Exhibit 99.1
 INDEX
 TERRASPHERE SYSTEMS LLC.
 CONVERTED ORGANICS INC.
 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTSIntroductionUnaudited Pro Forma Consolidated Balance Sheet as of September 30, 2010Unaudited Pro Forma Consolidated Statements of Operations and Comprehensive
Income (Loss) for the nine month period ended September 30, 2010Unaudited Pro Forma Consolidated Statements of Operations and Comprehensive
Income (Loss) for the year ended December 31, 2009Notes to Unaudited Pro Forma Consolidated Financial Statements




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##### 



UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 Introduction
  Terms
  Milestone
One Payment:
 Milestone Two
Payment:
 Milestone Three
Payment: pro rata
 Milestone Four Payment:




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##### 



Milestone One:
 Milestone Two:
 Milestones Three and Four:
  Election of Option One
    
    $
    2,961,000Election of Option Two
    
    
    4,490,000Milestone one payment
    
    
    1,403,000Milestone two payment
    
    
    711,000Milestones three and four payments
    
    
    1,684,000$
    11,249,000




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##### 



CONVERTED ORGANICS INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2010
 HistoricalConverted Organics
    
    
    Pro Forma
    
    
    
    
    
    
    Pro FormaInc. and subsidiaries
    
    
    Adjustments
    
    
    Reference
    
    
    ConsolidatedASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    483,068
    
    
    $
    98,633
    
    
    
    (1
    )
    
    $
    581,701Restricted cash
    
    
    613,295
    
    
    
    
    
    
    
    
    
    
    
    613,295Accounts receivable, net
    
    
    414,824
    
    
    
    2,820,000
    
    
    
    (1
    )
    
    
    3,234,824Inventories
    
    
    110,915
    
    
    
    
    
    
    
    
    
    
    
    110,915Other prepaid expenses
    
    
    53,406
    
    
    
    256,831
    
    
    
    (1
    )
    
    
    310,237Assets of discontinued operations and held for sale
    
    
    2,598,230
    
    
    
    
    
    
    
    
    
    
    
    2,598,230Total current assets
    
    
    4,273,738
    
    
    
    3,175,464
    
    
    
    
    
    
    
    7,449,202Deposits
    
    
    336,357
    
    
    
    
    
    
    
    (1
    )
    
    
    336,357Other assets
    
    
    500,000
    
    
    
    5,908
    
    
    
    
    
    
    
    505,908Property and equipment, net
    
    
    676,260
    
    
    
    177,677
    
    
    
    (1
    )
    
    
    853,937Construction-in-progress
    
    
    357,118
    
    
    
    97,673
    
    
    
    (1
    )
    
    
    454,791Intangible assets, net
    
    
    1,779,613
    
    
    
    9,587,000
    
    
    
    (1
    )
    
    
    11,366,613Non-current assets of discontinued operations
    
    
    1,271,158
    
    
    
    
    
    
    
    
    
    
    
    1,271,158Total assets
    
    $
    9,194,244
    
    
    $
    13,043,722
    
    
    
    
    
    
    $
    22,237,966LIABILITIES AND OWNERS EQUITY (DEFICIT)CURRENT LIABILITIESTerm notes payable  current
    
    $
    
    
    
    $
    452,351
    
    
    
    (1
    )
    
    $
    452,351Accounts payable
    
    
    1,294,798
    
    
    
    1,259,909
    
    
    
    (1
    )
    
    
    2,554,707Accrued compensation, officers, directors and consultants
    
    
    513,745
    
    
    
    
    
    
    
    
    
    
    
    513,745Accrued legal and other expenses
    
    
    216,914
    
    
    
    21,244
    
    
    
    (1
    )
    
    
    238,158Deferred revenue
    
    
    
    
    
    
    61,218
    
    
    
    (1
    )
    
    
    61,218Capital lease obligations  current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Liabilities of discontinued operations
    
    
    6,047,844
    
    
    
    
    
    
    
    
    
    
    
    6,047,844Total current liabilities
    
    
    8,073,301
    
    
    
    1,794,722
    
    
    
    
    
    
    
    9,868,023Capital lease obligation, net of current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Term notes payable, net of current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Derivative liabilities
    
    
    1,434,127
    
    
    
    
    
    
    
    
    
    
    
    1,434,127Non-current liabilities of discontinued operations
    
    
    17,531,311
    
    
    
    
    
    
    
    
    
    
    
    17,531,311Total liabilities
    
    
    27,038,739
    
    
    
    1,794,722
    
    
    
    
    
    
    
    28,833,461COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OWNERS EQUITY (DEFICIT)Preferred stock, $.0001 par value, authorized
10,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock, $.0001 par value, authorized 250,000,000 shares
    
    
    4,414
    
    
    
    2,744
    
    
    
    (1
    )
    
    
    7,158Additional paid-in capital
    
    
    63,662,679
    
    
    
    11,246,256
    
    
    
    (1
    )
    
    
    74,908,935Accumulated deficit
    
    
    (81,511,588
    )
    
    
    
    
    
    
    
    
    
    
    (81,511,588
    )Total owners equity
    
    
    (17,844,495
    )
    
    
    11,249,000
    
    
    
    
    
    
    
    (6,595,495
    )Total liabilities and owners equity
    
    $
    9,194,244
    
    
    $
    13,043,722
    
    
    
    
    
    
    $
    22,237,966
 The accompanying notes are an integral part of these unaudited pro forma consolidated
financial statements.




