grants and other awards deemed by the Committee
      to be
      consistent with the purposes of the 2007 Incentive Plan. Awards may be granted
      alone, or in conjunction with one or more other awards, as determined by the
      Committee.





The
      2007
      Incentive Plan was effective as of November 21, 2007, and was approved by the
      Company’s board of directors. The Company’s shareholders have not voted on
      approval of the 2007 Incentive Plan. A maximum of two million shares (2,000,000)
      of common stock has been authorized to be issued under the 2007 Incentive Plan
      in connection with the grant of awards, subject to adjustment for corporate
      transactions, including, without limitation, any stock dividend, forward stock
      split, reverse stock split, merger or recapitalization. Of this amount, no
      more
      than two million (2,000,000) shares of common stock may be issued as incentive
      stock options. Common stock issued under the 2007 Incentive Plan may be either
      newly issued shares, treasury shares, reacquired shares or any combination
      thereof. If common stock issued as restricted stock, restricted stock units
      or
      otherwise subject to repurchase or forfeiture rights is reacquired by us
      pursuant to such rights, or if any award is cancelled, terminates, or expires
      unexercised, the common stock which would otherwise have been issuable pursuant
      to such awards will be available for issuance under new awards. All awards
      under
      the 2007 Incentive Plan shall be granted within 10 years of the date the plan
      was adopted.





The
      Committee has exclusive discretion to select to whom awards will be granted;
      to
      determine the type, size, terms and conditions of each award; to modify or
      waive, within certain limits, the terms and conditions of any award; to
      determine the time when awards will be granted; to establish performance
      objectives; to prescribe the form of documents representing awards under the
      2007 Incentive Plan; and to make all other determinations which it deems
      necessary, advisable or desirable in the interpretation and administration
      of
      the 2007 Incentive Plan. At the discretion of the Committee, awards may be
      made
      under the 2007 Incentive Plan in assumption of, or in substitution for,
      outstanding awards previously granted by the Company, any predecessor or a
      company acquired by the Company or with which it combines. The Committee has
      the
      authority to administer and interpret the 2007 Incentive Plan, and its decisions
      are final, conclusive and binding. We anticipate that all of our employees
      and
      directors will be eligible to participate in the 2007 Incentive
      Plan.





On
      December 7, 2007 pursuant to the 2007 Incentive Plan the Company awarded certain
      employees 350,000 stock options with an exercise price of $1.00 and a term
      of 5
      years. All of the options issued were fully vested on the grant date. The
      Company has recognized $-0- and $450,000 of expense related to issuances in
      the
      Consolidated Statement of Operations for the three month period ended September
      30, 2008 and for the period from inception to September 30, 2008,
      respectively.


16


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





*Determining
      Fair-Value*




The
      Company uses the Black-Scholes option valuation model to determine the fair
      value of stock options and employee stock purchase plan shares. The
      determination of the fair value of share-based payment awards on the date of
      grant using an option-valuation
      model is affected by the Company’s stock price as well as assumptions regarding
      a number of complex variables. These variables include the Company’s expected
      stock price volatility over the term of the awards, projected employee stock
      option exercise behavior, expected risk-free interest rate and expected
      dividends.





The
      Company estimates the expected term and volatility of options granted based
      on
      values derived from its industry peer group. Our decision to use these measures
      of expected term and volatility was based upon the lack of availability of
      actively traded options in the Company’s own common stock and the Company’s
      assessment that the peer group measure of volatility is more representative
      of
      future stock price trends than the Company’s historical volatility. The Company
      bases the risk-free interest rate for option valuation on Constant Maturity
      Rates provided by the U.S. Treasury with remaining terms similar to the expected
      term of the options. The Company does not anticipate paying any cash dividends
      in the foreseeable future and therefore uses an expected dividend yield of
      zero
      in the option valuation model. In addition, SFAS No. 123(R) requires
      forfeitures of share-based awards to be estimated at the time of grant and
      revised, if necessary, in subsequent periods if actual forfeitures differ from
      those estimates. As this is the Company’s initial issuance and no historical
      data exists to estimate pre-vesting option forfeitures the Company has recorded
      stock-based compensation expense for the all the awards vested. The Company
      uses
      the straight-line attribution as its expensing method of the value of
      share-based compensation for options and awards.




Under
      SFAS No. 123(R) the Company uses the Black-Scholes option valuation model to
      estimate the fair value of the Company’s option awards. There were no grants
      during the three months ended September 30, 2008. The key assumptions used
      in
      the model during the period from inception through September 30, 2008 included
      a
      risk free interest rate of 5.00%, an expected volatility of 122.95% and an
      expected option life of 2 years.





*Financial
      Instruments –* Financial
      instruments, as defined in Financial Accounting Standard No. 107 Disclosures
      about Fair Value of Financial Instruments (Statement 107), consist of cash, evidence of ownership in an entity, and
      contracts that both (i) impose on one entity a contractual obligation to deliver
      cash or another financial instrument to a second entity, or to exchange other
      financial instruments on potentially unfavorable terms with the second entity,
      and (ii) conveys to that second entity a contractual right (a) to receive cash
      or another financial instrument from the first entity, or (b) to exchange other
      financial instruments on potentially favorable terms with the first entity.
      Accordingly, our financial instruments consist of cash and cash equivalents,
      accounts receivable, accounts payable, accrued liabilities, derivative financial
      instruments, and redeemable preferred stock that we have concluded is more
      akin
      to equity than debt.


17


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





We
      carry
      cash and cash equivalents, accounts payable and accrued liabilities at
      historical costs; their respective estimated fair values approximate carrying
      values due to their current nature. We carry derivative financial instruments
      at
      fair value in accordance with Financial Accounting Standard No. 133 Accounting
      for Derivative Financial Instruments and Hedging Activities (Statement 133). We carry redeemable preferred stock at either its basis derived
      from the cash received or fair value depending upon the classification afforded
      the preferred stock, or embedded components thereof, in accordance with
      Statement 133 and Financial Accounting Standard No. 150 Financial
      Instruments with Characteristics of both Equity and Liabilities (Statement 150).





*Derivative
      Financial Instruments* –
      Derivative financial instruments, as defined in Statement 133 consist of
      financial instruments or other contracts that contain a notional amount and
      one
      or more underlying (e.g. interest rate, security price or other variable),
      require no initial net investment and permit net settlement. Derivative
      financial instruments may be free-standing or embedded in other financial
      instruments. Further, derivative financial instruments are initially, and
      subsequently, measured at fair value and recorded as liabilities or, in rare
      instances, assets.





We
      generally do not use derivative financial instruments to hedge exposures to
      cash-flow, market or foreign-currency risks. However, we have entered into
      certain other financial instruments and contracts, such as redeemable preferred
      stock arrangements and freestanding warrants with features that are either
      (i)
      not afforded equity classification, (ii) embody risks not clearly and closely
      related to host contracts, or (iii) may be net-cash settled by the counterparty.
      As required by Statement 133, these instruments are required to be carried
      as
      derivative liabilities, at fair value, in our financial statements.





*Redeemable
      Preferred Stock* –
      Redeemable preferred stock (and, if ever, any other redeemable financial
      instrument we may enter into) is initially evaluated for possible classification
      as liabilities under Statement 150. Redeemable preferred stock classified as
      liabilities is recorded and carried at fair value. Redeemable preferred stock
      that does not, in its entirety, require liability classification is evaluated
      for embedded features that may require bifurcation and separate classification
      as derivative liabilities under Statement 133. In all instances, the
      classification of the redeemable preferred stock host contract that does not
      require liability classification is evaluated for equity classification or
      mezzanine classification based upon the nature of the redemption features.
      Generally, any feature that could require cash redemption for matters not within
      our control, irrespective of probability of the event occurring, requires
      classification outside of stockholders’ equity. See Note 10 for further
      disclosures about our redeemable preferred stock.





*Registration
      Payment Arrangements* ****** **–** Certain
      financial instruments, including convertible preferred stock and the related
      freestanding warrants issued in connection with those convertible instruments,
      are subject to registration rights agreements, which impose penalties for our
      failure to register the underlying common stock by a defined date. These
      potential cash penalties, which are referred to as registration payment
      arrangements, are recorded when payments are both probable and reasonably
      estimable, in accordance with FAS No. 5, Accounting
      for Contingencies *.* These
      liquidated damages were included in the liabilities that were exchanged for
      the
      Series C Preferred Stock. Accordingly, we no longer have an obligation to pay
      registration payments. See Note 10 for additional information related to the
      exchange.




18




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





*Recent
      Accounting Pronouncements*





In
      June
      2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"), which
      clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes
      a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. The Interpretation requires that the Company recognize in the
      financial statements the impact of tax position, if that position is more likely
      than not of being sustained on audit, based on the technical merits of the
      position. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods and disclosure. The
      provisions of


FIN
      48
      are effective for fiscal years beginning after December 15, 2006 with the
      cumulative effect of the change in accounting principle recorded as an
      adjustment to beginning retained earnings. The adoption of this statement did
      not have a material impact on the Company's consolidated financial position
      or
      results of operations.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
      standard defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. This statement is effective for financial statements issued
      for fiscal years beginning after November 15, 2007. Earlier application is
      encouraged. The adoption of this accounting pronouncement is being evaluated
      by
      management.





In
      September 2006, the Securities and Exchange Commission issued SAB No. 108
      "Considering the Effects of Prior Year Misstatements When Quantifying
      Misstatements in Current Year Financial Statements", which provides interpretive
      guidance on how the effects of the carryover or reversal of prior year
      misstatements should be considered in quantifying a current year misstatement.
      The guidance is applicable beginning fiscal 2008. The adoption of this statement
      did not have a material impact on the Company's consolidated financial position
      or results of operations.





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      160, “Noncontrolling Interests in Consolidated Financial Statements - An
      amendment of ARB No. 51”.SFAS 160 requires companies with noncontrolling
      interests to disclose such interests clearly as a portion of equity but separate
      from the parent’s equity. The noncontrolling interest’s portion of net income
      must also be clearly presented on the Income Statement. SFAS 160 is effective
      for financial statements issued for fiscal years beginning after December 15,
      2008. The adoption of this statement may have a material effect on the
      Company's future financial position or results of operations.





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      141, (revised 2007), “Business Combinations”. SFAS 141 (R) applies the
      acquisition method of accounting for business combinations established in SFAS
      141 to all acquisitions where the acquirer gains a controlling interest,
      regardless of whether consideration was exchanged. Consistent with SFAS 141,
      SFAS 141 (R) requires the acquirer to fair value the assets and liabilities
      of
      the acquiree and record goodwill on bargain purchases, with main difference
      the
      application to all acquisitions where control is achieved. SFAS 141 (R) is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008. The adoption of this statement may have a material
      effect on the Company's future financial position or results of
      operations.




19




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      3 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):





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 that are not currently required to be measured at fair value. The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. SFAS No. 159 also establishes presentation and disclosure
      requirements designed to facilitate comparisons between entities that choose
      different measurement attributes for similar types of assets and liabilities.
      SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
      The adoption of this statement did not have a material effect on the Company's
      future financial position or results of operations.





In
      March
      2008, the FASB issued FASB Statement No. 161 ("SFAS 161"), "Disclosures about
      Derivative Instruments and Hedging Activities". SFAS 161 requires companies
      with
      derivative instruments to disclose information that should enable
      financial-statement users to understand how and why a company uses derivative
      instruments, how derivative instruments and related hedged items are accounted
      for under FASB Statement No. 133 "Accounting for Derivative Instruments and
      Hedging Activities" and how derivative instruments and related hedged items
      affect a company's financial position, financial performance and cash flows.
      SFAS 161 is effective for financial statements issued for fiscal years and
      interim periods beginning after November 15, 2008. The adoption of this
      statement is currently being evaluated by management.





NOTE
      4 -
      ACCOUNTING FOR STOCK BASED COMPENSATION:





Prior
      to
      January 1, 2006, the Company accounted for Stock Options and Stock Based
      Compensation under the recognition and measurement provisions of APB Opinion
      No.
      25, “Accounting for Stock Issued to Employees”, and related Interpretations, as
      permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation”.
      Effective January 1, 2006, the Company adopted the fair value recognition
      provisions of SFAS No. 123(R), Share-Based Payment, using the
      modified-prospective-transition method. Under that transition method,
      compensation cost for all share-based payments granted prior to, but not yet
      vested as of January 1, 2006 are based on (a) the grant date fair value
      estimated in accordance with the original provisions of SFAS No. 123, and (b)
      compensation cost for all share-based payments granted subsequent to January
      1,
      2006 are based on the grant-date fair value estimated in accordance with the
      provisions of SFAS No.123(R). Results for prior periods have not been
      restated.





As
      a
      result of adopting SFAS No.123(R) on January 1, 2006, the Company has recognized
      $607,705 of expense related to issuances in the Consolidated Statement of
      Operations for the period from inception to September 30, 2008. There were
      no
      grants issued during the three month period ended September 30, 2008.


20


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      4 -
      ACCOUNTING FOR STOCK BASED COMPENSATION (CONTINUED):





*Stock
      Options and Warrants:*





The
      following table summarizes the activity related to all Company stock options
      and
      warrants for the period from August 21, 2006 (inception) through September
      30,
      2008:





Weighted AverageExercise Price
            
            Exercise PriceStock
            
            Per Share
            
            Per ShareWarrants
            
            Options
            
            Warrants
            
            Options
            
            Warrants
            
            OptionsBalances
                at August 21, 2006 (inception)
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Outstanding
                at June 30, 2006
            
            
            —
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Granted
            
            
            9,004,000
            
            
            —
            
            
            1.00-3.75
            
            
            —
            
            
            2.13
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Cancelled
                or expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at June 30, 2007
            
            
            9,004,000
            
            
            —
            
            $
            1.00-3.75
            
            $
            —
            
            $
            2.13
            
            $
            —Exercisable
                at June 30, 2007
            
            
            9,004,000
            
            
            —
            
            $
            1.00-3.75
            
            $
            —
            
            $
            2.13
            
            $
            —Granted
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at September 30, 2007
            
            
            9,004,000
            
            
            —
            
            $
            1.00-3.75
            
            $
            —
            
            $
            2.13
            
            $
            —Granted
            
            
            23,092,171
            
            
            350,000
            
            $
            0.75-2.00
            
            $
            1.00
            
            $
            1.72
            
            $
            1.00Exercised
            
            
            —
            
            
            (50,000
            )
            
            —
            
            
            (1.00
            )
            
            —
            
            
            (1.00
            )Outstanding
                at December 31, 2007
            
            
            32,096,171
            
            
            300,000
            
            $
            0.75-3.75
            
            $
            1.00
            
            $
            1.70
            
            $
            1.00Granted
            
            
            —
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Exercised
            
            
            (38,400
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at March 31, 2008
            
            
            32,057,771
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Granted
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Cancelled
                or expired
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Outstanding
                at June 30, 2008
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Exercisable
                at June 30, 2008
            
            
            32,057,771
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Granted
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Cancelled
                or expired
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Outstanding
                at September 30, 2008
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —Exercisable
                at September
                30, 2008 (unaudited)
            
            
            32,057,771
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —





The
      warrants expire at various dates ranging from April 2010 through October
      2017.


