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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

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<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 8pt">As filed with the Securities and
    Exchange Commission on September&#160;15, 2009</FONT></B>
</DIV>

<DIV align="right" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">Registration
    No.&#160;333-&#160;&#160;&#160;&#160;&#160;&#160;</FONT></B>
</DIV>

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<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 12pt">UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 11pt">Washington,&#160;D.C.
    20549</FONT></B>
</DIV>

<DIV style="margin-top: 1pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 15%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=540 length=84 -->

<DIV style="margin-top: 1pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 14pt"><FONT style="white-space: nowrap">Form&#160;S-1</FONT></FONT></B>
</DIV>

<DIV style="margin-top: 1pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>REGISTRATION STATEMENT</B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>UNDER</B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>THE SECURITIES ACT OF 1933</B>
</DIV>

<DIV style="margin-top: 1pt; font-size: 1pt">&nbsp;</DIV>

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<DIV style="margin-top: 1pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 20pt">Converted Organics
    Inc.</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 7pt">(Exact name of registrant as
    specified in its charter)</FONT></I>
</DIV>

<DIV style="margin-top: 1pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="34%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="32%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="32%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom">
<TD nowrap align="center" valign="top">
<DIV style="text-indent: -7pt; margin-left: 7pt">
    <B>Delaware</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    <B>2873</B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    <B>20-4075963</B>
</TD>
</TR>
<TR valign="bottom">
<TD align="center" valign="top">
    <I>(State or other jurisdiction of<BR>
    incorporation or organization)</I>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    <I>(Primary Standard Industrial<BR>
    Classification Code Number)</I>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    <I>(I.R.S. Employer<BR>
    Identification Number) </I>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

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<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">7A Commercial Wharf
    West</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">Boston, MA 02110</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">(617)&#160;624-0111</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 7pt">(Address, including zip code,
    and telephone number, including area code, of registrant&#146;s
    principal executive offices)</FONT></I>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

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<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">Edward J. Gildea</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">Chief Executive
    Officer</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">7A Commercial Wharf
    West</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">Boston, MA 02110</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 7pt">(617)&#160;624-0111</FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I><FONT style="font-size: 7pt">(Name, address, including zip
    code, and telephone number, including area code, of agent for
    service)</FONT></I>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 15%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=540 length=84 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><I><FONT style="font-size: 7pt">Copies to:</FONT></I></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="50%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="49%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom">
<TD align="center" valign="top">
<DIV style="text-indent: -7pt; margin-left: 7pt">
    <B>Ralph V. De Martino,&#160;Esq.<BR>
    Cavas S. Pavri,&#160;Esq.<BR>
    Cozen O&#146;Connor<BR>
    The Army&#160;&#038; Navy Club Building<BR>
    1627&#160;I&#160;Street, NW, Suite&#160;1100<BR>
    Washington, DC 20006<BR>
    <FONT style="white-space: nowrap">(202)&#160;912-4800</FONT><BR>
    Facsimile: (202) 912-4830</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    <B>Kenneth R. Koch,&#160;Esq.<BR>
    Mintz Levin Cohn Ferris Glovsky and Popeo,&#160;P.C.<BR>
    The Chrysler Center<BR>
    666 Third Avenue<BR>
    New York, NY 10017<BR>
    <FONT style="white-space: nowrap">(212)&#160;935-3000</FONT><BR>
    Facsimile: (212) 983-3115 </B>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 2%; font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Approximate date of commencement of proposed sale to the
    public:</B>&#160;&#160;As soon as practicable after the
    effective date of this Registration Statement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 2%; font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If any of the securities being registered on this Form are to be
    offered on a delayed or continuous basis pursuant to
    Rule&#160;415 under the Securities Act of 1933, check the
    following
    box.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#254;
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 2%; font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If this Form is filed to register additional securities for an
    offering pursuant to Rule 462(b) under the Securities Act, check
    the following box and list the Securities Act registration
    statement number of the earlier effective registration statement
    for the same
    offering.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 2%; font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If this Form is a post-effective amendment filed pursuant to
    Rule&#160;462(c) under the Securities Act, check the following
    box and list the Securities Act registration statement number of
    the earlier effective registration statement for the same
    offering.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 2%; font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If this Form is a post-effective amendment filed pursuant to
    Rule&#160;462(d) under the Securities Act, check the following
    box and list the Securities Act registration statement number of
    the earlier effective registration statement for the same
    offering.&#160;&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 2%; font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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
    &#147;large accelerated filer,&#148; &#147;accelerated
    filer&#148; and &#147;smaller reporting company&#148; in
    Rule&#160;12b-2 of the Exchange Act. (Check one):
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="17%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="11%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="10%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="11%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="24%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
    <TD width="11%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="16%">&nbsp;</TD>	<!-- colindex=04 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom">
<TD align="center" valign="top">
<DIV style="text-indent: -7pt; margin-left: 7pt">
    Large accelerated
    filer&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    Accelerated
    filer&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;
    </FONT>
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Non-accelerated
    filer&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#111;</FONT><BR>
    (Do not check if a smaller reporting company)
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Smaller reporting
    company&#160;<FONT style="font-family: Wingdings; font-variant: normal">&#254;</FONT>
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 15%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=540 length=84 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 7pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CALCULATION
    OF REGISTRATION FEE</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 6pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="44%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutterleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutterright -->
    <TD width="12%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=03 type=gutterleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=03 type=gutterright -->
    <TD width="12%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=04 type=gutterleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=04 type=gutterright -->
    <TD width="12%">&nbsp;</TD>	<!-- colindex=04 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=05 type=gutterleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=05 type=gutterright -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 6pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
    <B>Proposed Maximum<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
    <B>Proposed Maximum<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-top: 3px double #000000">
    <B>Amount of<BR>
    </B>
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
</TR>
<TR style="font-size: 6pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
    <B>Title of Each Class of<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Amount to be<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Offering Price per<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Aggregate<BR>
    </B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Registration<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 6pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
    <B>Securities to be Registered</B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Registered</B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Security(1)</B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Offering Price(1)</B>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Fee</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Units, each consisting of one share of Common Stock,
    $.0001&#160;par value, and one Class&#160;H Warrant(2)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    14,375,000 Units
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $1.36
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $19,550,000
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    $
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    1,090.89
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Shares of Common Stock included as part of the Units(2)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    14,375,000&#160;Shares
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    (3)
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Class&#160;H Warrants included as part of the Units(2)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD align="center" valign="bottom" style="border-top: 1px solid #000000">
    14,375,000 Class H Warrants
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    (3)
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Shares of Common Stock underlying the Class&#160;H Warrants
    included in the Units(4)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD align="center" valign="bottom" style="border-top: 1px solid #000000">
    14,375,000&#160;Shares of<BR>
    Common Stock
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $1.63
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $23,431,250
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    $
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    1,307.47
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Representative&#146;s Unit Purchase Option
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    1
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $100.00
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $100
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    $
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    1.00
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Units underlying the Representative&#146;s Unit Purchase Option
    (&#147;Underwriters&#146; Units&#148;)(4)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    500,000 Units
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $1.36
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $680,000
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    $
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    37.95
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Shares of Common Stock included as part of the
    Underwriters&#146; Units(4)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD align="center" valign="bottom" style="border-top: 1px solid #000000">
    500,000&#160;Shares of<BR>
    Common Stock
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    (3)
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Class&#160;H Warrants included as part of the Underwriters&#146;
    Units(4)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD align="center" valign="bottom" style="border-top: 1px solid #000000">
    500,000 Class H<BR>
    Warrants
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#151;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    &#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    (3)
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Shares of Common Stock underlying the Class&#160;H Warrants
    included in the Underwriters&#146; Units(4)
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD align="center" valign="bottom" style="border-top: 1px solid #000000">
    500,000&#160;Shares of Common Stock
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $1.63
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $815,000
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    $
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    45.48
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top" style="border-top: 1px solid #000000">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Total
</DIV>
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    $44,476,350
</TD>
<TD style="border-right: 1px solid #000000; padding-right: 2pt; border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
    $
</TD>
<TD nowrap align="center" valign="bottom" style="border-top: 1px solid #000000">
    2,482.79
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 1px solid #000000">
&nbsp;
</TD>
</TR>
<TR style="font-size: 1pt">
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom" style="border-top: 3px double #000000">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    <FONT style="font-size: 7pt">(1)
    </FONT></TD>
    <TD></TD>
    <TD valign="bottom">
    <FONT style="font-size: 7pt">Estimated solely for the purpose of
    calculating the registration fee.
    </FONT></TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    <FONT style="font-size: 7pt">(2)
    </FONT></TD>
    <TD></TD>
    <TD valign="bottom">
    <FONT style="font-size: 7pt">Includes 1,875,000 Units,
    1,875,000&#160;shares of Common Stock and 1,875,000 Class&#160;H
    Warrants underlying such Units which may be issued on exercise
    of a <FONT style="white-space: nowrap">45-day</FONT>
    option granted to the Underwriters to cover over-allotments, if
    any.
    </FONT></TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    <FONT style="font-size: 7pt">(3)
    </FONT></TD>
    <TD></TD>
    <TD valign="bottom">
    <FONT style="font-size: 7pt">No fee pursuant to Rule&#160;457(g).
    </FONT></TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    <FONT style="font-size: 7pt">(4)
    </FONT></TD>
    <TD></TD>
    <TD valign="bottom">
    <FONT style="font-size: 7pt">Pursuant to Rule&#160;416, there
    are also being registered such additional securities as may be
    issued to prevent dilution resulting from stock splits, stock
    dividends or similar transactions as a result of the
    anti-dilution provisions contained in the Class&#160;H Warrants.
    </FONT></TD>
</TR>

</TABLE>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 15%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=540 length=84 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 2%; font-size: 7pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>The Registrant hereby amends this Registration Statement on
    such date or dates as may be necessary to delay its effective
    date until the Registrant shall file a further amendment which
    specifically states that this Registration Statement shall
    thereafter become effective in accordance with Section&#160;8(a)
    of the Securities Act of 1933 or until the Registration
    Statement shall become effective on such date as the Commission,
    acting pursuant to Section&#160;8(a), may determine.</B>
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=540 length=0 -->

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 2pt solid #000000"></CENTER><!-- callerid=999 iwidth=540 length=0 -->

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 94%; margin-left: 3%"><!-- BEGIN PAGE WIDTH -->
</DIV><!-- END PAGE WIDTH -->
<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 16pt">$&#160;&#160;&#160;&#160;&#160;</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <IMG src="b77237b7723700.gif" alt="(CONVERTED ORGANICS LOGO)"><FONT style="font-size: 16pt">
    </FONT>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 14pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Units</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are
    selling&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;units,
    each unit consisting of one share of our common stock and one
    Class&#160;H warrant. Each Class&#160;H warrant entitles the
    holder to purchase one share of our common stock at a price of
    $&#160;&#160;&#160;&#160;&#160; , and will expire on
    December&#160;31, 2014. The Class&#160;H warrants will be
    exercisable 60&#160;days after issuance.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our common stock and Class&#160;B warrants are quoted on the
    NASDAQ Capital Market under the symbols &#147;COIN&#148; and
    &#147;COINZ,&#148; respectively. The last sale prices of our
    common stock and Class&#160;B warrants on September&#160;13,
    2009 were $1.37 per&#160;share and $0.35 per&#160;share,
    respectively.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There is presently no public market for our units or
    Class&#160;H warrants, and no market for the units will exist.
    Each of the common stock and the Class&#160;H warrants
    underlying the units will begin trading separately upon the
    closing of this offering. We have applied to list the
    Class&#160;H warrants on the NASDAQ Capital Market under the
    symbol
    &#147;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;.<B>&#148;
    </B>We cannot assure you, however, that our securities will
    continue to be listed on the NASDAQ Capital Market.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>These are speculative securities. Investing in our securities
    involves significant risks. You should purchase these securities
    only if you can afford a complete loss of your investment. See
    &#147;Risk Factors&#148; beginning on page&#160;7.</B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Neither the Securities and Exchange Commission nor any state
    securities commission has approved or disapproved of these
    securities or passed upon the adequacy or accuracy of this
    prospectus. Any representation to the contrary is a criminal
    offense.</B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="68%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Underwriting<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Proceeds to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Price to<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Discounts and<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Converted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Public</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Commissions(1)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Organics</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Per Unit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">

</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    This amount does not include a non-accountable expense allowance
    in the amount of 3% of the gross proceeds, or
    $&#160;&#160;&#160;&#160;&#160; ($&#160;&#160;&#160;&#160;&#160;
    per unit) payable to Chardan Capital Markets, LLC.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Delivery of the units will be made on or
    about&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2009. We have granted the underwriters a
    <FONT style="white-space: nowrap">45-day</FONT>
    option to purchase up
    to&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    additional units solely to cover over-allotments, if any.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with this offering, we have also agreed to sell to
    Chardan Capital Markets, LLC an option to purchase up to 4% of
    the units sold for $100. If the underwriter exercises this
    option, each unit may be purchased for
    $&#160;&#160;&#160;&#160;&#160; per unit
    (&#160;&#160;&#160;&#160;&#160;% of the price of the units sold
    in the offering).
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 18pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Chardan
    Capital Markets, LLC<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 18pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <FONT style="font-size: 10pt; font-family: 'Times New Roman', Times">The
    date of this prospectus
    is&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2009
    </FONT>
</DIV>

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 18%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=84 -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <BR>
    <B><FONT style="font-family: 'Times New Roman', Times">TABLE OF
    CONTENTS</FONT></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<DIV align="left">
<!-- TOC -->
</DIV>

<DIV align="left">
<A name="tocpage"></A>
</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="95%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadright -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Page</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#101'><FONT style="font-variant: SMALL-CAPS">Prospectus
    Summary</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#102'><FONT style="font-variant: SMALL-CAPS">Risk
    Factors</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#103'><FONT style="font-variant: SMALL-CAPS">Special
    Note&#160;Regarding Forward-Looking Statements</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#104'><FONT style="font-variant: SMALL-CAPS">Use of
    Proceeds</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#119'><FONT style="font-variant: SMALL-CAPS">Price
    Range of Common Stock</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    19
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#106'><FONT style="font-variant: SMALL-CAPS">Capitalization</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#107'><FONT style="font-variant: SMALL-CAPS">Dilution</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    21
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#108'><FONT style="font-variant: SMALL-CAPS">Management&#146;s
    Discussion and Analysis of Financial Condition and Results of
    Operations</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#109'><FONT style="font-variant: SMALL-CAPS">Business</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    35
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#110'><FONT style="font-variant: SMALL-CAPS">Management</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    47
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#111'><FONT style="font-variant: SMALL-CAPS">Executive
    Compensation</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    50
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#113'><FONT style="font-variant: SMALL-CAPS">Principal
    Stockholders</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#112'><FONT style="font-variant: SMALL-CAPS">Related
    Party Transactions</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    53
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#114'><FONT style="font-variant: SMALL-CAPS">Underwriting</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    54
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#115'><FONT style="font-variant: SMALL-CAPS">Description
    of Capital Stock</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    55
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#116'><FONT style="font-variant: SMALL-CAPS">Legal
    Matters</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    61
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#117'><FONT style="font-variant: SMALL-CAPS">Experts</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    62
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#118'><FONT style="font-variant: SMALL-CAPS">Where You
    Can Find More Information</FONT></A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    62
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="b77237exv3w2.htm">EX-3.2 Amendment to Certificate of Incorporation</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="b77237exv21w1.htm">EX-21.1 Subsidiaries of the Company</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="b77237exv23w1.htm">EX-23.1 Consent of CCR LLP</A></FONT></TD></TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 18%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=84 -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>You should rely only on the information contained in this
    document or to which we have referred you. We have not
    authorized anyone to provide you with information that is
    different. This document may only be used where it is legal to
    sell these securities. The information contained in this
    document may only be accurate on the date of this document.</B>
</DIV>

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->
<A name='101'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">PROSPECTUS
    SUMMARY</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>The following summary highlights selected information
    contained in this prospectus. This summary does not contain all
    the information that may be important to you. You should read
    the more detailed information contained in this prospectus,
    including but not limited to, the risk factors beginning on
    page&#160;7. References to &#147;we,&#148; &#147;us,&#148;
    &#147;our,&#148; &#147;Converted Organics&#148; or the
    &#147;Company&#148; mean Converted Organics Inc. and its
    subsidiaries.</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    Company</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We use food and other food processing waste as a raw material to
    manufacture, sell and distribute all-natural soil amendment and
    fertilizer products combining disease suppression and nutrition
    characteristics.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our revenue comes from two sources: &#147;tip&#148; fees and
    product sales. Waste haulers pay the tip fees to us for
    accepting food waste generated by food distributors such as
    grocery stores, produce docks, fish markets and food processors,
    and by hospitality venues such as hotels, restaurants,
    convention centers and airports. Revenue also comes from the
    customers who purchase our products. Our products possess a
    combination of nutritional, disease suppression and soil
    amendment characteristics. The products are sold in both dry and
    liquid form and will be stable with an extended shelf life
    compared to other organic fertilizers. Among other uses, the
    liquid product is expected to be used to mitigate powdery
    mildew, a leaf fungus that restricts the flow of water and
    nutrients to plants. These products can be used either on a
    stand-alone basis or in combination with more traditional
    petrochemical-based fertilizers and crop protection products.
    Based on growth trial performance, increased environmental
    awareness, trends in consumer food preferences and
    company-sponsored research, we believe there will be a demand
    for our products in the agribusiness, turf management and retail
    markets. We also expect to benefit from increased regulatory
    focus on organic waste processing and on environmentally
    friendly growing practices.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We operate two manufacturing facilities, one in Woodbridge, New
    Jersey and the other in Gonzales, California, where we use both
    owned and licensed proprietary technology to produce our
    products.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are positioning ourselves to take advantage of the growing
    market for organic products. We believe there are two primary
    business drivers influencing commercial agriculture. First,
    commercial farmers are focused on improving the economic yield
    of their land: maximizing the value derived from crop output
    (quantity and quality). Second, commercial farmers are focused
    on reducing the use of chemical products, while also meeting the
    demand for cost-effective, environmentally responsible
    alternatives. We believe this change in focus is the result of:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Consumer demand for safer, higher quality food;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The restriction on use of registered chemical products. Several
    U.S.&#160;government authorities, including the Environmental
    Protection Agency, the Food and Drug Administration, and the
    U.S.&#160;Department of Agriculture, or USDA, regulate the use
    of fertilizers;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Environmental concerns and the demand for sustainable
    technologies;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Demand for more food for the growing world population;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The cost effectiveness and efficacy of non-chemical based
    products to growers.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In this connection, according to the Organic Trade Association,
    sales of organic food and beverages in the United States have
    grown from $1&#160;billion in 1990 to approximately
    $20&#160;billion in 2007 and are expected to grow at an average
    of 18% per year through 2010. Furthermore, the Organic Trade
    Association reports that organic foods represented approximately
    2.8% of total food and beverage sales in 2006, growing 20.9% in
    2006, one of the fastest growing categories. According to the
    Nutrition Business Journal, consumer demand is driving organic
    sector expansion, particularly for fruit, vegetables and dairy
    products. This demand, in turn, is driving commercial farmers to
    shift more of their acreage from conventional practices, which
    predominantly use synthetic fertilizers, to organic practices,
    which require the use of certified organic fertilizers or other
    natural organic materials to facilitate crop growth. The
    USDA&#146;s Economic Research Service reports that the
</DIV>
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    1
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    number of certified organic farm acres has grown from
    0.9&#160;million in 1992 to 4.1&#160;million in 2005, a compound
    annual growth rate of 12% per year.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe farmers are facing pressures to change from
    conventional production practices to more environmentally
    friendly practices. U.S.&#160;agricultural producers are turning
    to certified organic farming methods as a potential way to lower
    production costs, decrease reliance on nonrenewable resources
    such as chemical fertilizers, increase market share with an
    &#147;organically grown&#148; label and capture premium prices,
    thereby boosting farm income.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our long term strategic plan calls for the development and
    construction of facilities in addition to our Gonzales and
    Woodbridge facilities. In this connection, we have already done
    preliminary work aimed at establishing facilities in Rhode
    Island and Massachusetts. Any future expansion is dependent on
    our ability to raise additional financing beyond the proceeds we
    may receive from the offering contemplated by this prospectus.
    We may also seek to expand by licensing third parties to use our
    technology or by building less capital intensive, smaller
    facilities, if they are commercially feasible.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Opening additional facilities should allow us to achieve
    economies of scale in marketing and selling our fertilizer
    products as the cost of these activities would be spread over a
    larger volume of product. If our overall volume of production
    increases, we also believe we may be able to more effectively
    approach larger agribusiness customers requiring larger
    quantities of fertilizer to efficiently utilize their
    distribution systems.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We were incorporated under the laws of the state of Delaware in
    January 2006, and we transitioned from a development stage
    company to an operating company in the second quarter of 2008 as
    operations commenced. We generated approximately
    $1.5&#160;million in revenue for the year ended
    December&#160;31, 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In February 2006, we merged with our predecessor organizations,
    Mining Organics Management, LLC and Mining Organics Harlem River
    Rail Yard, LLC, in transactions accounted for as a
    recapitalization. These predecessor organizations provided
    initial technical and organizational research that led to the
    foundation of the current business plan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, we completed an initial public
    offering of stock and also completed a bond offering with the
    New Jersey Economic Development Authority. The net proceeds of
    the stock offering of $8.9&#160;million, together with the net
    proceeds of the bond offering of $16.5&#160;million, were used
    to develop and construct the Woodbridge facility, fund our
    marketing and administrative expenses during the construction
    period and fund specific principal and interest reserves as
    specified in the bond offering. Of the total net proceeds of the
    stock and bond offerings of $25.4&#160;million,
    $14.6&#160;million was used towards the construction of the
    Woodbridge facility and the remaining $10.8&#160;million was
    used for items detailed above.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we acquired the assets, including the
    intellectual property, of Waste Recovery Industries, LLC, or WRI
    . This acquisition made us the exclusive owner of the
    proprietary technology and process known as the High Temperature
    Liquid Composting or HTLC system, which processes various
    biodegradable waste products into liquid and solid organic-based
    fertilizer and feed products.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Also on January&#160;24, 2008, we acquired the net assets of
    United Organic Products, LLC, which was under common ownership
    with WRI. With this acquisition, we acquired a leading liquid
    fertilizer product line, as well as the operations of the
    Gonzales facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our principal business office is located at 7A Commercial Wharf
    West, Boston, Massachusetts 02110, and our telephone number is
    <FONT style="white-space: nowrap">(617)&#160;624-0111.</FONT>
    Our website address is <I>www.convertedorganics.com</I>.
    Information contained on our website or any other website does
    not constitute part of this prospectus.
</DIV>
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    2
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">THE
    OFFERING</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="36%"></TD>
    <TD width="1%"></TD>
    <TD width="63%"></TD>
</TR>

<TR>
    <TD valign="top">
    <I>Securities offered:</I></TD>
    <TD></TD>
    <TD valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;units,
    at $&#160;&#160;&#160;&#160;&#160; per unit
    (plus&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;additional
    units if the representative of the underwriters exercise the
    over-allotment option), each unit consisting of:</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    &#149;&#160;one share of common stock; and</DIV>
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    &#149;&#160;one Class&#160;H warrant.</DIV>
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="bottom">
    Each of the common stock and the Class&#160;H warrants will
    begin trading separately upon the closing of this offering, and
    the units will not be listed on any market.</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    <I>Common Stock:</I> </TD>
    <TD></TD>
    <TD valign="bottom">
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    &#160;&#160;<I>Number outstanding before this<BR>
    &#160;&#160;offering</I></DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
    20,412,708&#160;shares</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    &#160;&#160;<I>Number to be outstanding after this<BR>
    &#160;&#160;offering</I></DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    (without giving effect to exercise of the Class&#160;H warrants,
    or any of our other outstanding options, warrants or convertible
    notes)</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    <I>Class&#160;H Warrants:</I> </TD>
    <TD></TD>
    <TD valign="bottom">
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    &#160;&#160;<I>Number outstanding before this<BR>
    &#160;&#160;offering</I></DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
    None.</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    &#160;&#160;<I>Number to be outstanding after this<BR>
    &#160;&#160;offering</I></DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    <I>Exercise price</I></TD>
    <TD></TD>
    <TD valign="bottom">
    $</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    <I>Securities issuable on exercise of Class&#160;H warrants</I></DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
    Each Class&#160;H warrant is exercisable for one share of common
    stock.</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    <I>Exercise period</I></TD>
    <TD></TD>
    <TD valign="bottom">
    The Class&#160;H warrants will be exercisable 60&#160;days after
    issuance. The Class&#160;H warrants will expire at
    5:00&#160;p.m., New York City time, on December&#160;31, 2014.</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    <I>NASDAQ Capital Market symbols for our:</I> </DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    &#160;&#160;<I>Common stock</I></TD>
    <TD></TD>
    <TD valign="bottom">
    COIN</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
    &#160;&#160;<I>Class&#160;B warrants</I></TD>
    <TD></TD>
    <TD valign="bottom">
    COINZ</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    <I>Proposed NASDAQ Capital Market symbols for our Class&#160;H
    Warrants</I></DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD valign="top">
<DIV style="text-indent: -5%; margin-left: 5%">
    <I>Risk Factors</I></DIV>
</TD>
    <TD></TD>
    <TD valign="bottom">
    You should carefully consider all of the risks set forth in the
    section entitled &#147;Risk Factors&#148; beginning on
    page&#160;7 of this prospectus.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The number of shares to be outstanding after this offering
    excludes:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    1,248,895&#160;shares of common stock issuable upon the exercise
    of outstanding options issued pursuant to our current stock
    option plans;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    274,772&#160;shares of common stock issuable upon the exercise
    of options available for future grant under our stock option
    plans;
</TD>
</TR>

</TABLE>
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    3
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    393,657&#160;shares of common stock issuable upon the exercise
    of 131,219 underwriter units;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    1,000,000&#160;shares of common stock issuable upon conversion
    of a $1,540,000 convertible note issued in September 2009;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    shares underlying a convertible note that is convertible into
    our common stock at the option of the holder at a price equal to
    the average closing price of our common stock on the NASDAQ
    Capital Market for the five days preceding conversion (as of
    September&#160;1, 2009, the note had a remaining principal
    balance of approximately $458,000);
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    4,932,438 Class&#160;B warrants. Each Class&#160;B warrant
    entitles the holder to purchase one share of common stock at an
    exercise price of $11.00 per share. In addition, the warrant
    provides for anti-dilution protection in connection with our
    issuance of any stock dividends, which we have declared since
    the issuance of the warrants. Accordingly, in the aggregate,
    holders of the Class&#160;B warrants may currently purchase a
    total of 6,177,012&#160;shares of our common stock;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    885,000 shares of common stock reserved for issuance under our
    Class&#160;C warrants exercisable at $1.00 per share;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    415,000 shares of common stock reserved for issuance under our
    Class&#160;D warrants exercisable at $1.02 per share;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    1,500,000 shares of common stock reserved for issuance under our
    Class&#160;E warrants exercisable at $1.63 per share;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    585,000 shares of common stock reserved for issuance under our
    Class&#160;F warrants exercisable at $1.25 per share;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    2,500,000 shares of common stock reserved for issuance under our
    Class&#160;G warrants exercisable at $1.25 per share.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 1%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Except where we state otherwise, the information we present in
    this prospectus assumes:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    no exercise of our outstanding options;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    no exercise of our outstanding warrants;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    no conversion of our outstanding convertible notes;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    no exercise of the underwriters&#146; unit purchase
    option;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    no exercise of the underwriters&#146; over-allotment option.
</TD>
</TR>

</TABLE>
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    4
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">SUMMARY
    CONSOLIDATED AND OTHER FINANCIAL DATA</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following tables summarize our consolidated financial and
    other data. The consolidated statements of operations data for
    the years ended December&#160;31, 2008 and 2007 and the
    consolidated balance sheet data as of December&#160;31, 2008 and
    2007 have been derived from our audited consolidated financial
    statements included elsewhere in this prospectus. The
    consolidated statement of operations data for the six months
    ended June&#160;30, 2009 and 2008, and the consolidated balance
    sheet data as of June&#160;30, 2009, have been derived from our
    unaudited consolidated financial statements included elsewhere
    in this prospectus. The unaudited consolidated financial
    statements have been prepared on a basis consistent with our
    audited financial statements and include, in the opinion of
    management, all adjustments that management considers necessary
    for the fair statement of the financial information set forth in
    those financial statements. The following financial data should
    be read in conjunction with, and is qualified by reference to,
    our consolidated financial statements and related notes and
    schedules included elsewhere in this prospectus and the
    information under &#147;Management&#146;s Discussion and
    Analysis of Financial Condition and Results of Operations&#148;
    below. Our historical results are not necessarily indicative of
    the results to be expected in any future period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="72%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Years Ended December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Selected Operating Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Revenues
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,547,981
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Cost of good sold
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,981,084
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Gross (loss)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (433,103
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Loss from operations
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (10,381,733
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,674,842
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Other (expenses), net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (5,797,365
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (409,170
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Loss before provision for income taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,179,098
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,084,012
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,179,098
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,084,012
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net loss per share, basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2.70
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (0.87
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Weighted average common shares outstanding
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,985,017
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,716,378
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="71%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>As of December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Selected Balance Sheet Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,357,940
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    287,867
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Property, plant and equipment
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    19,725,146
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Other assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,534,922
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    21,888,860
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    32,618,008
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22,176,727
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Working capital (deficit)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,243,941
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    663,050
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    27,571,076
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20,090,372
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total owners&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,046,932
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,086,355
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    5
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<DIV style="width: 100%; height: 9in; border-top: 1px solid #000000; padding-top: 12pt; border-right: 1px solid #000000; padding-right: 12pt; border-bottom: 1px solid #000000; padding-bottom: 12pt; border-left: 1px solid #000000; padding-left: 12pt"><!-- Begin box 1 -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="72%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Six Months Ended June&#160;30,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Selected Operating Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Revenues
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,484,023
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    752,907
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Cost of good sold
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,757,264
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    624,548
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Gross (loss) profit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,273,061
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    128,359
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Loss from operations
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,443,230
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (5,617,669
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Other income/(expenses)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    516,828
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,920,705
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Loss before provision for income taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926,402
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (8,538,374
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926,402
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (8,538,374
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net loss per share, basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (0.58
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.49
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Weighted average common shares outstanding
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,985,904
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,747,616
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="71%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>As of June&#160;30,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Selected Balance Sheet Data:</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,808,156
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5,202,718
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Property, plant and equipment
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22,825,134
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,648,088
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Other assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,330,777
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18,710,416
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    30,964,067
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    31,561,222
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Working capital (deficit)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,782,563
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,247,785
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    26,006,202
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    24,481,359
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total shareholders&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,957,865
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,079,863
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>
</DIV><!-- End box 1 -->