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##### 



CONVERTED ORGANICS INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010
 HistoricalConverted Organics
    
    
    Pro Forma
    
    
    
    
    
    
    Pro FormaInc. and subsidiaries
    
    
    Adjustments
    
    
    Reference
    
    
    ConsolidatedRevenues
    
    $
    2,765,641
    
    
    $
    4,502,549
    
    
    
    (2
    )
    
    $
    7,268,190Cost of good sold
    
    
    2,020,752
    
    
    
    703,301
    
    
    
    (2
    )
    
    
    2,724,053Gross income
    
    
    744,889
    
    
    
    3,799,248
    
    
    
    
    
    
    
    4,544,137Operating expensesGeneral and administrative expenses
    
    
    10,413,049
    
    
    
    1,046,185
    
    
    
    (2
    )
    
    
    11,459,234Research and development
    
    
    176,650
    
    
    
    35,448
    
    
    
    (2
    )
    
    
    212,098Amortization of capitalized costs
    
    
    216,006
    
    
    
    508,532
    
    
    
    (2),
    (3)
    
    
    724,538Loss from operations
    
    
    (10,060,816
    )
    
    
    2,209,083
    
    
    
    
    
    
    
    (7,851,733
    )Other income/(expenses)Other income
    
    
    7,871
    
    
    
    94,532
    
    
    
    (2
    )
    
    
    102,403Derivative gain/(loss)
    
    
    1,160,711
    
    
    
    
    
    
    
    
    
    
    
    1,160,711Interest expense
    
    
    (15,883
    )
    
    
    (14,382
    )
    
    
    (2
    )
    
    
    (30,265
    )1,152,699
    
    
    
    80,150
    
    
    
    
    
    
    
    1,232,849Loss from continuing operations before provision for income taxes
    
    
    (8,908,117
    )
    
    
    2,289,233
    
    
    
    
    
    
    
    (6,618,884
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Net loss from continuing operations
    
    
    (8,908,117
    )
    
    
    2,289,233
    
    
    
    
    
    
    
    (6,618,884
    )Net loss from discontinued operations
    
    
    (22,711,406
    )
    
    
    
    
    
    
    
    
    
    
    (22,711,406
    )Net income (loss)
    
    
    (31,619,523
    )
    
    
    2,289,233
    
    
    
    
    
    
    
    (29,330,290
    )Net income (loss) attributable to noncontrolling interest
    
    
    
    
    
    
    (335,795
    )
    
    
    (2
    )
    
    
    (335,795
    )Net income (loss) attributable to Converted Organics Inc.
before other comprehensive income (loss)
    
    
    (31,619,523
    )
    
    
    2,625,028
    
    
    
    
    
    
    
    (28,994,495
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    
    
    
    
    (17,308
    )
    
    
    (2
    )
    
    
    (17,308
    )Comprehensive income (loss)
    
    
    (31,619,523
    )
    
    
    2,607,720
    
    
    
    
    
    
    
    (29,011,803
    )Comprehensive income (loss) attributable to noncontrolling interest
    
    
    
    
    
    
    (2,596
    )
    
    
    (2
    )
    
    
    (2,596
    )Comprehensive income (loss) attributable to Converted Organics Inc.
    
    $
    (31,619,523
    )
    
    $
    2,610,316
    
    
    
    
    
    
    $
    (29,009,207
    )Net loss per share, basic and diluted
    
    $
    (0.78
    )
    
    
    
    
    
    
    (5
    )
    
    $
    (0.43
    )Weighted average common shares outstanding
    
    
    40,354,562
    
    
    
    
    
    
    
    (5
    )
    
    
    67,793,055
 The accompanying notes are an integral part of these unaudited pro forma consolidated
financial statements.




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##### 



CONVERTED ORGANICS INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2009
 HistoricalConverted Organics
    
    
    Pro Forma
    
    
    
    
    
    
    Pro FormaInc. and subsidiaries
    
    
    Adjustments
    
    
    Reference
    
    
    ConsolidatedRevenues
    
    $
    2,633,782
    
    
    $
    36,732
    
    
    
    (2
    )
    
    $
    2,670,514Cost of good sold
    
    
    6,914,857
    
    
    
    
    
    
    
    
    
    
    
    6,914,857Gross loss
    
    
    (4,281,075
    )
    
    
    36,732
    
    
    
    
    
    
    
    (4,244,343
    )Operating expensesGeneral and administrative expenses
    
    
    10,049,830
    
    
    
    1,291,586
    
    
    
    (2
    )
    
    
    11,341,416Research and development
    
    
    637,142
    
    
    
    613
    
    
    
    (2
    )
    
    
    637,755Depreciation expense
    
    
    723,846
    
    
    
    
    
    
    
    
    
    
    
    723,846Amortization of capitalized costs
    
    
    357,718
    
    
    
    645,516
    
    
    
    (2),
    (3)
    
    
    1,003,234Amortization of license
    
    
    16,500
    
    
    
    
    
    
    
    
    
    
    
    16,500Loss from operations
    
    
    (16,066,111
    )
    
    
    (1,900,983
    )
    
    
    
    
    
    
    (17,967,094
    )Other income/(expenses)Interest income
    
    
    24,097
    
    
    
    
    
    
    
    
    
    
    
    24,097Loss on impairment of long-term assets
    
    
    (3,928,129
    )
    