21


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      5 –
INCOME (LOSS) PER SHARE:





Components
      of loss per common share for the period for the following periods are as
      follows:





Three Months
              Ended
              September 30, 2008
            
            Three Months
              Ended
              September 30, 2007Income
                (loss) applicable to common shareholders
            
            $
            1,895,405
            
            $
            2,725,814Weighted
                average shares outstanding:Basic
            
            
            14,485,782
            
            
            14,000,000Diluted
            
            
            77,277,235
            
            
            20,225,427Income
                (loss) per share—basic
            
            $
            0.13
            
            $
            0.19Income
                (loss) per share—diluted
            
            $
            0.02
            
            $
            0.13





Diluted
      weighted average per share outstanding for all periods presented, other than
      the
      three months ended September 30, 2007 do not include the effect of dilutive
      Series A and B Preferred Stock and Series A-1, A-2, B-1, B-2, C-1, C-2, BD-1,
      BD-2, BD-3, BD-7, BD-8 and BD-9 and consultant warrants because to do so would
      have been anti-dilutive (see list of anti-dilutive shares below). Accordingly,
      basic and diluted net loss per share for these periods is the
      same.


22




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      5 -
      LOSS PER SHARE (CONTINUED):





Below
      is
      a detailed list of the Company’s common stock equivalents at September 30,
      2008:




CommonEquivalents**Securities**Series
                C Preferred
            
            
            20,619,128Series
                D Preferred
            
            
            14,000,000***Warrants:***Class
                A-1 Warrants
            
            
            3,000,000Class
                A-2 Warrants
            
            
            3,000,000Class
                B-1 Warrants
            
            
            480,000Class
                B-2 Warrants
            
            
            480,000Class
                BD-1 Warrants
            
            
            300,000Class
                BD-2 Warrants
            
            
            300,000Class
                BD-3 Warrants
            
            
            300,000Class
                BD-4 Warrants
            
            
            1,600Class
                BD-5 Warrants
            
            
            1,600Class
                BD-6 Warrants
            
            
            1,600Class
                BD-7 Warrants
            
            
            821,333Class
                BD-8 Warrants
            
            
            821,333Class
                BD-9 Warrants
            
            
            821,333Class
                BD-10 Warrants
            
            
            700,000Class
                BD-11 Warrants
            
            
            1,400,000Warrant
                issued to consultants
            
            
            1,000,000Paul
                Morrison Options
            
            
            300,000Class
                C-1 Warrants
            
            
            10,266,086Class
                C-2 Warrants
            
            
            10,266,086Class
                D-1 Warrants
            
            
            28,000,000Total
                common stock equivalent shares (unaudited)
            
            
            96,880,099





(1)
            Warrants
                were repriced to $0.75 in connection with the Series C Convertible
                Preferred and Warrant Financing Transaction on October 19, 2007 (see
                Note
                10). The repricing gave rise to an approximate $3.2 million derivative
                expense.




23


OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      6 –
INVESTMENT IN DEBT SECURITIES:





On
      February 12, 2008, we purchased a face-value $150,000, 6.0% per annum,
      Convertible Promissory Note from an early-stage, Member-Managed Limited
      Liability Company in the Media Sector. Principal and interest are payable on
      February 12, 2010. The Convertible Promissory Note is convertible at our option
      into Member Units representing an aggregate of 2.0% of the investee’s aggregate
      member units.





Investments
      in these debt securities are carried as available-for-sale securities under
      Statement’s on Financial Accounting Standards No. 115. Debt securities
      classified as *available-for-sale
      securities* are
      reported at fair value, with unrealized gains and losses excluded from earnings
      and reported in a separate component of shareholders’ equity.





Fair
      value is based upon the present value of the forward cash-flows, discounted
      at a
      credit-risk adjusted rate for similar instruments. The conversion option is
      considered a fair-value enhancement when such amount is readily convertible
      into
      cash, which, as a private, closely held company, it is not currently. Changes
      in
      the fair value of available-for-sale debt securities arise from changes in
      market interest rates for similar instruments and the period remaining to
      maturity.





On
      April
      3, 2008, we amended the Convertible Promissory Note to add full-ratchet
      anti-dilution protection and a “Most Favored Nation” provision which would allow
      us to exchange the promissory note for any securities issued by the Investee
      in
      a subsequent financing on a dollar by dollar basis.





On
      April
      4, 2008, we invested an additional $300,000 and received a Convertible
      Promissory Note which accrues interest at 6% per year and is due and payable
      on
      February 12, 2010. We have the option to convert the note anytime prior to
      maturity and we would receive Membership Interests equal to the principle
      balance on the note divided by $10,000,000. This note contains full ratchet
      anti-dilution protection and a “Most Favored Nation”
provision.


24





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      7 –
INTANGIBLE ASSETS:





Our
      intangible assets consist of the following at September 30, 2008:





Carrying
            
            AccumulatedIntangible
                Assets:
            
            Amount
            
            AmortizationLicense
                agreement
            
            $
            148,690
            
            $
            (604,315
            )Patent
                costs
            
            
            1,161,430
            
            
            (88,421
            )Total
            
            $
            1,310,120
            
            $
            (692,736
            )Aggregate
                Amortization ExpenseQuarter
                ended September 30, 2008
            
            $
            74,887Estimated
                Amortization ExpensePeriod
                from September 30, 2008 through June 30, 2009:
            
            $
            50,842Year ending June 30:2010
            
            
            75,7292011
            
            
            95,0212012
            
            
            107,8172013
            
            
            88,0782014
            
            
            88,078Thereafter
            
            
            804,5551,310,120





On
      October 12, 2007 we sold a portion of our licenses to ResponzeTV. The carrying
      value of the licenses sold was $653,005 and the related accumulated accumulation
      was $286,521. The difference of $366,484 was recorded as an addition to our
      investment in ResponzeTV.





*Licensing
      Agreement -* On
      October 13, 2006, the Company entered into an agreement with a related party.
      This agreement was subsequently amended on November 20, 2006. Under the terms
      of
      the Licensing Agreement the Company has obtained the exclusive right and license
      to certain licensed products through December 31, 2011 with an option to renew
      for an additional five year period provided all the minimum royalty payments
      have been paid during the initial term. In consideration of the license granted
      and the services to be performed, the Company will compensate the other party
      an
      annual guaranteed minimum (payable semi-annually) royalty as
      follows:





Annual
            
            
            
            MinimumPeriod
            
            Dates
            
            Royalty1
            
            
            Effective
                Date to 12/31/07
            
            $
            1,000,0002
            
            
            1/1/08
                to 12/31/08
            
            $
            400,0003
            
            
            1/1/09
                to 12/31/09
            
            $
            400,0004
            
            
            1/1/10
                to 12/31/10
            
            $
            400,0005
            
            
            1/1/11
                to 12/31/11
            
            $
            400,0006
            
            
            1/1/12
                to 12/31/15
            
            $
            400,000





25




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      7 –
INTANGIBLE ASSETS (CONTINUED):





In
      addition to the minimum royalty payment the Company will also compensate the
      other party a sales royalty of eight percent (8%) on each annual period's net
      sales made in all venues other than infomercials; a minimum of three percent
      (3%) on each annual period's net sales made through infomercials and four
      percent (4%) should the revenues exceed media expenditures by a three to one
      media ratio. The sales royalty is payable on a quarterly basis within forty-five
      (45) days after the close of the prior quarter's sales. The payment of sales
      royalties are credited against the guaranteed minimum royalty payment for any
      annual period.





In
      addition to the sales royalties and guaranteed minimum royalties being paid
      the
      Company also delivered three million (3,000,000) shares of the Company's common
      stock, which represented 25% of the issued and outstanding common stock on
      that
      date.





On
      November 20, 2006 the Licensing Agreement was amended to change the date of
      the
      first annual Guaranteed Minimum Royalty payment from thirty (30) days following
      the effective date to January 3, 2007. In addition, the amendment revised
      subsequent payments to occur on January 1 st and July
      1 st of each
      annual period. On November 22, 2006 the Company made a payment of $850,000
      pursuant to this agreement. On January 10, 2007 the Company made a payment
      of
      $150,000 pursuant to the licensing agreement. The payment was the final payment
      of the $1,000,000 initial installment due under the agreement.





For
      the
      three months ended September 30, 2008 and 2007 the Company recognized $162,021
      and $385,715 of expenses related to this agreement.





*Straightening
      Irons Agreement -* On
      February 12, 2007, the Company entered into an agreement with a manufacturer
      of
      straightening irons. Pursuant to the terms of the contract the Company
 agrees to pay Licensor a Royalty payment of one percent (1.0%) of the
      Adjusted Gross Collected Revenues (“AGCR”), defined below, on all revenues
      generated from the sale of the Product and up-sells of like category sold in
      connection with the Product and through the inbound call. The Royalties shall
      be
      paid quarterly, along with sufficient reports justifying the calculation of
      the
      Royalty payments. Should the Infomercial’s performance exceed a two
      point two five (2.25) times the media ratio, meaning the revenues generated
      by
      the Infomercial, less returns and charge backs exceed two and one quarter times
      the expenditures on the media ratio (the “Media Ratio”), the Royalty shall
      increase to two and one half percent (2.5%) of the AGCR. Should the Media Ratio
      exceeds three (3) times the Media Ratio, the Royalty shall be bumped to three
      and one half percent (3.5%), if the Media Ratio exceeds three and one half
      (3.5)
      times the Media Ratio, the Royalty shall be four percent (4%), and in the event
      the Media Ratio exceeds four (4) times the Media Ratio, the Royalty shall be
      boosted to five percent (5%). The Royalty on sales in all other channels of
      distribution except Live Shopping shall be five percent (5%) of the wholesale
      revenues. Licensor shall receive six percent (6%) royalty for Live Shopping
      on
      wholesale revenues less returns. Upon the execution of this Agreement, ORH
      shall
      issue Licensor 15,000 common shares of OmniReliant Holdings, Inc. (ORHI) which
      shall be restricted stock and subject to the SEC 144 Rules.





Adjusted
      Gross Collected Revenues. “AGCR”
      shall mean ORH’s Gross Revenue from sales of the Products, less all of the
      following:





·
            Shipping
                & Handling, credit card fees, refunds, credits or other allowances
                on
                business, as actually incurred and as reserved for (“Returns”);
                not





·
            Sales,
                excise, use, value added or any like
                taxes;





·
            Cost
                of goods for purposes of liquidation or closeout (“Liquidation Sales”).
                Licensor shall have the first right of refusal to purchase the liquidation
                inventory at a penny above ORH’s best
                offer.


26




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      7 –
INTANGIBLE ASSETS (CONTINUED):





The
      reserve for Returns and un-collectibles shall initially be ten percent (10%)
      of
      Adjusted Gross Revenues, and shall be adjusted periodically based upon actual
      experience.





The
      Company shall have the right to sell and distribute the Products at such prices
      and on such terms and conditions (including shipping and handling charges)
      as
      ORH may establish. In the event that ORH fails, during the one-year period
      commencing upon Rollout and continuing thereafter, to generate $2,000,000 in
      Product sales per year (“Minimum Quantities”), Licensor may provide 30 days
      prior written notice to ORH and make ORH’s rights hereunder non-exclusive. For
      the life of the Product, ORH or a designated third party, such as the
      manufacturer, on behalf of ORH will maintain and keep in force product liability
      insurance with an insurer approved by Licensor in the amounts not less than
      $2,000,000 per occurrence and $5,000,000 in the aggregate covering all Products
      licensed by ORH from Licensor. ORH, Licensor and, upon ORH’s request, any of
      ORH’s subsidiaries, affiliates or sub-licensees who are involved with the
      marketing and distribution of the Products shall be named as additional insured
      on all such insurance policies, each of which shall be endorsed so as to provide
      at least 30 days notice to ORH of its cancellation, termination or
      non-renewal.





As
      of
      December 31, 2007, this agreement was fully amortized; therefore the Company
      had
      no expense related to this agreement for the three months ended September 30,
      2008.





*Patent
      Application Agreement -* On June
      18, 2007, OmniReliant Holdings, Inc. (“the Company”) entered into an Agreement
      for Acquisition of a Patent Application with Product & Technology Partners
      LLC. Pursuant to the Agreement, the Company acquired from Seller the rights
      to a
      patent-pending self-warming topical pharmaceutical product capable of delivering
      salicylic acid in a foam suitable for consumer use. In consideration for the
      rights to the product, the Company agreed to pay Seller in the following
      manner:





a)
            Upon
                execution of the Agreement, the Company paid Seller (i) an aggregate
                of
                Twenty Five Thousand dollars ($25,000) and (ii) issued to the Seller
                Two
                Hundred Thousand (200,000) shares of the Company’s common
                stock.




b)
            Following
                the completion of due diligence (which shall be six months from the
                date
                of the Agreement), if the Company is satisfied with the Product and
                intends to offer Product for sale, the Company shall pay to Seller
                Twenty
                Five Thousand dollars ($25,000).




c)
            The
                Company shall also pay Seller installment payments of up to a maximum
                of
                Four Hundred Thousand Dollars ($400,000), payable over a period of
                4 years
                beginning six months from the date of the Agreement. If no revenues
                are
                generated from the sale of the Product, no installment payments shall
                be
                due.




On
      January 22, 2008 the Company paid the additional $25,000 pursuant to the terms
      listed above.





The
      Company has received a written opinion issued by the USPTO as International
      Search Authority and a response was filed as entering Chapter ii of the PCT
      designating the USPTO as International Examining Authority. The Company has
      consulted with the scientist regarding the application and we believe the
      technology has many future uses. Once approved, the Company plans to market
      and
      sell products using the technology acquired.





The
      Company estimates the patent pending application will take up to 3 years to
      go
      through the approval process. At such time the Company will begin amortizing
      the
      cost over 20 years, the useful life of the asset.





In
      the
      event additional assistance is required with the patent pending application
      or
      development of a product the members of Product & Technology Partners, LLC
      have agreed to work with the Company on a consulting basis.


27




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      7 –
INTANGIBLE ASSETS (CONTINUED):





For
      the
      three months ended September 30, 2008 and for the period from inception through
      September 30, 2008 the Company did not recognize any expense related to this
      agreement.





The
      Company entered into a patent agreement on January 24, 2008. Amortization
      expense related to the agreement for the three months ended September 30, 2008
      and for the period from inception through September 30, 2008 was 12,353 and
      32,941, respectively. In addition, 200,000 shares were issued in connection
      with
      this agreement.





NOTE
      8 -
      COMMITMENTS & CONTINGENCIES:





*Consulting
      Agreement -* On
      October 1, 2006 the Company entered into a six (6) month consulting agreement
      with Harrington Business Development, LLC (“HBD”) to provide services related to
      the creation, production, and editing of infomercials and also to consult the
      Company on marketing and distribution of its products. In consideration for
      the
      services performed the Company will compensate HBD $15,000 per month. On April
      1, 2007 the Company verbally extended the term of the Harrington Business
      Development, LLC consulting agreement for an additional three months. The
      agreement was not renewed subsequent to June 30, 2007. The shareholders of
      HBD
      are also shareholders of the Company.





On
      July
      14, 2008 the Company entered into a one (1) year consulting agreement with
      HBD
      to provide services related to, but not be limited to, the media production
      related to The Franklin Mint, Inc., media purchase and management, supervision
      of editing and dubbing of productions, shipping of tapes or DVDs to television
      or radio networks and stations, assistance in website development, assistance
      in
      establishing call centers and scripting for inbound calls, tracking of media
      results, and any other assistance that is needed from the Company. In
      consideration for the services performed the Company will compensate HBD $50,000
      per month net of $5,000 for office rent. The Company has right to extend the
      term of the Harrington Business Development, LLC consulting agreement for an
      additional year. For the three months ended September 30, 2008 and 2007 the
      Company recognized expenses amounting to $-0- and $135,000, related to this
      agreement.