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    6
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='102'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">RISK
    FACTORS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>If you purchase our securities, you will assume a high degree
    of risk. In deciding whether to invest, you should carefully
    consider the following risk factors, as well as the other
    information contained elsewhere in this prospectus. Any of the
    following risks, as well as other risks and uncertainties
    discussed in this prospectus, could have a material adverse
    effect on our business, financial condition, results of
    operations or prospects and cause the value of our securities to
    decline, which could cause you to lose all or part of your
    investment.</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Risks
    Relating to Our Business</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    received a modified report from our independent registered
    public accounting firm with an emphasis of matter paragraph for
    our year ended December&#160;31, 2008 with respect to our
    ability to continue as a going concern. The existence of such a
    report may adversely affect our stock price and our ability to
    raise capital, and even if we are successfully able to complete
    this offering, there is no assurance that we will not receive a
    similar emphasis of matter paragraph in their opinion for our
    year ending December&#160;31, 2009.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe there exists substantial doubt regarding our ability
    to continue as a going concern unless this offering or a similar
    financing is consummated. Our independent registered public
    accounting firm has modified and included in their report for
    our year ended December&#160;31, 2008 an emphasis of matter
    paragraph with respect to our ability to continue as a going
    concern. Even if we are able to complete this offering, there is
    no assurance that our independent registered public accounting
    firm will not again so emphasis this matter in their report for
    our year ending December&#160;31, 2009. Our consolidated
    financial statements have been prepared on the basis of a going
    concern, which contemplates the realization of assets and the
    satisfaction of liabilities in the normal course of business. If
    we became unable to continue as a going concern, we would have
    to liquidate our assets and we might receive significantly less
    than the values at which they are carried on our consolidated
    financial statements. The inclusion of a going concern
    modification in our independent registered public accounting
    firm&#146;s audit opinion for the year ended December&#160;31,
    2008&#160;may materially and adversely affect our stock price
    and our ability to raise new capital, as well as adversely
    affect our business. In addition, if our independent registered
    public accounting firm&#146;s report for our year ending
    December&#160;31, 2009 again has an emphasis of this matter, it
    may adversely affect our stock price and our ability to raise
    new capital in the future, as well as adversely affect our
    business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    need to raise additional capital to fund our operations through
    the near term, and we do not have any commitments for that
    capital.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For the year ended December&#160;31, 2008, we incurred a net
    loss of approximately $16.2&#160;million, and had an accumulated
    deficit of $26.6&#160;million. For the six months ended
    June&#160;30, 2009, we had a net loss of $6.9&#160;million, an
    accumulated deficit of approximately $35.7&#160;million,
    negative working capital of approximately $3.7&#160;million, and
    we continue to incur such losses. We need additional capital to
    execute our business strategy, and if we are unsuccessful in
    raising additional capital either through this offering or
    otherwise, we will be unable to fully execute our business
    strategy on a timely basis, if at all. If we complete this
    offering, we expect the funds received will be sufficient to
    operate our current business until we are cash flow positive,
    which we expect to occur by the end of the third quarter of
    2010, assuming that our sales levels do not decrease and
    assuming that we do not encounter any unforeseen costs or
    expenses. If our sales levels decrease or if we encounter
    unforeseen costs or expenses, we will require additional
    financing prior to such date for which we have no commitments.
    The proceeds from this offering are intended to fund our current
    business operations, and will not permit us to finance
    additional facilities. If we are unable to complete this
    offering, we will need additional financing immediately, for
    which we have no commitments. We do not know whether any
    financing, if obtained, will be adequate to meet our capital
    needs and to support our growth. If adequate capital cannot be
    obtained on satisfactory terms, we may curtail or delay the
    implementation of updates to our facilities or delay the
    expansion of our sales and marketing capabilities, any of which
    could cause our business to fail.
</DIV>

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    <BR>
    7
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If we raise additional capital through the issuance of equity
    securities, such issuances will likely cause dilution to our
    stockholders, particularly if we are required to do so during
    periods when our common stock is trading at historically low
    price levels. If we raise additional capital through the
    issuance of debt securities, the debt securities may be secured
    and any interest payments would reduce the amount of cash
    available to operate and grow our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    will need to obtain additional debt and equity financing to
    complete subsequent stages of our business plan.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Even if this offering is consummated, we will require
    significant additional financing to increase the capacity of our
    Woodbridge facility to its permitted 500 tons per day capacity
    from the current full processing capacity of 250 tons per day
    and to invest in the construction of new facilities. Our
    long-term business strategy contemplates the expansion of our
    Woodbridge facility and the construction of new facilities, and
    we do not have any commitments for the financing required to
    complete such projects. Any new facility will likely be
    individually financed and require considerable debt. While we
    believe state government-sponsored debt programs may be
    available to finance our requirements, public or private debt
    may not be available at all or on terms acceptable to us for the
    development of future facilities. We do not intend to utilize
    the proceeds from this offering to finance any new manufacturing
    facilities or to expand our Woodbridge facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To meet our future capital requirements, we may issue additional
    securities in the future with rights, terms and preferences
    designated by our Board of Directors, without a vote of
    stockholders, which could adversely affect stockholder rights.
    Additional financing will likely cause dilution to our
    stockholders and could involve the issuance of securities with
    rights senior to the outstanding shares. There is no assurance
    that such financing will be sufficient, that the financing will
    be available on terms acceptable to us and at such times as
    required, or that we will be able to obtain the additional
    financing required, if any, for the continued operation and
    growth of our business. Any inability to raise necessary capital
    will have a material adverse effect on our ability to implement
    our business strategy and will have a material adverse effect on
    our revenues and net income.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Constructing
    and equipping our Woodbridge facility has taken longer and cost
    more than we expected, which has resulted in significant amounts
    being owed to construction vendors for which we do not have the
    cash resources to satisfy.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Woodbridge facility became operational in June 2008. We
    incurred approximately $5.7&#160;million in construction cost
    and design change overruns on an initial budget of
    $19.6&#160;million. These design changes and upgrades are
    substantially complete, but we can offer no assurance that we
    will not experience additional overruns and delays before total
    completion.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Of the $5.7&#160;million in upgrades, design changes and
    construction costs discussed above, we currently estimate that
    we will be able to fund approximately $500,000 in costs. In
    order to finance the additional $5.2&#160;million in upgrades,
    design changes and construction costs, we have entered into
    agreements with all but one of the various construction vendors
    regarding payment plans, which generally provide we pay interest
    only for six months with the remaining principal balance and
    interest thereon to be repaid in 18&#160;monthly installments.
    We owe approximately $2.4&#160;million to one construction
    vendor with whom we are presently negotiating. Such vendor has
    commenced a lawsuit against us. These negotiations and legal
    actions could result in interruptions to the operations of our
    Woodbridge facility, which would adversely effect our business
    results.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    have limited operating history, and our prospects are difficult
    to evaluate.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have not operated any facility other than our Gonzales
    facility, which we purchased in January 2008, and our Woodbridge
    facility, which became operational in June 2008. Our activities
    to date have been limited primarily to developing our business,
    and consequently there is limited historical financial
    information related to operations available upon which you may
    base your evaluation of our business and prospects. The revenue
    and income potential of our business is unproven. If we are
    unable to develop our business, we will not
</DIV>

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    <BR>
    8
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    achieve our goals and could suffer economic loss or collapse,
    which may have a material negative effect on our financial
    performance.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    expect to incur significant losses for some time, and we may
    never operate profitably.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    From inception through June&#160;30, 2009, we incurred an
    accumulated net loss of approximately $27.2&#160;million. The
    revenues that we began generating from our Gonzales facility in
    February 2008 and from our Woodbridge facility during the first
    half of 2009 have not yet resulted in our earning a profit and
    we will continue to incur significant losses for at least the
    near future. There is no assurance that our operations will ever
    become profitable.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">If we
    are unable to manage our transition to an operating company
    effectively, our operating results will be adversely
    affected.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Failure to manage effectively our transition to an operating
    company will harm our business. To date, substantially all of
    our activities and resources have been directed at developing
    our business plan, arranging financing, licensing technology,
    obtaining permits and approvals, securing a lease for our
    Woodbridge facility and options for additional facilities,
    purchasing our Gonzales facility and beginning to operate our
    facilities. The transition to a converter of waste and
    manufacturer and vendor of fertilizer products requires
    effective planning and management. In addition, future expansion
    will be expensive and will likely strain our management and
    other resources. We may not be able to easily transfer our
    skills to operating a facility or otherwise effectively manage
    our transition to an operating company.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We are
    dependent on a small number of major customers for our revenues
    and the loss of any of these major customers would adversely
    affect our results of operations.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Gonzales and Woodbridge facilities rely on a few major
    customers for a majority of their revenues. From January&#160;1,
    2009 until August&#160;31, 2009, approximately 71% of the
    revenues generated by the Gonzales facility were from three
    customers. From January&#160;1, 2009 until August&#160;31, 2009,
    approximately 48% of the revenues generated by the Woodbridge
    facility, excluding tip fees, were from two customers. We do not
    have any long-term agreements with any of our customers. The
    loss of any of our major customers could adversely effect our
    results of operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We are
    exposed to risks from legislation requiring companies to
    evaluate internal control over financial
    reporting.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Section&#160;404 of the Sarbanes-Oxley Act of 2002
    (&#147;Section&#160;404&#148;) required our management to begin
    to report on the operating effectiveness of our internal control
    over financial reporting for the year ended December&#160;31,
    2008. CCR LLP, our independent registered public accounting
    firm, will be required to opine on the effectiveness of our
    internal control over financial reporting beginning with the
    year ending December&#160;31, 2009. We must continue an ongoing
    program to perform the system and process evaluation and testing
    necessary to comply with these requirements. We expect that this
    program will require us to incur significant expenses and to
    devote resources to Section&#160;404 compliance on an ongoing
    annual basis.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    It is difficult for us to predict how long it will take to
    complete management&#146;s assessment of the effectiveness of
    our internal control over financial reporting each year and to
    remediate any deficiencies in our internal control over
    financial reporting, if any. We are currently completing
    internal assessments in anticipation of our independent
    registered public accounting firm opining on the effectiveness
    of our internal control over financial reporting for the current
    year. Due to financial constraints, we have not yet retained any
    outside consultants to assist us, although we intend to hire
    such consultants if we are able to successfully complete this
    offering. As a result, we may not be able to complete the
    assessment process on a timely basis each year. In the event
    that our Chief Executive Officer, Chief Financial Officer or
    independent registered public accounting firm determines that
    our internal control over financial reporting is not effective
    as defined under Section&#160;404, we cannot predict how
    regulators will react or how the market prices of our securities
    will be affected.
</DIV>

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    <BR>
    9
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<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Our
    future success is dependent on our existing key employees, and
    hiring and assimilating new key employees, and our inability to
    attract or retain key personnel in the future would materially
    harm our business and results of operations.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our success depends on the continuing efforts and abilities of
    our current management team. In addition, our future success
    will depend, in part, on our ability to attract and retain
    highly skilled employees, including management, technical and
    sales personnel. We may be unable to identify and attract highly
    qualified employees in the future. In addition, we may not be
    able to successfully assimilate these employees or hire
    qualified personnel to replace them. The loss of services of any
    of our key personnel, the inability to attract or retain key
    personnel in the future, or delays in hiring required personnel
    could materially harm our business and results of operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    have little or no experience in the food waste conversion or
    fertilizer industries, which increases the risk of our inability
    to build our facilities and operate our business.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are currently, and are likely for some time to continue to
    be, dependent upon our present management team. Most of these
    individuals are experienced in business generally, and in
    governing and operating a public company. However, our present
    management team does not have experience organizing the
    construction, equipping and start up of a food waste conversion
    facility. In addition, none of our directors has any experience
    in the food waste conversion or fertilizer products industries.
    As a result, we may not develop our business successfully.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    license certain technology from a third party, and our failure
    to perform under the terms of the license could result in
    material adverse consequences.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We use certain licensed technology and patented pieces of
    process equipment in our Woodbridge facility that have been
    licensed to us by International Bio-Recovery Corporation, or
    IBRC. The license contains various criteria, such as the payment
    of royalties, the branding on packaging and the requirement to
    conduct our processing within certain parameters. If we fail to
    perform under the terms of the license, the license may be
    terminated by the licensor, and we will have to modify our
    process and employ other equipment. We currently own and employ
    an alternative process to that of IBRC, which is utilized at our
    Gonzales facility. If the license agreement is terminated or
    held invalid for any reason, or if it is determined that IBRC
    has improperly licensed its process to us, our Woodbridge
    operations and revenues could be adversely affected.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">The
    EATAD technology we will use to operate our Woodbridge facility
    is unproven at the scale on which we intend to
    operate.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    While IBRC has operated a facility in British Columbia using the
    Enhanced Autothermal Thermophilic Aerobic Digestion, or EATAD,
    process, its plant there is smaller than our Woodbridge
    facility. IBRC developed the initial drawings for our Woodbridge
    facility, but neither IBRC nor we have operated a plant of the
    proposed size. There is no assurance that we will be able to
    <FONT style="white-space: nowrap">scale-up</FONT> the
    Woodbridge facility successfully.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Our
    Woodbridge and Gonzales facility sites, as well as future
    facility sites, may have unknown environmental problems that
    could be expensive and time consuming to correct.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There can be no assurance that we will not encounter hazardous
    environmental conditions at the Woodbridge and Gonzales facility
    sites or any additional future facility sites that may delay the
    construction of our future food waste conversion facilities or
    require us to incur significant
    <FONT style="white-space: nowrap">clean-up</FONT> or
    correction costs. Upon encountering a hazardous environmental
    condition, our contractor may suspend work in the affected area.
    If we receive notice of a hazardous environmental condition, we
    may be required to correct the condition prior to continuing
    construction. The presence of a hazardous environmental
    condition will likely delay construction of the particular
    facility and may require significant expenditures to correct the
    environmental condition. If we encounter any hazardous
    environmental conditions during construction that require time
    or money to correct, such event could delay our ability to
    generate revenue.
</DIV>

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    <BR>
    10
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    have recently commenced operations and may not be able to
    successfully operate our Woodbridge or Gonzales
    facility.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe our Woodbridge facility is the first commercial
    facility of its kind in the United States to recycle food waste
    into fertilizer and may not function as anticipated. We have
    produced our products at our Gonzales facility since February
    2008 and have had limited production from our Woodbridge
    facility since June 2008. As such, we have limited operating
    experience, and may be unable to successfully operate these
    facilities. In addition, the control of the manufacturing
    process will require operators with extensive training and
    experience that may be difficult to attain.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Our
    lack of business diversification may have a material negative
    effect on our financial performance.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have two products to sell to customers to generate revenue:
    dry and liquid soil fertilizer products. We do not expect to
    have any other products. Although we also expect to receive
    &#147;tip&#148; fees from food waste haulers, our lack of
    business diversification could have a material adverse effect on
    our operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We may
    not be able to produce products from our facilities in
    commercial quantities or sell them at competitive
    prices.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have produced our products at our Gonzales facility since
    February 2008 and have had limited production from our
    Woodbridge facility since June 2008. Accordingly, our ability to
    produce our products in commercial quantities at a competitive
    cost is unproven. We may not be able to produce products from
    our facilities in commercial quantities or sell them at prices
    competitive with other similar products.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We may
    be unable to establish marketing and sales capabilities
    necessary to commercialize and gain market acceptance for our
    products.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We currently have limited resources to expand our sales and
    marketing capabilities. We will need to either hire sales
    personnel with expertise in the markets we intend to address or
    contract with others to provide sales support. Co-promotion or
    other marketing arrangements to commercialize our planned
    products could significantly limit the revenues we derive from
    our products, and the parties with whom we would enter such
    agreements may fail to commercialize our products successfully.
    Our products address different markets and can be offered
    through multiple sales channels. Addressing each market
    effectively will require sales and marketing resources tailored
    to the particular market and to the sales channels that we
    choose to employ, and we may not be able to develop such
    specialized marketing resources.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Pressure
    by our customers to reduce prices and agree to long-term supply
    arrangements may adversely affect our net sales and profit
    margins.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our current and potential customers, especially large
    agricultural companies, are often under budgetary pressure and
    are very price sensitive. Our customers may negotiate supply
    arrangements with us well in advance of delivery dates, thereby
    requiring us to commit to product prices before we can
    accurately determine our final costs. If this happens, we may
    have to reduce our conversion costs and obtain higher volume
    orders to offset lower average sales prices. If we are unable to
    offset lower sales prices by reducing our costs, our gross
    profit margins will decline, which could have a material
    negative effect on our financial performance.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">The
    fertilizer industry is highly competitive, which may adversely
    affect our ability to generate and grow sales.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Chemical fertilizers are manufactured by many companies and are
    plentiful and relatively inexpensive. In addition, there are
    some 1,500 &#147;crop products&#148; registered as
    &#147;organic&#148; with the Organic Materials Review Institute,
    a number that has increased by approximately 50% since 2002. If
    we fail to keep up with changes affecting the markets that we
    intend to serve, we will become less competitive, adversely
    affecting our financial performance.
</DIV>

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    <BR>
    11
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Defects
    in our products or failures in quality control could impair our
    ability to sell our products or could result in product
    liability claims, litigation and other significant events with
    substantial additional costs.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Detection of any significant defects in our products or failure
    in our quality control procedures may result in, among other
    things, delay in
    <FONT style="white-space: nowrap">time-to-market,</FONT>
    loss of sales and market acceptance of our products, diversion
    of development resources, and injury to our reputation. The
    costs we may incur in correcting any product defects may be
    substantial. Additionally, errors, defects or other performance
    problems could result in financial or other damages to our
    customers, which could result in litigation. Product liability
    litigation, even if we prevail, would be time consuming and
    costly to defend, and if we do not prevail, could result in the
    imposition of a damages award. We presently maintain product
    liability insurance; however, it may not be adequate to cover
    any claims.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Energy
    and fuel cost variations could adversely affect operating
    results and expenses.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Energy costs, particularly electricity and natural gas,
    constitute a substantial portion of our operating expenses. The
    price and supply of energy and natural gas are unpredictable and
    fluctuate based on events outside our control, including demand
    for oil and gas, weather, actions by OPEC and other oil and gas
    producers, and conflict in oil-producing countries. Price
    escalations in the cost of electricity or reductions in the
    supply of natural gas could increase operating expenses and
    negatively affect our results of operations. We may not be able
    to pass through all or part of the increased energy and fuel
    costs to our customers.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We may
    not be able to obtain sufficient material to produce our
    products, and we are dependent on a small number of waste
    haulers to provide the food waste we use to produce our
    products.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our revenue comes from two sources: &#147;tip&#148; fees and
    product sales. We are dependent on a stable supply of food waste
    in order to produce our products and to utilize our available
    capacity. Waste haulers pay the tip fees to us for accepting
    food waste generated by food distributors such as grocery
    stores, produce docks, fish markets and food processors, and by
    hospitality venues such as hotels, restaurants, convention
    centers and airports. Insufficient food waste feedstock will
    adversely affect our efficiency and may cause us to increase our
    tip fee discount from prevailing rates,, which is the discount
    we pay to haulers that provide larger quantities of food waste,
    likely resulting in reduced revenues and net income. Competing
    disposal outlets for food waste and increased demand for
    applications such as biofuels may develop and adversely affect
    our business. In addition, if alternate uses for food waste are
    developed in the future, these alternate uses could increase the
    competition for food waste.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Our
    license agreement with IBRC restricts the territory into which
    we may sell our products and grants a cooperative a right of
    first refusal to purchase our products.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have entered into a license agreement with IBRC that, among
    other terms, contains a restriction on our right to sell our
    planned products outside a territory defined generally as the
    Eastern Seaboard of the United States. The license agreement
    also grants a proposed cooperative, which to our knowledge has
    not been formed and of which IBRC will be a member, a right of
    first refusal to purchase the products sold from our Woodbridge
    facility under certain circumstances. While we believe that the
    territory specified in the license agreement is broad enough to
    absorb the amount of product we plan to produce and that the
    right of first refusal will not impair our ability to sell our
    products, these restrictions may have a material adverse effect
    on the volume and price of our product sales. In addition, we
    may become completely dependent on a third party for the sale of
    our products.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Successful
    infringement claims by third parties could result in substantial
    damages, lost product sales and the loss of important
    proprietary rights.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We may have to defend ourselves against patent and other
    infringement claims asserted by third parties regarding the
    technology we have licensed, resulting in diversion of
    management focus and additional expenses for the defense of
    claims. In addition, if a patent infringement suit was brought,
    we might be forced to stop or delay developing, manufacturing or
    selling potential products that are claimed to infringe a patent
</DIV>

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    <BR>
    12
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    covering a third party&#146;s intellectual property unless that
    party grants us rights to use its intellectual property. We may
    be unable to obtain these rights on terms acceptable to us, if
    at all. If we cannot obtain all necessary licenses on
    commercially reasonable terms, we may be unable to continue
    selling such products. Even if we are able to obtain rights to a
    third party&#146;s patented intellectual property, these rights
    may be non-exclusive, and therefore our competitors may obtain
    access to the same intellectual property. Ultimately, we may be
    unable to commercialize our potential products or may have to
    cease some or all of our business operations as a result of
    patent infringement claims, which could severely harm our
    business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Our
    EATAD license agreement with IBRC imposes obligations on us
    related to infringement actions that may become burdensome or
    result in termination of our license agreement.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If our use of the licensed EATAD technology is alleged to
    infringe the intellectual property of a third party, we may
    become obligated to defend such infringement action. Although
    IBRC has agreed to bear the costs of such defense, if the
    licensed EATAD technology is found by a court to be infringing,
    IBRC could terminate the license agreement, which may prevent us
    from continuing to operate our Woodbridge facility. In such an
    event, we may become obligated to find alternative technology or
    to pay a royalty to a party other than IBRC to continue to
    operate.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If a third party is allegedly infringing on any of the licensed
    technology, then either we or IBRC may attempt to enforce the
    IBRC intellectual property rights. In general, our possession of
    rights to use the know-how related to the licensed technology
    will not be sufficient to prevent others from employing similar
    technology that we believe is infringing. Any such enforcement
    action against alleged infringers, whether by us or by IBRC, may
    be required to be maintained at our expense under the terms of
    the license agreement. The costs of such an enforcement action
    may be prohibitive, reduce our net income, if any, or prevent us
    from continuing operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Our
    HTLC technology imposes obligations on us related to
    infringement actions that may become burdensome.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If our use of our HTLC technology is alleged to infringe the
    intellectual property of a third party, we may become obligated
    to defend such infringement action. In such an event, we may
    become obligated to find alternative technology or to pay a
    royalty to a third party to continue to operate.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If a third party is allegedly infringing any of our HTLC
    technology, then we may attempt to enforce our intellectual
    property rights. In general, our possession of rights to use the
    know-how related to our HTLC technology will not be sufficient
    to prevent others from employing similar technology that we
    believe is infringing. Any such enforcement action against
    alleged infringers may be required at our expense. The costs of
    such an enforcement action may be prohibitive, reduce our net
    income, if any, or prevent us from continuing operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    have provided a bond guaranty to the holders of the bonds issued
    in connection with our Woodbridge facility, and the terms of the
    guaranty may hinder our ability to operate our business by
    imposing restrictive covenants, which may prohibit us from
    taking actions to manage or expand our business.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The terms of the bond guaranty executed by us on behalf of
    Converted Organics of Woodbridge LLC, prohibit us from repaying
    debt and other obligations that funded our working capital until
    certain ratios of EBITDA to debt service are met. Specifically,
    we were initially required to achieve a debt service ratio
    coverage of 2.0 to 1 during our first full year of operation,
    which was waived by the bond holders during 2008 and is required
    during 2009. We do not currently expect that we will meet the
    required debt service ratio coverage in 2009, which means that
    our bond guaranty will remain outstanding, and we will continue
    to be prohibited from repaying debt and other obligations that
    funded our working capital. The failure to meet the debt service
    ratio will not result in any defaults on the bonds.
</DIV>

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    <BR>
    13
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Mandatory
    redemption of our bonds issued in connection with our Woodbridge
    facility could have a material adverse effect on our liquidity
    and cash resources.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The bonds issued to construct our Woodbridge facility are
    subject to mandatory redemption by us if the Woodbridge facility
    is condemned, we cease to operate the facility, the bonds become
    taxable, a change in control occurs and under certain other
    circumstances. Depending upon the circumstances, such an event
    could require a payment to our bondholders ranging between 100%
    and 110% of the principal amount of the bonds outstanding, plus
    interest. If we are required to redeem our bonds, such
    redemption will have a material adverse effect on our liquidity
    and cash resources, and may impair our ability to continue to
    operate.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">The
    communities where our facilities may be located may be averse to
    hosting waste handling and manufacturing
    facilities.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Local residents and authorities in communities where our
    facilities may be located may be concerned about odor, vermin,
    noise, increased truck traffic, air pollution, decreased
    property values, and public health risks associated with
    operating a manufacturing facility in their area. These
    constituencies may oppose our permitting applications or raise
    other issues regarding our proposed facilities or bring legal
    challenges to prevent us from constructing or operating
    facilities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the
    <FONT style="white-space: nowrap">start-up</FONT>
    phase at the Woodbridge facility, we experienced odor-related
    issues. As a result of these issues, we have been assessed fines
    from the Health Department of Middlesex County, New Jersey, and
    have been named a party in a lawsuit by a neighboring business.
    With respect to the fines assessed by the Health Department, we
    are currently contesting or attempting to negotiate the extent
    of the fines. With respect to the litigation, the plaintiff has
    alleged various causes of action connected to the odors
    emanating from the facility, and in addition to monetary damages
    is seeking enjoinment of any and all operations which in any way
    cause or contribute to the alleged pollution. If we are
    unsuccessful in defending the above litigation or any new
    litigation, we may be subject to judgments or fines, or our
    operations may be interrupted or terminated.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Our
    facilities will require certain permits to operate, which we may
    not be able to obtain or obtain on a timely basis.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For our Woodbridge facility and Gonzales facility, we have
    obtained the permits and approvals required to operate the
    facilities. We may not be able to secure all the necessary
    permits for future facilities on a timely basis or at all, which
    may prevent us from operating the facility according to our
    business plan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For our facilities, we may need certain permits to operate solid
    waste or recycling facilities, as well as permits for our sewage
    connection, water supply, land use, air emission, and wastewater
    discharge. The specific permit and approval requirements are set
    by the state and the various local jurisdictions, including but
    not limited to city, town, county, township and state agencies
    having control over the specific properties. Permits once given
    may be withdrawn. Inability to obtain or maintain permits to
    construct, operate or maintain our facilities will severely and
    adversely affect our business.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Changes
    in environmental regulations or violations of such regulations
    could result in increased expense and could have a material
    negative effect on our financial performance.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are subject to extensive air, water and other environmental
    regulations and need to maintain the environmental permits we
    have received to operate our Woodbridge and Gonzales facilities,
    and obtain a number of environmental permits to construct and
    operate our planned facilities. If for any reason any of these
    permits are not maintained or granted, construction costs for
    our food waste conversion facilities may increase, or the
    facilities may not be constructed at all. Additionally, any
    changes in environmental laws and regulations, both at the
    federal and state level, could require us to invest or spend
    considerable resources in order to comply with future
    environmental regulations. We have been fined for alleged
    environmental violations in connection with the operation of our
    Woodbridge facility, and are currently contesting certain
    alleged environmental violations. Our failure to comply with
    environmental regulations could cause us to lose our required
    permits, which could cause the interruption or cessation of our
    operations. Furthermore, the expense
</DIV>