    
    
    
    
    
    
    
    
    
    (3,928,129
    )Derivative gain/(loss)
    
    
    5,766,035
    
    
    
    
    
    
    
    
    
    
    
    5,766,035Other income
    
    
    68,995
    
    
    
    55,114
    
    
    
    (2
    )
    
    
    124,109Interest expense
    
    
    (6,970,675
    )
    
    
    (9,218
    )
    
    
    (2
    )
    
    
    (6,979,893
    )(5,039,677
    )
    
    
    45,896
    
    
    
    
    
    
    
    (4,993,781
    )Loss before provision for income taxes
    
    
    (21,105,788
    )
    
    
    (1,855,087
    )
    
    
    
    
    
    
    (22,960,875
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Net loss
    
    
    (21,105,788
    )
    
    
    (1,855,087
    )
    
    
    
    
    
    
    (22,960,875
    )Net income (loss) attributable to noncontrolling interest
    
    
    
    
    
    
    74,934
    
    
    
    (2
    )
    
    
    74,934Net income (loss) attributable to Converted Organics Inc.
before other comprehensive income (loss)
    
    
    (21,105,788
    )
    
    
    (1,930,021
    )
    
    
    
    
    
    
    (23,035,809
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    
    
    
    
    (57,491
    )
    
    
    (2
    )
    
    
    (57,491
    )Comprehensive income (loss)
    
    
    (21,105,788
    )
    
    
    (1,987,512
    )
    
    
    
    
    
    
    (23,093,300
    )Comprehensive income (loss) attributable to noncontrolling interest
    
    
    
    
    
    
    (8,623
    )
    
    
    (2
    )
    
    
    (8,623
    )Comprehensive income (loss) attributable to Converted Organics Inc.
    
    $
    (21,105,788
    )
    
    $
    (1,978,889
    )
    
    
    
    
    
    $
    (23,084,677
    )Net loss per share, basic and diluted
    
    $
    (1.08
    )
    
    
    
    
    
    
    (5
    )
    
    $
    (0.49
    )Weighted average common shares outstanding
    
    
    19,569,853
    
    
    
    
    
    
    
    (5
    )
    
    
    47,137,489
 The accompanying notes are an integral part of these unaudited pro forma consolidated
financial statements.




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##### 



CONVERTED ORGANICS INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 The following numbered notes are referenced on the Unaudited Pro Forma Consolidated Balance Sheet
and Statements of Operations and Comprehensive Income (Loss).
 (1)
    
    The Company purchased 95% of the membership interests in TerraSphere
Systems, LLC, for consideration and contingent consideration with an
estimated fair value of $11,249,000 all consideration is to be paid in the
Companys common stock.The estimated purchase price has been allocated to the assets and
liabilities on a preliminary basis using estimated fair value information
currently available. The allocation of the purchase price to the assets and
liabilities will be finalized within a year as the Company obtains more
information regarding asset valuations, liabilities assumed, contingent
consideration and revisions of preliminary estimates of fair value made as
the date of purchase. The preliminary purchase price allocation is as
follows:
 Cash and cash equivalents
    
    $
    98,633Accounts receivable
    
    
    2,820,000Other assets
    
    
    262,739Leasehold improvements
    
    
    177,677Construction-in-process
    
    
    97,673Patents and patent related costs
    
    
    9,587,000Assumption of liabilities
    
    
    (1,794,722
    )Total allocation of purchase price (*)
    
    $
    11,249,000
 The Company plans to amortize the leasehold improvements over their estimated
service lives or the remaining terms of the related leases, whichever are
shorter. Patents and patent related costs will be amortized over the 15 year
remaining life of the patents.
 
 (*)
    
    The purchase price of $11,249,000 is an estimate based on the
assumptions listed in the Unaudited Pro Forma Condensed Combined
Financial Statements section of this document. Actual results
could vary significantly from this estimate. Any adjustments
within one year would adjust the purchase price. Adjustments
after one year of the acquisition date are remeasured to fair
value at each reporting date until the contingency is resolved
and the changes in fair value are recognized in earnings in
accordance with ASC 805 Business Combinations.(2)
    
    The operations of TerraSphere Systems, LLC are consolidated with the operations of Converted Organics Inc. assuming
that the transaction was completed on January 1, 2009.(3)
    
    Amortization expense related to the fair value assigned to the patent and patent related costs.(4)
    
    TerraSphere Systems, LLC provision for income taxes has been eliminated to give effect to the transaction occurring
on January 1, 2009.(5)
    
    Earnings per share has been recalculated to reflect the number of common stock shares issued in acquiring TerraSphere.