*Employment
      Agreement -* On
      October 31, 2006 the Company entered into an employment agreement with Paul
      Morrison to act as its Chief Operating Officer and President. Under the terms
      of
      the agreement Mr. Morrison's contract will be for a term of two (2) years with
      automatic successive two (2) year term renewals subject to a notice of
      non-renewal. In consideration for the services he is to receive a base salary
      of
      $120,000 per year with annual pay increases of ten percent (10%); incentive
      bonus of one and half percent (1.5%) of pretax profits on the sales of certain
      products payable the day after the Company's 10-KSB annual report is filed
      with
      the SEC; the issuance of 300,000 shares the Company's restricted common stock
      payable as follows: 150,000 shares upon execution of the agreement and 150,000
      shares on the first anniversary of employment with the Company. On October
      31,
      2006, prior to the recapitalization, OmniReliant Corporation issued Mr. Morrison
      150,000 shares and recorded $15,000 of stock compensation expense related to
      this agreement.





*Assignment
      of Contract -* On
      November 10, 2006 the Company entered into an agreement with Reliant
      International Media, LLC (“RIM”) to assume a marketing and distribution
      agreement RIM had with a third party manufacturer of spa related products.
      The
      original agreement was entered into on September 25, 2006 for a term of twelve
      (12) months. The agreement gives the Company exclusive rights to market and
      distribute the product in the United States and Canada. The Company also
      received the non-exclusive right to all other countries. The shareholders of
      RIM
      are also shareholders of the Company.


28




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      8 -
      COMMITMENTS & CONTINGENCIES (CONTINUED):





*International
      Distribution Agreement -* On March
      19, 2007, the Company entered into an International Distribution Agreement
      with
      Reliant International Media LLC. Pursuant to the Agreement, the Company has
      granted Reliant the exclusive right to represent the Company with respect to
      sales of certain products through retail distribution channels in the United
      Kingdom, Japan and Korea. The products covered by the agreement include any
      and
      all products marketed by the Company under the Kathy Hilton name, likeness
      or
      brand, excluding all perfume and perfume related products. In consideration
      for
      Reliant’s marketing services, the Company has agreed to pay to Reliant a royalty
      equal to ten percent of the Company’s gross revenues. The shareholders of
      Reliant International Media are also shareholders of the Company.





*Public
      Relations Agreement -* On
      April
      27, 2007 the Company entered into a three year consulting agreement with a
      public relations firm. Pursuant to the terms of the agreement the Company will
      pay the following as compensation for services: $7,500 payable each month;
      1,000,000 warrants with a term of 3 years, issued at the onset, entitling the
      holder to purchase shares of the Company’s common stock at an exercise price of
      $1.00 per share; exclusive rights to all future public relation contracts
      awarded to the Company for Kathy Hilton licenses; and compensation at the rate
      of 3% of projected gross wholesale sales per year on all future Kathy Hilton
      licenses awarded to the Company. For the year ended June 30, 2007 the Company
      recognized $2,490,151 of expense related to this agreement, of which $2,471,401
      was associated with the 1,000,000 warrants which were issued. The value of
      the
      warrants was determined by using the Black-Scholes option pricing model. The
      Company used a volatility percentage of 23.6%, a risk free interest rate of
      5.00%, and an expected life of 1 1⁄2 years in calculating the fair
      value.





NOTE
      9 –
STOCKHOLDERS’ EQUITY:





*Common
      Stock Purchase Agreement*





On
      November 22, 2006 the Company and OmniReliant entered into a securities purchase
      agreement with the Company's then principal stockholder, Cynthia Allison,
      pursuant to which OmniReliant purchased 5,000,000 shares of the Company's common
      stock from Ms. Allison for a purchase price of $475,813. Pursuant to the Common
      Stock Purchase Agreement, OmniReliant transferred the 5,000,000 shares to the
      Company for cancellation. The transaction with Ms. Allison was accounted for
      as
      a reduction of additional paid in capital.





*Exchange
      Agreement*





Pursuant
      to the Exchange Agreement, dated November 22, 2006, the Company issued
      12,300,000 shares of common stock to the OmniReliant stockholders. The common
      stock was issued to the following stockholders pursuant to the Exchange
      Agreement:





Number ofName
            
            SharesApogee Financial Investments, Inc.
            
            
            3,000,000ZTZ Trust Inc.
            
            
            3,000,000Kevin Harrington
            
            
            1,500,000Tim Harrington
            
            
            1,500,000KRH Licensing Company, LLC
            
            
            3,000,000Paul Morrison
            
            
            300,000Total
            
            
            12,300,000




29




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      9 –
STOCKHOLDERS’ EQUITY (CONTINUED):





*Public
      Relations Agreement* ***-*** On
      April
      27, 2007 the Company entered into a three year consulting agreement with a
      public relations firm. Pursuant to the terms of the agreement the Company will
      pay the following as compensation for services: $7,500 payable each month;
      1,000,000 warrants with a term of 3 years, issued at the onset, entitling the
      holder to purchase shares of the Company’s common stock at an exercise price of
      $1.00 per share; exclusive rights to all future public relation contracts
      awarded to the Company for Kathy Hilton licenses; and compensation at the rate
      of 3% of projected gross wholesale sales per year on all future Kathy Hilton
      licenses awarded to the Company. For the three months ended September 30, 2008
      and for the period from inception through September 30, 2008 the Company has
      recognized $90,000 and $2,490,151 of expenses related to this agreement. No
      warrants were issued for the three months ended September 30, 2008. For the
      period from inception through September 30, 2008 the Company recognized expenses
      of $2,471,401 associated with the 1,000,000 warrants that were originally issued
      in connection with this agreement.





As
      more
      fully discussed in Note 10, these warrants were reclassified to liabilities
      on
      May 22, 2007, and were carried at their fair values, with adjustments to income
      until October 18, 2008, at which time they will be reclassed to
      equity.





*Patent
      Application Agreement -* On June
      18, 2007, the Company entered into an Agreement for Acquisition of a Patent
      Application. The Company upon execution of the Agreement issued to the Seller
      Two Hundred Thousand (200,000) shares of the Company’s common stock. For the
      quarter ended September 30, 2008 the Company did not recognize any expense
      related to this agreement. See *“Patent
      Application Agreement”* above
      for additional details.





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS:





This
      footnote includes (i) the details of our redeemable preferred stock, (ii) our
      accounting for the Series A, Series B, Series C, and Series D Financing
      Transactions both on the inception dates and thereafter, (iii) our consideration
      related to and accounting for warrants issued in these transactions and (iv)
      registration payment arrangements extended to the investors.





***Series
      A, Series B, Series C, and Series D Convertible Preferred
      Stock:***





The
      Company is authorized to sell or issue 100,000,000 shares of preferred stock.





On
      November 22, 2006, we designated 3,000 shares of our preferred stock as Series
      A
      10% Convertible Preferred Stock (“Series A Preferred”). On May 25, 2007, we
      designated 1,000 shares of our preferred stock as Series B 10% Convertible
      Preferred Stock (“Series B Preferred”). On October 18, 2007, we designated
      10,620,000 shares of our preferred stock as Series C Convertible Preferred
      Stock
      (“Series C Preferred”). On April 30, 2008, we designated 7,000,000 shares of our
      preferred stock as Series D Convertible Preferred Stock (“Series D
      Preferred”).The Series A has a par value of $0.0001, a stated value of $1,000
      and a liquidation preference of $1,000, plus accrued dividends, if any. The
      Series B has a par value of $0.0001, a stated value of $1,000 and a liquidation
      preference of $1,000. The Series C has a par value of $0.0001, a stated value
      of
      $1.00 and a liquidation preference of $1.00. The Series D has a par value of
      $0.0001, a stated value of $1.00 and a liquidation preference of $1,000. The
      Series A Preferred, Series B Preferred, Series C Preferred and Series D
      Preferred were convertible into our common stock at stated conversion prices
      of
      $1.00, $1.25, $0.75, and $0.50 respectively, based upon the stated value. The
      conversion prices are subject to anti-dilution protection for (i) traditional
      capital restructurings, such as splits, stock dividends and reorganizations
      and
      (ii) sales or issuances of common shares or contracts to which common shares
      are
      indexed at less than the stated conversion prices.


30




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





Holders
      of the Company’s Series C and D Preferred are not entitled to dividends. Holders
      of the Company’s Series A Preferred and the Series B Preferred (collectively the
“Series A and B Preferred”) were entitled to cumulative dividends at the rate
      per share of 10% per annum, payable quarterly on January 1, April 1, July 1
      and
      October 1. Dividends were payable in cash or common stock, as follows: (a)
      if
      funds were legally available and certain equity conditions, described below,
      have not been met during the preceding five consecutive trading days payment
      must be in cash; (b) if funds were available and the equity conditions have
      been
      met during the five preceding trading days the payment may be made, at the
      sole
      election of the Company, in either cash or common shares (at a 10% discount
      to
      the trading market price, as defined in the Certificate of Designation).





The
      Certificate of Designation provided that dividends were cumulative and
      unconditionally payable, even in the absence of a Board declaration.
      Accordingly, we accrued dividends as they were earned. As of October 18, 2007,
      (the date the Series A and B Preferred were exchanged for Series C Preferred),
      we had accrued $285,355 and $24,209 in dividends related to the Series A and
      B
      Preferred shares, respectively. Preferred stock dividends are recorded as a
      reduction of stockholders’ equity. However, we also reflect preferred stock
      dividends as a reduction of our net loss for purposes of calculating income
      (loss) applicable to common stockholders and our net loss per common
      share.





As
      discussed in more detail in this footnote, the Series A and B Preferred Stock
      were exchanged for Series C Preferred Stock and Warrants.





The
      Series C and Series D Preferred are redeemable for cash in an amount
      representing the stated value. The following events give rise to a redemption
      triggering event:





·
            The
                Corporation shall fail to have available a sufficient number of authorized
                and unreserved shares of Common Stock to issue to such Holder upon
                a
                conversion hereunder;





·
            Unless
                specifically addressed elsewhere in this Certificate of Designation
                as a
                Triggering Event, the Corporation shall fail to observe or perform
                any
                other covenant, agreement or warranty contained in the Certificate
                of
                Designation, and such failure or breach shall not, if subject to
                the
                possibility of a cure by the Corporation, have been cured within
                20
                calendar days after the date on which written notice of such failure
                or
                breach shall have been delivered;





·
            The
                Corporation shall be party to a Change of Control Transaction;





·
            There
                shall have occurred a Bankruptcy Event;





·
            Any
                monetary judgment, writ or similar final process shall be entered
                or filed
                against the Corporation, any Subsidiary or any of their respective
                property or other assets for greater than
                $100,000.





If
      the
      Company fails to pay the Triggering Redemption amount on the date it is due,
      interest will accrue at a rate equal to the lesser of 18% per year, or the
      maximum rate permitted by applicable law, accruing daily from the date of the
      Triggering event until it is paid in full.




31




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





***Sales
      of Series A and Series B Preferred Stock and
      Warrants:***





On
      November 22, 2006 and May 25, 2007, we sold 3,000 Series A Preferred shares
      and
      600 Series B Preferred shares, respectively, plus two tranches of warrants
      with
      each financing. We also issued warrants to placement agents. The following
      table
      illustrates details of the sales of these financial instruments:





Series A
            
            Series B
            
            TotalGross
                proceeds
            
            $
            3,000,000
            
            $
            600,000
            
            $
            3,600,000Financing
                costs paid in cash
            
            
            (475,000
            )
            
            (95,000
            )
            
            (570,000
            )Net
                proceeds
            
            $
            2,525,000
            
            $
            505,000
            
            $
            3,030,000Common
                shares indexed to financial instruments:Series
                A and B Preferred
            
            
            3,000,000
            
            
            480,000
            
            
            3,480,000Investor
                warrants:Tranche
                A/B-1
            
            
            3,000,000
            
            
            480,000
            
            
            3,480,000Tranche
                A/B-2
            
            
            3,000,000
            
            
            480,000
            
            
            3,480,000Placement
                agent warrants
            
            
            900,000
            
            
            144,000
            
            
            1,044,0009,900,000
            
            
            1,584,000
            
            
            11,484,000





Apogee
      Financial Investments, Inc., a company owned by certain of our stockholders,
      received cash fees of $125,000 for consulting and due diligence services
      rendered in connection with the transactions, which amount is included in the
      financing costs paid in cash in the table above.





The
      following table illustrates the terms of the warrants issued in connection
      with
      the Series A and B Preferred Financings:





Warrant terms:
            
            Strike Price
            
            TermTranche A-1
            
            $1.50
            
            5 yearsTranche A-2
            
            $1.00
            
            10 yearsTranche B-1
            
            $1.87
            
            3 yearsTranche B-2
            
            $3.75
            
            5 yearsPlacement agents:Series A Financing
            
            $1.00—$3.00
            
            10 yearsSeries B Financing
            
            $1.25—$3.75
            
            10 years




32




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





The
      following tables illustrate (i) how the net proceeds arising from each of the
      Series A Preferred and Series B Preferred financing was allocated on
      the
      financing inception dates and (ii)
      how the aggregate financing costs (both cash and warrant consideration) were
      allocated on
      the
      inception dates :





Classification
            
            Series A
            
            Series B
            
            TotalRedeemable
                preferred stock (mezzanine)
            
            $
            —
            
            $
            —
            
            $
            —Redeemable
                preferred stock (liability)
            
            
            —
            
            
            (780,000
            )
            
            (780,000
            )Derivative
                warrants (investor warrants)
            
            
            (16,342,550
            )
            
            (1,655,567
            )
            
            (17,998,117
            )Beneficial
                conversion feature
            
            
            (1,173,510
            )
            
            —
            
            
            (1,173,510
            )Derivative
                put liability
            
            
            (834,826
            )
            
            —
            
            
            (834,826
            )Day-one
                derivative loss
            
            
            15,350,886
            
            
            1,835,567
            
            
            17,186,453Gross
                proceeds
            
            $
            3,000,000
            
            $
            600,000
            
            $
            3,600,000





The
      accounting and reporting for complex financing transactions that embody multiple
      financial instruments, some of which are features embedded within financial
      instruments, can best be described as a step-by-step process where the terms
      and
      features of the financial instruments are compared to multiple standards in
      a
      hierarchy of decision making. The following summarizes this process and
      conclusions during the process.





As
      an
      initial consideration, we are required to consider whether the Series A and
      B
      Preferred Stock are, by their terms, financial instruments that require
      liability classification under Statements on Financial Accounting Standards
      No.
      150 Accounting
      for Certain Financial Instruments with Characteristics of both Equity and
      Liability .
      Statement 150 generally provides that financial instruments that are issued
      in
      the form of shares that are mandatorily redeemable on a fixed or determinable
      date or upon an event certain to occur be classified as liabilities. Neither
      the
      Series A Preferred nor the Series B Preferred provide for their redemption
      on
      fixed or determinable date. In addition, events that could give rise to cash
      redemption are conditional and not certain to occur.