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    <BR>
    14
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    of compliance could be significant enough to reduce our net
    income and have a material negative effect on our financial
    performance.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Risks
    Related to Investment in Our Securities</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">We
    have a significant number of warrants outstanding, and while
    these warrants are outstanding, it may be more difficult to
    raise additional equity capital. Additionally, certain of these
    warrants contain anti-dilution provisions that may result in the
    reduction of their exercise prices due to the completion of this
    offering.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition to the Class&#160;H warrants being issued in this
    offering, we have outstanding:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    4,932,438 Class&#160;B warrants. Each Class&#160;B warrant
    entitles the holder to purchase one share of common stock at an
    exercise price of $11.00 per share. In addition, the warrant
    provides for anti-dilution protection in connection with our
    issuance of any stock dividends, which we have declared since
    the issuance of the warrants. Accordingly, in the aggregate,
    holders of the Class&#160;B warrants may currently purchase a
    total of 6,177,012&#160;shares of our common stock;;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    885,000 Class&#160;C warrants exercisable at $1.00 per share;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    415,000 Class&#160;D warrants exercisable at $1.02 per share;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    1,500,000 Class&#160;E warrants exercisable at $1.63 per share;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    585,000 Class&#160;F warrants exercisable at $1.25 per
    share;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    2,500,000 Class&#160;G warrants exercisable at $1.25 per share.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The holders of those warrants are given the opportunity to
    profit from a rise in the market price of our common stock. In
    addition, the Class&#160;B, C, D and H warrants are not
    redeemable by us. We may find it more difficult to raise
    additional equity capital while these warrants are outstanding.
    At any time during which these public warrants are likely to be
    exercised, we may be able to obtain additional equity capital on
    more favorable terms from other sources.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Furthermore, the Class&#160;C, D and G warrants contain
    anti-dilution provisions under which, if we issue, with certain
    exceptions, securities at a price lower than the exercise price
    of such warrants, the exercise price of the warrants will be
    reduced to the lower price; provided that the Class&#160;G
    warrants provide for a minimum exercise price of $1.08 per
    share, unless we receive stockholder approval for a lower price.
    The exercise price of these warrants may be reduced as a result
    of this offering.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">The
    common stock and Class&#160;H warrants included in the units
    will trade separately upon the closing of this offering, which,
    along with our currently publicly traded warrants, may provide
    investors with an arbitrage opportunity that could adversely
    affect our common stock.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The common stock and Class&#160;H warrants included in the units
    will trade separately upon the closing of this offering. Because
    the units will never trade as a unit, and because we also have
    other publicly traded warrants, investors may be provided with
    an arbitrage opportunity that could depress the price of our
    common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">If we
    issue shares of preferred stock, your investment could be
    diluted or subordinated to the rights of the holders of
    preferred stock.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Board of Directors is authorized by our Certificate of
    Incorporation to establish classes or series of preferred stock
    and fix the designation, powers, preferences and rights of the
    shares of each such class or series without any further vote or
    action by our stockholders. Any shares of preferred stock so
    issued could have priority over our common stock with respect to
    dividend or liquidation rights. The issuance of shares of
    preferred stock, or the issuance of rights to purchase such
    shares, could be used to discourage an unsolicited acquisition
    proposal. For instance, the issuance of a series of preferred
    stock might impede a business combination by including class
    voting rights that would enable a holder to block such a
    transaction. In
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    15
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    addition, under certain circumstances, the issuance of preferred
    stock could adversely affect the voting power of holders of our
    common stock. Although our Board of Directors is required to
    make any determination to issue preferred stock based on its
    judgment as to the best interests of our stockholders, our Board
    could act in a manner that would discourage an acquisition
    attempt or other transaction that some, or a majority, of our
    stockholders might believe to be in their best interests or in
    which such stockholders might receive a premium for their stock
    over the then-market price of such stock. Presently, our Board
    of Directors does not intend to seek stockholder approval prior
    to the issuance of currently authorized stock, unless otherwise
    required by law or applicable stock exchange rules. Although we
    have no plans to issue any shares of preferred stock or to adopt
    any new series, preferences or other classification of preferred
    stock, any such action by our Board of Directors or issuance of
    preferred stock by us could dilute your investment in our common
    stock and warrants or subordinate your holdings to the shares of
    preferred stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">You
    will experience immediate dilution in the book value per share
    of the common stock you purchase as part of the
    units.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Because the price per share of the common stock including in the
    units being offered is substantially higher than the book value
    per share of our common stock, you will suffer substantial
    dilution in the net tangible book value of the common stock you
    purchase in this offering. See the section entitled
    &#147;Dilution&#148; below for a more detailed discussion of the
    dilution you will incur if you purchase the units.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Future
    issuances or sales, or the potential for future issuances or
    sales, of shares of our common stock, or the exercise of
    warrants to purchase our common stock, may cause the trading
    price of our securities to decline and could impair our ability
    to raise capital through subsequent equity
    offerings.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During 2009, we have issued a significant number of shares of
    our common stock and warrants to acquire shares of our common
    stock in connection with various financings and the repayment of
    debt, and we anticipate that we will continue to do so in the
    future. The additional shares of our common stock issued and to
    be issued in the future upon the exercise of warrants or options
    could cause the market price of our common stock to decline and
    could have an adverse effect on our earnings per share, if and
    when we become profitable. In addition, future sales of a
    substantial number of shares of our common stock or other
    securities in the public markets, or the perception that these
    sales may occur, could cause the market price of our common
    stock and our Class&#160;H warrants to decline, and could
    materially impair our ability to raise capital through the sale
    of additional securities.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">If we
    do not maintain an effective registration statement or comply
    with applicable state securities laws, you may not be able to
    exercise the Class&#160;H warrants.</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For you to be able to exercise the Class&#160;H warrants, the
    shares of our common stock to be issued to you upon exercise of
    the Class&#160;H warrants must be covered by an effective and
    current registration statement and qualify or be exempt under
    the securities laws of the state or other jurisdiction in which
    you live. We cannot assure you that we will continue to maintain
    a current registration statement relating to the shares of our
    common stock underlying the Class&#160;H warrants. As such, you
    may encounter circumstances in which you will be unable to
    exercise the Class&#160;H warrants. Consequently, there is a
    possibility that you will never be able to exercise the
    Class&#160;H warrants, and that you will never receive shares or
    payment of cash in settlement of the warrants. This potential
    inability to exercise the Class&#160;H warrants may have an
    adverse effect on demand for the warrants and the prices that
    can be obtained from reselling them.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    16
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='103'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">SPECIAL
    NOTE&#160;REGARDING FORWARD-LOOKING STATEMENTS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The SEC encourages companies to disclose forward-looking
    information so that investors can better understand a
    company&#146;s future prospects and make informed investment
    decisions. This prospectus contains such &#147;forward-looking
    statements&#148; within the meaning of the Private Securities
    Litigation Reform Act of 1995.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Words such as &#147;may,&#148; &#147;potential,&#148;
    &#147;anticipate,&#148; &#147;could,&#148; &#147;estimate,&#148;
    &#147;expects,&#148; &#147;projects,&#148; &#147;intends,&#148;
    &#147;plans,&#148; &#147;believes&#148; and words and terms of
    similar substance used in connection with any discussion of
    future operating or financial performance identify
    forward-looking statements. All forward-looking statements are
    management&#146;s present expectations of future events and are
    subject to a number of risks and uncertainties that could cause
    actual results to differ materially from those described in the
    forward-looking statements. Some of the factors which could
    cause our results to differ materially from our expectations
    include the following:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    consumer demand for our products;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the availability of an adequate supply of food waste stream
    feedstock and the competition for such supply;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the unpredictable cost of compliance with environmental and
    other government regulation;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the time and cost of obtaining USDA, state or other product
    labeling designations;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to manage expenses;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the demand for organic fertilizer and the resulting prices
    customers are willing to pay;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    supply of organic fertilizer products from the use of competing
    or newly developed technologies;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to attract and retain key personnel;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    adoption of new accounting regulations and standards;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    adverse changes in the securities markets;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our ability to comply with continued listing requirements of the
    NASDAQ Capital Market;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the availability of and costs associated with sources of
    liquidity, including our ability to obtain bond financing for
    future facilities.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Please also see the discussion of risks and uncertainties under
    the heading &#147;Risk Factors&#148; above.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In light of these assumptions, risks and uncertainties, the
    results and events discussed in the forward-looking statements
    contained in this prospectus might not occur. Investors are
    cautioned not to place undue reliance on the forward-looking
    statements, which speak only as of the date of this prospectus.
    We are not under any obligation, and we expressly disclaim any
    obligation, to update or alter any forward-looking statements,
    whether as a result of new information, future events or
    otherwise.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    17
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='104'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">USE OF
    PROCEEDS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We estimate that the net proceeds from the sale of units
    (assuming no exercise of the Class&#160;H warrants or the
    over-allotment option) by us in the offering, after deducting
    estimated underwriting discounts and commissions and estimated
    offering expenses payable by us, will be
    $&#160;&#160;&#160;&#160;&#160;&#160;million, assuming a public
    offering price of $&#160;&#160;&#160;&#160;&#160; per unit.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If a Class&#160;H warrantholder exercises its warrant, we may
    also receive proceeds from the exercise of the warrants. We
    cannot predict when, or if, the warrants will be exercised. It
    is possible that the warrants may expire and never be exercised.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We anticipate that we will use the net proceeds of this offering
    for:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="88%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Working Capital and General Corporate Purposes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Upgrading our Gonzales Facility
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,250,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Investing in the Development of New Facilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Continuing the Development of Our Licensing Program
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    400,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Continuing the Development of Smaller Capacity Operating Unit
    Line of Business, Including Patent and Intellectual Property
    Development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,000,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Repayment of September 2009 Note(1)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,540,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    Consists of a note in the principal amount of $1,540,000, which
    was issued at an original issue discount of 10%. The funds from
    the note are being utilized for working capital.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have no definitive agreements or commitments with respect to
    any of the above activities. Our management may decide to change
    the use of the net proceeds from this offering if opportunities
    or needs arise. Such opportunities and needs could include
    payment of certain contractual obligations, the need to make
    increased capital or operating expenditures if we change our
    business plan, or payment of an unexpected liability. The actual
    use of the proceeds may vary significantly and will depend on a
    number of factors, including our future revenue and cash
    generated by operations and the other factors described in the
    section entitled &#147;Risk Factors&#148; appearing elsewhere in
    this prospectus. Accordingly, our management will have broad
    discretion in applying the net proceeds of this offering.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    18
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='119'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">PRICE
    RANGE OF COMMON STOCK</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Market
    Information</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our common stock has been listed on the NASDAQ Capital Market
    under the symbol &#147;COIN&#148; since March&#160;16, 2007.
    Prior to March&#160;16, 2007, there was no public market for our
    common stock. The following table sets forth the range of high
    and low sales prices per share as reported on NASDAQ for the
    periods indicated.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="87%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>2009</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>High</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Low</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    First Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4.16
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    0.66
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Second Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.62
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    0.72
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Third Quarter (thru September&#160;14, 2009)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1.64
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    0.92
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="86%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>2008</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>High</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Low</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    First Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    14.17
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3.93
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Second Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    10.37
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4.50
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Third Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    7.83
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.99
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Fourth Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    6.46
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="87%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>2007</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>High</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Low</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    First Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.86
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.31
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Second Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.72
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.02
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Third Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.83
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1.86
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Fourth Quarter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4.39
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2.05
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Dividends</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have not declared or paid any cash dividends and do not
    intend to pay any cash dividends in the foreseeable future. We
    intend to retain any future earnings for use in the operation
    and expansion of our business. Any future decision to pay cash
    dividends on our common stock will be at the discretion of our
    Board of Directors and will depend upon our financial condition,
    results of operation, capital requirements and other factors our
    Board of Directors may deem relevant.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    19
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='106'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CAPITALIZATION</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table is derived from our unaudited financial
    statements as of June&#160;30, 2009 and sets forth:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our actual capitalization as of June&#160;30, 2009;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    our capitalization on a pro forma as adjusted basis to reflect:
    (a)&#160;the sale of the units offered by us at an assumed
    public offering price of $&#160;&#160;&#160;&#160;&#160; per
    unit; (b)&#160;the sale of 1,961,000&#160;shares of our common
    stock issued in our July 2009 offering at a price of $1.02 per
    share; and (c)&#160;the repayment of the $1,540,000 note issued
    in September 2009.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="74%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>June&#160;30, 2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro Forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Actual</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>as Adjusted</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    DEBT
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Term notes payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,269,183
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,269,183
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Convertible note payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    541,450
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    541,450
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Bonds payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total debt
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    20,310,633
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    20,310,633
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    OWNERS&#146; EQUITY
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Preferred stock, $.0001&#160;par value, authorized
    10,000,000&#160;shares; no shares issued and outstanding
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Common stock, $.0001&#160;par value, authorized
    75,000,000&#160;shares; 18,353,608&#160;shares outstanding at
    June&#160;30, 2009
    actual;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;shares
    issued and outstanding pro forma as adjusted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Additional paid-in capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40,668,709
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Deficit accumulated during the development stage
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (35,712,679
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Total owners&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4,957,865
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">

</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This table assumes no exercise by the underwriters of their
    option to purchase up to an
    additional&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;units
    from us to cover over-allotments.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    This table should be considered in conjunction with the sections
    of this prospectus captioned &#147;Use of Proceeds&#148; and
    &#147;Management&#146;s Discussion and Analysis of Financial
    Condition and Results of Operations,&#148; as well as the
    financial statements and related notes included elsewhere in
    this prospectus.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    20
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='107'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">DILUTION</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our unaudited net tangible book value on June&#160;30, 2009 was
    approximately $(1,409,729), or approximately $(0.08) per share
    of common stock. Net tangible book value per share is equal to
    the amount of our total tangible assets, less total liabilities,
    divided by the aggregate number of shares of common stock
    outstanding. Dilution per share represents the difference
    between the amount per unit paid by purchasers of units in this
    offering of $&#160;&#160;&#160;&#160;&#160; per unit and the net
    tangible book value per share of our common stock immediately
    after this offering. After giving effect to the sale
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;units
    in this offering at a price of $&#160;&#160;&#160;&#160;&#160;
    per unit (and assuming no exercise of the Class&#160;H warrants)
    and the sale of 1,961,000&#160;shares of common stock in our
    July 2009 offering at a price of $1.02 per share, and after
    deducting $1,540,000 for repayment of the note issued in
    September 2009 and estimated offering expenses of
    $&#160;&#160;&#160;&#160;&#160; , our net tangible book value as
    of June&#160;30, 2009 would have been approximately
    $&#160;&#160;&#160;&#160;&#160;, or approximately
    $&#160;&#160;&#160;&#160;&#160; per share. This represents an
    immediate dilution of $&#160;&#160;&#160;&#160;&#160; per share
    to new investors purchasing units in this offering. The
    following table illustrates this dilution:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="81%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Public offering price per unit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net tangible book value per share as of June&#160;30, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (0.08
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Increase per unit attributable to July 2009 offering and the
    current offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net tangible book value per share as of June&#160;30, 2009 after
    giving effect to the July 2009 offering and the sale of the
    shares in this offering and after giving effect to the repayment
    of the September 2009 note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Dilution per unit to new investors
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    21
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='108'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">MANAGEMENT&#146;S
    DISCUSSION AND ANALYSIS OF<BR>
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following discussion should be read in conjunction with the
    consolidated financial statements and related notes to the
    consolidated financial statements included elsewhere in this
    prospectus. This discussion contains forward-looking statements
    that relate to future events or our future financial
    performance. These statements involve known and unknown risks,
    uncertainties and other factors that may cause our actual
    results, levels of activity, performance or achievements to be
    materially different from any future results, levels of
    activity, performance or achievements expressed or implied by
    these forward-looking statements. These forward-looking
    statements are based largely on our current expectations and are
    subject to a number of uncertainties and risks including those
    set forth in the &#147;Risk Factors&#148; section above. Actual
    results could differ materially from these forward-looking
    statements.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Introduction</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our operating structure is composed of our parent company,
    Converted Organics Inc., two wholly-owned operating subsidiaries
    and a 92.5% owned non-operating subsidiary. The first operating
    subsidiary is Converted Organics of Woodbridge, LLC, which
    includes the operation of our Woodbridge, New Jersey facility.
    The second operating subsidiary is Converted Organics of
    California, LLC, which includes the operation of our Gonzales,
    California facility. The 92.5% owned subsidiary is Converted
    Organics of Rhode Island, LLC, which currently has no operating
    activity. We construct and operate processing facilities that
    use food waste as raw material to manufacture all-natural soil
    amendment and fertilizer products combining nutritional and
    disease suppression characteristics. In addition to our current
    sales in the agribusiness and retail markets, we plan to sell
    and distribute our products in the turf management market. We
    have hired experienced sales and marketing personnel in these
    markets and have begun to introduce the product to the
    marketplace. We plan to hire additional experienced sales
    personnel during 2009. We also hope to achieve additional
    revenue by licensing the use of our technology to others.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Woodbridge
    Facility</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We obtained a long-term lease expiring June 2026 for a site in a
    portion of an industrial building in Woodbridge, New Jersey that
    the landlord has modified and that we have equipped as our first
    internally-constructed food waste conversion facility. We are
    currently producing both liquid and dry product at that
    facility. In the first half of 2009, we began to record tip fee
    and product sales revenue; nevertheless, we are currently
    operating at less than full capacity at that facility, or 250
    tons per day. As we have transitioned to an operating company,
    we have experienced operating inefficiencies. We have also
    experienced odor-related issues that have caused interruptions
    in our production. At full capacity, the Woodbridge facility is
    expected to process approximately 78,000 tons of food waste and
    produce approximately 9,900 tons of dry product and
    approximately 10,000 tons of liquid product annually. We have
    substantially completed upgrades to the Woodbridge facility, and
    we are presently bringing equipment on-line to fulfill our
    commitment to overcome operational difficulties that hampered
    the efficiency of the plant at opening. We believe these
    upgrades will allow us to achieve capacity at the facility of
    approximately 70% of full capacity. During the first half of
    2009, we generated revenue from this facility in the form of tip
    fees of approximately $75,000 and product sales of approximately
    $277,000. In order for this facility to be cash flow positive,
    we estimate that total revenues from the facility would need to
    be in a range of $450,000 to $550,000 per month. We estimate
    that our products, both liquid and dry, can be sold for a price
    in the range of $400 to $700 per ton based on the market to
    which it is sold. Therefore, the potential monthly sales from
    this facility at 70% capacity ranges from approximately $700,000
    to $1,100,000. Based on the above, we would have to produce and
    sell approximately
    <FONT style="white-space: nowrap">45-55%</FONT> of
    the capacity of the Woodbridge facility to be cash flow positive
    at that facility, and, until our sales and production volume
    reach that level, we will not be cash flow positive and may
    therefore require additional funding to subsidize operations at
    that facility. Cash flow generated by exceeding that
    sales/production number would be used to fund operations at the
    corporate level and to pay down approximately $2.4&#160;million
    of the payables related to construction activity at this
    facility.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    22
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">UOP
    Acquisition; Gonzales Facility</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we acquired the net assets of United
    Organic Products, LLC, or UOP, which was under common ownership
    with Waste Recovery Industries, LLC, or WRI. With this
    transaction, we acquired a leading liquid fertilizer product
    line, as well as the Gonzales facility, which is a
    <FONT style="white-space: nowrap">state-of-the-art</FONT>
    production facility that services a strong West Coast
    agribusiness customer base through established distribution
    channels. This facility is operational and began to generate
    revenues for us in February 2008. The purchase price of
    $2,500,000 was paid in cash of $1,500,000 and notes payable of
    $1,000,000. The note matures on January&#160;1, 2011, has an
    interest rate of 7% per annum, is payable monthly in arrears,
    and is convertible into our common stock at the option of the
    holder at a price equal to the average closing price of our
    common stock on the NASDAQ Capital Market for the five days
    preceding conversion. As of September&#160;1, 2009, the note
    payable had a remaining principal balance of approximately
    $458,000 and the holder had converted approximately $138,000 in
    principal and interest on the note into 102,500&#160;shares of
    our common stock.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Gonzales facility generated revenue during the first half of
    2009 of approximately $1,079,000 with a negative operating
    margin of approximately $77,000. In the three months ended
    June&#160;30, 2009, the facility generated approximately
    $809,000 in sales, with a positive operating margin of
    approximately $68,000. We plan to continue to improve this
    operating margin by channeling sales into the turf and retail
    markets, which we believe to be more profitable, by generating
    tip fees from receiving additional quantities of food processing
    waste and by reducing the amount of raw material and freight
    costs currently associated with the production process. In
    addition, we have plans to add capacity to the Gonzales plant,
    whereby the plant will produce approximately three times its
    current production and will be capable of producing both liquid
    and solid products. We have completed certain aspects of the
    planned upgrades which allow us to receive solid food waste for
    processing but have delayed the upgrades which would allow us to
    produce dry product. The remaining upgrades have been delayed
    due to cash flow constraints. We intend to use the proceeds from
    this offering to complete the upgrades.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In order for the Gonzales facility to begin to generate cash
    flow from operations, it would need to generate sales levels of
    $200,000 per month for 2009. We estimate that the plant under
    its current configuration could generate monthly sales in the
    range of $350,000 to $400,000. If sales increase above the
    $200,000 per month level, we expect the additional cash flow
    from the Gonzales facility will be used to offset operating
    expenses at the corporate level. Based on sales in the latter
    months of the second quarter of 2009, we have achieved breakeven
    sales levels at the Gonzales facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we entered into a
    <FONT style="white-space: nowrap">10-year</FONT>
    lease for land in Gonzales, California, where our Gonzales
    facility is located. The land is leased from Valley Land
    Holdings, LLC, or VLH, a California limited liability company
    whose sole member is a former officer and director. The lease
    provides for a monthly rent of $9,000. The lease is also
    renewable for three five-year terms after the expiration of the
    initial
    <FONT style="white-space: nowrap">10-year</FONT>
    term. In addition, we own the Gonzales facility and the
    operating equipment used in the facility.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">WRI
    Acquisition</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we also acquired the net assets,
    including the intellectual property, of WRI. This acquisition
    makes us the exclusive owner of the proprietary technology and
    process known as the High Temperature Liquid Composting, or
    HTLC, system, which processes various biodegradable waste
    products into liquid and solid food waste-based fertilizer and
    feed products. The purchase price of $500,000 was paid with a 7%
    short-term note that matured and was paid on May&#160;1, 2008.
    In addition, the purchase price provides for a technology fee
    payment of $5,500 per ton of waste-processing capacity that is
    added to plants that were not planned at the time of this
    acquisition and that use this new technology. The per ton fee is
    not payable on the Woodbridge facility, the facility that is
    being planned in Rhode Island, or the Gonzales facility acquired
    in the acquisition or the currently planned addition thereto,
    except to the extent that capacity (in excess of the currently
    planned addition) is added to the Gonzales facility in the
    future. Also, the purchase agreement provides that if we decide
    to exercise our right, obtained in the WRI acquisition, to enter
    into a joint venture with Pacific Seafood Inc. for the
    development of a fish waste-processing product, we will pay 50%
    of our net profits, which is less the 50% of net profits paid
    Pacific Seafoods Inc., earned from this product to the seller
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    23
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    of WRI. Combined payments of both the $5,500 per ton technology
    fee and the profits paid from the fish waste-processing product,
    if any, is capped at $7.0&#160;million with no minimum payment
    required. In April 2008, we entered into an agreement with
    Pacific Seafoods Inc. whereby we will pay Pacific Seafoods Inc.
    50% of the net profits from the fish waste-processing product.
    To date, no profits have been earned from the fish
    waste-processing product. It is our intention to expense the
    payments, if any, that are paid on either the profits from the
    fish waste-processing product or the $5,500 per-ton technology
    fee.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Pro Forma
    Financial Information</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The unaudited supplemental pro forma information discloses the
    condensed results of operations for the year ended
    December&#160;31, 2008 and for the current fiscal year up to the
    date of the most recent interim period presented, which is the
    six months ended June&#160;30, 2009 (and for the corresponding
    period in the preceding year) as though the business combination
    had been completed as of January&#160;1, 2008 In addition, the
    unaudited supplemental pro forma information discloses the
    condensed balance sheet as of December&#160;31, 2008 as though
    the business combination had been completed as of
    January&#160;1, 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The pro forma condensed consolidated financial information is
    based upon available information and certain assumptions that we
    believe are reasonable. The unaudited supplemental pro forma
    information does not purport to represent what our financial
    condition or results of operations would actually have been had
    these transactions in fact occurred as of the dates indicated
    above or to project our results of operations for the period
    indicated or for any other period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="47%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="15%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="14" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Twelve Months Ended December&#160;31, 2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Historical Converted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Organics and<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Subsidiaries</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Adjustments</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Reference</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Consolidated</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revenues (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,548
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,548
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cost of goods sold
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,981
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,001
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    General&#160;&#038; administrative expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,310
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,343
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,179
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (53
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,232
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share&#160;&#151; basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2.70
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2.71
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="47%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="15%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="14" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Six Months Ended June&#160;30, 2009</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Historical Converted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Organics and<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Subsidiaries</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Adjustments</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Reference</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Consolidated</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revenues (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,484
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,484
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cost of goods sold
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,757
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,757
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    General&#160;&#038; administrative expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,176
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,176
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share&#160;&#151; basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (0.58
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (0.58
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="47%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="15%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="14" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Six Months Ended June&#160;30, 2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Historical Converted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Organics and<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Subsidiaries</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Adjustments</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Reference</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Consolidated</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revenues (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    753
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    753
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cost of goods sold
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    625
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    645
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    General&#160;&#038; administrative expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,346
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    33
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,379
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (8,538
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (53
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (8,591
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share&#160;&#151; basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.49
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.49
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    No revenues are recognized in the pro forma presentation.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    24
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (2) </TD>
    <TD></TD>
    <TD valign="bottom">
    The acquired company incurred Cost of Goods Sold during the
    pre-acquisition period of approximately $20,000.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (3) </TD>
    <TD></TD>
    <TD valign="bottom">
    The acquired company incurred General&#160;&#038; administrative
    expenses of approximately $33,000 during the pre-acquisition
    period.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="44%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="15%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="14" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>As of December&#160;31, 2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Historical Converted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Organics and<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Pro forma<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Subsidiaries</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Adjustments</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Reference</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Consolidated</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    7,230
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    7,230
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    32,618
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    32,618
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Current liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,474
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,474
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    27,571
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    27,571
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Owners&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,047
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,047
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    No pro forma adjustments are made since the balances of the
    acquired entity are included in the balances as of
    December&#160;31, 2008.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Rhode
    Island Facility</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Rhode Island Industrial Facilities Corporation provided
    initial approval to our Revenue Bond Financing Application for
    up to $15.0&#160;million for the construction of a new facility
    in Rhode Island. In addition, the Rhode Island Resource Recovery
    Corporation, or RIRRC, gave us final approval to lease nine
    acres of land in the newly created Lakeside Commerce Industrial
    Park in Johnston, Rhode Island. We previously filed an
    application with the Rhode Island Department of Environmental
    Management for the operation of a Putrescible Waste Recycling
    Center at that site. On September&#160;1, 2008, we entered into
    a twenty-year ground lease with the RIRRC under which we are
    obligated to pay $9,167 per month, plus $8 per ton of fertilizer
    (liquid or solid) sold from the facility.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Recent
    Financing Activities&#160;&#151; January 2008, March 2009, May
    2009 and July 2009 Financings</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we entered into private financing with
    three investors for a total amount of $4,500,000, referred to
    herein as the 2008 Financing. We used the proceeds to fund the
    acquisition of the assets described above, to fund further
    development activities and to provide working capital. The 2008
    Financing was offered at an original issue discount of 10%. The
    investors were issued convertible debentures in the amount of
    $4,500,000, with interest accruing at 10% per annum and with the
    principal balance to be paid by January&#160;24, 2009, which
    deadline was extended to July&#160;24, 2009. In addition, we
    initially issued to the investors an aggregate of 750,000
    Class&#160;A warrants and 750,000 Class&#160;B warrants
    exercisable at $8.25 and $11.00 per warrant share, respectively.
    Of these warrants, 50% were returned to us when we obtained
    shareholder approval for the 2008 Financing, which was required
    by the NASDAQ Stock Market. A placement fee of $225,000 was paid
    out of the proceeds of this loan. The investors had the option,
    at any time on or before the extended maturity date of
    July&#160;24, 2009 to convert the outstanding principal of the
    convertible debentures into shares of our common stock at the
    rate per share equal to 70% of the average of the three lowest
    closing prices of common stock during the
    <FONT style="white-space: nowrap">20-day</FONT>
    trading period immediately prior to a notice of conversion. As
    of June&#160;30, 2009, the investors converted the entirety of
    the debentures into 7,366,310&#160;shares, reducing the
    principal amount of the debt to $0. In addition, the investors
    received 131,834&#160;shares of common stock as interest on the
    debentures during the pay-off period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On March&#160;6, 2009, we entered into an agreement with the
    holders of our $17.5&#160;million New Jersey Economic
    Development Authority bonds to release $2.0&#160;million for
    capital expenditures on our Woodbridge facility and to defer
    interest payments on the bonds through July&#160;30, 2009. These
    funds had been held in a reserve for bond principal and interest
    payments along with a reserve for lease payments. As
    consideration for the release of the reserve funds, we issued
    the bond holders 2,284,409 Class&#160;B warrants. The
    Class&#160;B warrants are exercisable at $11.00 per warrant.
    These warrants are not registered and cannot be traded.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    25
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;7, 2009, we entered into a formal agreement with an
    institutional investor, wherein we agreed to sell to the
    investor, for the sum of $1,182,500, six-month nonconvertible
    original issue discount notes with an aggregate principal amount
    of $1,331,000. The agreement provided that if we raised over
    $1,330,313 while the notes were outstanding, the first
    $1,330,313 must be used to repay the notes. Additionally, in
    connection with the notes issued pursuant to the agreement, the
    investor received five-year Class&#160;C warrants to purchase
    750,000&#160;shares and five-year Class&#160;D warrants to
    purchase 350,000&#160;shares of common stock, with exercise
    prices of $1.00 per share and $1.02 per share, respectively,
    subject to certain anti-dilution rights for issuances below the
    exercise prices. These warrants are not registered and cannot be
    traded. The expense associated with the issuance of these
    warrants was calculated using a Black-Scholes model with the
    following assumptions: risk-free interest rate of 2.05%; no
    dividend yield; volatility factor of 96.7%; and a term of five
    years. We determined that the warrants issued have a fair value
    of $1,557,953. We recorded the relative fair value of the
    warrants to the underlying notes of $1,330,313 as
    additional-paid-in capital and established a discount on the
    debt. The discount was fully amortized at repayment of the note
    (12&#160;days later) and at such time the entire amortization
    totaled approximately $637,850 for the three months ended
    June&#160;30, 2009. Also pursuant to this agreement, the
    investment banker we utilized was issued five-year Class&#160;C
    warrants to purchase 135,000&#160;shares of common stock and
    Class&#160;D warrants to purchase 65,000&#160;shares of common
    stock with exercise prices of $1.00 per share and
    $1.02&#160;per&#160;share, respectively. The expense associated
    with these warrants was calculated in the same manner as
    described above. The expense of $285,000 is included in general
    and administrative expense on the consolidated statements of
    operations for the three and six month periods ended
    June&#160;30, 2009 and 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;19, 2009, we entered into an agreement with four
    institutional investors whereby the investors agreed to purchase
    1,500,000&#160;shares of our common stock for $1.40 per share,
    providing $2.2&#160;million before fees and expenses. The
    May&#160;7, 2009 nonconvertible short-term note described above
    was immediately repaid with the proceeds of the May&#160;19,
    2009 offering as required under such an instrument. In addition,
    and as an inducement to enter into this transaction, we issued
    the investors 1,500,000 warrants, with a strike price of $1.40
    per share and a
    <FONT style="white-space: nowrap">90-day</FONT> term.
    We made the offering and sale of these shares and the shares
    underlying the warrants pursuant to a shelf registration
    statement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;26, 2009, we entered into an amended agreement with
    the same four institutional investors, discussed in the prior
    paragraph, pursuant to which the warrants issued at $1.40 per
    share were exercised in full for aggregate proceeds of
    $2.1&#160;million. Pursuant to such amended agreement, we agreed
    to issue to these investors in the aggregate Class&#160;E
    warrants to purchase an additional 1,500,000&#160;shares of our
    common stock at an exercise price of $1.63 per share. We may
    redeem these warrants for $.001 per warrant share at any time
    after our common stock has closed at or above $2.42 for five
    consecutive trading days. The Class&#160;E warrants are
    exercisable six months after their date of issuance and expire
    on May&#160;27, 2014. We made the offering and sale of these
    warrants and the shares underlying the warrants pursuant to a
    shelf registration statement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On July&#160;16, 2009, we sold 1,961,000&#160;shares of common
    stock at $1.02 per share under our shelf registration statement.
    In addition, we issued 585,000 Class&#160;F warrants with an
    exercise price of $1.25 per share. The Class&#160;F warrants
    have a five-year life from the date of issuance and cannot be
    exercised until six months from the date of issuance.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On September&#160;14, 2009, we entered into a formal agreement
    with an institutional investor, wherein we agreed to sell to the
    investor, for the sum of $1,400,000, a six-month convertible
    original issue discount note with a principal amount of
    $1,540,000. The agreement provided that if we raised any debt or
    equity financing while the note was outstanding, the first
    monies raised must be used to repay the note. The principal
    amount of the note is convertible into shares of our common
    stock at $1.54 per share. Additionally, in connection with the
    note issued, the investor received a five-year Class&#160;G
    warrant to purchase 2,500,000&#160;shares of common stock, with
    an exercise price of $1.25 per share, subject to certain
    anti-dilution rights for issuances below the exercise price.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    26
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Construction
    and <FONT style="white-space: nowrap">Start-up</FONT>
    Period</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We commenced plant operations at our Woodbridge facility in June
    2008, where we are processing both liquid and solid waste and
    producing both liquid and solid fertilizer and soil enhancement
    products. Construction has been substantially completed on all
    aspects of the facility, and we are generating both tip fee and
    product sales revenue. Although the plant is operating at less
    than full capacity we have substantially completed all plant
    upgrades, which will allow us to operate at 70% capacity. We had
    budgeted approximately $14.6&#160;million for the design,
    building, and testing of our facility, including related
    non-recurring engineering costs. The capital outlay of
    $14.6&#160;million came from the $25.4&#160;million raised by
    our initial public offering of stock and the issuance of New
    Jersey Economic Development Bonds, both of which closed on
    February&#160;16, 2007, and does not include $4.6&#160;million
    of lease financing provided by the landlord of the Woodbridge
    facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The total cost of the plant exceeded the estimate of
    $14.6&#160;million by approximately $2.2&#160;million (which did
    not include $4.6&#160;million of lease financing). Also, we
    purchased additional equipment, which will allow us to produce
    additional dry product, which is in high demand by the retail
    market. The cost of this additional equipment was approximately
    $1.5&#160;million. We decided to incorporate the HTLC technology
    acquired from WRI into the Woodbridge facility. These costs were
    approximately $2.0&#160;million, bringing the total plant cost
    to $20.3&#160;million, not including lease financing.
    Installation of the HTLC technology and additional equipment was
    dependent on our ability to raise additional capital and
    negotiate extended payment terms with our construction vendors.
    We have negotiated revised payment terms with all but one of our
    construction vendors. This vendor has placed a lien on the
    property in New Jersey and commenced a lawsuit against us, which
    are further discussed in the &#147;Liquidity and Capital
    Resources&#148; section. The purpose of adding the HTLC
    technology to the Woodbridge facility is two-fold: first, we
    believe it will significantly lower operating costs, most
    notably utility costs as the need to evaporate significant
    amounts of liquid byproduct would no longer be necessary, and
    second, the non-evaporated liquid can be used in the production
    process and sold as additional product.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the start up phase at the Woodbridge facility, we
    experienced emissions violations related to odor issues. We were
    fined by the Middlesex County Health Department for these
    violations and we subsequently hired additional consultants to
    assist with the correction process. In late July 2009, we began
    implementing operational procedures at the plant which were
    recommended by the odor control consultants and since then we
    have not experienced significant odor issues; however, we have
    not obtained release from the Middlesex County Health Department
    concerning this issue and there is no assurance that we can
    obtain such a release. As of September&#160;3, 2009, the total
    amount of fines levied by the Middlesex County Health Department
    total $356,250, of which we have paid $87,750, and we are either
    contesting or negotiating the unpaid balance of $268,500, based
    on the date of violation. The financial statements at
    June&#160;30, 2009 include an accrued liability of $75,000
    related to the unpaid balance.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Full-scale
    Operations</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Full capacity at the Woodbridge facility would provide
    processing capacity of approximately 250 tons per day. As
    discussed above, we have completed the necessary upgrades to the
    Woodbridge facility, which are expected to allow us to increase
    capacity at the facility to approximately 70% of full capacity.
    We have two revenue streams: (1)&#160;tip fees that in our
    potential markets range from $40 to $80 per ton, and
    (2)&#160;product sales. Tip fees are paid to us to receive the
    food waste stream from waste haulers; the hauler pays us,
    instead of a landfill, to take the waste. If the haulers source
    separate and pay in advance, they are charged tip fees that are
    up to 20% below market.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Operations at the Gonzales facility began in February 2008 with
    the production of approximately 25 tons per day of liquid
    fertilizer. This output is presently being sold into the
    California agricultural market. We have completed certain
    upgrades to the plant that allow us to accept solid food waste
    for processing. We have not completed the upgrades that allow us
    to produce a solid fertilizer product, as we have delayed those
    enhancements due to cash flow restrictions.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    27
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Critical
    Accounting Policies and Estimates</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our plan of operation is based in part upon our consolidated
    financial statements, which have been prepared in accordance
    with accounting principles generally accepted in the United
    States of America (GAAP). The preparation of financial
    statements in accordance with GAAP requires management to make
    estimates and assumptions that affect the reported amounts of
    assets and liabilities, including the recoverability of tangible
    and intangible assets, disclosure of contingent assets and
    liabilities as of the date of the financial statements, and the
    reported amounts of expenses during the periods covered. A
    summary of accounting policies that have been applied to the
    historical financial statements can be found in the notes to the
    consolidated financial statements.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We evaluate our estimates on an on-going basis. The most
    significant estimates relate to intangible assets, deferred
    financing and issuance costs, and the fair value of financial
    instruments. We base our estimates on our historical and
    industry 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
    values of assets and liabilities that are not readily apparent
    from other sources. Actual results may differ materially from
    those estimates.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following is a brief discussion of our critical accounting
    policies and methods, and the judgments and estimates used by us
    in their application:
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Revenue
    Recognition</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Revenue is recognized when each of the following criteria is met:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    persuasive evidence of a sales arrangement exists;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    delivery of the product has occurred;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    the sales price is fixed or determinable;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    collectability is reasonably assured.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In those cases where all four criteria are not met, we defer
    recognition of revenue until the period where these criteria are
    satisfied. Revenue is generally recognized upon shipment.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Share-Based
    Compensation</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Share-based compensation issued to employees is measured at the
    grant date, based on the fair value of the award, and is
    recognized as an expense over the requisite service period
    (generally the vesting period of the grant). Share-based
    compensation issued to non-employees is measured at grant date,
    based on the fair value of the consideration received or the
    fair value of the equity instruments issued, whichever is more
    readily measurable, and is recognized as an expense over the
    requisite service period. Stock options granted in 2008 were
    calculated at the date of grant using a Black-Scholes pricing
    model with the following assumptions: risk-free interest rate of
    3.52%; no dividend yield; expected volatility factor of 52.3%;
    and an expected term of five years. The fair value for the
    10,000 immediately vesting stock options granted in 2007 was
    estimated at the date of grant using a Black-Scholes pricing
    model with the following assumptions: risk-free interest rate of
    4.9%; no dividend yield; expected volatility factor of 16.9%;
    and an expected term of five years. Estimates and judgments used
    in the preparation of our financial statements are, by their
    nature, uncertain and unpredictable, and depend upon, among
    other things, many factors outside of our control, such as the
    results of our operations and other economic conditions.
    Accordingly, our estimates and judgments may prove to be
    incorrect and actual results may differ, perhaps significantly,
    from these estimates under different estimates, assumptions or
    conditions.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Other
    Long-Lived Assets</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Long-lived assets and certain intangible assets be reviewed for
    impairment whenever events or changes in circumstances indicate
    that the carrying amount may not be recoverable, such as
    technological changes or
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    28
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    significantly increased competition. If undiscounted expected
    future cash flows are less than the carrying value of the
    assets, an impairment loss is to be recognized based on the fair
    value of the assets, calculated using a discounted cash flow
    model. There is inherent subjectivity and judgments involved in
    cash flow analyses such as estimating revenue and cost growth
    rates, residual or terminal values and discount rates, which can
    have a significant impact on the amount of any impairment.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Other long-lived assets, such as identifiable intangible assets,
    are amortized over their estimated useful lives. These assets
    are reviewed for impairment whenever events or circumstances
    provide evidence that suggests that the carrying amount of the
    assets may not be recoverable, with impairment being based upon
    an evaluation of the identifiable undiscounted cash flows. If
    impaired, the resulting charge reflects the excess of the
    assets&#146; carrying cost over its fair value. As described
    above, there is inherent subjectivity involved in estimating
    future cash flows, which can have a significant impact on the
    amount of any impairment. Also, if market conditions become less
    favorable, future cash flows (the key variable in assessing the
    impairment of these assets) may decrease and as a result we may
    be required to recognize impairment charges in the future.
    Estimates and judgments used in the preparation of our financial
    statements are, by their nature, uncertain and unpredictable,
    and depend upon, among other things, many factors outside of our
    control, such as the results of our operations and other
    economic conditions. Accordingly, our estimates and judgments
    may prove to be incorrect and actual results may differ, perhaps
    significantly, from these estimates under different estimates,
    assumptions or conditions.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Capitalization
    of Interest Costs</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have capitalized interest costs, net of certain interest
    income, related to our New Jersey Economic Development Authority
    bonds in the amount of $1,077,689 and $403,573 as of
    December&#160;31, 2008 and December&#160;31, 2007, respectively.
    Capitalized interest costs during the construction phase of the
    Woodbridge facility are included in
    <FONT style="white-space: nowrap">construction-in-progress</FONT>
    on the consolidated balance sheets.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times"><FONT style="white-space: nowrap">Construction-in-Progress</FONT></FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="white-space: nowrap">Construction-in-progress</FONT>
    includes amounts incurred for construction costs, equipment
    purchases and capitalized interest costs for items still under
    construction related to the construction of the Woodbridge
    facility.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Restricted
    Cash</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008, we had remaining approximately
    $2,608,000 of restricted cash as required by our bond agreement.
    This cash was raised by us in our initial public offering and
    bond financing, both of which closed on February&#160;16, 2007,
    and is set aside in three separate accounts consisting of
    $34,000 for the construction of the Woodbridge facility, $8,000
    for the working capital requirements of the Woodbridge
    subsidiary while the facility is under construction, and
    $2,028,000 in reserve for bond principal and interest payments
    along with a reserve for lease payments. In March 2009, the
    bondholder released $2,000,000 of these restricted funds for us
    to use and therefore we have classified cash as a current asset
    on our balance sheet as of December&#160;31, 2008. We have
    classified this restricted cash as non-current to the extent
    that such funds are to be used to acquire non-current assets or
    are to be used to service non-current liabilities. Third-party
    trustee approval is required for disbursement of all restricted
    funds.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Consolidation</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our consolidated financial statements include the transactions
    and balances of Converted Organics Inc. and its subsidiaries,
    Converted Organics of California, LLC, Converted Organics of
    Woodbridge, LLC and Converted Organics of Rhode Island, LLC. The
    transactions and balances of Valley Land Holdings, LLC, a
    variable interest entity of Converted Organics of California,
    LLC, were also consolidated therein until April&#160;1, 2009.
    All intercompany transactions and balances have been eliminated
    in consolidation.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The consolidated financial statements included Valley Land
    Holdings, LLC, or VLH, as VLH had been deemed to be our variable
    interest entity as it was the primary beneficiary of that
    variable interest entity
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    29
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    following the acquisition of the net assets of United Organic
    Products, LLC. VLH&#146;s assets and liabilities consist
    primarily of cash, land and a mortgage note payable on the land
    on which the California facility is located. Its operations
    consist of rental income on the land from us and related
    operating expenses. In 2009, the sole member of VLH contributed
    cash and property to VLH in a recapitalization. VLH has
    henceforth been sufficiently capitalized and is no longer
    considered to be a variable interest entity of us. We have
    deconsolidated VLH as a variable interest entity as of
    April&#160;1, 2009 in our financial statements.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Fair
    Value Measurements</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have partially implemented SFAS&#160;No.&#160;157, &#147;Fair
    Value Measurements&#148; (&#147;SFAS&#160;No.&#160;157&#148;)
    for assets and liabilities. SFAS&#160;No.&#160;157 defines fair
    value, establishes a framework for measuring fair value, and
    expands disclosure about fair value. This standard only applies
    when other standards require or permit the fair value
    measurement of assets and liabilities. It does not increase the
    use of fair value measurement. The standard is effective for
    fiscal years beginning after November&#160;15, 2008. The major
    categories of assets and liabilities that have not been measured
    and disclosed using SFAS&#160;No.&#160;157 fair value guidance
    are property and equipment and goodwill.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Earnings
    (Loss) Per Share</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Basic earnings (loss) per share, or EPS, is computed by dividing
    the net income (loss) attributable to the common stockholders
    (the numerator) by the weighted average number of shares of
    common stock outstanding (the denominator) during the reporting
    periods. Diluted income (loss) per share is computed by
    increasing the denominator by the weighted average number of
    additional shares that could have been outstanding from
    securities convertible into common stock, such as stock options
    and warrants (using the &#147;treasury stock&#148; method), and
    convertible preferred stock and debt (using the
    &#147;if-converted&#148; method), unless their effect on net
    income (loss) per share is antidilutive. Under the
    &#147;if-converted&#148; method, convertible instruments are
    assumed to have been converted as of the beginning of the period
    or when issued, if later. The effect of computing the diluted
    income (loss) per share is antidilutive and, as such, basic and
    diluted earnings (loss) per share are the same for the three and
    six month periods ended June&#160;30, 2009 and 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Results
    of Operations for the Six Months Ended June&#160;30, 2009 and
    2008</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the six months ended June&#160;30, 2009, we had sales of
    approximately $1,484,000, compared to $753,000 for the same
    period in 2008. During 2009, we had cost of goods sold of
    approximately $3,757,000, leaving a negative gross margin of
    approximately $2,273,000, compared to $625,000 cost of goods
    sold and $128,000&#160;gross margin for the same period in 2008.
    The negative gross margins in 2009 were generated due to high
    production costs (salaries, rents, depreciation, supplies, etc.)
    at both our Woodbridge and Gonzales facilities and low sales and
    production volume. We expect gross margin to improve in the
    future as we increase production and expand our sales efforts
    into the more profitable retail and agricultural markets. Of the
    $2,273,000 negative gross margin in the six months ended
    June&#160;30, 2009, approximately $77,000 was generated at our
    Gonzales facility due to sales volumes not yet being high enough
    to cover all fixed production costs, higher than anticipated
    production and transportation costs, and approximately
    $2,215,000 in negative gross margin was generated at our
    Woodbridge facility due to low sales volume and fixed costs
    associated with the facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the three months ended June&#160;30, 2009, we had sales
    of approximately $992,000, compared to $493,000 for the same
    period in 2008. During 2009, we had cost of goods sold of
    approximately $2,113,000, leaving a negative gross margin of
    approximately $1,120,000, compared to $403,000 cost of goods
    sold and $90,000&#160;gross margin for the same period in 2008.
    Of the $1,120,000 negative gross margin in the three months
    ended June&#160;30, 2009, approximately $68,000 positive gross
    margin was generated at our Gonzales facility, and the
    Woodbridge facility generated $1,180,000 of negative gross
    margin.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We incurred general and administrative expenses of approximately
    $4,175,000 and $5,346,000 for the
    <FONT style="white-space: nowrap">six-month</FONT>
    periods ended June&#160;30, 2009 and 2008, respectively. The
    principal components of the approximately $1,171,000 decrease in
    general and administrative expenses is due to allocation of
    rent, production salaries and
</DIV>