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##### 



TERRASPHERE SYSTEMS LLC
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
AND FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2010 AND 2009




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##### 



TERRASPHERE SYSTEMS LLC
TABLE OF CONTENTS
 PageCONSOLIDATED FINANCIAL STATEMENTSConsolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009
    
    
    1Consolidated Statements of Operations and Comprehensive Income (Loss)
for the three and nine month periods ended September 30, 2010 and 2009 (Unaudited)
    
    
    2Consolidated Statement of Changes in Members Equity (Deficit)
for the nine month period ended September 30, 2010 (Unaudited)
    
    
    3Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2010 and 2009 (Unaudited)
    
    
    4Notes to Consolidated Interim Financial Statements (Unaudited)
    
    
    5




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##### 



TERRASPHERE SYSTEMS LLC
 
 CONSOLIDATED BALANCE SHEETS
 September 30, 2010(Unaudited)
    
    
    December 31, 2009ASSETSCurrent assets:Cash
    
    $
    98,633
    
    
    $
    197,046Accounts receivable
    
    
    2,820,000
    
    
    
    Tax refund receivable
    
    
    203,106
    
    
    
    15,244Inventories  work in process
    
    
    
    
    
    
    34,565Prepaid expenses
    
    
    53,725
    
    
    
    42,100Total current assets
    
    
    3,175,464
    
    
    
    288,955Leasehold improvements, net
    
    
    177,677
    
    
    
    161,948Patent and patent related costs, net
    
    
    155,127
    
    
    
    134,932Pre-construction costs
    
    
    97,673
    
    
    
    Other assets
    
    
    5,796
    
    
    
    5,692Total assets
    
    $
    3,611,737
    
    
    $
    591,527LIABILITIES AND MEMBERS EQUITY (DEFICIT)Current liabilities:Note payable
    
    $
    350,000
    
    
    $
    Note payable  member
    
    
    20,000
    
    
    
    20,000Due to member
    
    
    82,351
    
    
    
    102,292Accounts payable
    
    
    1,259,909
    
    
    
    732,866Accrued expenses
    
    
    21,244
    
    
    
    6,862Deferred tax liability
    
    
    981,000
    
    
    
    Deferred revenue
    
    
    61,218
    
    
    
    763,767Total current liabilities
    
    
    2,775,722
    
    
    
    1,625,787Members equity (deficit):TerraSphere Systems LLC members equity (deficit):Members equity (deficit)
    
    
    1,179,903
    
    
    
    (1,043,475
    )Accumulated other comprehensive loss
    
    
    (56,966
    )
    
    
    (42,254
    )Total Terrasphere Systems LLC members equity
(deficit)
    
    
    1,122,937
    
    
    
    (1,085,729
    )Noncontrolling interest
    
    
    (286,922
    )
    
    
    51,469Total members equity (deficit)
    
    
    836,015
    
    
    
    (1,034,260
    )Total liabilities and members equity (deficit)
    
    $
    3,611,737
    
    
    $
    591,527
 The accompanying notes are an integral part of these consolidated interim financial statements.
 - 1 -




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##### 



TERRASPHERE SYSTEMS LLC
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 (UNAUDITED)
 Three month periods ended
    
    
    Nine month periods endedSeptember 30, 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    September 30, 2009Revenue:Sales
    
    $
    
    
    
    $
    
    
    
    $
    675,000
    
    
    $
    Licensing and marketing fees
    
    
    9,183
    
    
    
    9,183
    
    
    
    3,827,549
    
    
    
    27,5499,183
    
    
    
    9,183
    
    
    
    4,502,549
    
    
    
    27,549Cost of goods sold
    
    
    
    
    
    
    
    
    
    
    703,301
    
    
    
    Gross profit
    
    
    9,183
    
    
    
    9,183
    
    
    
    3,799,248
    
    
    
    27,549General and administrative expense
    
    
    235,797
    
    
    
    144,362
    
    
    
    1,075,367
    
    
    
    621,620Amortization expense
    
    
    12,767
    
    
    
    1,759
    
    
    
    35,448
    
    
    
    5,168Income (loss) from operations
    
    
    (239,381
    )
    
    
    (136,938
    )
    
    
    2,688,433
    
    
    
    (599,239
    )Other income (expense)Other income (expense), net
    
    
    (10,355
    )
    
    
    (24,680
    )
    
    
    110,575
    
    
    
    (21,433
    )Foreign currency gain (loss)
    
    
    25,852
    
    
    
    (19,443
    )
    
    
    (16,043
    )
    
    
    (8,312
    )Interest expense
    
    
    (6,493
    )
    
    
    (5,666
    )
    
    
    (14,382
    )
    
    
    (7,070
    )Total other income (expense)
    
    
    9,004
    
    
    
    (49,789
    )
    
    
    80,150
    
    
    
    (36,815
    )Net income (loss) before tax provision
    
    
    (230,377
    )
    
    
    (186,727
    )
    
    
    2,768,583
    
    
    
    (636,054
    )Provision for (benefit from) income taxes
    
    
    (130,000
    )
    
    
    
    
    
    
    981,000
    
    
    
    Net income (loss)
    
    
    (100,377
    )
    
    
    (186,727
    )
    
    
    1,787,583
    
    
    
    (636,054
    )Net loss attributable to noncontrolling interest
    
    
    (34,393
    )
    
    
    (19,740
    )
    
    
    (335,795
    )
    
    
    (50,663
    )Net income (loss) attributable to TerraSphere Systems LLC before other comprehensive income (loss)
    
    
    (65,984
    )
    
    
    (166,987
    )
    
    
    2,123,378
    
    
    
    (585,391
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (33,582
    )
    
    
    (28,048
    )
    
    
    (17,308
    )
    
    
    (45,274
    )Comprehensive income (loss)
    
    
    (99,566
    )
    
    
    (195,035
    )
    
    
    2,106,070
    
    
    
    (630,665
    )Comprehensive loss attributable to noncontrolling interest
    
    
    (5,037
    )
    
    
    (4,207
    )
    
    
    (2,596
    )
    
    
    (6,791
    )Comprehensive income (loss) attributable to TerraSphere Systems LLC
    
    $
    (94,528
    )
    