·
            Series
                A Preferred—November 22, 2006—The Series A Preferred did not require
                liability classification onthe
                inception date because the contract did not provide for a fixed or
                determinable redemption (an unconditional payment requirement) and
                events
                that could give rise to cash redemption were conditional and not
                certain
                to occur on the inception date. However, other standards exist that
                provide for classification of redeemable securities outside of
                stockholders’ equity when, irrespective of probability, contingent
                redemption events are outside of the issuer’s control. As a result, the
                Series A Preferred required classification outside of stockholders’ equity
                on the inception date.





·
            Series
                B Preferred—May 25, 2007—The Series B Preferred has terms and features
                consistent with those embodied in the Series A Preferred. However,
                as more
                fully discussed below, on the issuance date the Company’s ability to share
                settle any of its share-indexed financial instruments was not within
                its
                control, due to the triggering of the variable-share-indexed conversion
                feature in the Series A Preferred. Because share settlement was not
                within
                the Company’s control, net cash settlement was assumed and the Series B
                Preferred was initially classified in liabilities, at fair
                value.





33




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





The
      terms
      and conditions of the Series A Preferred were also subject to evaluation under
      Statement 133. Derivative financial instruments, as defined in Statement 133
      consist of financial instruments or other contracts that contain a notional
      amount and one or more underlying (e.g. interest rate, security price or other
      variable), require no initial net investment and permit net settlement.
      Derivative financial instruments may be free-standing or embedded in other
      financial instruments. Further, derivative financial instruments are initially,
      and subsequently, measured at fair value and recorded as liabilities or, in
      rare
      instances, assets.





In
      considering the application of Statement 133, we identified those specific
      terms
      and features embedded in the contracts that possess the characteristics of
      derivative financial instruments. Those features included the conversion option,
      redemption features and other equity-indexed terms and conditions. In evaluating
      the respective classification of these embedded derivatives, we are required
      to
      determine whether the host contract (the Series A and B Preferred) is more
      akin
      to a debt or equity instrument in regards to the risks. This determination
      is
      subjective. However, in complying with the guidance provided in EITF D-109
      Determining the Nature of a Host Contract Related to a Hybrid Financial
      Instrument Issued in the Form of a Share under Statement No. 133 we concluded,
      based upon the preponderance and weight of all terms, conditions and features
      of
      the host contracts, that the Series A Preferred was more akin to an equity
      instrument for purposes of considering the clear and close relation of the
      embedded feature to the host contract. Based upon this conclusion, we further
      concluded that (i) the equity indexed and settled embedded features did require
      derivative liability classification and (ii) certain redemption features (that
      is, features that afford the investor the right to put the instruments for
      cash)
      required bifurcation and classification as compound embedded derivative
      liabilities, at fair value on the inception date. These amounts are reflected
      in
      the table above as derivative put liabilities and are valued using multiple,
      probability-weighted cash flow outcomes and market discount rates that are
      commensurate with our estimated credit risk.





Although,
      as described above, the embedded conversion feature did not require liability
      classification under Statement 133, we were required to consider if the hybrid
      preferred contracts embodied beneficial conversion features (“BCF”). A BCF is
      present when the “effective” conversion price ascribed to the conversion feature
      has intrinsic value. Further, a BCF is accounted for as a component of paid-in
      capital on the inception date. As reflected in the tables above, the Series
      A
      Preferred was found to have a BCF. The aggregate BCF at its intrinsic value
      amounted to $9,326,490. This amount gives effect to the (i) the trading market
      price on the contract dates and (ii) the effective conversion price of each
      preferred issuance after allocation of proceeds to all financial instruments
      sold based upon their relative fair values. Notwithstanding, BCF was limited
      to
      the value ascribed to the remaining hybrid contract (using the relative fair
      value approach). Accordingly, the BCF allocated to paid-in capital amounted
      to
      $1,173,510.




In
      determining how the basis of the hybrid instruments would be allocated to the
      host contracts, detachable warrants, and the embedded conversion features,
      we
      utilized the guidance of Statement 133 Implementation Issue No. B-6 (“DIG Issue
      B6”) provided by the Derivatives Implementation Group. DIG Issue B6 provides
      that the initial carrying values of the host contract component and the embedded
      derivative components of a hybrid instrument should be determined by recording
      the embedded derivative at fair value and determining the initial carrying
      value
      assigned to the host contract as the difference between the basis of the hybrid
      instrument and the fair value of the embedded derivatives (a “with and without”
method based on the fair value of the embedded derivative). Since there were
      warrants issued concurrently with the host instrument and a BCF calculated
      upon
      inception, these components also needed to be considered when calculating the
      value to be assigned to the host instrument. When we evaluated the warrants,
      we
      concluded that equity classification was not appropriate for the investor
      warrants under EITF 00-19, “ Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock ”.
      Accordingly the proceeds from the issuance of the debt and the detachable
      warrants was first allocated to the debt and the warrants based on their
      relative fair values as described in APB 14. The embedded derivatives in the
      debt
      instrument that required bifurcation (put liability) were then bifurcated at
      their fair values from the proceeds allocated to the debt under APB 14 and
      then
      the BCF was calculated. After the allocation process, any residual proceeds
      would be allocated to the debt host, however, the aggregate fair values of
      the
      warrants, put and BCF exceeded the gross proceeds so we recognized a day-one
      derivative loss as indicated.




34




OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





As
      discussed above, the initial allocation of the basis in the Series A Preferred
      Financing transaction resulted in no basis ascribed to the redeemable preferred
      stock. According to EITF D-98 Classification
      and Measurement of Redeemable Securities ,
      if the
      security is not currently redeemable and it is not probable that the security
      will be become redeemable, accretion to face value is not necessary. The Series
      A Preferred is convertible upon inception and there was no persuasive evidence
      that the Preferred Stock would not be redeemed. Based on this information,
      redemption could not be considered “not probable” of occurring and accretion was
      necessary. Redeemable preferred stock is required to be accreted to its
      redemption values through periodic charges to retained earnings or, if no term
      of redemption is embodied in the contract, as is the case of the Series A
      Preferred, on the date of issuance. As a result, a day-one deemed dividend
      of
      $3,000,000 was recorded to accrete the Series A Preferred to its redemption
      value.





The
      allocation of the basis of the Series A and Series B Financing transactions
      required the allocation to certain financial instruments at their respective
      fair values, and these fair values in each instance exceeded the cash proceeds
      obtained from the transactions. As a result, we were required to record day-one
      derivative losses in connection with these transactions because fair value
      was
      the required standard.





***Subsequent
      and Ongoing Classification Considerations:***





The
      evaluation of the classification of the Series A and B Preferred was required
      at
      each reporting date. Statement 150 requires reclassification of financial
      instruments otherwise classified in stockholders’ equity or redeemable preferred
      stock to liabilities when the conditional redemption becomes certain of
      occurrence. On May 21, 2007 and thereafter we were in default under the terms
      and conditions of the Series A Preferred due to non-registration of the
      underlying common shares (also see registration rights, below). On that date,
      the Series A Preferred Stock became redeemable for cash at 130% of the stated
      value, or $3,900,000, or, at the holder’s option, in the number of common shares
      equal to the cash redemption price divided by the 75% of the trading market
      price. The operation of the feature related to the holder’s rights to redeem in
      common shares has rendered the number of shares necessary to share-settle the
      contract (and our other share-indexed financial instruments) indeterminate.
      Therefore, share settlement of the Series A Preferred, and all other of our
      share-indexed financial instruments was presumed to no longer to be within
      our
      control. The triggering of the redemption and the share-settlement feature
      of
      the Series A Preferred had the following financial effects:





·
            The
                Series A Preferred required reclassification from its mezzanine
                classification to liabilities, at fair value, because the redemption
                is no
                longer conditional. This reclassification was accomplished by transferring
                the fair value from the mezzanine classification and joining the
                put
                derivative (that was fair valued on the date of the redemption triggering
                event with a charge to income).





·
            The
                Series B Preferred Stock, although possessing terms and conditions
                similar
                to those of the Series A Preferred was not afforded equity classification
                because share-settlement is presumed not to be within the Company’s
                control. In addition, investor and placement agent warrants issued
                with
                the Series B Preferred did not achieve equity classification for
                this same
                reason.




35


OMNIRELIANT
        HOLDINGS, INC. & SUBSIDIARY
 (A
        Development Stage Company)
 NOTES
        TO
        UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





·
            Other
                share-indexed financial instruments, such as warrants, required
                reclassification to liabilities because our ability to share-settle
                those
                instruments was no longer within our control. Thisreclassificationwas accomplished by transferring the fair value of these instruments
                from
                stockholders’ equity to liabilities at their fair values. They require
                ongoing fair value measurement. See “Warrant Considerations,”
                below.





The
      following table illustrates the activity with respect to each of the Series
      A
      and Series B Preferred from their respective inception dates to September 30,
      2008:





Series A
            
            Series B
            
            TotalMezzanineInitial
                allocation of Series A Preferred in the mezzanine
            
            $
            —
            
            $
            —
            
            $
            —Accretion
                to redemption value
            
            
            3,000,000
            
            
            —
            
            
            3,000,000Reclassification
                to liabilities
            
            
            (3,000,000
            )
            
            —
            
            
            (3,000,000
            )Redeemable
                preferred stock
            
            $
            —
            
            $
            —
            
            $
            —LiabilitiesReclassification
                from mezzanine
            
            $
            3,000,000
            
            $
            —
            
            $
            3,000,000Reclassification
                from paid-in capital
            
            
            1,600,270
            
            
            —
            
            
            1,600,270Reclassification
                from derivative
            
            
            599,730
            
            
            —
            
            
            599,730Initial
                allocation of Series B Preferred in liabilities
            
            
            —
            
            
            780,000
            
            
            780,000Redeemable
                preferred stock (liabilities)
            
            
            5,200,000
            
            
            780,000
            
            
            5,980,000Exchanged
                for Series C Preferred
            
            
            (5,200,000
            )
            
            (780,000
            )
            
            (5,980,000
            )$
            —
            
            $
            —
            
            $
            —





When
      the
      redeemable preferred stock was reflected in liabilities, the value was based
      upon the redemption values calculated as follows:





·
            Series
                A—This amount represents the common stock equivalent value associated
                with
                the holders’ redemption alternative to require the Company to settle the
                debt in common stock, in the number of shares equal to the cash redemption
                amount (130% of the stated value) divided by 75.0% of the trading
                market
                value.





·
            Series
                B—This amount represents only the cash redemption value because, unlike
                the Series A Preferred holders, the Series B Preferred holders did
                not
                have the right to require redemption in common
                stock.





·
            The
                shares underlying the investor warrants were subject to firm registration
                rights. That is, we were required to deliver registered shares, and
                the
                Registration Rights Agreement did not specify how the warrant contract
                would be settled in the event that we are unable to deliver registered
                shares. As a result, net-cash settlement was assumed under the standard.
                That ultimate assumption required us to classify the warrants as
                derivative liabilities at their fair values and account for the warrants
                at fair value with changes recognized in
                income.




36





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





·
            The
                shares underlying the placement agent warrants are not subject to
                the
                registration rights. Accordingly, the placement agent warrants issued
                with
                the Series A Preferred Financing were afforded equity classification.
                On
                May 21, 2007, however, our ability to share-settle our share-indexed
                financial instruments was placed out of our control because the number
                of
                shares necessary to share-settle the Series A Preferred became
                indeterminate and we potentially could have insufficient authorized
                shares
                to settle all of our share-indexed financial instruments. On that
                date,
                the warrants issued with the Series A Preferred required reclassification
                to liabilities. Subsequently, on May 25, 2007, the placement agent
                warrants issued with the Series B Preferred Financing did not achieve
                equity classification for this reason. The Series A and Series B
                Preferred
                Stock were exchanged for Series C Preferred Stock and warrants on
                October
                18, 2007, as discussed in the following section. Upon the exchange
                of the
                Series A and B Preferred Stock for Series C Preferred Stock, there
                was no
                longer a variable conversion rate associated with the Preferred Stock
                Financings. Accordingly, share settlement was again determined to
                be
                within the Company’s control and the placement agent warrants from the
                Series A and B Financings were reclassed to equity.





Note:
      In
      accordance with SFAS 150, the carrying amount of the Series A and B Preferred
      Stock were measured at fair value when the instruments were classified as
      liabilities. Certain provisions in the Preferred Stock were considered when
      determining the fair value of the instrument. There was no right to participate
      in earnings, the liquidation preference of the Preferred Stock was the same
      as
      the stated rate, there were no voting rights and the Preferred Stock was not
      redeemable by the Company, so no value was ascribed to these provisions. There
      was also no value ascribed to the cumulative dividend feature since the Company
      was unable to pay its dividend from earnings. Accordingly, the fair value
      approximates the redemption value of the Preferred Stock which is calculated
      as
      a common stock equivalent value based upon observable market prices.




37





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





***Sale
      and Exchange of Series C Preferred Stock:***





On
      October 18, 2007, we sold 6,400,000 Series C Preferred shares plus two tranches
      of warrants. We also issued warrants to placement agents. On October 18, 2007,
      we also exchanged all outstanding Series A Preferred, and Series B Preferred,
      for 3,909,564 shares of Series C Preferred and two tranches of warrants. The
      following table illustrates details of the sales of these financial
      instruments:





Series C
              Financing
            
            Series C
              Exchange
            
            TotalGross proceeds
            
            $
            6,400,000
            
            $
            —
            
            $
            6,400,000Financing
                costs paid in cash
            
            
            (340,000
            )
            
            —
            
            
            (340,000
            )Net
                proceeds
            
            $
            6,060,000
            
            $
            —
            
            $
            6,060,000Common
                shares indexed to financial instruments:Series
                C Preferred
            
            
            8,533,333
            
            
            5,212,752
            
            
            13,746,085Investor
                warrants:Tranche
                C-1
            
            
            8,533,334
            
            
            5,212,752
            
            
            13,746,086Tranche
                C-2
            
            
            8,533,334
            
            
            5,212,752
            
            
            13,746,086Placement
                agent warrants
            
            
            2,559,999
            
            
            —
            
            
            2,559,99928,160,000
            
            
            15,638,256
            
            
            43,798,256





Apogee
      Financial Investments, Inc., a company owned by certain of our stockholders,
      and
      Midtown Partners & Company LLC, a related company, received cash fees of
      $340,000 for consulting and due diligence services rendered in connection with
      the transactions, which amount is included in the financing costs paid in cash
      in the table above.





The
      following table illustrates the terms of the warrants issued in connection
      with
      the Series C Preferred Financing:





Warrant terms:
            
            Strike Price
            
            TermTranche
                C-1
            
            $
            1.50
            
            
            5
                yearsTranche
                C-2
            
            $
            2.00
            
            
            10
                yearsPlacement
                agents
            
            $
            0.75-$2.00
            
            
            10
                years




38





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





The
      following tables illustrate how the net proceeds arising from each of the Series
      C Preferred Financing and Exchange was allocated on the inception
      dates:





Series C
              Financing
            
            Series C
              Exchange
            
            TotalRedeemable preferred stock (mezzanine)
            
            $
            —
            
            $
            (13,553,155
            )
            $
            (13,553,155
            )Beneficial conversion
                feature (paid-in capital)
            
            
            (2,766,833
            )
            
            —
            
            
            (2,766,833
            )Derivative
                put liability
            
            
            (399,150
            )
            
            —
            
            
            (399,150
            )Sub-total
                redeemable preferred
            
            
            (3,165,983
            )
            
            (13,553,155
            )
            
            (16,719,138
            )Paid-in
                capital (investor warrants)
            
            
            (3,633,167
            )
            
            (17,796,834
            )
            
            (21,430,001
            )Loss
                on extinguishment of redeemable preferred stock
            
            
            —
            
            
            26,247,006
            
            
            26,247,006Day-one
                derivative loss
            
            
            399,150
            
            
            —
            
            
            399,150Loss
                on extinguishment of other liabilities
            
            
            —
            
            
            271,109
            
            
            271,109Gross
                proceeds (financing) basis (exchange)
            
            $
            (6,400,000
            )
            $
            (4,831,874
            )
            $
            (11,231,874
            )





The
      Exchange of Series A and B Preferred for Series C Preferred and related
      warrants, was accounted for as the settlement of the former financial
      instruments resulting in (i) an extinguishment loss, to the extent that the
      fair
      value of the Series C Preferred and related warrants exceeded the carrying
      values of the Series A and B Preferred (included in liabilities). The following
      table illustrates the calculations related to the Exchange.