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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    utilities to cost of sales in 2009, along with a decrease in
    compensation expense associated with the issuance of stock
    options of $2,140,000. This was offset by an increase in
    professional fees associated with financing activities and
    general costs of growing the business.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We incurred general and administrative expenses of approximately
    $2,503,000 and $3,759,000 for the three-month periods ended
    June&#160;30, 2009 and 2008, respectively. The principal
    components of the approximately $1,256,000 decrease in general
    and administrative expenses are similar in nature to the
    components of the decrease in the six-month activity described
    above.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We incurred depreciation expense of approximately $626,000 and
    $7,000 for the six months ended June&#160;30, 2009 and 2008,
    respectively, and $306,000 and $3,000 for the three months ended
    June&#160;30, 2009 and 2008, respectively. The increase in
    depreciation expense is due to assets placed in service and
    depreciated, particularly at the Woodbridge facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We recognized derivative accounting gains of $3,565,000 and $0
    in the six-month periods ended June&#160;30, 2009 and 2008,
    respectively, and derivative gains of $2,153,000 and $0 in the
    three months ended June&#160;30, 2009 and 2008, respectively.
    These gains are non-cash in nature.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest expense for the six months ended June&#160;30, 2009 and
    2008 was $3,110,000 and $3,127,000, respectively. The components
    of interest expense for the period ended June&#160;30, 2009 are:
    (i)&#160;recognition of $562,000 of interest expense associated
    with the extension of the convertible debentures issued in
    January 2008, which became due in January 2009 and which were
    extended until July 2009 (200,000&#160;shares of common stock
    were issued in connection with such extension),
    (ii)&#160;recognition of approximately $660,000 of interest
    expense associated with the issuance of warrants in connection
    with the March&#160;6, 2009 financing arrangement with the
    holders of our bonds, and approximately $920,000 of interest
    expense associated with the issuances of warrants related to
    short-term non-convertible notes issued in the quarter, and
    (iii)&#160;recognition of $700,000 in interest expense on our
    New Jersey Economic Development Authority bonds, and
    approximately $268,000 on our other various borrowings during
    the six months ending June&#160;30, 2009.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest expense for the six months ended June&#160;30, 2008
    comprised (i)&#160;$176,000 of interest expense on various
    short-term notes; (ii)&#160;recognition of approximately
    $2,093,000 in connection with borrowing transactions, primarily
    non-cash items; (iii)&#160;$700,000 on our NJ EDA bonds; and
    (iv)&#160;approximately $158,000 in penalties associated with
    convertible debt.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As a result of the variances described above, for the six months
    ended June&#160;30, 2009, net loss was $6.9&#160;million,
    compared to $8.5&#160;million for the same period in 2008. For
    the three months ended June&#160;30, 2009, the net loss was
    $3.0&#160;million versus $6.1&#160;million for the same period
    in 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of June&#160;30, 2009, we had current assets of approximately
    $3.5&#160;million, compared to $7.2&#160;million as of
    December&#160;31, 2008. Our total assets were approximately
    $30.9&#160;million as of June&#160;30, 2009, compared to
    approximately $32.6&#160;million as of December&#160;31, 2008.
    The majority of the decrease in current assets from
    December&#160;31, 2008 to June&#160;30, 2009 is due to the use
    of cash for working capital requirements.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of June&#160;30, 2009, we had current liabilities of
    approximately $7.3&#160;million, compared to $9.5&#160;million
    at December&#160;31, 2008. This decrease is due largely to the
    conversion of debt into shares of our common stock, and the
    negotiation of term notes with our construction vendors, which
    moved some of that liability from current to non-current. In
    addition, we had long-term liabilities of approximately
    $18.8&#160;million as of June&#160;30, 2009 as compared to
    $18.1&#160;million at December&#160;31, 2008. The increase is
    due to the reclassification of amounts owed to construction
    vendors to long-term liabilities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For the six months ended June&#160;30, 2009, we had negative
    cash flow from operating activity of approximately
    $4.1&#160;million, comprising primarily loss from operations
    offset by certain non-cash items such as depreciation, non-cash
    interest expense associated with the issuance of warrants,
    amortization of deferred financing fees and amortization of
    discounts on private financing, and an increase in accounts
    payable and accrued expenses. We also had negative cash flow
    from investing activities of $985,000, primarily related to
    construction at the Woodbridge facility, offset by the release
    of restricted cash set aside for that purpose. The
</DIV>

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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    negative cash flow from both operating and investing activities
    was offset by approximately $3.6&#160;million in positive cash
    flow from financing activities comprising proceeds from our
    various equity transactions.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Results
    of Operations for the Years Ended December&#160;31, 2008 and
    2007</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For the period from inception (May&#160;3, 2003)&#160;until
    December&#160;31, 2007, we were a development stage company with
    no revenues. We began to earn revenues from our Gonzales and
    Woodbridge facilities during 2008, and therefore we are no
    longer reporting as a development stage company.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the year ended December 2008, we had sales of
    approximately $1.5&#160;million, compared to $0 for the same
    period in 2007. During 2008, we had cost of goods sold of
    approximately $2.0&#160;million, leaving a negative gross margin
    of approximately $433,000, compared to $0 cost of goods sold and
    $0&#160;gross margin for the same period in 2007. The sales and
    negative gross margins were derived primarily from both our
    Gonzales and Woodbridge facilities. The negative gross margin
    was generated in the third and fourth quarters and is further
    explained below. Of the $433,000 negative gross margin in the
    year ended December&#160;31, 2008, approximately $275,000 was
    generated at our Gonzales facility due to lower than expected
    sales volume and higher than anticipated production and
    transportation costs, and approximately $158,000 in negative
    gross margin was generated at our Woodbridge facility due to low
    sales volume and the start up nature of the facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We incurred operating expenses of approximately
    $10.3&#160;million and $3.7&#160;million for the years ended
    December&#160;31, 2008 and 2007, respectively. The principal
    components of the $6.6&#160;million increase in operating
    expenses is an increase in general and administrative expenses
    of $6.3&#160;million (due mainly to an increase in general and
    administrative expenses of $1.4&#160;million for additional
    personnel and other costs associated with the start up of the
    Woodbridge facility, $829,000 in additional expenses associated
    with the Gonzales facility, $500,000 in additional personnel at
    the corporate offices, $290,000 in expense related to the
    issuance of stock for remuneration for services rendered,
    $200,000 in professional fees relating to private placement
    financing, $150,000 relating to recognition of liquidated
    damages associated with the private placement financing, an
    additional $200,000 in amortization of intangible assets
    acquired from UOP and WRI, and $2.3&#160;million recognized as
    compensation expense upon the issuance of employee stock options
    as calculated using the Black-Scholes pricing model), offset by
    a $350,000 reduction in research and development costs.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Interest expense for the years ended December&#160;31, 2008 and
    2007 was $5.8&#160;million and $1.2&#160;million, respectively.
    The increase is due to the interest payments on the convertible
    debentures issued in the 2008 Financing described above;
    amortization of the original issue discount on the convertible
    debentures issued in the 2008 Financing; and amortization of the
    discount related to the beneficial conversion feature of the
    convertible debentures issued in the 2008 Financing and other
    convertible debt. Interest income was $290,000 in the year ended
    December&#160;31, 2008 and $824,000 for the same period in 2007.
    The decrease is due to our declining balances in restricted cash.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Amortization of other intangible assets expense was $399,000 for
    the year ended December&#160;31, 2008 and $62,000 during the
    same period in 2007. The increase is due to amortization of
    costs associated with the convertible debentures issued in the
    2008 Financing, which are being amortized over the life of the
    loan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For the year ended December&#160;31, 2008, net loss was
    $16.2&#160;million, compared to $4.1&#160;million for the same
    period in 2007. The increase in net loss primarily represents
    the effects of the increase in our operating costs and interest
    expense, as discussed above.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008, we had current assets of
    approximately $7.2&#160;million, compared to $3.2&#160;million
    as of December&#160;31, 2007. Our total assets were
    approximately $32.6&#160;million as of December&#160;31, 2008
    compared to approximately $22.2&#160;million as of
    December&#160;31, 2007. The majority of the increase in both
    current and total assets from December&#160;31, 2007 to
    December&#160;31, 2008 is due to receipt of approximately
    $11.3&#160;million in cash from the voluntary exercise of our
    Class&#160;A warrants and $3.0&#160;million in net assets
    acquired with our acquisitions of UOP and WRI.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008, we had current liabilities of
    approximately $9.5&#160;million, compared to $2.5&#160;million
    at December&#160;31, 2007. This significant increase is due
    largely to the convertible debentures issued
</DIV>

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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    in the 2008 Financing, net of discounts of $230,000 and loans
    issued in association with our acquisitions of UOP and WRI, and
    an increase in accounts payable to construction-related vendors.
    In addition, we had long-term liabilities of approximately
    $18.1&#160;million as of December&#160;31, 2008, as compared to
    $17.6&#160;million at December&#160;31, 2007. This increase is
    primarily due to the issuance of long-term notes payable in
    association with our acquisition of UOP and WRI.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For the twelve months ended December&#160;31, 2008, we had
    negative cash flow from operating activity of approximately
    $7.3&#160;million, comprising primarily loss from operations
    offset by certain non-cash items such as depreciation,
    amortization of deferred financing fees and amortization of
    discounts on private financing, $2.3&#160;million in expense
    associated with the grant of stock options and an increase in
    accounts payable and accrued expenses. We also had negative cash
    flow from investing activities of $4.7&#160;million, primarily
    related to the purchase of UOP assets and construction at the
    Woodbridge facility, offset by the release of restricted cash
    set aside for that purpose. The negative cash flow from both
    operating and investing activities was offset by approximately
    $15.0&#160;million in positive cash flow from financing
    activities comprising approximately $11.3&#160;million from the
    exercise of warrants, and $3.7&#160;million from the proceeds of
    the January&#160;24, 2008 private financing.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Liquidity
    and Capital Resources</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At June&#160;30, 2009, we had total current assets of
    approximately $3.5&#160;million consisting primarily of cash,
    accounts receivable, inventories and prepaid assets, and had
    current liabilities of approximately $7.3&#160;million,
    consisting primarily of accounts payable, accrued expenses and
    notes payable, leaving us with negative working capital of
    approximately $3.8&#160;million. Non-current assets totaled
    $27.4&#160;million and consisted primarily of property and
    equipment, intangible assets and construction in process.
    Non-current liabilities of $18.7&#160;million consist primarily
    of bonds payable of $17.5&#160;million and the long-term portion
    of our term notes payable of $1.2&#160;million at June&#160;30,
    2009. We have an accumulated deficit at June&#160;30, 2009 of
    approximately $35.7&#160;million. Owners&#146; equity at
    June&#160;30, 2009 was approximately $5.0&#160;million. For the
    first half of 2009, we generated revenues from operations of
    approximately $1,484,000.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At June&#160;30, 2009, our current liabilities are greater than
    our current assets by approximately $3.8&#160;million. We have
    trade accounts payable of approximately $4.3&#160;million, of
    which approximately $2.4&#160;million relates to construction at
    the Woodbridge facility. We have come to agreement with three of
    our four construction vendors for extended payment terms with
    interest. Those vendors have agreed to release their liens upon
    receipt of final payment. We continue to negotiate with the
    fourth vendor, who has filed a lien against our assets and has
    commenced a lawsuit for breach of contract. The funds from the
    debt and equity offerings we recently completed have not been
    used towards payment of the construction vendor amounts and we
    are currently negotiating with the vendor to issue a note for
    the outstanding amounts owed.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our independent registered public accountants have issued a
    going-concern opinion on our financial statements as of
    December&#160;31, 2008. We had incurred a net loss of
    approximately $16.2&#160;million during the year ended
    December&#160;31, 2008, had a working capital deficiency as of
    December&#160;31, 2008, and an accumulated deficit of
    approximately $26.6&#160;million. As of June&#160;30, 2009, we
    continued to have a working capital deficiency, and for the six
    months ended June&#160;30, 2009, we had a net loss of
    $6.9&#160;million and an accumulated deficit of approximately
    $35.7&#160;million.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our plan to become cash flow positive and to work through our
    current working capital deficit is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We currently have manufacturing capabilities in our Woodbridge
    and Gonzales facilities as a means to generate revenues and
    cash. Our cash requirements on a monthly basis are approximately
    $275,000 at the corporate level, $500,000 for Woodbridge and
    $200,000 for Gonzales. Currently, only the Gonzales facility is
    generating enough cash flow to cover its cash requirements,
    leaving us with a cash shortfall of approximately $775,000 per
    month. We estimate that at the current production capacity we
    could provide enough product to achieve additional revenues of
    $1,000,000 to $1,500,000 per month, which at those levels would
    provide sufficient cash flow to cover our cash requirements,
    including additional variable costs associated with increased
    production. Until such sales levels are achieved and we are cash
    flow positive, we will have to seek
</DIV>

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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    additional means of financing in order to cover the shortfall.
    During the first half of 2009, we reduced the entire
    $4.5&#160;million convertible debenture balance from our
    January&#160;24, 2008 financing by converting the balance into
    shares of our common stock. In addition, during the first
    quarter of 2009, the holders of the New&#160;Jersey Economic
    Development Authority bonds released $2.0&#160;million of
    escrowed funds for us to use and we obtained $1,331,000 of
    secured debt financing. We raised another $4.2&#160;million in
    capital through the issuance of common stock and the exercise of
    warrants. In September 2009, we raised $1.4&#160;million by the
    issuance of a convertible note in principal amount of
    $1.54&#160;million, which included an original issue discount of
    10%, and the issuance of warrants to purchase
    2,500,000&#160;shares of common stock at an exercise price of
    $1.25 per share. In addition, we have a shelf registration
    statement which would allow us to sell shares into the market to
    raise additional financing of up to $2.0&#160;million, provided
    that pursuant to SEC rules we may not access the
    $2.0&#160;million available under the shelf registration
    statement until our stock price is at or above $1.86. We are
    using the proceeds from the debt and equity offerings we
    completed during the year to fund working capital requirements
    and to add additional sales and marketing personnel in order to
    achieve increased sales levels during the remainder of 2009.
    Specifically, we are seeking sales personnel to assist with
    sales of liquid product into the agricultural market. Also, we
    continue to expand our sales efforts into the retail market by
    increasing the number of sales presentations to the retail
    channel for orders to be placed for early 2010 delivery.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We need additional capital to execute our business strategy, and
    if we are unsuccessful in either raising additional capital
    through this offering or otherwise, we will be unable to fully
    execute our business strategy on a timely basis, if at all. If
    we complete this offering, we expect the funds received will be
    sufficient to operate our current business until we are cash
    flow positive, which we expect to occur by the end of the third
    quarter of 2010, assuming our sales levels do not decrease and
    assuming we do not encounter any unforeseen costs or expenses.
    If our sales levels decrease or if we encounter unforeseen costs
    or expenses, we will require additional financing prior to such
    date for which we have no commitments. The proceeds from this
    offering are intended to fund our current business operations,
    and will not permit us to finance additional facilities. If are
    unable to complete this offering, we will need additional
    financing in the short-term for which we have no commitments. We
    do not know whether any financing, if obtained, will be adequate
    to meet our capital needs and to support our growth. If adequate
    capital cannot be obtained on satisfactory terms, we may curtail
    or delay the implementation of updates to our facilities or
    delay the expansion of our sales and marketing capabilities, any
    of which could cause our business to fail.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During this period of limited cash availability, we have lowered
    costs in the administrative areas of the company and
    concentrated on production in both Woodbridge and Gonzales. In
    addition, we have and will continue to be required to curtail
    certain production and sales costs until sales orders begin to
    increase to the desired levels, and most notably we will have to
    limit the production of product to two variations of liquid and
    dry product and the desired sales level will have to be derived
    from those products.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We do not have any commitments for additional equity or debt
    funding, and there is no assurance that capital in any form
    would be available to us, and if available, on terms and
    conditions that are acceptable. Moreover, we are not permitted
    to borrow any future funds unless we obtain the consent of the
    holders of the New Jersey Economic Development Authority bonds.
    We have obtained such consent for prior financing, but there is
    no guarantee that we can obtain such consent in the future.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Off-Balance
    Sheet Transactions</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We do not engage in material off-balance sheet transactions.
</DIV>

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    <BR>
    34
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<A name='109'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">BUSINESS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Overview</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During 2008, we transitioned from a development stage company
    (our first reported revenues were in February 2008)&#160;to a
    fully operational company that operates processing facilities
    that use food waste as raw material to manufacture all-natural
    soil amendment and fertilizer products combining nutritional and
    disease suppression characteristics. In addition to our sales in
    the agribusiness market, we sell and distribute our products in
    the turf management and retail markets. We currently operate two
    facilities:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Woodbridge facility.</I>&#160;&#160;A facility in Woodbridge,
    New Jersey that we have equipped as our first
    internally-constructed food waste conversion facility, referred
    to herein as the Woodbridge facility. Operations at the
    Woodbridge facility began in late June of 2008, and include
    processing solid waste and producing both liquid and dry
    fertilizer and soil enhancement products.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Gonzales facility.</I>&#160;&#160;A facility in Gonzales,
    California, referred to herein as the Gonzales facility, that we
    acquired in January 2008. The Gonzales facility is operational
    and began to generate revenue for us in February 2008.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We were incorporated under the laws of the state of Delaware in
    January 2006. In February 2006, we merged with our predecessor
    organizations, Mining Organics Management, LLC, or MOM, and
    Mining Organics Harlem River Rail Yard, LLC, or HRRY, in
    transactions accounted for as a recapitalization. These
    predecessor organizations provided initial technical and
    organizational research that led to the foundation of the
    current business plan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, we successfully completed an initial
    public offering of stock and successfully completed a bond
    offering with the New Jersey Economic Development Authority. The
    net proceeds of the stock offering of $8.9&#160;million,
    together with the net proceeds of the bond offering of
    $16.5&#160;million, were used to develop and construct the
    Woodbridge facility, fund our marketing and administrative
    expenses during the construction period and fund specific
    principal and interest reserves as specified in the bond
    offering. Of the total net proceeds of the stock and bond
    offerings of $25.4&#160;million, $14.6&#160;million was used
    towards the construction of the Woodbridge facility and the
    remaining $10.8&#160;million was used for items detailed above.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we acquired the assets, including the
    intellectual property, of Waste Recovery Industries, LLC, or
    WRI. This acquisition makes us the exclusive owner of the
    proprietary technology and process known as the High Temperature
    Liquid Composting, or HTLC, system, which processes various
    biodegradable waste products into liquid and solid organic-based
    fertilizer and feed products.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Also on January&#160;24, 2008, we acquired the net assets of
    United Organic Products, LLC, or UOP, which was under common
    ownership with WRI. With this acquisition, we acquired a leading
    liquid fertilizer product line, as well as the Gonzales
    facility, which is a production facility that services a West
    Coast agribusiness customer base through established
    distribution channels.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    Revenue Sources</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our revenue comes from two sources: &#147;tip&#148; fees and
    product sales. Waste haulers pay tip fees to us for accepting
    food waste generated by food distributors such as grocery
    stores, produce docks, fish markets and food processors, and by
    hospitality venues such as hotels, restaurants, convention
    centers and airports. Revenue also comes from the customers who
    purchase our products. Our products possess a combination of
    nutritional, disease suppression and soil amendment
    characteristics. The products are sold in both dry and liquid
    form and will be stable with an extended shelf life compared to
    other organic fertilizers. Among other uses, the liquid product
    is expected to be used to mitigate powdery mildew, a leaf fungus
    that restricts the flow of water and nutrients to plants. Our
    products can be used either on a stand-alone basis or in
    combination with more traditional petrochemical-based
    fertilizers and crop protection products. Based on growth trials
    we have conducted with local farmers, company-sponsored
    research, increased environmental awareness and trends in
    consumer food preferences, we believe our products will have
    demand in the agribusiness, turf management
</DIV>