    $
    (190,828
    )
    
    $
    2,108,666
    
    
    $
    (623,874
    )
 The accompanying notes are an integral part of these consolidated interim financial statements.
 - 2 -




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##### 



TERRASPHERE SYSTEMS LLC
 
 CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS EQUITY (DEFICIT)
 FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010
 (UNAUDITED)
 TerraSphere Systems LLCAccumulatedOther
    
    
    
    
    
    
    
    
    
    
    Members EquityMembers Equity
    
    
    Comprehensive
    
    
    
    
    
    
    Noncontrolling
    
    
    (Deficit)(Deficit)
    
    
    Loss
    
    
    Total
    
    
    Interest
    
    
    TotalBalance, December 31, 2009
    
    $
    (1,043,475
    )
    
    $
    (42,254
    )
    
    $
    (1,085,729
    )
    
    $
    51,469
    
    
    $
    (1,034,260
    )Contributions
    
    
    100,000
    
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    100,000Foreign currency
translation adjustment
    
    
    
    
    
    
    (14,712
    )
    
    
    (14,712
    )
    
    
    (2,596
    )
    
    
    (17,308
    )Net income (loss)
    
    
    2,123,378
    
    
    
    
    
    
    
    2,123,378
    
    
    
    (335,795
    )
    
    
    1,787,583Balance, September 30, 2010
    
    $
    1,179,903
    
    
    $
    (56,966
    )
    
    $
    1,122,937
    
    
    $
    (286,922
    )
    
    $
    836,015
 The accompanying notes are an integral part of these consolidated interim financial statements.
 - 3 -




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##### 



TERRASPHERE SYSTEMS LLC
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine month periods endedSeptember 30, 2010
    
    
    September 30, 2009Net income (loss)
    
    $
    1,787,583
    
    
    $
    (636,054
    )Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:Amortization of patents and patent related costs
    
    
    6,266
    
    
    
    5,168Amortization of leasehold improvements
    
    
    29,182
    
    
    
    Deferred income taxes
    
    
    981,000
    
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (2,820,000
    )
    
    
    400,000Other receivables
    
    
    (186,794
    )
    
    
    112,020Inventories
    
    
    34,565
    
    
    
    Prepaid expenses
    
    
    (11,625
    )
    
    
    (30,850
    )Other assets
    
    
    
    
    
    
    3,766Increase (decrease) in:Accounts payable
    
    
    523,404
    
    
    
    75,464Accrued expenses
    
    
    14,382
    
    
    
    (2,772
    )Deferred revenue
    
    
    (702,549
    )
    
    
    372,451Net cash (used in) provided by operating
activities
    
    
    (344,586
    )
    
    
    299,193Cash flows from investing activities:Patent and patent related costs
    
    
    (26,461
    )
    
    
    (42,781
    )Expenditures for leasehold improvements
    
    
    (97,673
    )
    
    
    Pre-construction costs
    
    
    (41,875
    )
    
    
    Net cash used in investing activities
    
    
    (166,009
    )
    
    
    (42,781
    )Cash flows from financing activities:Member contributions
    
    
    100,000
    
    
    
    100,000Proceeds from note payable
    
    
    350,000
    
    
    
    Proceeds from note payable  member
    
    
    
    
    
    
    20,000Advances from (repayments to) member
    
    
    (19,941
    )
    
    
    102,291Net cash provided by financing activities
    
    
    430,059
    
    
    
    222,291Effect of exchange rate changes on cash
    
    
    (17,877
    )
    
    
    (135,127
    )(Decrease) increase in cash
    
    
    (98,413
    )
    
    
    343,576Cash, beginning of period
    
    
    197,046
    
    
    
    8,083Cash, end of period
    
    $
    98,633
    
    
    $
    351,659
 The accompanying notes are an integral part of these consolidated interim financial statements.
 - 4 -




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##### 



TERRASPHERE SYSTEMS LLC
 
 NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE 1  NATURE OF OPERATIONS
 TerraSphere Systems LLC (TerraSphere or the Company), located in Boston,
Massachusetts, designs and builds highly efficient systems for growing organic fruits
and vegetables in a controlled, indoor environment. The Company partners with
private businesses and public institutions to create solutions for food production
challenges. The Company derives its revenues from licensing fees and royalties, as
well as the sale of equipment and expects future revenue from operating facilities
using the TerraSphere System. The TerraSphere System uses technology to operate
automated, software driven plant growth systems that can be used to grow a variety of
crops, from lettuce to tree seedlings to rare medicinal herbs. On November 12, 2010,
Converted Organics, Inc. acquired 95% of the membership interest of TerraSphere (See
Note 11).
 PharmaSphere, LLC (PharmaSphere), located in Boston, Massachusetts, is a
wholly-owned subsidiary of TerraSphere. PharmaSpheres business plan is to utilize
the TerraSphere System for the production of high value biocompounds sourced from
plants and used as active pharmaceutical ingredients and for the production of
transgenic plants (genetically engineered plants) for the biotechnology market.
PharmaSphere has a wholly-owned subsidiary PharmaSphere Worcester, LLC, which was
formed to build a facility in Worcester, Massachusetts utilizing PharmaSpheres
business plan. The building of the facility has not commenced. PharmaSphere has no
revenue to date.
 TerraSphere Systems Canada, Inc. (TerraSphere Canada), located in Vancouver,
British Columbia, operates the research and manufacturing facility for TerraSphere
and is eighty-five percent owned by TerraSphere.
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 CONSOLIDATION
 The accompanying consolidated financial statements include the transactions and
balances of TerraSphere System LLC and its wholly-owned subsidiary, PharmaSphere,
LLC. The assets, liabilities and results of operations of TerraSphere Systems
Canada, Inc. are also included in the consolidated financial statements with
appropriate recognition of noncontrolling interest. All intercompany transactions
and balances have been eliminated in consolidation.
 CODIFICATION
 Effective July 1, 2009, the Financial Accounting Standard Boards (FASB) Accounting
Standards Codification (ASC) became the single official source of authoritative,
non-governmental U.S. generally accepted accounting principles (GAAP). The
historical GAAP hierarchy was eliminated and the ASC became the only level of
authoritative GAAP. The Companys accounting policies were not affected by the
conversion to ASC.
 - 5 -