Fair
                value of Series C Preferred
            
            $
            13,553,155Fair
                value of Series C investor warrants
            
            
            17,796,83431,349,989Carrying
                values of financial instruments exchanged:Series
                A Preferred
            
            
            (5,200,000
            )Series
                B Preferred
            
            
            (780,000
            )Accrued
                dividends
            
            
            (309,564
            )Accrued
                damages
            
            
            (542,080
            )Unamortized
                finance costs
            
            
            1,999,771Total
                carrying values
            
            
            (4,831,873
            )Excess
                of fair values over carrying values
            
            $
            26,518,116Allocation
                of excess:Extinguishment
                of redeemable preferred
            
            $
            26,247,007Extinguishment
                of other liabilities
            
            
            271,109Excess
                of fair values over carrying values
            
            $
            26,518,116




39





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





The
      investor warrants were valued using BSM. Significant assumptions underlying
      the
      BSM calculations are as follows:





Financing Inception Dates:
            
            A-1
            
            A-2
            
            B-1
            
            B-2Trading market price
            
            $
            3.50
            
            $
            3.50
            
            $
            3.50
            
            $
            3.50Strike
                or exercise price
            
            $
            1.50
            
            $
            1.00
            
            $
            1.87
            
            $
            3.75Expected
                term in years
            
            
            5yrs
            
            
            10yrs
            
            
            3yrs
            
            
            5yrsVolatility
            
            
            43.91
            %
            
            51.15
            %
            
            39.86
            %
            
            42.19
            %Risk-free
                rate
            
            
            4.57
            %
            
            4.57
            %
            
            4.81
            %
            
            4.80
            %Expected
                dividend rate
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00





October 18, 2007:
            
            A-1
            
            A-2
            
            B-1
            
            B-2Trading market
                price
            
            $
            2.60
            
            $
            2.60
            
            $
            2.60
            
            $
            2.60Strike
                or exercise price:Contract
                price
            
            $
            1.50
            
            $
            1.00
            
            $
            1.87
            
            $
            3.75Repriced
            
            $
            0.75
            
            $
            0.75
            
            $
            0.75
            
            $
            0.75Expected
                term in years
            
            
            4.10yrs
            
            
            9.10yrs
            
            
            2.60yrs
            
            
            4.60yrsVolatility
            
            
            39.73
            %
            
            50.03
            %
            
            34.98
            %
            
            40.08
            %Risk-free
                rate
            
            
            4.17
            %
            
            4.52
            %
            
            3.98
            %
            
            4.17
            %Expected
                dividend rate
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00





On
      October 18, 2007, certain warrants were repriced from their original exercise
      price to $0.75 in connection with the Series C Preferred financing. On April
      30,
      2008 certain warrants were repriced to $0.50 in connection with the Series
      D
      Preferred Financing. We recorded an expense of approximately $3.2 million
      resulting from repricing of warrants.





The
      fair
      value of the warrants issued to placement agents in connection with the Series
      A
      Preferred and Series B Preferred financing transactions amounted to $2,492,312
      and $384,034, respectively; $2,876,346 in the aggregate. The fair values were
      calculated using the Black-Scholes-Merton (“BSM”) valuation
      technique.





Notes
      to
      BSM: We did not have a historical trading history sufficient to develop an
      internal volatility rate for use in BSM. As a result, we have used a peer
      approach wherein the historical trading volatilities of certain companies with
      similar characteristics as ours and who had a sufficient trading history were
      used as an estimate of our volatility. In developing this model, no one company
      was weighted more heavily. We do not have a history to develop the expected
      term
      for our warrants. Accordingly, we have used the contractual remaining term
      in
      our calculations. Finally, for purposes of our risk-free rate, we have used
      the
      publicly-available yields on zero-coupon Treasury securities with remaining
      terms to maturity consistent with the remaining contractual term of the
      warrants. These assumptions are estimates of future trends. Actual results
      during the periods that the warrants are outstanding will most likely be
      different.




40





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





***Sales
      of Series D Preferred Stock and Warrants:***





On
      April
      30, 2008, we entered into securities purchase agreement (the “Purchase
      Agreement”) with Vicis Capital Master Fund (“Vicis”) pursuant to which Vicis
      purchased 7,000,000 shares of our Series D Convertible Preferred Stock (“Series
      D Preferred Stock”), respectively for an aggregate purchase price of $7,000,000.
      The Series D Preferred Stock has a conversion price of $0.50 and is convertible
      into an aggregate amount of 14,000,000 shares of common stock. The Series D
      Preferred Stock does not pay annual dividends but each holder of Series D
      Preferred Stock has the right to such number of votes equal to the number of
      shares of common stock that the Series D Preferred Stock may be converted into,
      subject to the beneficial ownership limitation described below.





In
      connection with the Agreement, Vicis received a Series D warrant to purchase
      28,000,000 shares of common stock of the Company (“Series D Warrants”). The
      Series D Warrants are exercisable for a period of seven years from the date
      of
      issuance at an initial exercise price of $0.75. Vicis may exercise the Series
      D
      Warrants on a cashless basis if the shares of common stock underlying the Series
      D Warrants are not then registered pursuant to an effective registration
      statement. In the event Vicis exercises the Series D Warrants on a cashless
      basis, then we will not receive any proceeds.





The
      conversion price of the Series D Preferred Stock and the exercise price of
      the
      Series D Warrants are subject to full ratchet and anti-dilution adjustment
      for
      subsequent lower price issuances by the Company, as well as customary adjustment
      provisions for stock splits, stock dividends, and recapitalizations.





In
      addition, the Company, Vicis and Dynamic Decisions Strategic Opportunities
      (“Dynamic Decisions”) have entered into Amendment No. 1 to its amended and
      restated registration rights agreement (“Amended Registration Rights Agreement”)
      pursuant to which if at any time after the date of the Amended Registration
      Rights Agreement we shall decide to prepare and file with the Commission a
      registration statement relating to an offering for our own account or the
      account of others under the Securities Act of any of its equity securities,
      other than on Form S-4 or Form S-8 (each as promulgated under the Securities
      Act) or their then equivalents relating to equity securities to be issued solely
      in connection with any acquisition of any entity or business or equity
      securities issuable in connection with the stock option or other employee
      benefit plans, then we will send to each holder a written notice of such
      determination and, if within fifteen days after the date of such notice, any
      such holder shall so request in writing, we will include in the registration
      statement, all or any part of such Registrable Securities (as defined in Amended
      Registration Rights Agreement) such holders request to be
      registered.





Vicis
      has
      contractually agreed to restrict their ability to convert the Series D Preferred
      Stock and exercise the Series D Warrants and receive shares of our common stock
      such that the number of shares of the Company common stock held by them and
      their affiliates after such conversion or exercise does not exceed 4.99% of
      our
      issued and outstanding shares of common stock.





At
      any
      time before the one year anniversary of the date we initially issued the shares
      of Series D Preferred Stock, we may, upon written notice, redeem the outstanding
      shares of Series D Preferred Stock in cash at a price equal to 110% of Stated
      Value (as such term is defined in the Certificate of Designations).





41





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





The
      following table illustrates (i) how the net proceeds arising from the Series
      D
      Preferred financing were allocated on
      the
      financing inception date and (ii)
      how the aggregate financing costs (both cash and warrant consideration) were
      allocated on
      the
      inception date :





Classification
            
            Series
                DRedeemable
                Preferred Stock (Mezzanine)
            
            $
            -Derivative
                warrants (investor warrants)
            
            
            (18,174,800
            )Derivative
                warrants (agent warrants)
            
            
            (1,131,620
            )Beneficial
                conversion feature
            
            
            (2,839,864
            )Derivative
                put liability
            
            
            (1,024,605
            )Deferred
                financing costs
            
            
            1,077,268Retained
                earnings (financing fees)
            
            
            316,615Paid
                in capital (financing fees)
            
            
            286,487Day-one
                derivative loss
            
            
            14,965,519Net
                proceeds
            
            $
            6,525,000





The
      accounting and reporting for complex financing transactions that embody multiple
      financial instruments, some of which are features embedded within financial
      instruments, can best be described as a step-by-step process where the terms
      and
      features of the financial instruments are compared to multiple standards in
      a
      hierarchy of decision making. The following summarizes this process and
      conclusions during the process.





As
      an
      initial consideration, we are required to consider whether the Series D
      Preferred Stock is, by its terms, financial instruments that require liability
      classification under Statements on Financial Accounting Standards No. 150 Accounting
      for Certain Financial Instruments with Characteristics of both Equity and
      Liability .
      Statement 150 generally provides that financial instruments that are issued
      in
      the form of shares that are mandatorily redeemable on a fixed or determinable
      date or upon an event certain to occur be classified as liabilities.





·
            The
                Series D Preferred did not require liability classification on the
                inception date because the contract did not provide for a fixed or
                determinable redemption (an unconditional payment requirement) and
                events
                that could give rise to cash redemption were conditional and not
                certain
                to occur on the inception date. However, other standards exist that
                provide for classification of redeemable securities outside of
                stockholders’ equity when, irrespective of probability, contingent
                redemption events are outside of the issuer’s control. As a result, the
                Series D Preferred required classification outside of stockholders’ equity
                on the inception date.





The
      terms
      and conditions of the Series D Preferred were also subject to evaluation under
      Statement 133. Derivative financial instruments, as defined in Statement 133
      consist of financial instruments or other contracts that contain a notional
      amount and one or more underlying (e.g. interest rate, security price or other
      variable), require no initial net investment and permit net settlement.
      Derivative financial instruments may be free-standing or embedded in other
      financial instruments. Further, derivative financial instruments are initially,
      and subsequently, measured at fair value and recorded as liabilities or, in
      rare
      instances, assets.





42





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





In
      considering the application of Statement 133, we identified those specific
      terms
      and features embedded in the contracts that possess the characteristics of
      derivative financial instruments. Those features included the conversion option,
      redemption features and other equity-indexed terms and conditions. In evaluating
      the respective classification of these embedded derivatives, we are required
      to
      determine whether the host contract (the Series D Preferred) is more akin to
      a
      debt or equity instrument in regards to the risks. This determination is
      subjective. However, in complying with the guidance provided in EITF D-109 Determining
      the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued
      in
      the Form of a Share under Statement No. 133 we
      concluded, based upon the preponderance and weight of all terms, conditions
      and
      features of the host contracts, that the Series D Preferred was more akin to
      an
      equity instrument for purposes of considering the clear and close relation
      of
      the embedded feature to the host contract. Based upon this conclusion, we
      further concluded that (i) the equity indexed and settled embedded features
      did
      not require derivative liability classification and (ii) certain redemption
      features (that is, features that afford the investor the right to put the
      instruments for cash) required bifurcation and classification as compound
      embedded derivative liabilities, at fair value on the inception date. These
      amounts are reflected in the table above as derivative put liabilities and
      are
      valued using multiple, probability-weighted cash flow outcomes and market
      discount rates that are commensurate with our estimated credit
      risk.





Although,
      as described above, the embedded conversion feature did not require liability
      classification under Statement 133, we were required to consider if the hybrid
      preferred contracts embodied beneficial conversion features (“BCF”). A BCF is
      present when the “effective” conversion price ascribed to the conversion feature
      has intrinsic value. Further, a BCF is accounted for as a component of paid-in
      capital on the inception date. As reflected in the tables above, the Series
      D
      Preferred was found to have a BCF. The aggregate BCF at its intrinsic value
      amounted to $38,460,136. This amount gives effect to the (i) the trading market
      price on the contract dates and (ii) the effective conversion price of each
      preferred issuance after allocation of proceeds to all financial instruments
      sold based upon their relative fair values. Notwithstanding, BCF was limited
      to
      the value ascribed to the remaining hybrid contract (using the relative fair
      value approach). Accordingly, the BCF allocated to paid-in capital amounted
      to
      $2,839,864.





As
      discussed above, the initial allocation of the basis in the Series D Preferred
      Financing transaction resulted in no basis ascribed to the redeemable preferred
      stock. According to EITF D-98 Classification
      and Measurement of Redeemable Securities ,
      if the
      security is not currently redeemable and it is not probable that the security
      will be become redeemable, accretion to face value is not necessary. The Series
      D Preferred is convertible upon inception and there was no persuasive evidence
      that the Preferred Stock would not be redeemed. Based on this information,
      redemption could not be considered “not probable” of occurring and accretion was
      necessary. Redeemable preferred stock is required to be accreted to its
      redemption values through periodic charges to retained earnings or, if no term
      of redemption is embodied in the contract, as is the case of the Series D
      Preferred, on the date of issuance. As a result, a day-one deemed dividend
      of
      $7,000,000 was recorded to accrete the Series D Preferred to its redemption
      value.





The
      allocation of the basis of the Series D Financing transaction required the
      allocation to certain financial instruments at their respective fair values,
      and
      these fair values in each instance exceeded the cash proceeds obtained from
      the
      transactions. As a result, we were required to record a day-one derivative
      loss
      in connection with this transaction because fair value was the required
      standard.





43





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





*Subsequent
      and Ongoing Classification Considerations:*





The
      evaluation of the classification of the Series D Preferred is required at each
      reporting date. Statement 150 requires reclassification of financial instruments
      otherwise classified in stockholders’ equity or redeemable preferred stock to
      liabilities when the conditional redemption becomes certain of occurrence.
      As of
      September 30, 2008, the conditional redemption was not considered certain to
      occur and the Series D Preferred continued to be recorded in the mezzanine
      section.





Midtown
      Partners & Co., LLC, (“Midtown”), which served as the Company’s placement
      agent in connection with the Purchase Agreement, received aggregate placement
      agent fees of approximately $350,000, as well as the following common stock
      purchase warrants: (a) a Series BD-10 warrant entitling Midtown to purchase
      700,000 shares of the Company's common stock at an exercise price of fifty
      cents
      ($0.50) per share, and (b) a Series BD-11 warrant entitling Midtown to purchase
      1,400,000 shares of our common stock at an exercise price of seventy-five cents
      ($0.75) per share. The Series BD-10 and BD-11 warrants have a term of five
      years
      from the date of issuance. Midtown is a FINRA registered broker-dealer. Pursuant
      to the terms of the Registration Rights Agreement by and between the Company
      and
      Midtown, if at any time after the date of the Registration Rights Agreement
      the
      Company decides to prepare and file with the Commission a registration statement
      relating to an offering for its own account or the account of others under
      the
      Securities Act of any of its equity securities, other than on Form S-4 or Form
      S-8 (each as promulgated under the Securities Act) or their then equivalents
      relating to equity securities to be issued solely in connection with any
      acquisition of any entity or business or equity securities issuable in
      connection with the stock option or other employee benefit plans, then the
      Company shall send to each holder a written notice of such determination and,
      if
      within fifteen days after the date of notice, the holder requests in writing,
      the Company will include in such registration statement, all or any part of
      such
      Registrable Securities (as defined in Registration Rights Agreement) the holders
      request to be registered.