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    <BR>
    35
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    and retail markets. We also expect to benefit from increased
    regulatory focus on food waste processing and on environmentally
    friendly growing practices.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    Woodbridge Facility</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We obtained a long-term lease expiring June 2026 for a site in a
    portion of an industrial building in Woodbridge, New Jersey that
    the landlord has modified and that we have equipped as our first
    internally-constructed food waste conversion facility. We are
    currently producing both liquid and dry product at that
    facility. In the first half of 2009, we began to record tip fee
    and product sales revenue; nevertheless, we are currently
    operating at less than full capacity at that facility, or 250
    tons per day. As we have transitioned to an operating company,
    we have experienced operating inefficiencies. We have also
    experienced odor-related issues that have caused interruptions
    in our production. At full capacity, the Woodbridge facility is
    expected to process approximately 78,000 tons of food waste and
    produce approximately 9,900 tons of dry product and
    approximately 10,000 tons of liquid product annually. We have
    substantially completed upgrades to the Woodbridge facility, and
    we are presently bringing equipment on-line to fulfill our
    commitment to overcome operational difficulties that hampered
    the efficiency of the plant at opening. We believe these
    upgrades will allow us to achieve capacity at the facility of
    approximately 70% of full capacity. During the first half of
    2009, we generated revenue from this facility in the form of tip
    fees of approximately $75,000 and product sales of approximately
    $277,000. In order for this facility to be cash flow positive,
    we estimate that total revenues from the facility would need to
    be in a range of $450,000 to $550,000 per month. We estimate
    that our products, both liquid and dry, can be sold for a price
    in the range of $400 to $700 per ton based on the market to
    which it is sold. Therefore, the potential monthly sales from
    this facility at 70% capacity ranges from approximately $700,000
    to $1,100,000. Based on the above, we would have to produce and
    sell approximately
    <FONT style="white-space: nowrap">45-55%</FONT> of
    the capacity of the Woodbridge facility to be cash flow positive
    at that facility, and, until our sales and production volume
    reach that level, we will not be cash flow positive and may
    therefore require additional funding to subsidize operations at
    that facility. Cash flow generated by exceeding that
    sales/production number would be used to fund operations at the
    corporate level and to pay down approximately $2.4&#160;million
    of the payables related to construction activity at this
    facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of June&#160;30, 2009, we have outstanding amounts due to our
    New Jersey construction vendors of approximately
    $4.2&#160;million. With the exception of one contractor, we have
    negotiated with our remaining contractors to issue notes or
    otherwise repay approximately $1.8&#160;million of the
    outstanding amounts owed. We have not been able to negotiate
    payment terms with one contractor owed approximately
    $2.4&#160;million who has placed a lien on the Woodbridge
    facility and has commenced a lawsuit in the matter.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have agreements with 11 waste-hauling companies to provide
    food waste to the Woodbridge facility. Based on our current
    processing capacity, we are primarily utilizing three haulers
    that provide almost all of the food waste we need for our
    facility. We believe that we have an adequate supply of raw
    material to operate the plant at full processing capacity.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Woodbridge facility receives raw material from the New
    York-Northern New Jersey metropolitan area. It is located near
    the confluence of two major highways in northern New Jersey,
    providing efficient access for the delivery of feedstock from
    throughout this geographic area.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our conversion process has been approved for inclusion in the
    Middlesex County and New Jersey State Solid Waste Management
    Plan. We have been granted our Class&#160;C recycling permit,
    which is the primary environmental permit for this project. The
    remaining required permits are primarily those associated with
    the construction and operation of any manufacturing business,
    which we have also obtained.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Woodbridge facility uses significant amounts of electricity,
    natural gas and steam. We use the services of an energy
    management firm to purchase natural gas and electricity, and
    water is provided by the Town of Woodbridge. Wastewater is
    discharged by permit into the local sewage system.
</DIV>

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    <BR>
    36
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Our
    Gonzales Facility</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we acquired the net assets of UOP,
    which was under common ownership with WRI. With this
    transaction, we acquired a leading liquid fertilizer product
    line, and ownership of the Gonzales facility, a
    <FONT style="white-space: nowrap">state-of-the-art</FONT>
    production facility located in Gonzales, California that
    services a strong West Coast agribusiness customer base through
    established distribution channels. This facility is operational
    and began to generate revenues for us in February 2008. The
    purchase price of $2,500,000 was paid in cash of $1,500,000 and
    a note payable of $1,000,000. The note matures on
    January&#160;1, 2011, has an interest rate of 7% per annum, is
    payable monthly in arrears, and is convertible into our common
    stock at the option of the holder for a price equal to the
    average closing price of the stock on the NASDAQ Capital Market
    for the five days preceding conversion. As of September&#160;1,
    2009, the note payable had a remaining principal balance of
    approximately $458,000.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Gonzales facility generated revenue during the first half of
    2009 of approximately $1,079,000, with a negative operating
    margin of approximately $77,000. In the three months ended
    June&#160;30, 2009, the facility generated approximately
    $809,000 in sales, with a positive operating margin of
    approximately $68,000. We plan to continue to improve this
    operating margin by channeling sales into the turf and retail
    markets, which we believe to be more profitable, by generating
    tip fees from receiving additional quantities of food waste and
    by reducing the amount of raw material and freight costs
    currently associated with the production process. In addition,
    we have plans to triple the actual production capacity of our
    Gonzales facility, and to make the facility capable of producing
    both liquid and dry products. We have completed certain aspects
    of the planned upgrades that allow us to receive solid food
    waste for processing but have delayed the upgrades that would
    allow us to produce dry product. The remaining upgrades have
    been delayed due to cash flow constraints. We intend to use the
    proceeds from this offering to complete the upgrades.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In order for the Gonzales facility to begin to generate positive
    cash flow from operations, it would need to generate sales
    levels of $200,000 per month for 2009. We estimate that in its
    current configuration the plant has the capacity to generate
    monthly sales in the range of $350,000 to $400,000. If sales
    increase above the $200,000 per month level, we expect the
    additional cash flow from the Gonzales facility will be used to
    offset operating expenses at the corporate level. Based on sales
    in the latter months of the second quarter of 2009, we have
    achieved facility breakeven sales levels at the Gonzales
    facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, we entered into a
    <FONT style="white-space: nowrap">10-year</FONT>
    lease for land in Gonzales, California, where our Gonzales
    facility is located. The land is leased from Valley Land
    Holdings, LLC, or VLH, a California limited liability company
    whose sole member is a former officer and director of ours. The
    lease provided for a monthly rent of $9,000 for 2008, after
    which the lease payments were to increase 3% per year during the
    term of the lease. The lease is also renewable for three
    five-year terms after the expiration of the initial
    <FONT style="white-space: nowrap">10-year</FONT>
    term. In addition, we own the Gonzales facility and the
    operating equipment used in the facility.
</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Future
    Expansion of Business</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition to our Gonzales and Woodbridge facilities, our
    strategic plan calls for the development and construction of
    facilities in Rhode Island and Massachusetts. We currently are
    planning to operate these new facilities using the technology
    that we acquired in our acquisition of WRI. We anticipate that
    we will be able to use much of the engineering and design work
    used in our Gonzales facility. Any plans to further expand our
    Gonzales facility, or to construct any future facilities, is
    dependent on our ability to raise additional financing in
    addition to the funds from the offering contemplated by this
    prospectus.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In each of our contemplated locations, we have:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Engaged a local businessperson well-acquainted with the
    community to assist us in the permitting process and development
    of support from community groups;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Participated in numerous meetings with state, county and local
    regulatory bodies as well as environmental and economic
    development authorities;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Identified potential facility sites.
</TD>
</TR>

</TABLE>

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    <BR>
    37
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<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    If we are able to build new facilities, we anticipate we will
    achieve economies of scale in marketing and selling our
    fertilizer products as the cost of these activities is spread
    over a larger volume of product. If our overall volume of
    production increases, we also believe we may be able to more
    effectively approach larger agribusiness customers who may
    require larger quantities of fertilizer to efficiently utilize
    their distribution systems.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To date, we have undertaken the following activities in the
    following markets to prepare to develop additional facilities:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The Rhode Island Industrial Facilities Corporation gave initial
    approval to our Revenue Bond Financing Application for up to
    $15.0&#160;million for the construction of our proposed Rhode
    Island facility. In addition, the Rhode Island Resource Recovery
    Corporation gave us final approval to lease nine acres of land
    in the newly created Lakeside Commerce Industrial Park in
    Johnston, Rhode Island. We previously filed an application with
    the Rhode Island Department of Environmental Management for the
    operation of a Putrescible Waste Recycling Center at that site.
    As part of our efforts to establish a Rhode Island facility, we
    have established Converted Organics of Rhode Island, LLC, of
    which we are 92.5% owners. The minority share is owned by a
    local businessman who has assisted us with the process of
    developing a Rhode Island facility.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    In Massachusetts, we have performed initial development work in
    connection with construction of three manufacturing facilities
    to serve the eastern Massachusetts market. Our proposals to
    develop these facilities are currently under review by the
    property owners. The Massachusetts Strategic Envirotechnology
    Partnership Program has completed a review of our technology.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    We are actively pursuing the development of a licensing program
    and the production of a smaller capacity operating unit to be
    used by us or sold to third parties. We have begun the
    development of smaller capacity operating units, namely the
    Scalable Modular AeRobic Technology (SMART) units that are
    suitable for processing 5 to 50 tons of waste per day, depending
    on owner/user preference. The semi-portable units will be
    capable of operating indoors or outdoors, depending on certain
    criteria, and may be as sophisticated or as basic in design and
    function as the owner/user requires. The SMART system will be
    delivered to each jobsite in a number of pre-assembled,
    pre-tested components, and will include a license to use the
    HTLC technology. Our target market is users who seek to address
    waste problems on a smaller scale than would be addressed by a
    large processing facility. Our plan contemplates that purchasers
    of the SMART units would receive tip fees for accepting waste
    and would sell fertilizer and soil amendment products in the
    markets where their units operate. We plan to market and sell
    the SMART units in both the United States and abroad.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Conversion
    Process</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We use two processes in our Woodbridge facility to convert food
    waste into our solid and liquid fertilizer products. The first
    is based on technology called Enhanced Autothermal Thermophilic
    Aerobic Digestion, or EATAD. The EATAD process was developed by
    International Bio-Recovery Corporation, or IBRC, a British
    Columbia company that possesses technology in the form of
    know-how integral to the process and that has licensed to us
    their technology for food waste conversion in the metropolitan
    New York and Northern New Jersey areas. In addition, we use our
    own HTLC technology. We acquired the proprietary rights to the
    HTLC technology when we purchased UOP in 2008 and began to
    incorporate it into the operations at our Woodbridge facility.
    In simplified terms, both technologies work in a similar fashion
    in that once the prepared foodstock is heated to a certain
    temperature, it self-generates additional heat (autothermal),
    rising to very high, pathogen-destroying temperature levels
    (thermophilic). Bacteria added to the feedstock use vast amounts
    of oxygen (aerobic) to convert the food waste (digestion) to a
    rich blend of nutrients and single cell proteins. Foodstock
    preparation, digestion temperature, rate of oxygen addition,
    acidity and inoculation of the microbial regime are carefully
    controlled to produce products that are highly consistent from
    batch to batch.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We use only the HTLC process at our Gonzales facility.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    38
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The products we manufacture are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    A solid base product with plant nutrition, disease suppression
    and soil enhancement (amendment) benefits. The solid base
    product can then be used by us to produce a variety of products
    with various nitrogen (N), phosphorous (P), and potassium
    (K)&#160;compositions. In describing the composition of
    fertilizer, the nitrogen (N), phosphorus (P), and potassium
    (K)&#160;composition is identified. Presently, we produce both
    an 8-1-4 and a 4-1-8 solid granular product. These figures refer
    to the ratio of nitrogen (N), phosphorus (P), and potassium (K),
    respectively, in the products.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    A liquid base product with plant nutrition, disease suppression
    and soil enhancement (amendment) benefits. The liquid base
    product can then be used to produce a variety of products with
    various nitrogen, phosphorous and potassium compositions (NPK).
    Presently, we produce both a 1-1-1 and
    <FONT style="white-space: nowrap">6-0-0</FONT> liquid
    product.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    We produce a variety of liquid products including: Converted
    Organics 521, Converted Organics GP, Converted Organics XP,
    Converted Organics XK, Converted Organics LC, Converted Organics
    NC, SoilStart 7-1-1, and Aqueous Potash 0-0-10.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The efficacy of our products has been demonstrated both in
    university laboratories and multi-year growth trials funded by
    us and by IBRC. These field trials have been conducted on more
    than a dozen crops including potatoes, tomatoes, squash,
    blueberries, grapes, cotton and turf grass. While these studies
    have not been published, peer-reviewed or otherwise subject to
    third-party scrutiny, we believe the trials and other data show
    our solid and liquid products produced using the EATAD process
    have several valuable attributes:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Plant nutrition.</I>&#160;&#160;Historically, growers have
    focused on the nitrogen (N), phosphorous (P)&#160;and potassium
    (K)&#160;content of fertilizers. As agronomists have gained a
    better understanding of the importance of soil culture, they
    have turned their attention to humic and fulvic acids,
    phytohormones and other micronutrients and growth regulators not
    present in petrochemical-based fertilizers.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Disease suppression.</I>&#160;&#160;Based on field trials
    using product produced by the licensed technology, we believe
    our products combine nutrition with disease suppression
    characteristics to eliminate or significantly reduce the need
    for fungicides and other crop protection products. The
    products&#146; disease suppression properties have been observed
    under controlled laboratory conditions and in documented field
    trials. We also have other field reports that have shown the
    liquid concentrate to be effective in reducing the severity of
    powdery mildew on grapes, reducing verticillium pressure on
    tomatoes and reducing scab in potatoes.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Soil amendment.</I>&#160;&#160;As a result of its
    slow-release nature, our dry fertilizer product increases the
    organic content of soil, improving granularity and water
    retention and thus reducing NPK leaching and run-off.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Pathogen-free.</I>&#160;&#160;Due to high processing
    temperatures, our products are virtually pathogen-free and have
    extended shelf life.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We plan to apply to the U.S.&#160;Department of Agriculture, or
    the USDA, and various state agencies to have our products
    produced by the EATAD process labeled as an organic fertilizer
    or separately as an organic fungicide. We expect organic
    labeling, if obtained, to have a significant positive impact on
    pricing. We believe our products are positioned for the
    commercial market as a fertilizer supplement or as a material to
    be blended into traditional nutrition and disease suppression
    applications.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We use the HTLC system at our Gonzales facility to process food
    waste into liquid organic-based fertilizer and feed products.
    The HTLC technology used in our Gonzales facility can be used in
    all of our future operating plants. We have adopted the HTLC
    technology for certain aspects at the Woodbridge facility even
    though that facility and any future facility in the New York
    City metropolitan area is licensed to use the EATAD technology,
    and accordingly, we will be required to pay royalties on sales
    from those facilities to the owners of the EATAD technology. As
    exclusive owner of the HTLC technology, we expect to achieve the
    same or better operating results as we would with the licensed
    EATAD technology at a lower operating cost. Pursuant to the
    terms of the acquisition of the assets of WRI, we pay a fee for
    each ton of additional capacity added to our current or planned
    expansion. We anticipate that over time this fee will be less
    than the royalty expense paid for use of the licensed EATAD
    technology. In addition, we believe the product produced by the
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    39
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    HTLC technology will be equal to or better in terms of quality
    than products made through the use of the EATAD technology.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">IBRC
    License</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to a know-how license agreement dated July&#160;15,
    2003, as amended, IBRC granted us an exclusive license for a
    term of 40&#160;years to use its proprietary EATAD technology
    for the design, construction and operation of facilities within
    a 31.25&#160;mile radius from City Hall in New York City for the
    conversion of food waste into solid and liquid organic material.
    The license permits us to use the technology at our Woodbridge
    facility site; restricts the ability of IBRC and an affiliated
    company, Shearator Corporation, to grant another know-how or
    patent license related to the EATAD technology within the
    exclusive area; and restricts our ability to advertise or
    contract for a supply of food waste originating outside the same
    exclusive area. The licensed know-how relates to machinery and
    apparatus used in the EATAD process.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We are obligated to pay IBRC an aggregate royalty equal to 9% of
    the gross revenues from the sale of product produced by the
    Woodbridge facility using EATAD technology. We began paying
    royalties in the first half of 2009, as product shipments from
    Woodbridge commenced at that time. We are also obligated to
    purchase IBRC&#146;s patented macerators and shearators, as
    specified by or supplied by IBRC or Shearator Corporation for
    use at the Woodbridge facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, we paid a non-refundable deposit of $139,978 to
    IBRC in 2007 on a second plant licensing agreement. To date, we
    have not used the second licensing agreement to develop a new
    facility. We have also paid IBRC for market research, growth
    trails and other services.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Also, pursuant to the license agreement, we have granted a
    proposed cooperative called Genica, which has yet to be formed
    and of which IBRC will be a member, a right of first refusal to
    market all of our products in accordance with the terms and upon
    payment to us of the price listed on our then current price
    list. If we propose to sell end products to a third party for a
    price lower or otherwise on terms more favorable than such
    published price and terms, Genica also has a right of first
    refusal to market such products on the terms and upon payment to
    us of the price proposed to the third party. The license
    agreement does not specify the duration of such rights.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Marketing
    and Sales</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Target
    Markets</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    According to the U.S.&#160;Fertilizer Institute,
    U.S.&#160;fertilizer demand is 58&#160;million tons per year,
    with agribusiness consuming the majority of product and the
    professional turf and retail segments consuming the remainder.
    The concern of farmers, gardeners and landscapers about nutrient
    runoffs, soil health and other long-term effects of conventional
    chemical fertilizers has increased demand for organic
    fertilizer. We have identified three target markets for our
    products:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Agribusiness:&#160;&#160;</I>conventional farms, organic
    farms, horticulture, hydroponics and aquaculture;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Turf management:</I>&#160;&#160;professional lawn care and
    landscaping, golf courses, sod farms, commercial, government and
    institutional facilities;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Retail sales:&#160;&#160;</I>home improvement outlets, garden
    supply stores, nurseries, Internet sales and shopping networks.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Agribusiness:</I>&#160;&#160;We believe there are two primary
    business drivers influencing commercial agriculture. First,
    commercial farmers are focused on improving the economic yield
    of their land: maximizing the value derived from crop output
    (quantity and quality). Second, commercial farmers are focused
    on reducing the use
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    40
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    of chemical products, while also meeting the demand for
    cost-effective, environmentally responsible alternatives. We
    believe this change in focus is the result of:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Consumer demand for safer, higher quality food;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The restriction on use of registered chemical products. Several
    U.S.&#160;government authorities, including the Environmental
    Protection Agency, the Food and Drug Administration, and the
    USDA regulate the use of fertilizers. There are more than 14
    separate regulations governing the use of fertilizers;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Environmental concerns and the demand for sustainable
    technologies;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Demand for more food for the growing world population;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The cost effectiveness and efficacy of non-chemical based
    products to growers.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Consumer demand for organic food products increased throughout
    the 1990s to date at approximately 20% or more per annum. In the
    wake of USDA&#146;s implementation of national organic standards
    in October 2002, the organic food industry has continued to
    grow. According to the Organic Trade Association,
    United&#160;States&#146; sales of organic food and beverages
    have grown from $1&#160;billion in 1990 to approximately
    $20&#160;billion in 2007 and are expected to grow at an average
    of 18% per year through 2010. Furthermore, the Organic Trade
    Association reports that organic foods represented approximately
    2.8% of total food and beverage sales in 2006, growing 20.9% in
    2006, one of the fastest growing categories. According to the
    Nutrition Business Journal, consumer demand is driving organic
    sector expansion, particularly for fruit, vegetables and dairy
    products. This demand, in turn, is driving commercial farmers to
    shift more of their acreage from conventional practices, which
    predominantly use synthetic fertilizers, to organic practices,
    which require the use of certified organic fertilizers or other
    natural organic materials to facilitate crop growth. The
    USDA&#146;s National Agricultural Statistics Service reports
    that the number of certified organic farm acres has grown from
    0.9&#160;million in 1992 to 4.1&#160;million in 2005, a compound
    annual growth rate of 12% per year.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe farmers are facing pressures to change from
    conventional production practices to more environmentally
    friendly practices. U.S.&#160;agricultural producers are turning
    to certified organic farming methods as a potential way to lower
    production costs, decrease reliance on nonrenewable resources
    such as chemical fertilizers, increase market share with an
    &#147;organically grown&#148; label and capture premium prices,
    thereby boosting farm income.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Turf management:</I>&#160;&#160;We believe that the more than
    16,000 golf courses in the U.S.&#160;will continue to reduce
    their use of chemicals and chemical-based fertilizers to limit
    potentially harmful effects, such as chemical fertilizer runoff.
    The United States Golf Association, or USGA, provides guidelines
    for effective environmental course management. These guidelines
    include using nutrient products and practices that reduce the
    potential for contamination of ground and surface water.
    Strategies include using slow-release fertilizers and selected
    organic products and the application of nutrients through
    irrigation systems. Further, the USGA advises that the selection
    of chemical control strategies should be utilized only when
    other strategies are inadequate. We believe that our
    all-natural, slow-release fertilizer products will be well
    received in this market.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Retail sales:</I>&#160;&#160;The Freedonia Group&#146;s
    report on Lawn&#160;&#038; Garden Consumables indicates that the
    U.S.&#160;market for packaged lawn and garden consumables is
    $7.5&#160;billion and is expected to grow 4.5% per year to
    $9.3&#160;billion in 2012. Fertilizers are the largest product
    category, generating $2.85&#160;billion, or 38%, of total lawn
    and garden consumables sales. Fertilizers, mulch and growing
    media will lead gains, especially rubber mulch, colored mulch
    and premium soils. Organic formulations are expected to
    experience more favorable growth than conventional formulations
    across all product segments, due to increased consumer concern
    with regard to how synthetic chemical fertilizers and pesticides
    on lawns and gardens may affect human/pet health and the
    environment. Further, in 2009, The National Gardening
    Association reported that 40% of the nation&#146;s
    100&#160;million households with a yard say they are likely to
    use all-natural methods in the future due largely to
    environmental and health concerns.
</DIV>

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<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Product
    Sales and Distribution</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our license with IBRC restricts the sale of products from our
    Woodbridge facility to the Eastern Seaboard states, including
    Maine, New Hampshire, Vermont, Massachusetts, Rhode Island,
    Connecticut, New York, New&#160;Jersey, Pennsylvania, Delaware,
    Maryland, Virginia, District of Columbia, North Carolina, South
    Carolina, Georgia and Florida. Our Gonzales facility and future
    plants will not be subject to these territory restraints as they
    will operate using the HTLC technology that we acquired from WRI.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We sell and distribute our products through our sales
    organization, comprised of six employees and three to four
    independent contractors, which targets large purchasers of
    fertilizer products for distribution in our target geographic
    and product markets. Key activities of the sales organization
    include introduction of our products and the development of
    relationships with targeted clients and us. In addition, we have
    signed distribution agreements with six distributors to sell our
    products to numerous outlets in all of our target markets. Due
    to our small size, we believe the most efficient method for
    distribution of our products is through regional distributors.
    This method of distribution currently accounts for the majority
    of our sales. To the extent we make sales directly to customers,
    we generally require our customers to handle delivery of the
    product. We have also had preliminary discussions with
    manufacturer&#146;s representatives to explore sales of our
    products in appropriate retail outlets. In order to develop a
    consistent sales and distribution strategy, we have hired a
    seasoned professional to serve as Vice President of Marketing
    and have hired five in-house salespeople to assist with product
    pull-through into all of our targeted markets. In addition, with
    our acquisition of UOP, we have retained the services of former
    UOP employees who are currently selling product into the
    agribusiness market.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Environmental
    Impact of Our Business Model</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Food waste, the raw material of our manufacturing process, comes
    from a variety of sources. Prior to preparation, food must be
    grown or raised, harvested, packaged, shipped, unpacked, sorted,
    selected and repackaged before it finds its way into markets,
    restaurants or home kitchens. Currently, this process creates a
    large amount of food waste, particularly in densely populated
    metropolitan areas such as New York City, Northern New Jersey,
    and Eastern Massachusetts. Traditionally, the majority of food
    waste is disposed of in either landfills or incinerators that do
    not produce a product from this recyclable resource. We use a
    demonstrated technology that is environmentally benign to
    convert waste into valuable all-natural soil amendment and
    fertilizer products.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Food waste comprises 15% to 20% of the nation&#146;s waste
    stream. Disposing of or recycling food waste should be simple,
    since organic materials grow and decompose readily in nature.
    However, the large volumes of food wastes generated in urban
    areas combined with a lack of available land for traditional
    recycling methods, such as composting, make disposal of food
    wastes increasingly expensive and difficult. Landfill capacity
    is a significant concern, particularly in densely populated
    areas. In addition, landfills may create negative environmental
    effects including liquid wastes migrating into groundwater,
    landfill gas, consumption of open space, and air pollution
    associated with trucking waste to more remote sites. The
    alternative of incineration may produce toxic air pollutants and
    climate-changing gases, as well as ash containing heavy metals.
    Incineration also fails to recover the useful materials from
    organic wastes that can be recycled. Traditional composting is a
    slow process that uses large tracts of land, may generate
    offensive odors, and may attract vermin. In addition, composting
    usually creates an inconsistent product with lower economic
    value than the fertilizer products we will produce.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our process occurs in enclosed &#147;digesters&#148; housed
    within a building that uses effective emissions control
    equipment, which results in minimal amounts of dust and noise.
    By turning food waste into a fertilizer product using an
    environmentally benign process, we are able to reduce the total
    amount of solid waste that goes to landfills and incinerators,
    which in turn reduces the release of greenhouse gases such as
    methane and carbon dioxide.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the
    <FONT style="white-space: nowrap">start-up</FONT>
    phase at our Woodbridge facility, we experienced odor-related
    issues. As a result of these issues, we have been assessed fines
    from the Health Department of Middlesex County, New Jersey, and
    have been named a party in a lawsuit by a neighboring business.
    Based on a change in operational procedures
</DIV>

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    <BR>
    42
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    and working with two outside odor-control consultants, we
    believe we have significantly reduced the odor issues. However,
    if we are unsuccessful in controlling odor-related issues, we
    may be subject to further fines or litigation, and our
    operations may be interrupted or terminated.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table summarizes some of the advantages of our
    process compared with currently available methods employed to
    dispose of food waste:
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Comparison
    of Methods for Managing Food Waste</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
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<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Environmental<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Method</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Impacts</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Products</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Landfilling
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Loss of land<BR>
    Groundwater threat<BR>
    Methane gas<BR>
    Air pollution from trucks<BR>
    Useful materials not recycled<BR>
    Undesirable land use
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Landfill gas (minimal energy generation at some landfills)
</TD>
</TR>
<TR valign="bottom" style="line-height: 6pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
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&nbsp;
</TD>
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&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Incineration
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Air pollution<BR>
    Toxic emissions<BR>
    Useful materials not recycled<BR>
    Disposal of ash still required
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Electricity (only at some facilities)
</TD>
</TR>
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<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Composting
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Groundwater threat<BR>
    Odor<BR>
    Vermin<BR>
    Substantial land required
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Low value compost
</TD>
</TR>
<TR valign="bottom" style="line-height: 6pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
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&nbsp;
</TD>
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&nbsp;
</TD>
</TR>
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<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>Converted Organics</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    No solid waste<BR>
    Odor<BR>
    No harmful by-products<BR>
    Removal of waste from waste stream<BR>
    Consumption of electricity and natural gas <BR>
    Discharge of treated wastewater into sewage system
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Natural fertilizer
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Environmental regulators and other governmental authorities in
    our target markets have also focused more recently on the
    potential benefits of recycling increased amounts of food waste.
    For example, the New Jersey Department of Environmental
    Protection, or the NJDEP, estimates nearly 1.5&#160;million
    tons, or just over 7.4% of the state&#146;s total waste stream,
    is food waste, but in 2003, only 221,000 tons were recycled,
    which represented 15% of the recycled waste. The 2005 NJDEP
    Statewide Solid Waste Management Plan focused particularly on
    the &#147;food waste&#148; recycling stream as one of the most
    effective ways to create significant increases in recycling
    tonnages and rates. In New York, state and local environmental
    agencies are taking measures to encourage the diversion of
    organic materials from landfills and are actively seeking
    processes consistent with health and safety codes. The goal is
    to further reduce the amount of waste going to landfills and
    other traditional disposal facilities, particularly waste that
    is hauled great distances, especially in densely populated areas
    in the Northeast. In 2005, the Rhode Island Resource Recovery
    Corporation, or the RIRRC, began an examination of the bulk food
    waste processing technology of our technology licensor to
    determine whether using our licensed technology would be
    economically feasible, cost-effective, practicable, and an
    appropriate application in Rhode Island. The RIRRC completed its
    review and included the technology in its 2006 Solid Waster
    Master Plan. In 2006 in Massachusetts, the State Solid Waste
    Master Plan has also identified a need for increased
    organics-processing capacity within the state and has called for
    a streamlined regulatory approval path.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Competition</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We operate in a very competitive environment in our
    business&#146;s three dimensions&#160;&#151; organic waste
    stream feedstock, technology and end products&#160;&#151; each
    of which is quickly evolving. We believe we will be able to
    compete effectively because of the abundance of the supply of
    food waste in our geographic markets, the pricing of our tip
    fees and the quality of our products and technology.
</DIV>

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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Organic Waste Stream Feedstock.</I>&#160;&#160;Competition
    for the organic waste stream feedstock includes landfills,
    incinerators, animal feed, land application and traditional
    composting operations. Organic waste streams are generally
    categorized as pre- and post-consumer food waste, lawn and
    garden waste (sometimes called green waste), and bio-solids,
    including sewage sludge or the by-product of wastewater
    treatment. Some states, including New Jersey, have begun to
    regulate the manner in which food waste may be composted. New
    Jersey has created specific requirements for treatment in tanks
    or in-vessel, and we believe our Woodbridge facility is the
    first approved in-vessel processing facility in the state. In
    Massachusetts, state regulators are considering a ban on the
    disposal of organic materials at landfills and incinerators once
    sufficient organic processing capacity exists within the state,
    which, if adopted, would provide a competitive advantage for
    organic processes such as our process.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Technology.</I>&#160;&#160;There are a variety of
    technologies used to treat organic wastes including composting,
    digestion, hydrolysis and thermal processing. Companies using
    these technologies may compete with us for organic material.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Composting is a natural process of decomposition that can be
    enhanced by mounding the waste into windrows to retain heat,
    thereby accelerating decomposition. Large-scale compost
    facilities require significant amounts of land for operations
    that may not be readily available or that may be only available
    at significant cost in major metropolitan areas. Given the
    difficulties in controlling the process or the consistent
    ability to achieve germ-killing temperatures, the resulting
    compost is often inconsistent and generally would command a
    lower market price than our product.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Digestion may be either aerobic, like the HTLC or EATAD process,
    or anaerobic. Anaerobic digestion is, in simple terms,
    mechanized in-vessel composting. In addition to compost, most
    anaerobic digestion systems are designed to capture the methane
    generated. While methane has value as a source of energy, it is
    generally limited to
    <FONT style="white-space: nowrap">on-site</FONT> use,
    as it is not readily transported.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Hydrolysis is an energy-intensive chemical process that produces
    a by-product, most commonly ethanol. Thermal technologies
    extract the British thermal unit, or BTU, content of the waste
    to generate electricity. Food waste, which is typically 75%-90%
    water, is generally not a preferred feedstock. Absent
    technological breakthroughs, neither hydrolysis nor thermal
    technologies are expected to be accepted for food waste
    processing on a large-scale in the near term.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>End Products.</I>&#160;&#160;The organic fertilizer business
    is relatively new, highly fragmented, under-capitalized and
    growing rapidly. We are not aware of any dominant producers or
    products currently in the market. There are a number of single
    input, protein-based products, such as fish, bone and cottonseed
    meal, that can be used alone or mixed with chemical additives to
    create highly formulated fertilizer blends that target specific
    soil and crop needs. In this sense they are similar to our
    products, and provide additional competition in the organic
    fertilizer market. In the future, large producers of non-organic
    fertilizer may also increase their presence in the organic
    fertilizer market. These companies are generally better
    capitalized than us and have greater financial and marketing
    resources than us.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Most of the 58&#160;million tons of fertilizer consumed annually
    in North America is mined or derived from petroleum. These
    petroleum-based products generally have higher nutrient content
    (NPK) and cost less than organic fertilizers. Traditional
    petrochemical fertilizers are highly soluble and readily leach
    from the soil. Slow release products that are coated or
    specially processed command a premium. However, the economic
    value offered by petrochemicals, especially for field crops
    including corn, wheat, hay and soybeans, will not be supplanted
    in the foreseeable future. We compete with large producers of
    non-organics fertilizers, many of which are significantly larger
    and better capitalized than us. In addition, we compete with
    numerous smaller producers of fertilizer.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Despite a large number of new products in the end market, we
    believe that our products have a unique set of characteristics.
    We believe positioning and branding the combination of nutrition
    and disease suppression characteristics will differentiate our
    products from other organic fertilizer products to develop
    market demand, while maintaining or increasing pricing. In view
    of the barriers to entry created by the supply of food waste,
</DIV>