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##### 



TERRASPHERE SYSTEMS LLC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 FOREIGN OPERATIONS
 The accounting records of TerraSphere Canada are maintained in Canadian dollars, its
functional currency. Revenue and expense transactions are translated to U.S. dollars
using the average exchange rate of the month in which the transaction took place.
Assets and liabilities are translated to U.S. dollars using the exchange rate in
effect as of the balance sheet date. Equity transactions are translated to U.S.
dollars using the exchange rate in effect as of the date of the equity transaction.
Translation gains and losses are reported as a component of accumulated other
comprehensive income or loss. Gains and losses resulting from transactions which are
denominated in other than functional currencies are reported as foreign currency
exchange gain or loss in the statements of operations and comprehensive income (loss)
in the period the gain or loss occurred.
 USE OF ESTIMATES
 The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts and
disclosures in the consolidated financial statements. Actual results could differ
from those estimates.
 ACCOUNTS RECEIVABLE
 Accounts receivable represent balances due from customers, net of applicable
reserves for doubtful accounts. In determining the need for an allowance, objective
evidence that a single receivable is uncollectible, as well as historical collection
patterns for accounts receivable are considered at each balance sheet date. At
September 30, 2010 and December 31, 2009, the Company has determined that an
allowance for doubtful accounts is not deemed necessary.
 INVENTORIES
 Inventories are valued at the lower of cost or market, with cost determined by the
first in, first out method. Inventories consisted of the work-in-process related to
twelve TerraSphere System units at December 31, 2009. There were no inventory
reserves deemed necessary at December 31, 2009.
 LEASEHOLD IMPROVEMENTS
 Leasehold improvements are carried at cost and are amortized over their estimated
service life or the remaining term of the related lease, whichever is shorter.
Amortization expense incurred for the nine month periods ended September 30, 2010 and
2009 was $29,182 and $-0-, respectively.
 - 6 -




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##### 



TERRASPHERE SYSTEMS LLC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 PATENT AND PATENT RELATED COSTS
 The Company accounts for its patent and patent related costs in accordance with
Financial Accounting Standards Boards Accounting Standards Codification (ASC) ASC
350, which requires that intangible assets with finite lives, such as the Companys
specifically identifiable costs for patent and patent applications, be capitalized
and amortized over their respective estimated lives and reviewed for impairment
whenever events or other changes in circumstances indicate that the carrying amount
may not be recoverable.
 PRE-CONSTRUCTION COSTS
 Pre-construction costs include architectural and engineering services related to the
building of the PharmaSphere facility.
 REVENUE RECOGNITIONRevenue is recognized when all of the following criteria are met:
 
    
    Persuasive evidence of a sales arrangement exists;
    
    Delivery of the product has occurred;
    
    The sales price is fixed or determinable; and
    
    Collectability is reasonably assured.
 In those cases where all four criteria are not met, the Company defers recognition of
revenue until the period these criteria are satisfied. Revenue is generally
recognized upon shipment or upon completed performance on exclusive technology
licenses where the term is equal to the life of the associated intellectual property.
 The Company recognizes deferred revenue when payment has been received for product
sales but the revenue recognition criteria have not been met. In addition, the
Company defers revenue when payment has been received for future services to be
provided.
 INCOME TAXES
 No provision for income taxes is recognized for the period from January 1, 2010
through February 21, 2010 and for all prior periods because the Company is a limited
liability company. In lieu of federal and state income taxes, all income, losses,
deductions and credits pass through to the members for them to report on their
personal returns.
 The Company elected to be treated as a taxable association effective February 22,
2010 for United States federal and state tax purposes. The Company accounts for
income taxes following the asset and liability method in accordance with ASC 740.
Under such method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years that the asset is expected to be realized or the
liability settled.
 - 7 -