The
      Series D Preferred Stock is convertible into shares of common stock at a
      conversion price of $0.50.  Any previously issued and outstanding financial
      instruments afforded full ratchet protection with a conversion price greater
      than $0.50 automatically had their conversion price ratcheted down to the lower
      conversion price. These financial instruments included the Series C Preferred
      Financing and the investor and placement agent warrants related to the Series
      A,
      Series B, and Series C Financings.





The
      investor warrants were valued using BSM. Significant assumptions underlying
      the
      BSM calculations are as follows:





April
                30, 2008 (inception):
            
            Series
                DTrading
                market price
            
            $
            2.95Strike
                or exercise price:
            
            $
            0.75Expected
                term in years
            
            
            7yrsVolatility
            
            
            43.82
            %Risk-free
                rate
            
            
            3.34
            %Expected
                dividend rate
            
            $
            0.00




44





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





***Warrant
      Considerations***





The
      overall accounting for the Series A, B, C, and D Preferred Financings required
      consideration regarding the classification of the investor and placement agent
      warrants. Warrants are derivative financial instruments that are indexed to
      the
      Company’s own stock and, accordingly, equity classification of the warrants is
      dependent upon meeting eight specific conditions for equity classification
      provided in EITF 00-19 Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock .
      In
      evaluating the warrants under EITF 00-19, we noted that there were no explicit
      conditions that required net cash settlement. However, equity classification
      is
      permissible only in instances where the contract permits us to settle in
      unregistered shares.





·
            The
                shares underlying the Series A and B investor warrants were subject
                to
                firm registration rights. That is, we were required to deliver registered
                shares, and the Registration Rights Agreement did not specify how
                the
                warrant contract would be settled in the event that we are unable
                to
                deliver registered shares. As a result, net-cash settlement was assumed
                under the standard. That ultimate assumption requires us to classify
                the
                warrants as derivative liabilities at their fair values and account
                for
                the warrants at fair value each reporting period with changes recognized
                in income. The series c investor warrants are not subject to firm
                registration rights and they meet the criteria in EITF 00-19 paragraphs
                12-32 for equity classification. The Series D warrants are redeemable
                for
                cash upon certain events not considered within our control, as such,
                they
                require liability classification under SFAS 150, and must by classified
                as
                liabilities and adjusted to fair value each reporting period with
                changes
                in fair value recognized in income.





·
            The
                shares underlying the placement agent warrants are not subject to
                the
                registration rights. Accordingly, the placement agent warrants issued
                with
                the Series A Preferred Financing were afforded equity classification.
                On
                May 21, 2007, however, our ability to share-settle our share-indexed
                financial instruments was placed out of our control because the number
                of
                shares necessary to share-settle the Series A Preferred became
                indeterminate and we potentially could had insufficient authorized
                shares
                to settle all of our share-indexed financial instruments. On that
                date,
                the warrants issued with the Series A Preferred required reclassification
                to liabilities. Subsequently, on May 25, 2007, the placement agent
                warrants issued with the Series B Preferred Financing did not achieve
                equity classification for this reason. Upon the exchange of the Series
                A
                and B Preferred Stock for Series C Preferred Stock, there was no
                longer a
                variable conversion rate associated with the Preferred Stock Financings.
                Accordingly, share settlement was again determined to be within the
                Company’s control and the placement agent warrants from the Series A and
                B
                Preferred Financings were reclassed to equity. The placement agent
                warrants issued with the Series C Preferred were afforded equity
                classification. The placement agent warrants issued with the Series
                D
                Preferred were redeemable for cash upon the occurrence of certain
                events
                not considered within our control, as such, they require liability
                classification under SFAS 150, and must be classified as liabilities
                and
                adjusted to fair value each reporting period with changes in fair
                value
                recognized in income.





The
      warrants were valued using BSM. Significant assumptions underlying the BSM
      calculations are as follows at September 30, 2008:





A-1
            
            A-2
            
            B-1
            
            B-2
            
            DTrading market price
            
            $
            1.18
            
            $
            1.18
            
            $
            1.18
            
            $
            1.18
            
            $
            1.18Strike
                or exercise price
            
            $
            0.50
            
            $
            0.50
            
            $
            0.50
            
            $
            0.50
            
            $
            0.75Expected
                term in years
            
            
            3.14yrs
            
            
            8.14yrs
            
            
            1.65yrs
            
            
            3.65yrs
            
            
            6.58yrsVolatility
            
            
            40.32
            %
            
            45.31
            %
            
            43.21
            %
            
            39.78
            %
            
            42.90
            %Risk-free
                rate
            
            
            2.28
            %
            
            3.38
            %
            
            2.00
            %
            
            2.28
            %
            
            3.38
            %Expected
                dividend rate
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00








45





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





The
      warrants were valued using BSM. Significant assumptions underlying the BSM
      calculations are as follows for year ended September 30, 2007:





A-1
            
            A-2
            
            B-1
            
            B-2
            
            BD-1Trading market price
            
            $
            3.25
            
            $
            3.25
            
            $
            3.25
            
            $
            3.25
            
            $
            3.25Strike
                or exercise price
            
            $
            1.50
            
            $
            1.00
            
            $
            1.87
            
            $
            3.75
            
            $
            1.00Expected
                term in years
            
            
            4.15yrs
            
            
            9.15yrs
            
            
            2.65yrs
            
            
            4.65yrs
            
            
            9.15yrsVolatility
            
            
            39.60
            %
            
            52.07
            %
            
            34.97
            %
            
            40.03
            %
            
            52.07
            %Risk-free
                rate
            
            
            4.23
            %
            
            4.59
            %
            
            4.03
            %
            
            4.23
            %
            
            4.59
            %Expected
                dividend rate
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00




BD-2
            
            BD-3
            
            BD-4
            
            BD-5
            
            BD-6Trading market price
            
            $
            3.25
            
            $
            3.25
            
            $
            3.25
            
            $
            3.25
            
            $
            3.25Strike
                or exercise price
            
            $
            1.50
            
            $
            3.00
            
            $
            1.87
            
            $
            3.75
            
            $
            1.25Expected
                term in years
            
            
            9.15yrs
            
            
            9.15yrs
            
            
            9.65yrs
            
            
            9.65yrs
            
            
            9.65yrsVolatility
            
            
            52.07
            %
            
            52.07
            %
            
            51.33
            %
            
            51.33
            %
            
            51.33
            %Risk-free
                rate
            
            
            4.59
            %
            
            4.59
            %
            
            4.59
            %
            
            4.59
            %
            
            4.59
            %Expected
                dividend rate
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00





***Direct
      Financing Costs:***





Aggregate
      financing costs arising from the Series A, Series B, Series C, and Series D
      Preferred financings amounted to $2,967,313, $479,034, $5,538,797, and
      $1,680,370 respectively. As noted in the tables below, these financing
      costs were allocated among deferred financing costs, paid-in capital and
      retained earnings based upon the relative fair values of the components of
      the
      financing. That is, liability classified financial instruments (i.e.
      derivatives), mezzanine financial instruments and equity classified financial
      instruments (i.e. BCF). Since, as previously discussed, no basis was ascribed
      to
      the redeemable preferred stock, the amount of financing costs allocated to
      this
      category were reflected as a charge to retained earnings.





The
      following table illustrates the allocation of financing costs associated with
      the Series A, Series B, and Series D Financing Transactions:





Classification
            
            Series A
            
            Series B
            
            Series C
            
            Series D
            
            TotalDeferred
                financing costs (asset)
            
            $
            1,898,875
            
            $
            479,034
            
            $
            43,079
            
            $
            1,077,268
            
            $
            3,498,256Paid-in
                capital
            
            
            911,135
            
            
            —
            
            
            4,998,925
            
            
            286,487
            
            
            6,196,547Series
                C preferred mezzanine
            
            
            —
            
            
            —
            
            
            496,793
            
            
            —
            
            
            496,793Accumulated
                deficit (deemed dividend)
            
            
            157,303
            
            
            —
            
            
            —
            
            
            316,615
            
            
            473,918Aggregate
                finance costs
            
            $
            2,967,313
            
            $
            479,034
            
            $
            5,538,797
            
            $
            1,680,370
            
            $
            10,665,514Common
                shares indexed to warrants recorded as derivative
                liabilities
            
            
            
            
            
            
            
            
            
            
            
            37,060,000




46





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE
        10 -
        REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
        PAYMENT ARRANGEMENTS (CONTINUED):
 
 ***Derivative
        Financial Instruments***
 
 The
        following table summarizes the components of derivative liabilities as of
        September 30, 2008:
 
 Financing
                  Transaction:Series
                  A Convertible Preferred Financing- Investor warrants
              
              $
              (568,200
              )Series
                  B Convertible Preferred Financing- Investor warrants
              
              
              (16,944
              )Series
                  C Convertible Preferred Financing- Put liability
              
              
              (722,475
              )Series
                  D Convertible Preferred Financing- Investor warrants
              
              
              (1,509,200
              )Series
                  D Convertible Preferred Financing- Placement agent
                  warrants
              
              
              (68,780
              )Series
                  D Convertible Preferred Financing- Put liability
              
              
              (1,003,000
              )$
              (3,888,599
              )
 
 The
        following table summarizes the components of derivative income (expense)
        arising
        from fair value adjustments during the three month period ending September
        30,
        2008:
 
 Financing
                  Transactions:
              
              Embedded
                Derivatives
              
              Warrant
                Derivatives
              
              TotalSeries
                  A Financing
              
              $
              --
              
              $
              525,300
              
              $
              525,300Series
                  B Financing
              
              
              --
              
              
              25,440
              
              
              25,440Series
                  C Financing
              
              
              10,668
              
              
              --
              
              
              10,668Series
                  D Financing
              
              
              11,363
              
              
              1,899,730
              
              
              1,911,093Other
                  warrants, reclassified
              
              
              --
              
              
              --
              
              
              --Day-one
                  derivative losses
              
              
              --
              
              
              --
              
              
              --Total
                  derivative income (expense)
              
              $
              22,031
              
              $
              2,450,470
              
              $
              2,472,501
 
 The
        following table summarizes the components of derivative income (expense)
        arising
        from fair value adjustments during the three month period ending September
        30,
        2007:
 
 Financing
                  Transactions:
              
              Embedded
                Derivatives
              
              Warrants
                Derivatives
              
              TotalSeries
                  A Financing
              
              $
              --
              
              $
              2,884,659
              
              $
              2,884,659Series
                  B Financing
              
              
              --
              
              
              414,110
              
              
              414,110Other
                  warrants, reclassified
              
              
              --
              
              
              379,900
              
              
              379,900Day-one
                  derivative losses
              
              
              --
              
              
              --
              
              
              --Total
                  derivative income (expense)
              
              
              --
              
              $
              3,678,669
              
              $
              3,678,669




47





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





We
      estimate fair values of derivative financial instruments using various
      techniques (and combinations thereof) that are considered to be consistent
      with
      the objective measuring fair values. In selecting the appropriate technique,
      we
      consider, among other factors, the nature of the instrument, the market risks
      that it embodies and the expected means of settlement. For less complex
      derivative instruments, such as free-standing warrants, we generally use the
      Black-Scholes-Merton option valuation technique because it embodies all of
      the
      requisite assumptions (including  trading
      volatility, estimated terms and risk free rates) necessary to fair value these
      instruments. For forward contracts that contingently require net-cash settlement
      as the principal means of settlement, we project and discount future cash flows
      applying probability-weightage to multiple possible outcomes. Estimating fair
      values of derivative financial instruments requires the development of
      significant and subjective estimates that may, and are likely to, change over
      the duration of the instrument with related changes in internal and external
      market factors. In addition, option-based techniques are highly volatile and
      sensitive to changes in the trading market price of our common stock, which
      has
      a high estimated historical volatility. Since derivative financial instruments
      are initially and subsequently carried at fair values, our income will reflect
      the volatility in these estimate and assumption changes.





***Registration
      Rights Agreements***





In
      connection with the Series A and B Preferred financings, the Company and the
      Investors entered into a registration rights agreement pursuant to which the
      Company agreed to file, within 90 days after the closing (the Filing Date),
      a
      registration statement covering the common stock issuable upon conversion of
      the
      Preferred Stock and exercise of the Warrants. If (i) a Registration Statement
      is
      not filed on or prior to its Filing Date (if the Company files a Registration
      Statement without affording the Holders the opportunity to review and comment
      on
      the same as required or (ii) the Company fails to file with the Commission
      a
      request for acceleration in accordance with Rule 461 promulgated under the
      Securities Act, within five Trading Days of the date that the Company is
      notified (orally or in writing, whichever is earlier) by the Commission that
      a
      Registration Statement will not be “reviewed,” or not subject to further review,
      or (iii) prior to its Effectiveness Date, the Company fails to file a
      pre-effective amendment and otherwise respond in  writing
      to comments made by the Commission in respect of such Registration Statement
      within 10 calendar days after the receipt of comments by or notice from the
      Commission that such amendment is required in order for a Registration Statement
      to be declared effective, or (iv) a Registration Statement filed or required
      to
      be filed hereunder is not declared effective by the Commission by its
“Effectiveness Date” (the 150th calendar day following the date the  agreement
      was entered into or the 180th calendar day in the event of a “full review” of
      the initial Registration Statement by the Commission), or (v) after the
      Effectiveness Date, a Registration Statement ceases for any reason to remain
      continuously effective as to all Registrable Securities, for which it is
      required to be effective, or the Holders are otherwise not permitted to utilize
      the Prospectus therein to resell such Registrable Securities for more than
      10
      consecutive calendar days or more than an aggregate of 15 calendar days during
      any 12-month period (which need not be consecutive calendar days) then, in
      addition to any other rights the Holders may have hereunder or under applicable
      law, on each such Event Date and on each monthly anniversary of each such Event
      Date (if the applicable Event shall not have been cured by such date) until
      the
      applicable Event is cured, the Company shall pay to each Holder an amount in
      cash or shares of Common Stock, or combination thereof, as partial liquidated
      damages and not as a penalty, equal to 1.5% of the aggregate purchase price
      paid
      by such Holder pursuant to the Purchase Agreement for any Registrable Securities
      then held by such Holder (calculated as if all convertible securities had been
      fully converted.)