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    <BR>
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    regulatory controls and the cost of constructing facilities, we
    do not foresee a dominant manufacturer or product emerging in
    the near-term.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Major
    Customers</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Gonzales and Woodbridge facilities rely on a few major
    customers for a majority of their revenues. From January&#160;1,
    2009 until August&#160;31, 2009, approximately 71% of the
    revenues generated by the Gonzales facility were from three
    customers. From January&#160;1, 2009 until August&#160;31, 2009,
    approximately 48% of the revenues generated by the Woodbridge
    facility, excluding tip fees, were from two customers. We do not
    have any long-term agreements with any of our customers. The
    loss of any of our major customers could adversely effect our
    results of operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

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    <B><FONT style="font-family: 'Times New Roman', Times">Government
    Regulation</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Certain of our fertilizer end products are regulated or
    controlled by state, county and local governments as well as
    various agencies of the federal government, including the Food
    and Drug Administration and the USDA.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition to the regulations governing the sale of our end
    products, our facilities are subject to extensive regulation. We
    need certain permits to operate solid waste or recycling
    facilities as well as permits for our sewage connection, water
    supply, land use, air emission, and wastewater discharge. The
    specific permit and approval requirements are set by the state
    and the various local jurisdictions, including but not limited
    to city, town, county, and township and state agencies having
    control over the specific properties. We have obtained the
    permits and approvals required to operate our Woodbridge
    facility and Gonzales facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Environmental regulations also govern the operation of our
    facilities. Our future facilities will most likely be located in
    urban industrial areas where contamination may be present.
    Regulatory agencies may require us to remediate environmental
    conditions at our locations.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have contracted with a company to explore our ability to
    create carbon credits as a result of our manufacturing process
    and our diverting food waste from landfills. We have not
    determined the value, if any, of the potential carbon credits
    associated with our business.
</DIV>

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    <B><FONT style="font-family: 'Times New Roman', Times">Legal
    Proceedings</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On December&#160;11, 2008, we received notice that a complaint
    had been filed in a putative class action lawsuit on behalf of
    59&#160;persons or entities that purchased units pursuant to a
    financing terms agreement, or FTA, dated April&#160;11, 2006,
    captioned Gerald S. Leeseberg, et al.&#160;v. Converted
    Organics, Inc., filed in the U.S.&#160;District Court for the
    District of Delaware. The lawsuit alleges breach of contract,
    conversion, unjust enrichment, and breach of the implied
    covenant of good faith in connection with the alleged failure to
    register certain securities issued in the FTA, and the
    redemption of our Class&#160;A warrants in November 2008. The
    lawsuit seeks damages related to the failure to register certain
    securities, including alleged late fee payments, of
    approximately $5.25&#160;million, and unspecified damages
    related to the redemption of the Class&#160;A warrants. In
    February 2009, we filed a Motion for Partial Dismissal of
    Complaint. It is uncertain when the Court will rule on this
    motion. We plan to vigorously defend this matter and are unable
    to estimate any contingent losses that may or may not be
    incurred as a result of this litigation and its eventual
    disposition. Accordingly, no contingent loss has been recorded
    related to this matter.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;19, 2009, we received notice that a complaint had
    been filed in the Middlesex County Superior Court of New Jersey,
    captioned Lefcourt Associates, Ltd., et al.&#160;v. Converted
    Organics of Woodbridge, et al. The lawsuit alleges private and
    public nuisances, negligence, continuing trespasses and consumer
    common-law fraud in connection with the odors emanating from our
    Woodbridge facility and our alleged, intentional failure to
    disclose to adjacent property owners the possibility of our
    facility causing pollution. The lawsuit seeks enjoinment of any
    and all operations which in any way cause or contribute to the
    alleged pollution, compensatory and punitive damages, counsel
    fees and costs of suit and any and all other relief the Court
    deems equitable and just. In response to these allegations, we
    have filed opposition papers with the Court and
</DIV>

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    have complied with the plaintiff&#146;s requests for
    information. We have also paid to the Middlesex County Health
    Department penalties in the amount of $86,000 relating to odor
    emissions. We plan to vigorously defend this matter and are
    unable to estimate any contingent losses that may or may not be
    incurred as a result of this litigation and its eventual
    disposition. Accordingly, no contingent loss has been recorded
    related to this matter.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;28, 2009, we received notice that a Lien Claim
    Foreclosure Complaint had been filed in the Middlesex County
    Superior Court of New Jersey, captioned Armistead Mechanical,
    Inc.&#160;v. Converted Organics Inc., et al. Armistead filed
    this Lien Claim Foreclosure Complaint in order to perfect its
    previously filed lien claim. In connection with the Complaint,
    Armistead also filed a Demand for Arbitration in order to
    preserve its status quo and right to submit a contract dispute
    claim to binding arbitration. Armistead has indicated to us that
    it wishes to continue settlement discussions and has offered to
    cooperate with our efforts to secure financing for a mutually
    agreeable settlement. We intend to continue working towards an
    agreeable settlement with Armistead. On July&#160;10, 2009, we
    received an Amended Lien Claim Foreclosure Complaint from
    Armistead Mechanical. The amended complaint did not make any
    substantial changes to the suit. On August&#160;4, 2009, we
    filed a response to the complaint whereby we denied certain
    claims and at this time we are unable to estimate any contingent
    losses. On August&#160;28, 2009, the court entered an order
    staying the litigation pending the outcome of arbitration.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Middlesex County Health Department (MCHD) issued us a number
    of notices of violation, or NOV, following the commencement of
    our operations at our Woodbridge facility in February 2009, for
    alleged violations of New Jersey State Air Pollution Control
    Act, which prohibits certain off-site odors. The NOV alleged
    that odors emanating from our Woodbridge facility had impacted
    surrounding businesses and those odors were of sufficient
    intensity and duration to constitute air pollution under the
    act. As of September&#160;3, 2009, the total amount of fines
    levied by the Middlesex County Health Department equaled
    $356,250, of which we have paid $87,750 (of which $86,000 were
    related to odor emissions), and we are either contesting or
    negotiating the unpaid balance of $268,500, based on the date of
    violation. We recorded a liability of $75,000 in our financial
    statements as of June&#160;30, 2009 relating to the unpaid
    potion of the penalties. In addition, based on a change in
    operational procedures and working with two outside odor-control
    consultants, we believe we have significantly rectified the odor
    issues.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The NJDEP Bureau of Air Compliance and Enforcement issued us an
    Administrative Order in June 2009 for alleged violations of the
    air permit issued to us pursuant to the Air Pollution Control
    Act. The Administrative Order alleged that we were not operating
    in compliance with our air permit. No penalties were assessed in
    the Administrative Order. However, the Administrative Order
    remains an open matter because, as the NJDEP stated in the
    Administrative Order, the provisions of the order remain in
    effect during pendency of the hearing request. Additionally,
    while we have taken corrective actions, such actions do not
    preclude the State from initiating a future enforcement action
    or seeking penalties with respect the violations listed in the
    Administrative Order.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The NJDEP Bureau of Solid Waste Compliance and Enforcement
    issued us a NOV for alleged violations of the New Jersey State
    Solid Waste Management Act in June 2009. The NOV alleged that
    our Woodbridge facility was not operating in accordance with the
    terms of the General Class&#160;C Permit Approval. No penalties
    were assessed by the NOV. However, the NOV constituted
    notification that the facility is allegedly out of compliance
    with certain provisions of the General Class&#160;C Permit
    <FONT style="white-space: nowrap">and/or</FONT> the
    NJDEP Solid Waste regulations. The NOV remains an open matter
    because, as NJDEP stated in the NOV, while we have taken
    corrective actions, such actions do not preclude the State from
    initiating a future enforcement action with respect the
    violations listed in the NOV.
</DIV>

<DIV style="margin-top: 9pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Employees</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of September&#160;1, 2009, we had 31&#160;full-time
    employees, 13 of whom are in sales, management and
    administration, seven of whom work in our Gonzales facility and
    11 of whom work in our Woodbridge facility. Once the Woodbridge
    facility reaches its initial design capacity of 250 tons per
    day, we expect to have another seven full-time employees at that
    location, working in the areas of general plant management,
    equipment operation, quality control, maintenance, laborers, and
    administrative support. We are also planning for additional
    employees in the sales, marketing, finance, technology and
    administrative areas of the Company.
</DIV>

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    <BR>
    46
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<A name='110'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">MANAGEMENT</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Executive
    Officers and Directors</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth information about our executive
    officers and members of our board of directors as of
    September&#160;1, 2009:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="44%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadright -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="51%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Age</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Position</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Edward J. Gildea
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    57
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    President, Chief Executive Officer and Chairman of the Board
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    David R. Allen
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    54
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="bottom">
    Chief Financial Officer and Executive Vice-President of
    Administration
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Robert E. Cell(1)(2)(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    40
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    Director
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    John P. DeVillars(1)(2)(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    60
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    Director
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Edward A. Stoltenberg(1)(2)(3)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    70
</TD>
<TD>&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    Director
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    Member of the audit committee.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (2) </TD>
    <TD></TD>
    <TD valign="bottom">
    Member of the compensation committee.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (3) </TD>
    <TD></TD>
    <TD valign="bottom">
    Member of the nominating committee.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following is a brief description of the principal occupation
    and recent business experience of each of our directors and
    executive officers:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Edward J. Gildea </I>has been our Chairman, President and
    Chief Executive Officer since January 2006. From 2001 to 2005,
    he held several executive positions including Chief Operating
    Officer, Executive Vice President, Strategy and Business
    Development, and General Counsel of QualityMetric Incorporated,
    a private health status measurement business. During that
    period, Mr.&#160;Gildea was also engaged in the private practice
    of law representing business clients and held management
    positions in our predecessor companies. He holds an A.B. degree
    from the College of the Holy Cross and a J.D. degree from
    Suffolk University Law School. Mr.&#160;Gildea is the brother of
    William A. Gildea, a former affiliate of the company.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>David R. Allen </I>has been our Chief Financial Officer since
    March 2007. He was previously a director from June 2006 to March
    2007. Until 2004, he was the Chief Executive Officer and the
    Chief Financial Officer of Millbrook Press Inc., a publicly held
    publisher of children&#146;s books. Millbrook Press Inc. filed
    for bankruptcy in the District of Connecticut in February 2004
    in a liquidation proceeding in which all creditors were paid in
    full. Since 2004, Mr.&#160;Allen has acted as a management
    consultant and advisor to small public companies. Mr.&#160;Allen
    holds a B.S. degree and an M.S. degree from Bentley College in
    Waltham, Massachusetts. Mr.&#160;Allen is a Certified Public
    Accountant.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Robert E. Cell </I>has been a director since June 2006. In
    2006, he became the President and Chief Executive Officer of
    MyBuys.com, a preference-based marketing company. From 2004 to
    2005, he was the Chief Executive Officer of Cool Sign Media
    Inc., a provider of digital advertising and signage. From 2000
    to 2004, he held several executive positions, including Chief
    Operating Officer and Chief Financial Officer, at Blue Martini
    Software, Inc., a publicly held provider of client relationship
    management software applications. Mr.&#160;Cell has acted as a
    consultant to several public and private companies.
    Mr.&#160;Cell holds a B.S. degree and an M.B.A. from the
    University of Michigan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>John P. DeVillars </I>has been a director since June 2006. He
    is a founder and managing partner of BlueWave Strategies LLC, an
    environmental and renewable energy consulting firm established
    in 2003, and is a managing partner of its affiliated investment
    group, BlueWave Capital. He is a director of Clean Harbors Inc.,
    a hazardous waste management company. Until 2003,
    Mr.&#160;DeVillars held the position of Lecturer in
    Environmental Policy in the Department of Urban Studies and
    Planning at the Massachusetts Institute of Technology.
    Mr.&#160;DeVillars continues to lecture at MIT, the Harvard
    Graduate School of Design and the Kennedy School of Government.
    Mr.&#160;DeVillars holds a B.A. degree from the University of
    Pennsylvania and an M.P.A. from Harvard University.
</DIV>

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    <BR>
    47
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<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Edward A. Stoltenberg </I>has been a director since March
    2007. He is a Managing Director of Phoenix Financial Services,
    an investment banking firm which provides financial services to
    middle market public and private companies. He has been with
    Phoenix since 1999. Mr.&#160;Stoltenberg is a Certified Public
    Accountant and holds a B.A from Ohio Wesleyan University and an
    M.B.A from the University of Michigan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There are no family relationships among our officers and
    directors.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Board
    Classifications; Independence</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Board of Directors is comprised of four members divided into
    three classes as nearly equal in number as possible. Currently,
    Messrs.&#160;Stoltenberg and Cell serve as
    Class&#160;1&#160;directors, whose terms expire in 2010,
    Mr.&#160;DeVillars serves as a Class&#160;2&#160;director, whose
    term expires in 2011, and Mr.&#160;Edward Gildea serves as a
    Class&#160;3&#160;director, whose term expires in 2012.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Board of Directors is subject to the independence
    requirements of the NASDAQ Stock Market. In March 2009, our
    Board of Directors undertook its annual review of director
    independence. During this review, the Board considered
    transactions and relationships between each director or any
    member of his or her immediate family and the company and its
    subsidiaries and affiliates. The purpose of this review was to
    determine whether any such relationships or transactions existed
    that were inconsistent with a determination that the director is
    independent. Of the four members of the Board,
    Messrs.&#160;Cell, DeVillars and Stoltenberg were determined to
    be independent directors as defined by the NASDAQ Stock Market.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Board of Directors has three standing committees: an Audit
    Committee, a Compensation Committee and a Nominating and
    Governance Committee.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Audit Committee.</I>&#160;&#160;Our Audit Committee oversees
    our accounting and financial reporting processes, internal
    systems of accounting and financial controls, relationships with
    independent auditors, and audits of financial statements.
    Specific responsibilities include the following:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    appointing, evaluating and terminating our independent auditors;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    evaluating the qualifications, independence and performance of
    our independent auditors;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approving the audit and any non-audit services to be performed
    by the independent auditors;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    reviewing the design, implementation, adequacy and effectiveness
    of our internal controls and critical accounting policies;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    overseeing and monitoring the integrity of our financial
    statements and our compliance with legal and regulatory
    requirements as they relate to financial statements or
    accounting matters;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    with management and our independent auditors, reviewing any
    earnings announcements and other public announcements regarding
    our results of operations;&#160;and
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    preparing the report that the Securities and Exchange Commission
    requires in our annual proxy statement.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Audit Committee is comprised of Messrs.&#160;Stoltenberg,
    DeVillars and Cell. Mr.&#160;Stoltenberg serves as Chairman of
    the Audit Committee. The Board has determined that all members
    of the Audit Committee are independent under the rules of the
    Securities and Exchange Commission and the NASDAQ Stock Market.
    The Board has determined that Mr.&#160;Stoltenberg qualifies as
    an &#147;audit committee financial expert,&#148; as defined by
    the rules of the Securities and Exchange Commission.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Compensation Committee.</I>&#160;&#160;Our Compensation
    Committee assists our Board of Directors in determining the
    development plans and compensation of our officers, directors
    and employees. Specific responsibilities include the following:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    approving the compensation and benefits of our executive
    officers;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    reviewing the performance objectives and actual performance of
    our officers;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    administering our stock option and other equity compensation
    plans.
</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    48
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Compensation Committee is comprised of Messrs.&#160;Cell,
    DeVillars and Stoltenberg. Mr.&#160;Cell serves as Chairman of
    the Compensation Committee. The Board has determined that all
    members of the Compensation Committee are independent under the
    rules of the NASDAQ Stock Market.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Nominating and Governance Committee.</I>&#160;&#160;Our
    Nominating and Governance Committee assists the Board by
    identifying and recommending individuals qualified to become
    members of our Board of Directors, reviewing correspondence from
    our stockholders, and establishing, evaluating and overseeing
    our corporate governance guidelines. Specific responsibilities
    include the following:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    evaluating the composition, size and governance of our Board of
    Directors and its committees and making recommendations
    regarding future planning and the appointment of directors to
    our committees;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    determining procedures for selection of the CEO and other senior
    management;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    evaluating and recommending candidates for election to our Board
    of Directors.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Nominating and Governance Committee is comprised of
    Messrs.&#160;DeVillars, Cell and Stoltenberg. Mr.&#160;DeVillars
    serves as Chairman of our Nominating and Governance Committee.
    The Board has determined that all members of the Nominating and
    Governance Committee are independent under the rules of the
    NASDAQ Stock Market.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Compensation
    Committee Interlocks and Insider Participation</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    None of the members of our Compensation Committee is an officer
    or employee of ours. None of our executive officers currently
    serves, or in the past year has served, as a member of the board
    of directors or compensation committee of any entity that has
    one or more executive officers serving on our Board of Directors
    or Compensation Committee.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Director
    Compensation</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In 2008, our independent directors received options to purchase
    an aggregate of 44,000&#160;shares and an aggregate of $69,000
    in fees for their service on the Board of Directors, which
    included meeting fees of $1,000 per meeting per director.
    Directors who are also our employees do not receive compensation
    for their services as directors.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="64%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Fees Earned or<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Paid in Cash</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Awards(1)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Total</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Edward A. Stoltenberg(1)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    25,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    139,040
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    164,040
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Robert Cell
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    20,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    139,040
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    159,040
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    John DeVillars
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    24,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    139,040
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    163,040
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    Represents the compensation expense incurred by us in the
    respective fiscal year in connection with grants of stock
    options. The fair value for the stock options was estimated at
    the date of grant using a
    <FONT style="white-space: nowrap">Black-Scholes</FONT>
    pricing model with the following assumptions: risk-free interest
    rate of 3.52%; no dividend yield; volatility factor of 52.3%;
    and an expiration period of five years. The price resulting from
    the valuation was $3.16 per share.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    49
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='111'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">EXECUTIVE
    COMPENSATION</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Summary
    Compensation Table</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth certain information concerning
    total compensation received by our Chief Executive Officer and
    Chief Financial Officer (&#147;named executives&#148;) during
    2008 and 2007 for services rendered to us in all capacities for
    the last two fiscal years.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Summary
    Compensation Table</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="64%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="2%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Salary<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Awards<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Total<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name and Principal Position</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>($)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>($)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>($)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Edward J. Gildea,
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2008
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    215,260
</TD>
<TD nowrap align="left" valign="bottom">
    (1)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    395,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    610,260
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: 0pt; margin-left: 10pt">
    President and Chief Executive Officer
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2007
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    208,923
</TD>
<TD nowrap align="left" valign="bottom">
    (2)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    208,923
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    David Allen,
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2008
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    139,523
</TD>
<TD nowrap align="left" valign="bottom">
    (3)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    224,976
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    364,499
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: 0pt; margin-left: 10pt">
    Chief Financial Officer
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2007
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    72,930
</TD>
<TD nowrap align="left" valign="bottom">
    (4)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    72,930
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    Includes $22,000 of unpaid salary from 2007 that was paid in
    2008.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (2) </TD>
    <TD></TD>
    <TD valign="bottom">
    Includes paid salary of $186,923 and unpaid salary of $22,000.
    The unpaid salary was paid in January and February 2008.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (3) </TD>
    <TD></TD>
    <TD valign="bottom">
    Includes $8,580 of unpaid salary from 2007 that was paid in 2008.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (4) </TD>
    <TD></TD>
    <TD valign="bottom">
    Includes paid salary of $64,350 and unpaid salary of $8,580. The
    unpaid salary was paid in January and February 2008.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Outstanding
    Equity Awards at Fiscal Year End</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="41%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="13%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom">
    <B>Number of Securities Underlying Unexercised<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Options</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Option<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Exercisable</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Unexercisable</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price ($ per share)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Expiration Date</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Edward J. Gildea
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    100,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    June 15, 2011
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    125,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5.02
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    June 27, 2018
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    David R. Allen
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    10,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    June 15, 2011
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    71,195
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5.02
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    June 27, 2018
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">2006
    Stock Option Plan</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In June 2006, our Board of Directors and stockholders approved
    the 2006 Stock Option Plan, or Option Plan. The Option Plan
    authorizes the grant and issuance of options and other equity
    compensation to employees, officers and consultants. A total of
    1,666,667&#160;shares of common stock are reserved for issuance
    under the Option Plan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Option Plan is administered by our Compensation Committee.
    Subject to the provisions of the Option Plan, the Compensation
    Committee determines who will receive the options, the number of
    options granted, the manner of exercise and the exercise price
    of the options. The term of incentive stock options granted
    under the Option Plan may not exceed ten years, or five years
    for options granted to an optionee owning more than 10% of our
    voting stock. The exercise price of an incentive stock option
    granted under the Option Plan must be equal to or greater than
    the fair market value of our common stock on the date the option
    is granted. The exercise price of a non-qualified option granted
    under the Option Plan must be equal to or greater than 85% of
    the fair market value of our stock on the date the option is
    granted. An incentive stock option granted to an optionee owning
    more than 10% of our voting stock must have an exercise price
    equal to or greater than 110% of the fair market value of our
    common stock on the date the option is granted. Stock options
    issued under the option plan vest immediately upon date of grant.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At a Special Meeting of Shareholders on April&#160;3, 2008, our
    shareholders approved an amendment to the Option Plan to include
    an &#147;evergreen&#148; provision pursuant to which on
    January&#160;1st&#160;of each year, commencing
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    50
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    in 2009, the number of shares authorized for issuance under the
    Option Plan shall automatically be increased to an amount equal
    to 20% of our outstanding shares of common stock on the last day
    of the prior fiscal year.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Employment
    Agreements</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Effective as of February&#160;16, 2007, we entered into an
    employment agreement with Mr.&#160;Gildea to ensure the
    continuity of executive leadership, to clarify his roles and
    responsibilities, and to make explicit the terms and conditions
    of executive employment. Provisions concerning a change of
    control, and terms of compensation in that event, are included
    in the employment agreement consistent with what our
    Compensation Committee believes to be best industry practices.
    The change of control provisions in the employment agreement are
    designed to ensure that Mr.&#160;Gildea devotes his full energy
    and attention to the best long-term interests of the
    shareholders in the event that business conditions or external
    factors make consideration of a change of control appropriate.
    &#147;Change of Control&#148; is defined in the employment
    agreement to include: (i)&#160;the acquisition of any person or
    &#147;group&#148; (as defined by the Securities Exchange Act of
    1934, as amended) of beneficial ownership of 20% of the total
    shares or more than 35% of the then-outstanding shares of common
    stock, except for acquisitions of stock from us, by us or by
    employee benefit plans maintained by us or any of our
    affiliates; (ii)&#160;individuals who constitute our Board of
    Directors cease for any reason to constitute at least a majority
    of the Board unless the new members of the Board were nominated
    by the existing Board members for other than an election
    contest; (iii)&#160;consummation of a reorganization, merger,
    consolidation or sale or other disposition of all or
    substantially all of our assets, unless the transaction merger,
    consolidation or sale was initiated or approved by the Board of
    Directors; or (iv)&#160;approval by our stockholders of a
    complete liquidation or dissolution.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The employment agreement with Mr.&#160;Gildea for his service as
    President and Chief Executive Officer provides for a base salary
    of $220,000, which may be increased at the discretion of the
    Board. The employment agreement also provides for participation
    in the various benefit programs provided by us, including group
    life insurance, sick leave and disability, retirement plans and
    medical and dental insurance programs to the extent they are
    offered by us and to the extent that Mr.&#160;Gildea is eligible
    to participate in such plans under the terms of such plans.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the event that Mr.&#160;Gildea&#146;s employment is
    terminated or in the event that Mr.&#160;Gildea resigns for
    &#147;good reason&#148; following a Change of Control,
    Mr.&#160;Gildea is entitled to a lump sum of three years base
    salary plus three times his incentive compensation paid in the
    preceding 12&#160;months or the incentive compensation
    plan&#146;s target, if any, whichever is greater, plus continued
    participation in the insurance benefits for a three-year period.
    All stock options granted to Mr.&#160;Gildea would immediately
    vest and remain exercisable for three months following the date
    of termination.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Resignation for &#147;good reason&#148; under the employment
    agreement, means, among other things, the resignation of
    Mr.&#160;Gildea as a result of (i)&#160;without the express
    written consent of Mr.&#160;Gildea, our materially breach of the
    employment agreement which breach is not cured within
    30&#160;days following written notice by Mr.&#160;Gildea;
    (ii)&#160;the Board of Directors, without cause, substantially
    changing Mr.&#160;Gildea&#146;s core duties or removing his
    responsibility for those core duties, so as to effectively cause
    him to no longer be performing the duties of President and CEO;
    (iii)&#160;the Board of Directors, without cause, placing
    another executive above Mr.&#160;Gildea or one of the named
    officers in the company or requiring Mr.&#160;Gildea to be based
    in an office that is more than 100&#160;miles from
    Mr.&#160;Gildea&#146;s principal place of employment; or
    (iv)&#160;a Change of Control. The estimated expense to us of
    Mr.&#160;Gildea&#146;s termination in the event of a Change of
    Control as of December&#160;31, 2008 was $660,000. The estimated
    expense to us of Mr.&#160;Gildea&#146;s resignation for good
    reason or termination without cause in the absence of a change
    in control as of December&#160;31, 2008 was $220,000.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    51
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='113'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">PRINCIPAL
    STOCKHOLDERS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth information regarding the
    beneficial ownership of our outstanding common stock as of
    September&#160;1, 2009, and as adjusted to reflect the sale of
    the shares of common stock offered by us in this offering
    (assuming no exercise of the warrants included in the units),
    for:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    each person or group of affiliated persons known by us to
    beneficially own more than 5% of our common stock;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    each of our directors;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    each of our named executive officers;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    all of our directors and executive officers as a group.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Beneficial ownership is determined in accordance with the rules
    of the SEC. In computing the number of shares beneficially owned
    by a person and the percentage ownership of that person, shares
    of common stock subject to options or warrants held by that
    person that are currently exercisable or exercisable within
    60&#160;days of September&#160;1, 2009 are deemed outstanding,
    but are not deemed outstanding for computing the percentage
    ownership of any other person. These rules generally attribute
    beneficial ownership of securities to persons who possess sole
    or shared voting power or investment power with respect to such
    securities. The percentage of ownership is based on
    20,412,708&#160;shares of common stock outstanding as of
    September&#160;1, 2009.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Except as otherwise indicated below, the persons named in the
    table have sole voting and investment power with respect to all
    shares of common stock held by them, subject to applicable
    community property laws. Unless otherwise indicated, the address
    of each stockholder is
    <FONT style="white-space: nowrap">c/o&#160;Converted</FONT>
    Organics Inc., 7A Commercial Wharf West, Boston, Massachusetts
    02110.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="59%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="6%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="6%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom">
    <B>Shares Beneficially Owned<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom">
    <B>Shares Beneficially Owned<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Prior to this Offering</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>After this Offering</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Name of Beneficial Owner</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Number</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Percent</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Number</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Percent</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Edward J. Gildea
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    324,911
</TD>
<TD nowrap align="left" valign="bottom">
    (1)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.6
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    David R. Allen
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    85,141
</TD>
<TD nowrap align="left" valign="bottom">
    (2)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Robert E. Cell
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    54,000
</TD>
<TD nowrap align="left" valign="bottom">
    (3)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    John P. DeVillars
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    54,000
</TD>
<TD nowrap align="left" valign="bottom">
    (3)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Edward A. Stoltenberg
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    63,269
</TD>
<TD nowrap align="left" valign="bottom">
    (4)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    *
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    All directors and officers as a group (five persons)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    581,321
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2.8
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <B>5% Stockholders</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Oppenheimer Funds, Inc.(5)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,284,409
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.2
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Oppenheimer Rochester National Municipals(5)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,631,721
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.0
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="2%"></TD>
    <TD width="1%"></TD>
    <TD width="97%"></TD>
</TR>

<TR>
    <TD align="right" valign="top">
    *&#160;</TD>
    <TD></TD>
    <TD valign="bottom">
    Less than 1%.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (1) </TD>
    <TD></TD>
    <TD valign="bottom">
    Includes 1,400 Class&#160;B Warrants and options to purchase
    225,000&#160;shares.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (2) </TD>
    <TD></TD>
    <TD valign="bottom">
    Includes options to purchase 81,195&#160;shares.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (3) </TD>
    <TD></TD>
    <TD valign="bottom">
    Consists of options to purchase shares of our common stock.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (4) </TD>
    <TD></TD>
    <TD valign="bottom">
    Includes options to purchase 44,000&#160;shares. Includes
    2,966&#160;shares beneficially owned and held in trust.</TD>
</TR>