---



##### 



TERRASPHERE SYSTEMS LLC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 INCOME TAXES(Continued)
 Management has performed an evaluation of the Companys tax positions, ensuring that
these tax return positions meet the more likely than not recognition threshold and
can be measured with sufficient precision. These evaluations provide management with
a comprehensive model for how the Company should recognize, measure, present and
disclose in its financial statements certain tax positions that the Company has taken
or expects to take on income tax returns. Based upon these evaluations, management
has concluded that the Company has no uncertain tax positions that qualify for either
recognition or disclosure in the financial statements as of September 30, 2010. See
Note 9 for additional information. The Company is subject to U.S. federal, state and
local, or non-U.S. income tax examinations for years after 2006.
 RESEARCH AND DEVELOPMENT
 Research and development costs are charged to operations as incurred. There were no
research and development costs incurred for the nine month periods ended September
30, 2010 and 2009.
 FAIR VALUE MEASUREMENTS
 The Company applies ASC 820, which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. ASC 820
applies to reported balances that are required or permitted to be measured at fair
value under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.
 ASC 820 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market participant assumptions in
fair value measurements, ASC 820 establishes a fair value hierarchy that
distinguishes between market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable inputs that are
classified within Levels 1 and 2 of the hierarchy) and the reporting entitys own
assumptions about market participant assumptions (unobservable inputs classified
within Level 3 of the hierarchy).
 Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly. Level 2 inputs may include quoted prices
for similar assets and liabilities in active markets, as well as inputs that are
observable for the asset or liability (other than quoted prices), such as interest
rates, foreign exchange rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the asset or liability, which
are typically based on an entitys own assumptions, as there is little, if any,
related market activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair value hierarchy, the
level in the fair value hierarchy within which the entire fair value measurement
falls is based on the lowest level
input that is significant to the fair value measurement in its entirety. The
Companys assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to the
asset or liability.
 - 8 -




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##### 



TERRASPHERE SYSTEMS LLC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 3  CONCENTRATION OF CREDIT RISK
 The Companys financial instruments that are exposed to a concentration of
credit risk are cash and accounts receivable.
 Cash- The Company places its cash deposits with credit worthy banking institutions
in the United States and Canada which are continually reviewed by management. From
time to time, the bank balances of the Companys cash may exceed current United
States and Canadian insured limits. The Company, however, has not experienced any
losses in this area and management believes its cash deposits are not subject to
significant credit risk. At September 30, 2010 and December 31, 2009, the Companys
did not have cash balances on deposit that exceeded United States and Canadian
federal depository insurance limits.
 Accounts receivable- Four customers accounted for 100% of the Companys accounts
receivable at September 30, 2010. Five customers accounted for 100% of revenue for
the nine month period ended September 30, 2010.
 NOTE 4  PATENT AND PATENT RELATED COSTS
 The following reflects the Companys patent and patent related costs at:
 September 30, 2010
    
    
    December 31, 2009Carousel with spheres patent
    
    $
    32,407
    
    
    $
    32,407Carousel with arcuate ribs patent
    
    
    9,666
    
    
    
    9,666Rotatable carousel with arcuate ribs patent
    
    
    13,582
    
    
    
    13,582Carousel with spheres application (Canadian)
    
    
    10,259
    
    
    
    7,199Carousel with spheres application (Canadian)
    
    
    6,711
    
    
    
    5,836Carousel with spheres application (European)
    
    
    21,024
    
    
    
    19,001Carousel with spheres application (Chinese)
    
    
    11,901
    
    
    
    10,391Carousel with spheres application (Hong Kong)
    
    
    1,461
    
    
    
    1,461Carousel with spheres application (Japanese)
    
    
    14,901
    
    
    
    14,901Rotatable carousel with arcuate ribs application
    
    
    8,514
    
    
    
    8,514Rotatable carousel with drum-like members
(Canadian)
    
    
    5,900
    
    
    
    4,760Rotatable carousel with drum-like members
application
    
    
    8,985
    
    
    
    5,267Carousel with spheres application
    
    
    10,040
    
    
    
    10,040Tray apparatus application
    
    
    5,780
    
    
    
    5,780Collapsible stack application
    
    
    6,140
    
    
    
    6,140Marchildon application
    
    
    2,338
    
    
    
    2,338Apparatus for growing plants application
    
    
    14,135
    
    
    
    Total
    
    
    183,744
    
    
    
    157,283Less: accumulated amortization
    
    
    28,617
    
    
    
    22,351Patent and patent related costs, net
    
    $
    155,127
    
    
    $
    134,932
 Amortization expense for the nine month periods ended September 30, 2010 and 2009 was
$6,266 and $5,168, respectively.
 - 9 -




---



##### 



TERRASPHERE SYSTEMS LLC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 4  PATENT AND PATENT RELATED COSTS (Continued)
 Amortization expense is expected to be as follows in the years ending December
31:
 2010 (October 1, 2010 through December 31, 2010)
    