48





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      10 –
REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION
      PAYMENT ARRANGEMENTS (CONTINUED):





The
      parties agree that (1) the Company will not be liable for liquidated damages
      under this Agreement with respect to any Warrants or Warrant Shares, (2) in
      no
      event will the Company be liable for liquidated damages under this Agreement
      in
      excess of 1.5% of the aggregate Subscription Amount of the Holders in any 30-day
      period and (3) the maximum aggregate liquidated damages payable to a Holder
      under this Agreement shall be 9% of the aggregate Subscription Amount paid
      by
      such Holder pursuant to the Purchase Agreement. The price at which shares of
      Common Stock issuable in lieu of cash hereunder shall be equal to the lesser
      of
      (x) [90% of the average of the 5 consecutive VWAPs immediately prior to the
      applicable Event Date, (y) [90% of the average of the 5 consecutive VWAPs
      immediately prior to the date such damages are due or (z) the then applicable
      Conversion Price. Notwithstanding anything herein to the contrary, payment
      in
      shares of Common Stock may only occur if during the period from the applicable
      Event Date until such issuance is made in full all of the Equity Conditions
      (as
      defined above-“Convertible Preferred Stock Rights and Preferences”) have been
      met and the Company shall have given the Holder written irrevocable notice
      within 2 Trading Days of the Event Date. Subject to the terms and conditions
      described above, the decision whether to pay partial liquidated damages in
      shares of Common Stock or cash shall be at the discretion of the Company.
      Subject to the aforementioned conditions, failure to timely provide such written
      notice shall be deemed an election by the Company to pay the partial liquidated
      damages on such Event Date in cash. Except as otherwise provided, if at any
      time
      the Company pays partial liquidated damages partially in cash and partially
      in
      shares of Common Stock, then such payment shall be distributed ratably among
      the
      Holders based upon the subscription amount paid by each Holder. If the Company
      fails to pay any partial liquidated damages in full within seven days after
      the
      date payable, the Company will pay interest thereon at a rate of 18% per annum
      (or such lesser maximum amount that is permitted to be paid by applicable law)
      to the Holder, accruing daily from the date such partial liquidated damages
      are
      due until such amounts, plus all such interest thereon, are paid in full. The
      partial liquidated damages pursuant to the terms hereof shall apply on a daily
      pro-rata basis for any portion of a month prior to the cure of an
      Event.





On
      October 18, 2007, when the Series A and B Preferred were exchanged for the
      Series C Preferred, the Registration Rights Agreement was amended. The Amended
      Registration Rights Agreement calls for piggy-back registration rights only
      and
      the Company’s best efforts at obtaining and maintaining effectiveness. There are
      no stipulations or damages if the registration does not occur.





NOTE
      11 – RELATED
      PARTY TRANSACTIONS:





*Consulting
      Agreement -* On
      October 1, 2006 the Company entered into a six (6) month consulting agreement
      with Harrington Business Development, LLC (“HBD”). The shareholders of HBD are
      also shareholders of the Company. This agreement was not renewed subsequent
      to
      June 30, 2007 and therefore The Company did not recognize any expense related
      to
      this agreement for the quarter ended September 30, 2008. On July 14, 2008 the
      Company entered into a one (1) year consulting agreement with HBD. For the
      three
      months ended September 30, 2008 and 2007 the Company recognized expenses
      amounting to $-0- and $135,000, related to this agreement. Refer to the
“ *Consulting
      Agreement* ”
above
      for further details.





*Licensing
      Agreement -* On
      October 13, 2006, the Company entered into a licensing agreement with a
      shareholder of the Company. On November 22, 2006 the Company made a payment
      of
      $850,000 pursuant to the agreement. On January 10, 2007, pursuant to the
      agreement, the Company paid the remaining balance due of $150,000. The Company
      has recognized expense related to this agreement in the amount of $56,964 for
      the quarter ended September 30, 2008. See *“Licensing
      agreement”* above
      for further details.





*Assignment
      of Contract -* On
      November 10, 2006 the Company entered into an agreement with Reliant
      International Media, LLC (“RIM”). The members of RIM are also shareholders of
      the Company. See “ *Assignment
      of Contract* ”
above
      for further details.




49





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      11 – RELATED
      PARTY TRANSACTIONS (CONTINUED):





*Preferred
      Stock Purchase Agreement -* Midtown
      Partner & Co. LLC, served as the Company's placement agent in
      connection with the Series A, B and C Preferred Stock Purchase Agreements.
      Midtown Partners & Co. LLC received an aggregate placement agent fee
      related to Series A Preferred Stock Purchase agreement of approximately
      $300,000, as well as the following common stock purchase warrants: (a) series
      BD-1 common stock purchase warrants entitling Midtown Partners to purchase
      300,000 shares of the Company's common stock at an exercise price of one dollar
      ($1.00) per share, (b) series BD-2 common stock purchase warrants entitling
      Midtown Partners to purchase 300,000 shares of the Company's common stock at
      an
      exercise price of one dollar and fifty cents ($1.50) per share, and (c) series
      BD-3 common stock purchase warrants entitling Midtown Partners to purchase
      300,000 shares of the Company's common stock at an exercise price of three
      dollars ($3.00) per share. The Series BD warrants have a term of ten years.





In
      addition, Midtown Partner & Co. LLC received an aggregate placement
      agent fee related to the Series B Preferred Stock Purchase agreement of
      approximately $60,000, as well as the following common stock purchase warrants:
      (a) series BD-4 common stock purchase warrants entitling Midtown Partners to
      purchase 48,000 shares of the Company's common stock at an exercise price of
      one
      dollar and eighty-seven cents ($1.87) per share, and (b) series BD-5 common
      stock purchase warrants entitling Midtown Partners to purchase 48,000 shares
      of
      the Company's common stock at an exercise price of three dollars and
      seventy-five cents ($3.75) per share and (c) series BD-6 common stock purchase
      warrants entitling Midtown Partners to purchase 48,000 shares of the Company's
      common stock at an exercise price of one dollar and twenty five cents ($1.25)
      per share. The Series BD warrants have a term of ten years. The member’s of
      Midtown Partners & Co. LLC are also shareholders of the Company. See
“ *Preferred
      Stock Purchase Agreement”* above
      for further details.





Midtown
      Partner & Co. LLC received an aggregate placement agent fee related to
      the Series C Preferred Stock Purchase agreement of approximately $340,000,
      as
      well as the following common stock purchase warrants: (a) series BD-7 common
      stock purchase warrants entitling Midtown Partners to purchase 853,333 shares of
      the Company's common stock at an exercise price of seventy five cents ($0.75)
      per share, and (b) series BD-8 common stock purchase warrants entitling Midtown
      Partners to purchase 853,333 shares of the Company's common stock at an exercise
      price of one dollar and fifty cents ($1.50) per share and (c) series BD-8 common
      stock purchase warrants entitling Midtown Partners to purchase 853,333 shares
      of
      the Company's common stock at an exercise price of two dollars ($2.00) per
      share. The Series BD warrants have a term of ten years. The member’s of Midtown
      Partners & Co. LLC are also shareholders of the Company. See
“ *Preferred
      Stock Purchase Agreement”* above
      for further details.





*Preferred
      Stock Purchase Agreement -* Pursuant
      to a verbal agreement, Apogee Financial Investments, Inc., a merchant bank,
      received a cash fee of $125,000 for consulting and due diligence services
      rendered in connection with the Preferred Stock Purchase Agreement, Exchange
      Agreement and the Common Stock Purchase Agreement. Apogee Financial Investments,
      Inc. is owned by shareholders of the Company. See “ *Preferred
      Stock Purchase Agreement”* above
      for further details.





*Consulting
      Agreement -* On
      December 8, 2006 the Company entered into a verbal agreement with TotalCFO,
      LLC.
      TotalCFO, LLC is owned by a shareholder of the Company. The Company has
      recognized $18,000 of expense related to this agreement for the quarter ended
      September 30, 2008.





*International
      Distribution Agreement -* On March
      19, 2007, the Company entered into an International Distribution Agreement
      with
      Reliant International Media LLC. The shareholders of Reliant International
      Media, LLC are also shareholders of the Company. See “ *International
      Distribution Agreement* ”
above
      for further details.




50





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      12–
TRANSACTIONS WITH RESPONZETV:





Sublicense
      Agreement:





On
      October 19, 2007, we entered into a sublicense arrangement with ResponzeTV
      PLC
      providing for restricted rights to use the Kathy Hilton Trademark, as provided
      in our Principal License Agreement with KHL Holdings, Inc., without territorial
      restriction. The only restriction is as to fragrance related products. The
      structure of this arrangement was accomplished, as follows:





·
            We
                created a wholly-owned subsidiary named KHL Holdings, Inc. with minimal
                capitalization on October 12, 2007. This subsidiary had no operations;
                nor
                were any operations transferred to the
                subsidiary.





·
            Also
                on October 12, 2007, we executed a formal sublicense agreement with
                the
                newly formed for the use of the licensed trademark, which agreement
                required and received the formal acknowledgement of Kathy Hilton.





·
            On
                October 19, 2007 all outstanding common stock KHL Holdings, Inc.
                was sold
                to ResponzeTV for 10,000,000 shares of their common stock, which
                had a
                value of $6,538,240 based upon ResponzeTV’s trading market
                price.




·
            Also
                on October 19, 2007, we executed a formal assignment agreement providing
                for the assignment of KHL Holdings, Inc. rights in the sublicense
                agreement to ResponzeTV.





The
      sublicense agreement provides for Minimum Annual Guaranteed Payments that
      coincide with the Principal License Agreement (although in lower amounts in
      recognition of the restriction as to product types) and royalty payments in
      amounts consistent with the Principal License Agreement.




The
      substance of the above series of transactions is that of a sublicense
      arrangement between us and ResponzeTV; that is, a revenue arrangement. Our
      accounting for the activity arising from this arrangement, which will commence
      in the second fiscal quarter of our year ending June 30, 2008, provides for
      recognition of deferred revenue to the extent of the consideration received
      for
      the sublicense, which amounts will be recognized in our earnings when amounts
      are earned. As of September 30, 2008 we had recognized $546,917 of
      earnings.




Investment
      in ResponzeTV:





On
      October 19, 2007, we purchased 8,500,000 shares of ResponzeTV common stock
      (valued at $5,557,504 based upon the trading market price of $0.653824, as
      translated to US$) and warrants to purchase ResponzeTV common stock at prices
      between $0.75 and $2.04 for $5,100,000. The common shares purchased are freely
      trading in the United Kingdom; the warrants are not traded. We issued 500,000
      of
      the purchased shares to brokers.





Upon
      the
      completion of the aforementioned sublicense agreement, the purchase and the
      issuance of shares to the brokers, we owned 16.78% of ResponzeTV’s outstanding
      common stock. Our voting control coupled with our representation on ResponzeTV’s
      board of directors indicates that we have substantial influence with respect
      to
      ResponzeTV. As a result, the Company is accounting for the investment under
      the
      equity method of accounting in accordance with Accounting Principles Board
      Opinion No.18, “The Equity Method for Accounting for Investments in Common
      Stock” (APB 18).




51





OMNIRELIANT
      HOLDINGS, INC. & SUBSIDIARY


(A
      Development Stage Company)


NOTES
      TO
      UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE
      13 -
      SUBSEQUENT EVENTS:





On
      July
      24, 2008, the Company entered into a commercial real estate mortgage loan
      agreement (the “Mortgage Agreement”) with Omnicomm Studios, LLC (“Omnicomm”), a
      sixty percent owned subsidiary of the Company, pursuant to which Omnicomm
      obtained a $2,000,000 loan for purchase of property located in Pinellas County,
      Florida. The Mortgage Agreement contains a ballooning interest rate, where
      for
      the first three years it will bear a minimum per annum rate of 6.50% to a
      maximum per annum rate of 7.75% and for the last three years of the Mortgage
      Agreement it will bear a minimum per annum rate of 6.75% to a maximum per annum
      rate of 8.75%. The Mortgage Agreement matures on July 24, 2014, seventy-two
      months from the date of issuance (the “Maturity Date”). On November 7, 2008, the
      Company assigned its interest in the Mortgage Agreement to the bank providing
      a
      $2,000,000 mortgage/loan.




52





**ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**





**Special
      Note on Forward-Looking Statements**





Some
      of
      the statements contained in this Form 10-Q that are not historical facts are
      "forward-looking statements" which can be identified by the use of terminology
      such as "estimates," "projects," "plans," "believes," "expects," "anticipates,"
      "intends," or the negative or other variations, or by discussions of strategy
      that involve risks and uncertainties. We urge you to be cautious of the
      forward-looking statements, that such statements, which are contained in this
      Form 10-Q, reflect our current beliefs with respect to future events and involve
      known and unknown risks, uncertainties and other factors affecting our
      operations, market growth, services, products and licenses. No assurances can
      be
      given regarding the achievement of future results, as actual results may differ
      materially as a result of the risks we face, and actual events may differ from
      the assumptions underlying the statements that have been made regarding
      anticipated events. Factors that may cause actual results, our performance
      or
      achievements, or industry results, to differ materially from those contemplated
      by such forward-looking statements include without limitation:





1.
      Our
      ability to attract and retain management, and to integrate and maintain
      technical information and management information systems;





2.
      Our
      ability to generate customer demand for our services;





3.
      The
      intensity of competition; and





4.
      General economic conditions.





All
      written and oral forward-looking statements made in connection with this Form
      10-Q that are attributable to us or persons acting on our behalf are expressly
      qualified in their entirety by these cautionary statements. Given the
      uncertainties that surround such statements, you are cautioned not to place
      undue reliance on such forward-looking statements.





**Overview**





The
      following MD&A is intended to help the reader understand the results of
      operations, financial condition, and cash flows of OmniReliant Holdings,
      Inc.  MD&A is provided as a supplement to, and should be read in
      conjunction with, our financial statements and the accompanying notes to the
      financial statements ("Notes").





**Reverse
      Acquisition**





OmniReliant
      Corporation was incorporated on August 21, 2006 under the laws of the State
      of
      Florida. On November 22, 2006, Willowtree Advisor, Inc., an entity which was
      incorporated on June 16, 2004 under the laws of the State of Nevada, entered
      into an exchange agreement with the stockholders of OmniReliant Corporation
      (the
“Exchange Transaction”).





As
      a
      result of the Exchange Transaction, OmniReliant Corporation became a
      wholly-owned subsidiary of Willowtree Advisor, Inc. and succeeded to the
      business of OmniReliant Corporation as its sole business. The Exchange
      Transaction is deemed to be a reverse acquisition for accounting purposes.
      As a
      result, in accordance with the Accounting and Financial Reporting
      Interpretations and Guidance provided by the staff of the U.S. Securities and
      Exchange Commission, Willowtree Advisor, Inc. (the legal acquirer) is considered
      the accounting acquiree and OmniReliant Corporation (the legal acquiree) is
      considered the accounting acquirer. The discussions below, and the consolidated
      financial statements attached hereto, will in substance be those of OmniReliant
      Corporation, with the assets and liabilities, and revenues and expenses, of
      Willowtree Advisor, Inc. being included effective from the date of consummation
      of the Exchange Transaction.





53





**Plan
      of Operation - Development Stage Company**





The
      Company is a development stage company with limited revenues and limited
      historical information upon which to base an evaluation of its
      performance.





The
      Company engages in the creation, design, distribution, and sale of affordable
      luxury products. The Company plans to make these products available to U.S.
      and
      international consumers through direct response infomercials, live shopping
      networks, ecommerce, direct mail and traditional retail channels. The Company
      will first focus on bringing the Kathy Hilton fragrance product line to market,
      after which OmniReliant plans to develop other personalities and designer
      licenses. Ms. Hilton, who is the wife of Rick Hilton, the grandson of the Hilton
      Hotel founder, has agreed to appear in television segments and infomercials.
      We
      have entered into a license agreement with KRH Licensing Company, LLC, an
      affiliate of Rick and Kathy Hilton.