<TR style="line-height: 3pt; font-size: 1pt"><TD>&nbsp;</TD></TR>

<TR>
    <TD align="right" valign="top">
    (5) </TD>
    <TD></TD>
    <TD valign="bottom">
    The following information is based on the Schedule&#160;13G/A
    filed May&#160;4, 2009. Oppenheimer Funds, Inc. is an investment
    adviser in accordance with
    <FONT style="white-space: nowrap">Rule&#160;13d-1(b)(1)(ii)(E)</FONT>
    of the Securities Exchange Act of 1934, as amended, or the
    Exchange Act. Oppenheimer Rochester National Municipals is an
    investment company registered under section&#160;8 of the
    Investment Company Act of 1940. All beneficial ownership is
    disclaimed pursuant to
    <FONT style="white-space: nowrap">Rule&#160;13d-4</FONT>
    of the Exchange Act). All positions reported reflect the
    exercise of warrants for shares of common stock. The principal
    address of Oppenheimer Funds, Inc. is Two World Financial
    Center, 225 Liberty Street, New York, NY 10289. The principal
    address of Oppenheimer Rochester National Municipals is
    6803&#160;S.&#160;Tucson Way, Centennial, CO 80112. Oppenheimer
    Funds, Inc.&#146;s amount of beneficial ownership includes the
    ownership reported Oppenheimer Rochester National Municipals.</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    52
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='112'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">RELATED
    PARTY TRANSACTIONS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As payment for compensation accrued and not paid since
    April&#160;1, 2006 and expenses incurred but not reimbursed
    since April&#160;1, 2006, we intend to pay in the future, out of
    available cash, a total of $250,000 to the following current and
    former executive officers, directors and consultants, each of
    whom will receive $50,000: Edward J. Gildea, Thomas R. Buchanan,
    John A. Walsdorf, William A. Gildea and John E. Tucker.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We paid Mr.&#160;William A. Gildea, who was a 5% stockholder
    during 2007 and 2008 and is the brother of our President and
    CEO, for his services in connection with development efforts in
    New Jersey, New York and Rhode Island as well as his services in
    connection with the sale of our common stock. Mr.&#160;Gildea
    was paid $155,000 in 2007 and $180,000 in 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We paid Mr.&#160;John E. Tucker, who was a 5% stockholder during
    2007 and 2008, and his company, BioVentures LLC, for its
    services in connection with the design and development work for
    our manufacturing facility in Woodbridge, New Jersey.
    BioVentures LLC was paid $76,669 in 2007 and $60,000 in 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have a term note payable to our CEO, Mr.&#160;Edward J.
    Gildea. The unsecured term note for $89,170 is dated
    April&#160;30, 2007 with an original maturity of April&#160;30,
    2009, and accrues interest at 12% per annum. The note has been
    extended for one year until April&#160;30, 2010. We paid accrued
    interest of $21,400 upon extension of the note&#146;s due date.
    This note is subordinate to the New Jersey Economic Development
    Authority Bonds.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We believe the transactions described above were made on terms
    at least as favorable as those generally available from
    unaffiliated third parties. The transactions have been ratified
    by a majority of the members of our Board of Directors who are
    independent directors. Future transactions with our officers,
    directors or greater than five percent stockholders will be on
    terms no less favorable to us than could be obtained from
    unaffiliated third parties, and all such transactions will be
    reviewed and subject to approval by our Audit Committee, which
    will have access, at our expense, to our or independent legal
    counsel.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    53
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='114'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">UNDERWRITING</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We and Chardan Capital Markets, LLC have entered into an
    underwriting agreement with respect to the units being offered.
    Subject to certain conditions, Chardan Capital Markets, LLC is
    committed to purchase all of the units offered hereby, other
    than those units covered by the over-allotment option described
    below.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="89%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="9%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
    <B>Number of<BR>
    </B>
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Underwriters</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Units</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Chardan Capital Markets, LLC
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Units sold by Chardan Capital Markets, LLC to the public will
    initially be offered at the public offering price set forth on
    the cover of this prospectus. Any units sold by Chardan Capital
    Markets, LLC to securities dealers may be sold at a discount of
    up to $&#160;&#160;&#160;&#160;&#160; per unit from the public
    offering price. If all the units are not sold at the public
    offering price, Chardan Capital Markets, LLC may change the
    offering price and the other selling terms.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have granted to the underwriters an over-allotment option to
    purchase up
    to&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;additional&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    units from us at the same price to the public, less underwriting
    discounts. The underwriters may exercise this option any time
    during the
    <FONT style="white-space: nowrap">45-day</FONT>
    period after the date of this prospectus, but only to cover
    over-allotments, if any.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have agreed to sell to Chardan Capital Markets, LLC, for
    $100, an option to purchase up to a total
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    units (4% of the units sold). The units issuable upon exercise
    of this option are identical to those offered by this
    prospectus. This option is exercisable at
    $&#160;&#160;&#160;&#160;&#160; per share
    (&#160;&#160;&#160;&#160;&#160;% of the price of the shares sold
    in the offering), commencing on a date which is one year from
    the effective date of the registration statement and expiring
    five years from the effective date of the registration statement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We estimate that the total fees and expenses payable by us,
    excluding underwriting discounts and commissions, will be
    approximately $&#160;&#160;&#160;&#160;&#160;. The following
    table shows the underwriting fees to be paid to the underwriters
    by us in connection with this offering. These amounts are shown
    assuming both no exercise and full exercise of the
    underwriters&#146; over-allotment option.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="76%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="9%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="10%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>No Exercise</B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Full Exercise</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Per share paid by us
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="top">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have agreed to indemnify the underwriters against certain
    liabilities, including civil liabilities under the Securities
    Act, or to contribute to payments that the underwriters may be
    required to make in respect of those liabilities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We and each of our directors, executive officers and
    substantially all of our stockholders have agreed to certain
    restrictions on the ability to sell additional shares of our
    common stock for a period ending 180&#160;days after the date of
    this prospectus, subject to extension as described below. We and
    they have agreed not to directly or indirectly offer for sale,
    sell, contract to sell, grant any option for the sale of, or
    otherwise issue or dispose of, any shares of common stock,
    options or warrants to acquire shares of common stock, or any
    related security or instrument, without the prior written
    consent of Chardan Capital Markets, LLC on behalf of the
    underwriters, subject to certain exceptions.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The <FONT style="white-space: nowrap">lock-up</FONT>
    period described in the preceding paragraph will be extended
    if&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    in which case the
    <FONT style="white-space: nowrap">lock-up</FONT>
    period will be extended until the expiration of
    the&#160;&#160;-day period beginning on the date of issuance of
    the earnings release or the occurrence of the material news or
    material event.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To facilitate the offering, the underwriters may engage in
    transactions that stabilize, maintain or otherwise affect the
    price of our common stock during and after the offering.
    Specifically, the underwriters may over-allot or otherwise
    create a short position in the common stock for their own
    account by selling more shares of common stock than have been
    sold to them by us. Short sales involve the sale by the
    underwriters of a greater number of shares than they are
    required to purchase in this offering. &#147;Covered&#148; short
    sales are sales made in an amount not greater than the
    underwriters&#146; over-allotment option to purchase additional
    shares in this
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    54
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    offering. The underwriters may close out any covered short
    position by either exercising their option to purchase
    additional shares or purchasing shares in the open market. In
    determining the source of shares to close out the covered short
    position, the underwriters will consider, among other things,
    the price of shares available for purchase in the open market as
    compared to the price at which they may purchase shares through
    the over-allotment option. &#147;Naked&#148; short sales are
    sales in excess of this option. The underwriters must close out
    any naked short position by purchasing shares in the open
    market. A naked short position is more likely to be created if
    the underwriters are concerned that there may be downward
    pressure on the price of the common stock in the open market
    after pricing that could adversely affect investors who purchase
    in this offering.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, the underwriters may stabilize or maintain the
    price of the common stock by bidding for or purchasing shares of
    common stock in the open market and may impose penalty bids. If
    penalty bids are imposed, selling concessions allowed to
    syndicate members or other broker dealers participating in the
    offering are reclaimed if shares of common stock previously
    distributed in the offering are repurchased, whether in
    connection with stabilization transactions or otherwise. The
    effect of these transactions may be to stabilize or maintain the
    market price of the common stock at a level above that which
    might otherwise prevail in the open market. The imposition of a
    penalty bid may also effect the price of the common stock to the
    extent that it discourages resales of the common stock. The
    magnitude or effect of any stabilization or other transactions
    is uncertain. These transactions may be effected on The NASDAQ
    Capital Market or otherwise and, if commenced, may be
    discontinued at any time.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    From time to time in the ordinary course of their respective
    business, certain of the underwriters and their affiliates may
    in the future engage in commercial banking or investment banking
    transactions with us and our affiliates.
</DIV>
<A name='115'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">DESCRIPTION
    OF CAPITAL STOCK</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>The following information describes our capital stock as well
    as certain provisions of our certificate of incorporation and
    bylaws. This description is only a summary. You should also
    refer to our certificate of incorporation and bylaws, which have
    been filed as exhibits to the registration statement of which
    this prospectus is a part.</I>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our authorized capital stock consists of 75,000,000&#160;shares
    of common stock, $0.0001&#160;par value per share, and
    10,000,000&#160;shares of preferred stock, $0.0001&#160;par
    value per share. As of September&#160;4, 2009, we had
    20,412,708&#160;shares of common stock and no shares of
    preferred stock outstanding.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Common
    Stock</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Each outstanding share of common stock has one vote on all
    matters requiring a vote of the stockholders. There is no right
    to cumulative voting; thus, the holders of 50% or more of the
    shares outstanding can, if they choose to do so, elect all of
    the directors. In the event of a voluntary or involuntary
    liquidation, all stockholders are entitled to a <I>pro rata
    </I>distribution after payment of liabilities and after
    provision has been made for each class of stock, if any, having
    preference over the common stock. The holders of the common
    stock have no preemptive rights with respect to future offerings
    of shares of common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Dividend
    Policy</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have not declared or paid any cash dividends and do not
    intend to pay any cash dividends in the foreseeable future. We
    intend to retain any future earnings for use in the operation
    and expansion of our business. Any future decision to pay cash
    dividends on common stock will be at the discretion of our board
    of directors and will depend upon our financial condition,
    results of operation, capital requirements and other factors our
    board of directors may deem relevant. Holders of common stock
    are entitled to dividends if, as and when declared by the Board
    out of the funds legally available therefor. It is our present
    intention to retain earnings, if any, for use in our business.
    The payment of cash dividends on the common stock included in
    the units is unlikely in the foreseeable future.
</DIV>

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    <BR>
    55
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Class&#160;H
    Warrants</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Each Class&#160;H warrant entitles the holder to purchase one
    share of our common stock at a price of
    $&#160;&#160;&#160;&#160;&#160;&#160;per&#160;share, subject to
    adjustment as discussed below, at any time commencing
    60&#160;days after issuance. The Class&#160;H warrants will
    expire on December&#160;31, 2014 at 5:00&#160;p.m., New York
    City time. The Class&#160;H warrants are not redeemable.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Class&#160;H warrants will be issued in registered form
    under a warrant agreement
    between&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    as warrant agent, and us. You should review a copy of the
    warrant agreement, which has been filed as an exhibit to the
    registration statement of which this prospectus is a part, for a
    complete description of the terms and conditions applicable to
    the Class&#160;H warrants.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The exercise price and number of shares of common stock issuable
    on exercise of the Class&#160;H warrants may be adjusted in
    certain circumstances including in the event of a stock
    dividend, or our recapitalization, reorganization, merger or
    consolidation. However, the Class&#160;H warrants will not be
    adjusted for issuances of common stock, preferred stock or other
    securities at a price below their respective exercise prices.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Class&#160;H warrants may be exercised upon surrender of the
    warrant certificate on or prior to the expiration date at the
    offices of the warrant agent, with the exercise form on the
    reverse side of the warrant certificate completed and executed
    as indicated, accompanied by full payment of the exercise price,
    by certified check payable to us, for the number of Class&#160;H
    warrants being exercised. The Class&#160;H warrantholders do not
    have the rights or privileges of holders of common stock and any
    voting rights until they exercise their Class&#160;H warrants
    and receive shares of common stock. After the issuance of shares
    of common stock upon exercise of the Class&#160;H warrants, each
    holder will be entitled to one vote for each share held of
    record on all matters to be voted on by stockholders.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    No Class&#160;H warrants will be exercisable unless at the time
    of exercise a prospectus relating to common stock issuable upon
    exercise of the Class&#160;H warrants is current and the common
    stock has been registered or qualified or deemed to be exempt
    under the securities laws of the state of residence of the
    holder of the Class&#160;H warrants. We will use our reasonable
    efforts to maintain a current prospectus relating to common
    stock issuable upon exercise of the Class&#160;H warrants until
    the expiration of the Class&#160;H warrants. However, we cannot
    assure you that we will be able to do so. The Class&#160;H
    warrants may be deprived of any value and the market for the
    Class&#160;H warrants may be limited if the prospectus relating
    to the common stock issuable upon the exercise of the
    Class&#160;H warrants is not current or if the common stock is
    not qualified or exempt from qualification in the jurisdictions
    in which the holders of the Class&#160;H warrants reside.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    No fractional shares will be issued upon exercise of the
    Class&#160;H warrants. However, we will pay to the Class&#160;H
    warrantholder, in lieu of the issuance of any fractional share
    that is otherwise issuable to the Class&#160;H warrantholder, an
    amount in cash based on the market value of the common stock on
    the last trading day prior to the exercise date.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Purchase
    Option</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have agreed to sell to the representative of the underwriters
    an option to purchase up to a total
    of&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
    units at a
    <FONT style="white-space: nowrap">per-unit</FONT>
    price of $&#160;&#160;&#160;&#160;&#160;. For a more complete
    description of the purchase option, including the terms of the
    units underlying the option, see the section entitled
    &#147;Underwriting&#160;&#151; Purchase Option.&#148;
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Other
    Warrants</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Class&#160;B
    Warrants</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>General.</I>&#160;&#160;We have 4,932,438 Class&#160;B
    warrants outstanding. The Class&#160;B warrants may be exercised
    until the expiration date, which is February&#160;13, 2012. Each
    Class&#160;B warrant entitles the holder to purchase one share
    of common stock at an exercise price of $11.00 per share.
    Accordingly, holders of the Class&#160;B warrants may currently
    purchase 1.276&#160;shares of common stock for each warrant
    exercised, except for approximately 2.2&#160;million
    Class&#160;B warrants that are owned by our bond holders, who
    may purchase one share of common stock for each warrant
    exercised. Accordingly, in the aggregate, holders of the
    Class&#160;B warrants may currently
</DIV>

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    <BR>
    56
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    purchase a total of 6,177,012&#160;shares of our common stock.
    The warrant exercise price will be adjusted if specific events,
    summarized below, occur. A holder of warrants will not be deemed
    a holder of the underlying stock for any purpose until the
    warrant is exercised. If at their expiration date the
    Class&#160;B warrants are not currently exercisable, the
    expiration date will be extended for 30&#160;days following
    notice to the holders of the warrants that the warrants are
    again exercisable. If we cannot honor the exercise of
    Class&#160;B warrants and the securities underlying the warrants
    are listed on a securities exchange or if there are three
    independent market makers for the underlying securities, we may,
    but are not required to, settle the warrants for a price equal
    to the difference between the closing price of the underlying
    securities and the exercise price of the warrants. Because we
    are not required to settle the warrants by payment of cash, and
    because there is a possibility that warrant holders will not be
    able to exercise the warrants when they are
    <FONT style="white-space: nowrap">in-the-money</FONT>
    or otherwise, there is a risk that the warrants will never be
    settled in shares or payment of cash.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>No Redemption.</I>&#160;&#160;The Class&#160;B warrants are
    non-redeemable.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Exercise.</I>&#160;&#160;The holders of the Class&#160;B
    warrants may exercise them only if an appropriate registration
    statement is then in effect. To exercise a warrant, the holder
    must deliver to our transfer agent the warrant certificate on or
    before the expiration date or the redemption date, as
    applicable, with the form on the reverse side of the certificate
    executed as indicated, accompanied by payment of the full
    exercise price for the number of warrants being exercised.
    Fractional shares of common stock will not be issued upon
    exercise of the warrants.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Class&#160;C
    Warrants and Class&#160;D Warrants</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>General:</I>&#160;&#160;In connection with our financing
    completed in May 2009, we issued Class&#160;C warrants to
    purchase an aggregate of 885,000&#160;shares of common stock and
    Class&#160;D warrants to purchase an aggregate of
    415,000&#160;shares of common stock. The Class&#160;C warrants
    and Class&#160;D warrants both expire in May 2014. The initial
    exercise prices of the Class&#160;C warrants and Class&#160;D
    warrants were $1.00 per share and $1.50 per share, respectively.
    The warrants are subject to anti-dilution rights, which provide
    that the exercise price of the warrants shall be reduced if we
    make new issuances of our securities, with certain exceptions,
    below the warrants exercise prices to the price of such lower
    priced issuances. Pursuant to such provision, the exercise price
    of the Class&#160;D warrants has been reduced to and is
    currently at $1.02 per share. The Class&#160;C warrants and
    Class&#160;D warrants are non-redeemable. The warrant holders
    are entitled to a &#147;cashless exercise&#148; option if, at
    any time of exercise, there is no effective registration
    statement registering, or no current prospectus available for,
    the resale of the shares of common stock underlying the
    warrants. This option entitles the warrant holders to elect to
    receive fewer shares of common stock without paying the cash
    exercise price. The number of shares to be issued would be
    determined by a formula based on the total number of shares with
    respect to which the warrant is being exercised, the volume
    weighted average price per share of our common stock on the
    trading date immediately prior to the date of exercise and the
    applicable exercise price of the warrants.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Fundamental Transaction</I>s:&#160;&#160;If, at any time
    while the warrants are outstanding, we (1)&#160;effect any
    merger or consolidation, (2)&#160;effect any sale of all or
    substantially all of our assets, (3)&#160;are subject to or
    complete a tender offer or exchange offer, (4)&#160;effect any
    reclassification of our common stock or any compulsory share
    exchange pursuant to which our common stock is converted into or
    exchanged for other securities, cash or property, or
    (5)&#160;engage in one or more transactions with another party
    that results in that party acquiring more than 50% of our
    outstanding shares of common stock, each, a &#147;Fundamental
    Transaction,&#148; then the holder shall have the right
    thereafter to receive, upon exercise of the warrant, the same
    amount and kind of securities, cash or property as it would have
    been entitled to receive upon the occurrence of such Fundamental
    Transaction if it had been, immediately prior to such
    Fundamental Transaction, the holder of the number of shares then
    issuable upon exercise of the warrant, and any additional
    consideration payable as part of the Fundamental Transaction.
    Any successor to us or surviving entity shall assume the
    obligations under the warrant.
</DIV>

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    <BR>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Class&#160;E
    Warrants and Class&#160;F Warrants</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>General:</I>&#160;&#160;In connection with our financings
    completed in May 2009 and July 2009, we issued Class&#160;E
    warrants to purchase an aggregate of 1,500,000&#160;shares of
    our common stock and Class&#160;F warrants to purchase
    585,000&#160;shares of our common stock. The Class&#160;E
    warrants and Class&#160;F warrants expire in May 2014 and July
    2014, respectively.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The warrant holders are entitled to a &#147;cashless
    exercise&#148; option if, at any time of exercise, there is no
    effective registration statement registering, or no current
    prospectus available for, the issuance or resale of the shares
    of common stock underlying the warrants. This option entitles
    the warrant holders to elect to receive fewer shares of common
    stock without paying the cash exercise price. The number of
    shares to be issued would be determined by a formula based on
    the total number of shares with respect to which the warrant is
    being exercised, the volume weighted average price per share of
    our common stock on the trading date immediately prior to the
    date of exercise and the applicable exercise price of the
    warrants.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Call Provision:</I>&#160;&#160;Subject to certain exceptions,
    if the volume weighted average price per share of our common
    stock for each of five consecutive trading days exceeds $2.10
    (subject to adjustment for forward and reverse stock splits,
    recapitalizations, stock dividends and the like), then we may,
    within one trading day of the end of such period, call for
    cancellation of all or any portion of the unexercised warrants
    for consideration equal to $.001 per share.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Fundamental Transaction:</I>&#160;&#160;If, at any time while
    the warrants are outstanding, we (1)&#160;consolidate or merge
    with or into another corporation, (2)&#160;sell all or
    substantially all of our assets or (3)&#160;are subject to or
    complete a tender or exchange offer pursuant to which holders of
    our common stock are permitted to tender or exchange their
    shares for other securities, cash or property, (4)&#160;effect
    any reclassification of our common stock or any compulsory share
    exchange pursuant to which our common stock is converted into or
    exchanged for other securities, cash or property, or
    (5)&#160;engage in one or more transactions with another party
    that results in that party acquiring more than 50% of our
    outstanding shares of common stock, each, a &#147;Fundamental
    Transaction,&#148; then the holder shall have the right
    thereafter to receive, upon exercise of the warrant, the same
    amount and kind of securities, cash or property as it would have
    been entitled to receive upon the occurrence of such Fundamental
    Transaction if it had been, immediately prior to such
    Fundamental Transaction, the holder of the number of warrant
    shares then issuable upon exercise of the warrant, and any
    additional consideration payable as part of the Fundamental
    Transaction. Any successor to us or surviving entity shall
    assume the obligations under the warrant.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">Class&#160;G
    Warrants</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>General:</I>&#160;&#160;In connection with our financing
    completed in September 2009, we issued Class&#160;G warrants to
    purchase an aggregate of 2,500,000&#160;shares of common stock.
    The Class&#160;G warrants expire in September 2014. The initial
    exercise price of the Class&#160;G warrants is $1.25 per share.
    The warrants are subject to anti-dilution rights, which provide
    that the exercise price of the warrants be reduced if we make
    new issuances of our securities, with certain exceptions, below
    the warrant exercise price to the price of the lower priced
    securities; provided that without stockholder approval, the
    exercise price may not be reduced below $1.08 per share. The
    Class&#160;G warrants are non-redeemable. The warrant holders
    are entitled to a &#147;cashless exercise&#148; option if, at
    any time of exercise, there is no effective registration
    statement registering, or no current prospectus available for,
    the resale of the shares of common stock underlying the
    warrants. This option entitles the warrant holders to elect to
    receive fewer shares of common stock without paying the cash
    exercise price. The number of shares to be issued would be
    determined by a formula based on the total number of shares with
    respect to which the warrant is being exercised, the volume
    weighted average price per share of our common stock on the
    trading date immediately prior to the date of exercise and the
    applicable exercise price of the warrants.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Fundamental Transaction</I>s:&#160;&#160;If, at any time
    while the warrants are outstanding, we (1)&#160;effect any
    merger or consolidation, (2)&#160;effect any sale of all or
    substantially all of our assets, (3)&#160;are subject to or
    complete a tender offer or exchange offer, (4)&#160;effect any
    reclassification of our common stock or any compulsory share
    exchange pursuant to which our common stock is converted into or
    exchanged for other securities, cash or property, or
    (5)&#160;engage in one or more transactions with another party
    that results in that party acquiring more
</DIV>

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    <BR>
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    than 50% of our outstanding shares of common stock, each, a
    &#147;Fundamental Transaction,&#148; then the holder shall have
    the right thereafter to receive, upon exercise of the warrant,
    the same amount and kind of securities, cash or property as it
    would have been entitled to receive upon the occurrence of such
    Fundamental Transaction if it had been, immediately prior to
    such Fundamental Transaction, the holder of the number of shares
    then issuable upon exercise of the warrant, and any additional
    consideration payable as part of the Fundamental Transaction.
    Any successor to us or surviving entity shall assume the
    obligations under the warrant.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">IPO
    Underwriter&#146;s Warrants</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with our initial public offering, we issued to the
    underwriter warrants to purchase 131,219&#160;units, consisting
    of 131,219&#160;shares of our common stock, 131,219 Class&#160;A
    warrants and 131,219 Class&#160;B warrants. The
    underwriter&#146;s warrants are exercisable for units until
    February&#160;13, 2012. However, neither the underwriter&#146;s
    warrants nor the underlying securities may be sold, transferred,
    assigned, pledged or hypothecated, or be the subject of any
    hedging, short sale, derivative, put or call transaction that
    would result in the effective economic disposition of the
    securities by any person, except to any member participating in
    the offering and the officers or partners thereof, and only if
    all securities so transferred remain subject to the one-year
    <FONT style="white-space: nowrap">lock-up</FONT>
    restriction for the remainder of the
    <FONT style="white-space: nowrap">lock-up</FONT>
    period. We are obligated to cause a registration statement to
    remain effective until the earlier of February&#160;13, 2012 and
    the time that all the underwriter&#146;s warrants have been
    exercised, or will file a new registration statement covering
    the exercise and resale of these securities. If we cannot honor
    the exercise of the underwriter&#146;s warrants and the
    securities underlying the warrants are listed on a securities
    exchange or if there are three independent market makers for the
    underlying securities, we may, but are not required to, settle
    the underwriters&#146; warrants for a price equal to the
    difference between the closing price of the underlying
    securities and the exercise price of the warrants. Because we
    are not required to settle the representative&#146;s warrants by
    payment of cash, it is possible that the underwriter&#146;s
    warrants will never be settled in shares or payment of cash. The
    common stock and public warrants issued to the underwriter upon
    exercise of these underwriter&#146;s warrants will be freely
    tradable.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Preferred
    Stock</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Board of Directors is authorized by our Certificate of
    Incorporation to establish classes or series of preferred stock
    and fix the designation, powers, preferences and rights of the
    shares of each such class or series and the qualifications,
    limitations or restrictions thereof without any further vote or
    action by our stockholders. Any shares of preferred stock so
    issued would have priority over our common stock with respect to
    dividend or liquidation rights. Any future issuance of preferred
    stock may have the effect of delaying, deferring or preventing a
    change in our control without further action by our stockholders
    and may adversely affect the voting and other rights of the
    holders of our common stock. At present we have no plans to
    issue any additional shares of preferred stock or to adopt any
    new series, preferences or other classification of preferred
    stock.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The issuance of shares of preferred stock, or the issuance of
    rights to purchase such shares, could be used to discourage an
    unsolicited acquisition proposal. For instance, the issuance of
    a series of preferred stock might impede a business combination
    by including class voting rights that would enable a holder to
    block such a transaction. In addition, under certain
    circumstances, the issuance of preferred stock could adversely
    affect the voting power of holders of our common stock. Although
    our Board of Directors is required to make any determination to
    issue preferred stock based on its judgment as to the best
    interests of our stockholders, our Board could act in a manner
    that would discourage an acquisition attempt or other
    transaction that some, or a majority, of our stockholders might
    believe to be in their best interests or in which such
    stockholders might receive a premium for their stock over the
    then market price of such stock. Our Board presently does not
    intend to seek stockholder approval prior to the issuance of
    currently authorized stock, unless otherwise required by law or
    applicable stock exchange rules.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    59
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">2006
    Stock Option Plan</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our 2006 Stock Option Plan, or the Plan, currently authorizes
    the grant of up to 1,666,667&#160;shares, and the Plan provides
    an &#147;evergreen provision&#148; pursuant to which the number
    of shares issuable under the Plan will be automatically
    increased on January 1 of each year to an amount equal to 20% of
    the number of shares of our common stock outstanding on the last
    day of the prior fiscal year. Under the Plan, we may issue
    restricted stock awards, incentive stock option grants and
    non-qualified stock option grants. Employees and, in the case of
    nonqualified stock options, directors, consultants or any
    affiliate are eligible to receive grants under our Plan. As of
    September&#160;4, 2009, there were outstanding options to
    purchase 1,248,895&#160;shares under our Plan.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Anti-Takeover
    Effects of Certain Provisions of Delaware Law and Our
    Certificate of Incorporation and Bylaws</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our Certificate of Incorporation and Bylaws contain a number of
    provisions that could make our acquisition by means of a tender
    or exchange offer, a proxy contest or otherwise more difficult.
    These provisions are summarized below.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Staggered Board.</I>&#160;&#160;Staggered terms tend to
    protect against sudden changes in management and may have the
    effect of delaying, deferring or preventing a change in our
    control without further action by our stockholders. Our Board of
    Directors is divided into three classes, with one class of
    directors elected at each year&#146;s annual stockholder meeting.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Special Meetings.</I>&#160;&#160;Our Bylaws provide that
    special meetings of stockholders can be called by the President,
    at the request of a majority of the Board of Directors or at the
    written request of holders of at least 50% of the shares
    outstanding and entitled to vote.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Undesignated Preferred Stock.</I>&#160;&#160;The ability to
    authorize the issuance of our undesignated preferred stock makes
    it possible for our Board of Directors to issue preferred stock
    with voting or other rights or preferences that could impede the
    success of any attempt to acquire us. The ability to issue
    preferred stock may have the effect of deferring hostile
    takeovers or delaying changes in our control or management.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Delaware Anti-Takeover Statute.</I>&#160;&#160;We are subject
    to the provisions of Section&#160;203 of the Delaware General
    Corporation Law regulating corporate takeovers. In general,
    Section&#160;203 prohibits a publicly-held Delaware corporation
    from engaging under certain circumstances in a business
    combination with an interested stockholder for a period of three
    years following the date the person became an interested
    stockholder unless:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Prior to the date of the transaction, the board of directors of
    the corporation approved either the business combination or the
    transaction which resulted in the stockholder becoming an
    interested stockholder.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Upon completion of the transaction that resulted in the
    stockholder becoming an interested stockholder, the stockholder
    owned at least 85% of the voting stock of the corporation
    outstanding at the time the transaction commenced, excluding for
    purposes of determining the number of shares outstanding
    (1)&#160;shares owned by persons who are directors and also
    officers and (2)&#160;shares owned by employee stock plans in
    which employee participants do not have the right to determine
    confidentially whether shares held subject to the plan will be
    tendered in a tender or exchange offer.
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    On or subsequent to the date of the transaction, the business
    combination is approved by the board and authorized at an annual
    or special meeting of stockholders, and not by written consent,
    by the affirmative vote of at least
    66<FONT style="vertical-align: text-top; font-size: 70%;">2</FONT>/<FONT style="font-size: 70%;">3</FONT>%
    of the outstanding voting stock which is not owned by the
    interested stockholder.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Generally, a business combination includes a merger, asset or
    stock sale, or other transaction resulting in a financial
    benefit to the interested stockholder. An interested stockholder
    is a person who, together with affiliates and associates, owns
    or, within three years prior to the determination of interested
    stockholder status, did own 15% or more of a corporation&#146;s
    outstanding voting securities. We expect the existence of this
    provision to have an anti-takeover effect with respect to
    transactions our Board of Directors does not approve
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    60
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    in advance. We also anticipate that Section&#160;203 may also
    discourage attempted acquisitions that might result in a premium
    over the market price for the shares of common stock held by
    stockholders.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The provisions of Delaware law, our Certificate of Incorporation
    and our Bylaws could have the effect of discouraging others from
    attempting hostile takeovers and, as a consequence, they may
    also inhibit temporary fluctuations in the market price of our
    common stock that often result from actual or rumored hostile
    takeover attempts. These provisions may also have the effect of
    preventing changes in our management. It is possible that these
    provisions could make it more difficult to accomplish
    transactions that stockholders may otherwise deem to be in their
    best interests.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Limitation
    of Officer and Director Liability</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Delaware General Corporation Law authorizes corporations to
    limit or eliminate the personal liability of officers and
    directors to corporations and their stockholders for monetary
    damages for breach of the officers&#146; and directors&#146;
    fiduciary duty of care. Although the law does not change the
    officers&#146; and directors&#146; duty of care, it enables
    corporations to limit available relief in most cases to
    equitable remedies such as an injunction. Our certificate of
    incorporation limits the liability of officers and directors to
    us or our stockholders to the fullest extent permitted by
    applicable law. Specifically, our officers and directors will
    not be personally liable to us or our stockholders for monetary
    damages for breach of an officer&#146;s or a director&#146;s
    fiduciary duty as an officer or a director, as applicable,
    except for liability:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    for any breach of the officer&#146;s or director&#146;s duty of
    loyalty to us or our stockholders;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    for acts or omissions not in good faith or which involve
    intentional misconduct or a knowing violation of law;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    for unlawful payments of dividends or unlawful stock repurchases
    or redemptions as provided in Section&#160;174 of the
    DGCL;&#160;or
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    for any transaction from which the officer or director derived
    an improper personal benefit.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Indemnification</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To the maximum extent permitted by law, our bylaws provide for
    mandatory indemnification of directors and permit
    indemnification of our employees and agents against all expense,
    liability and loss to which they may become subject or which
    they may incur as a result of being or having been our director,
    officer, employee or agent. In addition, we must advance or
    reimburse directors and officers, and may advance or reimburse
    employees and agents, for expenses incurred by them as a result
    of indemnifiable claims.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Transfer
    Agent, Warrant Agent and Registrar</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The transfer agent and registrar for our common stock and
    warrant agent for our public warrants is Computershare
    Shareholder Services, Inc., and its wholly owned subsidiary,
    Computershare Trust&#160;Company, N.A., 250 Royall Street,
    Canton, Massachusetts 02021.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Listing</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our common stock and Class&#160;B warrants are listed on the
    NASDAQ Capital Market under the trading symbols &#147;COIN&#148;
    and &#147;COINZ,&#148; respectively. We intend to apply to list
    our Class&#160;H warrants on the NASDAQ Capital Market under the
    trading symbol
    &#147;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;.&#148;
</DIV>
<A name='116'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">LEGAL
    MATTERS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The validity of the securities offered in this prospectus is
    being passed upon for us by Cozen O&#146;Connor. Mintz Levin
    Cohn Ferris Glovsky and Popeo,&#160;P.C. is acting as counsel
    for the underwriters in this offering.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    61
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='117'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">EXPERTS</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The consolidated financial statements as of December&#160;31,
    2008 and 2007 and for each of the two years then ended, included
    in this prospectus have been audited by CCR LLP, independent
    registered public accountants, to the extent set forth in their
    report appearing herein. Such consolidated financial statements
    have been so included in reliance upon the report of such firm
    given upon their authority as experts in accounting and auditing.
</DIV>
<A name='118'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">WHERE YOU
    CAN FIND MORE INFORMATION</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have filed a registration statement on
    <FONT style="white-space: nowrap">Form&#160;S-1</FONT>
    with the SEC with respect to the units, common stock and
    Class&#160;H warrants we are offering by this prospectus. This
    prospectus does not include all of the information contained in
    the registration statement. You should refer to the registration
    statement and its exhibits for additional information. Whenever
    we make reference in this prospectus to any of our contracts,
    agreements or other documents, the references are not
    necessarily complete and you should refer to the exhibits
    attached to the registration statement for copies of the actual
    contract, agreement or other document. We are subject to the
    information reporting requirements of the Securities Exchange
    Act of 1934, and accordingly we are required to file annual,
    quarterly and special reports, proxy statements and other
    information with the SEC.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    You can read our SEC filings, including the registration
    statement, on the Internet at the SEC&#146;s website at
    <I>www.sec.gov</I>. You can also read and copy any document we
    file with the SEC at its public reference room at
    100&#160;F&#160;Street, N.E., Washington,&#160;D.C. 20549. You
    can also obtain copies of the documents at prescribed rates by
    writing to the Public Reference Section of the SEC at
    100&#160;F&#160;Street, N.E., Washington,&#160;D.C. 20549.
    Please call the SEC at
    <FONT style="white-space: nowrap">1-800-SEC-0330</FONT>
    for further information on the operation of the public reference
    room.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    62
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS</FONT></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>
<DIV align="left">
<!-- TOC -->
</DIV>