    $
    2,0342011
    
    
    8,1362012
    
    
    8,1362013
    
    
    8,1362014
    
    
    8,136Thereafter
    
    
    120,549Total
    
    $
    155,127
 NOTE 5  NOTES PAYABLE
 On August 27, 2010, the Company entered into a note payable to a third party in
the amount of $350,000, with a fixed interest rate of 15% per annum. Interest only
payments totaling $4,375 are due monthly with the principal balance due August, 27,
2011. The Company has accrued interest totaling $4,375 as of September 30, 2010.
 On May 29, 2009, the Company issued an unsecured note payable to a member in the
amount of $20,000, with a fixed interest rate of 10% per annum, maturing July 29,
2009. The Company is in default of the note and the member has not called the note
as of September 30, 2010. The Company has accrued interest totaling $2,685 and
$1,189 as of September 30, 2010 and December 31, 2009, respectively, and incurred
$1,496 in interest expense for the nine months ended September 30, 2010 and incurred
$181 in interest expense for the nine months ended September 30, 2009.
 NOTE 6  DUE TO MEMBER
 In 2009, a member provided an advance to the Company for working capital
purposes at an interest rate of 10% per annum. The principal amount due to the
member at September 30, 2010 and December 31, 2009 is $82,351 and $102,292,
respectively. The Company has accrued interest totaling $14,184 and $5,673
as of September 30, 2010 and December 31, 2009, respectively and incurred $8,511 and
$3,202 in interest expense for the nine month periods ended September 30, 2010 and
2009, respectively.
 NOTE 7  DEFERRED REVENUE
 The Company has recognized deferred revenue of $61,218 and $763,767 at September
30, 2010 and December 31, 2009, respectively.
 On May 18, 2007, TerraSphere Canada entered into a marketing agreement with the
Squamish Nation (Squamish) to promote the TerraSphere System to other First Nations
bands in Canada for $200,000 Canadian dollars ($183,772 U.S.). The Company is
recognizing the marketing fee over the term of the agreement (See Note 10). At
September 30, 2010 and December 31, 2009, deferred revenue associated with this
agreement is approximately $61,000 and $89,000, respectively.
 The Company deferred a $675,000 payment from the Squamish received in December 2009
relating to twelve TerraSphere System units which were delivered during the first
three months of 2010. Accordingly, the associated revenue was recognized during the
first quarter of 2010.
 - 10 -




---



##### 



TERRASPHERE SYSTEMS LLC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 8  LICENSING FEES
 The Company has developed a system of modules and processes for growing plants
in a controlled environment. The system uses and controls precise combinations of
light, water, nutrition, gravity, centrifugal forces, and gasses to produce growing
conditions that can be controlled and manipulated to result in desired plant growth
and maximum crop production (the Growth System). The Company has granted exclusive
licenses to use the Growth System for the remaining term of the associated patents. Revenue
recognized in connection with these license agreements was $3,800,000 for the nine
months ended September 30, 2010 as the Company has determined the revenue recognition
criteria have been met.
 NOTE 9  INCOME TAXES
 The Company elected to be treated as a taxable association effective February
22, 2010 (See Note 2).
 Income taxes for United States federal and state tax purposes for the nine month
period ended September 30, 2010 consisted of the following:
 Current
    
    $
    Deferred
    
    
    981,000$
    981,000
 Deferred income taxes reflect the net tax effects of temporary differences between
the cash basis of accounting used for income tax purposes and the accrual basis of
accounting used for financial reporting purposes. The principal sources of these
differences include the carrying amounts of accounts receivable, accounts payable and
deferred revenue for financial statement purposes which are not recognized for income
tax purposes.
 Principal components of the Companys net deferred tax liability at September 30,
2010 are as follows:
 Accounts receivable
    
    $
    1,072,000Accounts payable
    
    
    (114,000
    )Deferred revenue
    
    
    23,000$
    981,000
 The tax rate based on the federal and state statutory rates is reconciled to the
effective tax rate for the nine month period ended September 30, 2010 as follows:
 Federal and state statutory income tax rates
    
    
    34
    %Increase (decrease) resulting from:Exclusion of net loss incurred in period prior to corporate tax
election
    
    
    2
    %Exclusion of accrual to tax affect
    
    
    (1
    %)Effective tax rate
    
    
    35
    %
 
 - 11 -




---



##### 



TERRASPHERE SYSTEMS LLC
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 10   COMMITMENTS AND CONTINGENCIES
 LEASE
 The Company has entered into an operating lease agreement commencing November 1,
2009 for warehouse space in Vancouver, British Columbia for TerraSphere Canada. The
term is five years and the Company has a right to extend for an additional five
years. Future minimum payments under this lease are as follows:
 2010 (October 1, 2010 through December 31, 2010)
    
    $
    22,5002011
    
    
    89,9902012
    
    
    89,9902013
    
    
    89,9902014
    
    
    74,990Total
    
    $
    367,460
 Rent expense incurred in connection with this lease was approximately $68,000 for the
nine months ended September 30, 2010.
 MARKETING AGREEMENT
 On May 18, 2007, TerraSphere Canada entered into a marketing agreement with the
Squamish Nation to promote the TerraSphere System to other First Nations bands in
Canada. The Squamish paid TerraSphere $200,000 Canadian dollars ($183,772 U.S.) to
secure the rights to work with the First Nations bands across Canada through May
2012. This fee is being recognized as revenue over the term of the agreement (Note
7). Revenue recognized in connection with this agreement was $27,549 for the nine
months ended September 30, 2010 and 2009.
 In addition, the agreement stipulates that Squamish will receive a fee of 10% of any
license fee agreement executed between TerraSphere and a First Nations band.
Squamish also has the right of first refusal to participate in an ownership interest
of any venture formed pursuant to the First Nation band license agreement. These
rights must be executed no later than May 2012. No fees have been paid or accrued
for the nine months ended September 30, 2010 and 2009.
 NOTE 11  SUBSEQUENT EVENTS
 On July 6, 2010, the members of TerraSphere entered into a membership
acquisition agreement with Converted Organics, Inc (Converted), a publicly traded
company, whereby Converted agreed to acquire 95% of the membership interest of
TerraSphere solely in exchange for shares of Converteds common stock estimated at a
maximum purchase price of $13.4 million, subject to certain
adjustments. On November 12, 2010, Converted acquired 95% of the
membership interest of TerraSphere.
 In connection with the preparation of the consolidated financial statements,
management evaluated subsequent events after the balance sheet date of September 30,
2010 through November 15, 2010.
 - 12 -