It
      is the
      Company’s intention to design, manufacture, market and distribute prestige
      fragrances and related products. In addition, the Company has an agreement
      to
      market and distribute hair straightening irons. The Company plans to engage
      contract packagers and professionals in the field. In the United States, our
      plan is to enter into agreements to distribute our products through a targeted
      group of department and specialty stores, such as Macy's, Foley's, Marshall
      Fields, Famous Barr, Belks, Elder Beerman, Carson Pirie Scott, and Filenes.
      In
      international markets, we plan to distribute our products through established
      prestige distribution channels. We hope to sell products under private label
      that have already reached its market entry point.





As
      a
      development stage company, we may not be successful in implementing our plan
      to
      manufacture, market and distribute prestige fragrances and related products.
      Until our products are successfully manufactured and marketed on a live shopping
      network or via infomercials, we will not generate significant revenues and
      may
      not be successful. If we cannot generate sufficient revenues to continue
      operations, we will be forced to suspend or cease operations, and may forfeit
      our rights under license agreements.





We
      do not
      expect to make any significant purchases of equipment nor do we expect a
      significant change in the number of our employees.





Our
      officers and directors will handle our administrative duties with the help
      of a
      consultant, TotalCFO, LLC.





We
      cannot
      guarantee that we will be successful in our business operations. Our business
      is
      subject to risks inherent in the establishment of a new business enterprise.





**Results
      of Operations**





The
      following discussion of the financial condition and results of operations should
      be read in conjunction with the financial statements included herewith. This
      discussion should not be construed to imply that the results discussed herein
      will necessarily continue into the future, or that any conclusion reached herein
      will necessarily be indicative of actual operating results in the
      future.





**Quarter
      Ended September 30, 2008 compared to Quarter Ended September 30, 2007 (all
      references are to the Quarter Ended September 30)**





*Revenues.* Our
      revenues from product sales for the three months ended September 30, 2008 were
      $103,634 compared to the three months ended September 30, 2007 which was
      $158,823. This increase is primarily the result of launching our products.
      If we
      are unable to implement our plan to manufacture, market and distribute our
      products, our revenues will not significantly increase during the upcoming
      fiscal year.


*Cost
      of Product Sales.* Costs of
      Products Sold for the three months ended September 30, 2008 was $44,036_compared
      to the three months ended September 30, 2007 which was $98,426 This increase
      of
      profit was the result of selling directly to distributors versus selling to
      shopping channels that tend to have lower margins.





54





*Amortization
      –* Amortization
      expense related to our intangible assets for the three months ended September
      30, 2008 was $74,887 compared to the three months ended September 30, 2007
      which
      amounted to $184,723 We amortize our intangible assets using the straight-line
      method over periods of future benefit. We also consider our intangible assets
      for impairment when circumstances, if any, arise that indicates that we may
      not
      recover these assets through future revenue streams. During the period from
      August 21, 2006 (inception) through September 30, 2008, and through the date
      of
      this report, we concluded that our intangible assets were recoverable and that
      our estimated useful lives continued to be appropriate. However, given the
      developmental nature of our operations, we will continue to evaluate these
      assets as of each future reporting period. Our operations will continued to
      reflect amortization of these intangible assets over the remaining estimated
      useful lives.





*General
      and Administrative –* Our
      general and administrative expenses for the three months ended September 30,
      2008 were $496,084compared to the three months ended September 30, 2007 which
      amounted to $303,527. We may incur higher levels of general and administrative
      expenses when our operations become established and increase.





*Derivative
      Fair Value Adjustments –* Our
      derivative fair value adjustments for the three months ended September 30,
      2008
      were $2,472,501 compared to the three month period ended September 30, 2007
      which amounted to $3,678,669. The increase in the derivative fair value
      adjustment is primarily related to the additional preferred shares issued in
      connection with Series A and D financing agreements. ** Derivative
      financial instruments, as defined in Financial Accounting Standard No. 133
      consist of financial instruments or other contracts that contain a notional
      amount and one or more underlying (e.g. interest rate, security price or other
      variable), require no initial net investment and permit net settlement.
      Derivative financial instruments may be free-standing or embedded in other
      financial instruments. Further, derivative financial instruments are initially,
      and subsequently, measured at fair value and recorded as liabilities or, in
      rare
      instances, assets. We generally do not use derivative financial instruments
      to
      hedge exposures to cash-flow, market or foreign-currency risks. However, we
      have
      entered into certain other financial instruments and contracts, such as
      redeemable preferred stock arrangements and freestanding warrants with features
      that are either (i) not afforded equity classification, (ii) embody risks not
      clearly and closely related to host contracts, or (iii) may be net-cash settled
      by the counterparty. As required by Statement 133, these instruments are
      required to be carried as derivative liabilities, at fair value, in our
      financial statements.





We
      note
      that all share-indexed financial instruments previously and subsequently issued
      required derivative liability classification, unless otherwise exempted under
      Statement 133, so long as the Series A Preferred Stock embodied its current
      variable share-indexed redemption because, under these circumstances,
      share-settlement was presumed not to be within our control and net-cash
      settlement was assumed. Upon the exchange of the Series A and B Preferred Stock
      for Series C Preferred Stock, there was no longer a variable conversion rate
      associated with the Preferred Stock financings. Accordingly, share settlement
      was once again determined to be within our control and the share-indexed
      instruments were reclassified from liabilities to stockholders’ equity.





*Finance
      Costs –* Finance
      costs, which represent amortization of asset-classified finance costs arising
      from our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
      Stock and Warrant financing transactions for the three months ended September
      30, 2008 was $56,460 compared to the three months ended September 30, 2007
      which
      was $215,865. The decrease in finance costs is primarily related to the exchange
      on October 18, 2007 of the Series A and B Preferred Stock for Series C Preferred
      Stock. As a result of the exchange, the amount of the deferred finance costs
      allocated to the Series C Preferred decreased. The allocation of the finance
      costs is based upon the relative fair values of the components of the financing.
      We will continue to amortize deferred financing costs over the terms of the
      liability classified financial instruments.





*Net
      Income (Loss) –* Our
      net
      income (loss) for the three months ended September 30, 2008 was $1,895,405
      compared to the three months ended September 30, 2007 which was $2,725,814.
      This
      gives effect to the components of our operational income and costs and expenses
      and our other income and expense categories as discussed above.




55





*Income
      (loss) Applicable to Common Shareholders –* Income
      (loss) applicable to common stockholders represents our net loss as adjusted
      for
      cumulative dividends and accretions of discounts on our Series A, B and C
      Preferred Stock. Our income (loss) applicable to common shareholders and our
      income (loss) per common share (basic and diluted) for the three months ended
      September 30, 2008 was $1,895,405 compared to the three months ended September
      30, 2007 which was $2,725,814.All of the accumulated dividends in arrears
      associated with the Series A and Series B Preferred Stock were eliminated as
      part of the exchange agreement associated with the Series C Preferred Stock.
      There are no preferred dividends related to the Series C Preferred Stock, so
      it
      is not necessary to adjust net income for accrued preferred dividends in arrears
      in future periods unless a new agreement or amendment to the existing agreement
      warrants such treatment.





**Liquidity
      and Capital Resources**





*Liquidity*  *and
      Going Concern* –
Cash
      and cash equivalents amounted to $1,146,450 as of September 30, 2008. The
      Company has a working capital deficiency of $2,554,257. Included in the working
      capital deficiency is $3,888,599 of derivative financial instruments because
      net
      cash settlement is assumed with respect to certain share-indexed financial
      instruments, principally warrants.





The
      Company has suffered recurring losses while devoting substantially all of its
      efforts to raising capital, identifying and pursuing businesses opportunities.
      Moreover, the Company's total liabilities exceed its total assets and the
      Company's liquidity is substantially dependent on raising capital.




Currently
      the Company does not generate revenues from its operations, and the Company
      will
      require additional cash to develop its business plan and to pay ongoing
      operating expenses, including licensing fees.





These
      factors raise substantial doubt about the Company's ability to continue as
      a
      going concern. The accompanying consolidated financial statements have been
      prepared on a going concern basis, which contemplates continuing operations,
      realization of assets and liquidation of liabilities in the ordinary course
      of
      business. The Company's ability to continue as a going concern is dependent
      upon
      its ability to raise sufficient capital to implement a successful business
      plan
      and to generate profits sufficient to become financially viable.





To
      the
      extent that it becomes necessary to raise additional cash in the future as
      our
      current cash and working capital resources are depleted, we will seek to raise
      it through the public or private sale of debt or equity securities, the
      procurement of advances on contracts or licenses, funding from joint-venture
      or
      strategic partners, debt financing or short-term loans, or a combination of
      the
      foregoing. We also may seek to satisfy indebtedness without any cash outlay
      through the private issuance of debt or equity securities.





We
      have
      no assurance that future financings will be available to us on acceptable terms.
      If financing is not available to us on acceptable terms, we may be unable to
      continue our operations.





*Cash
      Flow from Operating Activities* –
We
      used
      cash of ($278,862) and ($302,839) in our operating activities during the nine
      months ended September 30, 2008 and 2007, respectively. Our cash flow gives
      effect to our net loss, as adjusted for non-cash charges and credits to income,
      including fair value adjustments to derivatives, share-based payments and
      amortization.





*Cash
      Flow from Investing Activities* –
We
      used
      cash of ($3,342,235) and ($3,335) in our investing activities during the nine
      months ended September 30, 2008 and 2007, respectively. We purchased a building
      for $2,750,984 and made additional investments of $375,000 during the
      quarter.





*Cash
      Flow from Financing Activities* –
We
      received $331,734 in cash from our financing activities for the nine month
      period ended September 30, 2008 that principally relate to the minority interest
      investment in OmniComm Studio’s LLC.





56





**Critical
      Accounting Policies**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States of America. The
      preparation of these consolidated financial statements requires us to make
      estimates and judgments that affect the reported amounts of assets, liabilities,
      revenues and expenses, and related disclosures of contingent assets and
      liabilities. For a description of those estimates, see Note 3, Summary of
      Significant Accounting Policies, contained in the explanatory notes to our
      audited financial statements for the three months ended September 30, 2008
      attached to this Form 10-Q. On an on-going basis, we evaluate our estimates,
      including those related to reserves, deferred tax assets and valuation
      allowance, impairment of long-lived assets, fair value of equity instruments
      issued to consultants for services and estimates of costs to complete contracts.
      We base our estimates on historical experience and on various other assumptions
      that we believe to be reasonable under the circumstances, the results of which
      form the basis for making judgments about the carrying value of assets and
      liabilities that are not readily apparent from other sources. Actual results
      may
      differ from these estimates under different assumptions or conditions; however,
      we believe that our estimates, including those for the above-described items,
      are reasonable.





**Effect
      of Recently Issued Accounting Pronouncements**





In
      June
      2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
      Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"), which
      clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes
      a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. The Interpretation requires that the Company recognize in the
      financial statements the impact of tax position, if that position is more likely
      than not of being sustained on audit, based on the technical merits of the
      position. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods and disclosure. The
      provisions of FIN 48 are effective for fiscal years beginning after December
      15,
      2006 with the cumulative effect of the change in accounting principle recorded
      as an adjustment to beginning retained earnings. The adoption of this statement
      does not have a material impact on the Company's consolidated financial position
      or results of operations.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
      standard defines fair value, establishes a framework for measuring fair value
      in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. This statement is effective for financial statements issued
      for fiscal years beginning after November 15, 2007. Earlier application is
      encouraged. The adoption of this accounting pronouncement is being evaluated
      by
      management.





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 will be effective at the
      beginning of fiscal year 2008. We are presently evaluating the impact of the
      adoption of SFAS No. 159 on our results of operations and financial
      position.





In
      September 2006, the Securities and Exchange Commission issued SAB No. 108
      "Considering the Effects of Prior Year Misstatements When Quantifying
      Misstatements in Current Year Financial Statements", which provides interpretive
      guidance on how the effects of the carryover or reversal of prior year
      misstatements should be considered in quantifying a current year misstatement.
      The guidance is applicable beginning fiscal 2008. The implementation of SAB
      No.
      108 does not have a material impact on the consolidated financial
      statements.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**





N/A





**Item
      4T. Controls and Procedures.**


**Evaluation
          of Disclosure Controls and Procedures**
  The
          Company’s Chief Executive Officer and Chief Financial Officer has evaluated
          the effectiveness of the Company’s disclosure controls and procedures (as
          defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
          the
          fiscal period ending September 30, 2008 covered by this Quarterly
          Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer
          and Chief Financial Officer has concluded that, as of the end of such
          period, the Company’s disclosure controls and procedures were not effective
          as required under Rules 13a-15(e) and 15d-15(e) under the Exchange
          Act.
  **Changes
          in Internal Controls over Financial Reporting**
  During
          the quarter ended September 30, 2008, there have been no changes in our
          internal control over financial reporting that have materially affected,
          or are
          reasonably likely to materially affect, our internal control over financial
          reporting.
  **Inherent
          Limitations of the Effectiveness of Internal Control**
  A
          control
          system, no matter how well conceived and operated, can provide only reasonable,
          not absolute, assurance that the objectives of the internal control system
          are
          met. Because of the inherent limitations of any internal control system,
          no
          evaluation of controls can provide absolute assurance that all control
          issues,
          if any, within a company have been detected.


57





**PART
      II**


**OTHER
      INFORMATION**





**Item
      1. Legal Proceedings.**





From
      time
      to time we may be a defendant and plaintiff in various legal proceedings arising
      in the normal course of our business. We are currently not a party to any
      material pending legal proceedings or government actions, including any
      bankruptcy, receivership, or similar proceedings. In addition, management is
      not
      aware of any known litigation or liabilities involving the operators of our
      properties that could affect our operations. Should any liabilities be incurred
      in the future, they will be accrued based on management’s best estimate of the
      potential loss. As such, there is no adverse effect on our consolidated
      financial position, results of operations or cash flow at this time.
      Furthermore, Management of the Company does not believe that there are any
      proceedings to which any director, officer, or affiliate of the Company, any
      owner of record of the beneficially owned more than five percent of the common
      stock of the Company, or any associate of any such director, officer, affiliate
      of the Company, or security holder is a party adverse to the Company or has
      a
      material interest adverse to the Company.





**Item
      1A. Risk Factors.**





There
      have been no material changes in our risk factors from those disclosed in our
      Form10-KSB filed with the SEC for the period ended June 30,
      2008.





**Item 2.
      Unregistered Sales of Equity Securities and Use of
      Proceeds.**





*Issuance
      of Unregistered Securities*





None.





*Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers.*





None.




**Item
      3. Defaults Upon Senior Securities.**





None.





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





None.





**Item 5.
      Other Information.**





None.





**Item 6.
      Exhibits.**





31.1
            Certification
                of Periodic Financial Reports by Paul Morrison in satisfaction
                of Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                of Periodic
                Financial Reports by Paul Morrison in satisfaction of Section 302
                of the
                Sarbanes-Oxley Act of 200232.1
            Certification
                of Periodic Financial Reports by Paul Morrison in satisfaction
                of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
                135032.2
            Certification
                of Periodic Financial Reports by Paul Morrison in satisfaction of
                Section
                906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
                1350




58





**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.




**OmniReliant
                Holdings, Inc.**Date: November
                19, 2008
            By:
            /s/ Paul
                MorrisonPaul
                MorrisonChief
                Executive Officer and ChiefFinancial Officer (Principal
                AccountingOfficer)




59