<DIV align="left">
<A name="tocpage"></A>
</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="97%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadright -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="3" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Page</B>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#300'>Report of Independent Registered Public
    Accounting Firm</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-1
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#301'>Consolidated Balance Sheets at December&#160;31,
    2008 and 2007</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-2
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#302'>Consolidated Statements of Operations for the
    years ended December&#160;31, 2008 and 2007</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-3
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#303'>Consolidated Statements of Changes in
    Owners&#146; Equity (Deficit) for the years ended
    December&#160;31, 2008 and 2007</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-4
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#304'>Consolidated Statements of Cash Flows for the
    years ended December&#160;31, 2008 and 2007</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-5
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#305'>Notes to Consolidated Financial Statements</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-6
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#306'>Consolidated Balance Sheets at June&#160;30, 2009
    (unaudited) and December&#160;31, 2008 (audited)</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-32
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#307'>Consolidated Statements of Operations for the
    three and six month periods ended June&#160;30, 2009 and 2008
    (unaudited)</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-33
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#308'>Consolidated Statement of Changes in Owners&#146;
    Equity (Deficit) for the six month period ended June&#160;30,
    2009 (unaudited)</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-34
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#309'>Consolidated Statements of Cash Flows for the six
    month periods ended June&#160;30, 2009 and 2008 (unaudited)</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-35
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    <A HREF='#310'>Notes to Consolidated Interim Financial
    Statements (unaudited)</A>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    F-36
</TD>
<TD>&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    63
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='300'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</FONT></B>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    To the Stockholders and Board of Directors of Converted Organics
    Inc.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We have audited the accompanying consolidated balance sheets of
    Converted Organics Inc. (the &#147;Company&#148;) as of
    December&#160;31, 2008 and 2007, and the related consolidated
    statements of operations, changes in owners&#146; equity
    (deficit) and cash flows for the years then ended. These
    consolidated financial statements are the responsibility of the
    Company&#146;s management. Our responsibility is to express an
    opinion on these consolidated financial statements based on our
    audits.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    We conducted our audits in accordance with the standards of the
    Public Company Accounting Oversight Board (United States). Those
    standards require that we plan and perform the audits to obtain
    reasonable assurance about whether the consolidated financial
    statements are free of material misstatement. The Company is not
    required to have, nor were we engaged to perform, an audit of
    its internal control over financial reporting. Our audits
    included consideration of internal control over financial
    reporting as a basis for designing audit procedures that are
    appropriate in the circumstances, but not for the purpose of
    expressing an opinion on the effectiveness of the Company&#146;s
    internal control over financial reporting. Accordingly, we
    express no such opinion. An audit includes examining, on a test
    basis, evidence supporting the amounts and disclosures in the
    consolidated financial statements, assessing the accounting
    principles used and significant estimates made by management, as
    well as evaluating the overall financial statement presentation.
    We believe that our audits provide a reasonable basis for our
    opinion.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In our opinion, the consolidated financial statements referred
    to above present fairly, in all material respects, the financial
    position of Converted Organics Inc. as of December&#160;31, 2008
    and 2007, and the results of their operations and their cash
    flows for the years then ended, in conformity with accounting
    principles generally accepted in the United States of America.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying consolidated financial statements have been
    prepared assuming that the Company will continue as a going
    concern. As shown in the accompanying consolidated financial
    statements, the Company has incurred a net loss of approximately
    $16.2&#160;million during the year ended December&#160;31, 2008,
    has a working capital deficiency as of December&#160;31, 2008
    and an accumulated deficit of approximately $26.6&#160;million.
    These factors raise substantial doubt about the Company&#146;s
    ability to continue as a going concern. Management&#146;s plans
    in regards to these matters are described in Note&#160;2. These
    consolidated financial statements do not include any adjustments
    that might result from the outcome of this uncertainty.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;<FONT style="font-variant: SMALL-CAPS">CCR
    LLP</FONT></DIV>
</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Glastonbury, Connecticut
</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    March&#160;27, 2009
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-1
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="8%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">Item&#160;8.<I>&#160;&#160;</I></FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: 'Times New Roman', Times">Financial
    Statements</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='301'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    BALANCE SHEETS</FONT></B></A>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 8pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="77%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31, <BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="9" align="center" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    <B>ASSETS</B>
</DIV>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    CURRENT ASSETS
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,357,940
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    287,867
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Restricted cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,547,557
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,590,053
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Accounts receivable, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    313,650
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Inventories
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    289,730
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Prepaid rent
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    389,930
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    190,600
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Other prepaid expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    73,937
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40,282
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Deposits
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    141,423
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Other receivables
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    94,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    55,450
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Deferred financing and issuance costs, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22,042
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 24pt">
    Total current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,230,459
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,164,252
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Deposits
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    912,054
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    554,978
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Restricted cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    60,563
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    12,006,359
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Property and equipment, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    19,725,146
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    <FONT style="white-space: nowrap">Construction-in-progress</FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    974,900
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,947,067
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Capitalized bond costs, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    862,010
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    909,679
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Intangible assets, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,852,876
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    585,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Deferred financing and issuance costs, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,642
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 24pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    32,618,008
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    22,176,727
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="line-height: 9pt">
<TD colspan="9">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="9" align="center" valign="bottom">
    <B>LIABILITIES AND OWNERS&#146; EQUITY (DEFICIT)</B>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    CURRENT LIABILITIES
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Term notes payable&#160;&#151; current
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    375,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Accounts payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,583,030
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    898,270
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Accrued compensation&#160;&#151; officers, directors and
    consultants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    430,748
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    397,781
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Accrued legal and other expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    164,620
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    199,261
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Accrued interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    601,166
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    630,890
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Convertible notes payable, net of unamortized discount
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,602,660
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Mortgage payable, current
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,006
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 24pt">
    Total current liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,474,400
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,501,202
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Term note payable, net of current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Mortgage payable, net of current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    245,160
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Convertible note payable, net of current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    351,516
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Bonds payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 24pt">
    Total liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    27,571,076
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20,090,372
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    COMMITMENTS AND CONTINGENCIES
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    OWNERS&#146; EQUITY (DEFICIT)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Preferred stock, $.0001&#160;par value, authorized
    10,000,000&#160;shares; no shares issued and outstanding
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Common stock, $.0001&#160;par value, authorized
    40,000,000&#160;shares; 7,431,436 and 4,229,898&#160;shares
    issued and outstanding at December&#160;31, 2008 and
    December&#160;31, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    743
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    423
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Additional paid-in capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    31,031,647
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    12,460,357
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Member&#146;s equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    619,657
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 16pt">
    Accumulated deficit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (26,605,115
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (10,374,425
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 24pt">
    Total owners&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,046,932
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,086,355
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 24pt">
    Total liabilities and owners&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    32,618,008
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    22,176,727
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-2
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='302'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    STATEMENTS OF OPERATIONS</FONT></B></A>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="74%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Year Ended</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31, <BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revenues
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,547,981
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cost of goods sold
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,981,084
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Gross loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (433,103
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    General and administrative expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,309,976
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,009,678
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    375,267
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    648,664
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Amortization of license and intangible assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    263,387
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Loss from operations
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (10,381,733
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,674,842
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Other income/(expenses)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    290,125
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    824,466
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Other income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    146,677
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Amortization of capitalized costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (399,269
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (62,429
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (5,834,898
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,171,207
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (5,797,365
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (409,170
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Loss before provision for income taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,179,098
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,084,012
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Provision for income taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,179,098
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,084,012
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share, basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (2.70
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (0.87
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Weighted average common shares outstanding
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,985,017
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,716,378
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-3
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='303'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    STATEMENTS OF CHANGES IN OWNERS&#146; EQUITY (DEFICIT)<BR>
    </FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Years
    Ended December&#160;31, 2008 and 2007</FONT></B></A>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 8pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="43%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=07 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=07 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=07 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=07 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Common Stock</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Total<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Shares Issued<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Additional<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Owners&#146;<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>and<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Paid-in<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Member&#146;s<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Accumulated<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Equity<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Outstanding</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Amount</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Capital</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Equity</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Deficit</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>(Deficit)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance, December&#160;31, 2006
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,333,333
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    133
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4,113,385
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (6,290,413
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (2,176,895
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Issuance of common stock and warrants in connection with the
    Company&#146;s initial public offering, net of issuance costs of
    $1,736,715
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,800,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    180
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,163,105
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,163,285
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock and warrants issued in connection with bridge units
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    293,629
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    29
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (29
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued in connection with extension of bridge
    financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    55,640
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    178,042
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    178,048
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Issuance of stock options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,929
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,929
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Stock dividends
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    747,296
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (75
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,084,012
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,084,012
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance, December&#160;31, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,229,898
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    423
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    12,460,357
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (10,374,425
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,086,355
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Consolidation of variable interest entity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    23,965
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    23,965
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued upon exercise of warrants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,780,506
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    178
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,435,476
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,435,654
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued upon exercise of options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    143,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    14
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    536,236
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    536,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued for services rendered
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    45,480
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    212,614
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    212,619
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Warrants issued in connection with financings, net of
    cancellations
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,113,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,113,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Beneficial conversion features on convertible notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,943,386
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,943,386
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Stock dividends
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,232,552
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    123
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (123
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Issuance of stock options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,329,951
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,329,951
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Member&#146;s contributions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    544,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    544,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Net income (loss)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    51,592
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,230,690
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (16,179,098
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance, December&#160;31, 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,431,436
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    743
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    31,031,647
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    619,657
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (26,605,115
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5,046,932
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-4
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='304'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    STATEMENTS OF CASH FLOWS</FONT></B></A>
</DIV>
</A>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 6pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="80%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Years Ended</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31, <BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    CASH FLOWS FROM OPERATING ACTIVITIES:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (16,179,098
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (4,084,012
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Adjustments to reconcile net loss to net cash used in operating
    activities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Consolidation of variable interest entity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,164
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Amortization of intangible asset&#160;&#151; license
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Amortization of other intangible assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    246,887
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Amortization of capitalized bond costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    47,669
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    43,696
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Amortization of deferred financing fees
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    331,600
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18,733
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Depreciation and amortization of property and equipment
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    411,843
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Amortization of beneficial conversion features
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,712,009
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Amortization of discounts on private financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,563,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Stock option compensation expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,329,951
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,929
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Stock issued for services rendered
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    212,619
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Forgiveness of debt and accrued interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (146,677
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Loss on sale of fixed asset
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    176
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Stock issued for extension of bridge financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    178,048
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Changes in operating assets and liabilities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    (Increase) decrease in:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Accounts receivable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (284,948
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Inventories
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (278,616
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Prepaid expenses and other current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (242,983
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (144,329
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Other assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (38,800
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Deposits
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (507,500
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (350,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Increase (decrease) in:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Accounts payable and other accrued expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,425,206
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    71,191
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Accrued compensation&#160;&#151; officers, directors and
    consultants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    32,967
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    97,781
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Accrued interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (8,048
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    488,271
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 24pt">
    Other
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    25,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 30pt">
    Net cash used in operating activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,324,329
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,658,192
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    CASH FLOWS FROM INVESTING ACTIVITIES
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Release of restricted cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,988,292
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,050,199
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Cash paid for acquisitions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Purchase of property and equipment
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (14,233,823
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Proceeds from sale of fixed assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    24,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Capitalized interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (72,438
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (403,572
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Construction costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (902,462
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,543,495
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Restrictions of cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (20,646,611
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Deposit on license
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (139,978
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 30pt">
    Net cash used in investing activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,696,431
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (19,683,457
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    CASH FLOWS FROM FINANCING ACTIVITIES
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Net proceeds from exercise of warrants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,435,654
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Proceeds from private financing, net of original issue discount
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,715,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Net proceeds from exercise of options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    536,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Member&#146;s contributions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    544,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Payments made for deferred issuance costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (42,916
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Payments made on mortgage payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,124
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Repayment of term notes issued for acquisition
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (814,447
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Net proceeds from bond financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16,546,625
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Net proceeds from initial public offering of stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,859,784
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Proceeds from term notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Repayment of term notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (250,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (125,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Repayment of demand notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (69,600
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (250,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Repayment of bridge loan
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,515,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 30pt">
    Net cash provided by financing activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    15,090,833
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    23,562,663
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    NET INCREASE IN CASH
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,070,073
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    221,014
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    CASH AND CASH EQUIVALENTS,  beginning of period
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    287,867
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    66,853
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    CASH AND CASH EQUIVALENTS, end of period
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,357,940
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    287,867
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 6pt">
    Supplemental cash flow information:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Cash paid during the period for:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5,864,622
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    908,456
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 12pt">
    Non-cash financing activities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Financing costs paid from proceeds of private financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    335,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Issuance costs paid from proceeds of initial public offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,040,216
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Issuance costs paid from proceeds of bond financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    953,375
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Beneficial conversion discount on convertible notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,943,386
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -6pt; margin-left: 18pt">
    Warrants issued in connection with financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,113,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-5
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='305'><B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL STATEMENTS</FONT></B></A>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;1&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">&#160;NATURE
    OF OPERATIONS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics Inc. (the &#147;Company&#148;) uses food and
    other waste as a raw material to manufacture, sell and
    distribute all-natural soil amendment products combining disease
    suppression and nutrition characteristics. The Company
    transitioned from a development stage company to an operating
    company in the second quarter of 2008 as operations commenced
    and the Company has approximately $1.5&#160;million in revenue
    for the year ended December&#160;31, 2008. The Company&#146;s
    revenues come from two sources: tip fees and product sales.
    Waste haulers pay the Company &#147;tip&#148; fees for accepting
    food waste generated by food distributors such as grocery
    stores, produce docks and fish markets, food processors, and
    hospitality venues such as hotels, restaurants, convention
    centers and airports. Revenue also comes from the sale of the
    Company&#146;s fertilizer products. The Company&#146;s products
    possess a combination of nutritional, disease suppression and
    soil amendment characteristics.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics of California, LLC, (&#147;California&#148;)
    a California limited liability company and
    <FONT style="white-space: nowrap">wholly-owned</FONT>
    subsidiary of the Company, was formed when the Company acquired
    the assets of United Organics Products, LLC. The California
    plant is located in Gonzales, California, in the Salinas Valley.
    California produces approximately 25 tons of organic fertilizer
    per day, and sells primarily to the California agricultural
    market. The California facility employs a proprietary method
    called High Temperature Liquid Composting (&#147;HTLC&#148;).
    The facility is currently being upgraded to expand its capacity
    and to enable it to accept larger amounts of food waste from
    waste haulers, thereby increasing tip fee revenue.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s second facility, located in Woodbridge, New
    Jersey (&#147;Woodbridge&#148;), is designed to service the New
    York-Northern New Jersey metropolitan area. The Company
    constructed this facility and it became partially operational in
    the second quarter of 2008. Converted Organics of Woodbridge,
    LLC, a New&#160;Jersey limited liability company and wholly
    owned subsidiary of the Company, was formed for the purpose of
    owning, constructing and operating the Woodbridge, New Jersey
    facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics of Rhode Island, LLC (&#147;Rhode Island), a
    Rhode Island limited liability company and subsidiary of the
    Company, was formed for the purpose of developing a facility at
    the Rhode Island central landfill.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;2&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">&#160;MANAGEMENT&#146;S
    PLAN OF OPERATION</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company currently has manufacturing capabilities in its
    Woodbridge and Gonzales facilities as a means to generate
    revenues and cash, although neither facility is currently
    generating positive cash flow from operations. If the remaining
    $3.6&#160;million of convertible debentures from the
    Company&#146;s 2008 Financing is converted into shares of common
    stock, the Company believes the release of $2.0&#160;million of
    escrowed funds by the holders of the NJEDA bonds (Note&#160;18),
    along with the cash from estimated sales from the Woodbridge and
    Gonzales facilities will provide enough working capital until
    the upgrades to the Woodbridge facility are complete and until
    the Company holds a shareholder vote to allow an investor
    (Note&#160;18)&#160;to purchase $1,500,000 of convertible term
    notes assuming they receive such approval and achieve the
    $750,000 sales level by May&#160;31, 2009; and provided that the
    Company is able to come to agreements with its construction
    vendors allowing them to delay payments to such vendors. If the
    Company obtains shareholder approval for the purchase of the
    convertible term notes but does not achieve the required sales
    level from Woodbridge and Gonzales, the Company will need to
    seek additional sources of working capital. Currently the
    Company estimates that the monthly breakeven sales for the
    Gonzales and Woodbridge facilities is in the range of $600,000
    to $750,000 and in addition current cash requirement at the
    corporate level is in a range of $250,000 to $300,000 per month
    for a total monthly cash requirement in the range of $850,000 to
    $1,050,000. The Company plans to produce, at Gonzales and
    Woodbridge, sufficient product to generate sales in the range of
    $1,050,000 to $1,550,000. Cash for use as working capital at the
    corporate level would not be available from operations until the
    Company achieved such monthly breakeven sales levels. If
    shareholder approval is received for the issuance of the
    convertible notes the Company would have to achieve breakeven
    sales levels
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-6
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    by July&#160;31, 2009 or the proceeds of the notes would not
    provide sufficient working capital for operations and if
    shareholder approval is not obtained and breakeven sales levels
    are not achieved, the Company will not have sufficient working
    capital to operate past May&#160;31, 2009. Based on 2009 sales
    as of the date of this report, the Company will need to increase
    sales volumes to achieve such break even sales levels, and there
    is no assurance that such efforts will be successful.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During this period of limited cash availability the company
    plans to lower costs in the administrative areas and to
    concentrate on production in both Woodbridge and Gonzales. In
    addition they will also have to curtail certain production and
    sales costs until sales orders begin to increase to the desired
    levels; most notably, the Company will have to limit the
    production of product to two variations of liquid and dry
    product and the desired sales level will have to be derived from
    those products.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company does not have any commitments for additional equity
    or debt funding and there is no assurance that capital in any
    form would be available and, if available, on terms and
    conditions that are acceptable. Moreover, the Company is not
    permitted to borrow any future funds unless they obtain the
    consent of the bondholders of the New Jersey Economic
    Development Bond. The Company has obtained such consent for
    prior financing, but there is no guarantee that they can obtain
    such consent in the future.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;3&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">&#160;SIGNIFICANT
    ACCOUNTING POLICIES</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATION</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying consolidated financial statements include the
    transactions and balances of Converted Organics Inc. and its
    subsidiaries, Converted Organics of Woodbridge, LLC, Converted
    Organics of California, LLC, and Converted Organics of Rhode
    Island, LLC. The transactions and balances of Valley Land
    Holdings, LLC, a variable interest entity, have also been
    consolidated therein. All intercompany transactions and balances
    have been eliminated in consolidation.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">DEVELOPMENT
    STAGE COMPANY</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Until the second quarter of 2008, the Company was a development
    stage company as defined by Statement of Financial Accounting
    Standards (SFAS) No.&#160;7, <I>&#147;Accounting and Reporting
    by Development Stage Enterprises&#148;</I>, as it had no
    principal operations or significant revenue. During the second
    quarter of 2008, the Company&#146;s California facility was
    operating near capacity and recognized revenue from the sale of
    its product. Also during the second quarter of 2008, the tip
    floor of the New Jersey facility commenced operations and began
    to accept food waste on a limited basis. During the second half
    of 2008, operations have increased at both facilities, and the
    Company is no longer a development stage company.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">VARIABLE
    INTEREST ENTITY</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The consolidated financial statements include Valley Land
    Holdings, LLC (&#147;VLH&#148;), as VLH has been deemed to be a
    variable interest entity of the Company as it is the primary
    beneficiary of that variable interest entity following the
    acquisition of the net assets of United Organic Products, LLC
    (Note&#160;4). VLH&#146;s assets and liabilities consist
    primarily of cash, land and a mortgage note payable on the land
    on which the California facility is located. Its operations
    consist of rental income on the land from the Company and
    related operating expenses. VLH&#146;s activities support the
    operations of the California facility and do not have sufficient
    equity at risk to remain viable without the support of the
    Company.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">USE OF
    ESTIMATES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-7
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    the reported amounts and disclosures in the consolidated
    financial statements. Actual results could differ from those
    estimates.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CASH
    AND CASH EQUIVALENTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company considers financial instruments with an original
    maturity date of three months or less from the date of purchase
    to be cash equivalents. The Company had cash equivalents of
    $534,800 and $0 at December&#160;31, 2008 and December&#160;31,
    2007, respectively, consisting of certificates of deposit. These
    certificates of deposit are held by VLH.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">RESTRICTED
    CASH</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008 and 2007, the Company had remaining
    approximately $2,608,000 and $14,596,000, respectively, of cash
    which is restricted under its bond agreement (Note&#160;11).
    This cash was raised by the Company in its initial public
    offering and bond financing on February&#160;16, 2007 and is set
    aside in three separate accounts at December&#160;31, 2008 and
    2007, consisting of $34,000 and $10,032,000, respectively, for
    the construction of the Woodbridge operating facility; $8,000
    and $1,541,000, respectively, for the working capital
    requirements of the Woodbridge subsidiary while the facility is
    under construction; and $2,566,000 and $3,023,000, respectively,
    in reserve for bond principal and interest payments along with a
    reserve for lease payments. The Company has classified this
    restricted cash as non-current to the extent that such funds are
    to be used to acquire non-current assets or are to be used to
    service non-current liabilities. Third party trustee approval is
    required for disbursement of all restricted funds. Subsequent to
    December&#160;31, 2008, $2,000,000 of the restricted cash was
    made available to the Company for use other than its restricted
    purpose (Note&#160;18).
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">ACCOUNTS
    RECEIVABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Accounts receivable represents 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 December&#160;31, 2008, an allowance for doubtful
    accounts of $16,000 has been established against certain
    receivables that management has identified as uncollectible. A
    charge of $16,000 is reflected in the consolidated statements of
    operations for the year ended December&#160;31, 2008. There was
    no allowance for doubtful accounts deemed necessary at
    December&#160;31, 2007.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">INVENTORIES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Inventories are valued at the lower of cost or market, with cost
    determined by the first in, first out method. Inventory consists
    primarily of raw materials, packaging materials and finished
    goods, which consist of soil amendment products. Inventory
    balances are presented net of applicable reserves. There were no
    inventory reserves at December&#160;31, 2008 and
    December&#160;31, 2007.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PREPAID
    RENT</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has recorded prepaid rent on its consolidated
    balance sheets which represents the difference between actual
    lease rental payments made as of December&#160;31, 2008 and 2007
    and the straight line rent expense recorded in the
    Company&#146;s consolidated statements of operations for the
    years then ended relating to the Company&#146;s facilities in
    Woodbridge, New Jersey and Gonzales, California.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">DEPOSITS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has made deposits totaling $415,000 for its
    Woodbridge facility in accordance with the terms of that lease
    and has made a deposit of $139,986 for a license at its planned
    Rhode Island facility. The
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-8
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Gonzales facility has deposits on equipment of $346,668. The
    Company has various security deposits relating to operating
    leases of $10,400. These amounts are recorded as noncurrent
    assets on the Company&#146;s consolidated balance sheets. The
    Company also has made deposits on packaging materials ordered
    for product to be manufactured in its New Jersey facility of
    $141,423, which is recorded as a current asset on the
    Company&#146;s consolidated balance sheets.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times"><FONT style="white-space: nowrap">CONSTRUCTION-IN-PROGRESS</FONT></FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <FONT style="white-space: nowrap">Construction-in-progress</FONT>
    on the consolidated balance sheets includes amounts incurred for
    construction costs, equipment purchases and capitalized interest
    costs related to the construction of the Company&#146;s
    Woodbridge, New Jersey facility, and expansion of its Gonzales,
    California plant that have not yet been placed in service.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">INTANGIBLE
    ASSETS&#160;&#151; LICENSE AND OTHER INTANGIBLES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company accounts for its intangible assets in accordance
    with SFAS&#160;No.&#160;142, <I>&#147;Goodwill and Other
    Intangible Assets.&#148; </I>SFAS&#160;No.&#160;142 requires
    that intangible assets with finite lives, such as the
    Company&#146;s license, 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.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">LONG-LIVED
    ASSETS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In accordance with SFAS&#160;No.&#160;144, <I>&#147;Accounting
    for the Impairment or Disposal of Long-Lived Assets&#148;,
    </I>long-lived assets are reviewed for impairment whenever
    events or changes in circumstances indicate that the carrying
    amount of an asset may not be recoverable. Such reviews are
    based on a comparison of the asset&#146;s undiscounted cash
    flows to the recorded carrying value of the asset. If the
    asset&#146;s recorded carrying value exceeds the sum of the
    undiscounted cash flows expected to result from the use and
    eventual disposition of the asset, the asset is written down to
    its estimated fair value. Impairment charges, if any, are
    recorded in the period in which the impairment is determined. No
    impairment charges were deemed necessary during the years ended
    December&#160;31, 2008 and 2007.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PROPERTY
    AND EQUIPMENT</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Property and equipment are stated at cost. Depreciation is
    computed on the straight-line basis over the estimated useful
    lives of 7 to 20&#160;years.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">DEFERRED
    FINANCING AND ISSUANCE COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the private financing arrangement of
    January&#160;24, 2008, the Company incurred legal and placement
    fees of $345,000, $10,000 of which was paid in the year ended
    December&#160;31, 2007, and $335,000 of which was paid from the
    proceeds of the loan. These fees are being amortized over one
    year. Amortization expense totaled $322,958 during the year
    ended December&#160;31, 2008 related to these costs.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CAPITALIZED
    BOND COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with its $17.5&#160;million bond financing on
    February&#160;16, 2007, the Company has capitalized bond
    issuance costs of $953,375 and is amortizing these costs over
    the life of the bond. Amortization expense of $47,669 and
    $43,696 was recorded during the years ended December&#160;31,
    2008 and 2007, respectively, related to these bond issuance
    costs.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-9
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">REVENUE
    RECOGNITION</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In accordance with Staff Accounting Bulletin&#160;104,
    <I>&#147;Revenue Recognition in Financial Statements,&#148;
    </I>(&#147;SAB&#160;104&#148;) revenue is recognized when each
    of the following criteria is met:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Persuasive evidence of a sales arrangement exists;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Delivery of the product has occurred;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The sales price is fixed or determinable, and:
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Collectability is reasonably assured.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">SHARE
    BASED COMPENSATION</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company accounts for share based compensation in accordance
    with Statement of Financial Accounting Standards
    (&#147;SFAS&#148;) No.&#160;123(R), <I>&#147;Share-Based
    Payment.&#148; </I>Under the provisions of
    SFAS&#160;No.&#160;123(R), share-based compensation issued to
    employees is measured at the grant date, based on the fair value
    of the award, and is recognized as an expense over the requisite
    service period (generally the vesting period of the grant).
    Share-based compensation issued to non-employees is measured at
    the grant date, based on the fair value of the equity
    instruments issued and is recognized as an expense over the
    requisite service period.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">RESEARCH
    AND DEVELOPMENT COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Research and development costs include the costs of engineering,
    design, feasibility studies, outside services, personnel and
    other costs incurred in development of the Company&#146;s
    manufacturing facilities. All such costs are charged to expense
    as incurred.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">INCOME
    TAXES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Deferred income taxes are computed in accordance with
    SFAS&#160;No.&#160;109, <I>&#147;Accounting for Income
    Taxes&#148;</I> and reflect the net tax effects of temporary
    differences between the financial reporting carrying amounts of
    assets and liabilities for financial reporting and income tax
    purposes. The Company establishes a valuation allowance if it
    believes that it is more likely than not that some or all of the
    deferred tax assets will not be realized (see Note&#160;14).
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is subject to U.S.&#160;federal income tax as well
    as income tax of certain state jurisdictions. The Company has
    not been audited by the I.R.S. or any states in connection with
    income taxes. The periods from inception through 2008 remain
    open to examination by the I.R.S. and state authorities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;1, 2007, the Company adopted the provisions of
    FASB interpretation No.&#160;48, <I>&#147;Accounting for
    Uncertainty in Income Taxes- an interpretation of FASB Statement
    No.&#160;109&#148;</I> (&#147;FIN&#160;No.&#160;48&#148;). The
    Interpretation contains a two step approach to recognizing and
    measuring uncertain tax positions accounted for in accordance
    with FASB Statement No.&#160;109. The first step is to evaluate
    the tax position for recognition by determining if the weight of
    the available evidence indicates that it is more likely than not
    that the position will be sustained on audit, including
    resolution of related appeals or litigation process, if any. The
    second step is to measure the tax benefit as the largest amount
    which is more than 50% likely of being realized upon ultimate
    settlement. The adoption of FIN&#160;No.&#160;48 did not have
    any material impact on the Company&#146;s consolidated financial
    statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-10
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company recognizes interest accrued related to unrecognized
    tax benefits in interest expense. Penalties, if incurred, are
    recognized as a component of income tax expense.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">FAIR
    VALUE MEASUREMENTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has partially implemented SFAS&#160;No.&#160;157,
    <I>&#147;Fair Value Measurements&#148;</I>
    (&#147;SFAS&#160;No.&#160;157&#148;) for financial assets and
    financial liabilities. SFAS&#160;No.&#160;157 defines fair
    value, establishes a framework for measuring fair value, expands
    disclosure about fair value measurements and is effective for
    fiscal years beginning after November&#160;15, 2007, except as
    it relates to nonrecurring fair value measurements of
    nonfinancial assets and liabilities. This standard only applies
    when other standards require or permit the fair value
    measurement of assets and liabilities. It does not increase the
    use of fair value measurement. The Company has determined that
    none of its financial assets or liabilities are measured at fair
    value on a recurring basis therefore the disclosures required by
    SFAS&#160;No.&#160;157 do not currently apply. With regard to
    nonfinancial assets and liabilities which are not recognized or
    disclosed at fair value in the Company&#146;s financial
    statements on a recurring basis (at least annually), the
    standard is effective for fiscal years beginning after
    November&#160;15, 2008. The major categories of assets and
    liabilities that have not been measured and disclosed using
    SFAS&#160;No.&#160;157 fair value guidance are property and
    equipment in certain circumstances and goodwill.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">ACCOUNTING
    STANDARDS NOT YET ADOPTED</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In February 2007, the FASB issued SFAS&#160;No.&#160;159,
    <I>Fair Value Option for Financial Assets and Financial
    Liabilities </I>(&#147;SFAS&#160;No.&#160;159&#148;), which
    permits entities to choose to measure many financial assets and
    financial liabilities at fair value. Unrealized gains and losses
    on items for which the fair value option has been elected would
    be reported in earnings. SFAS&#160;No.&#160;159 is effective for
    financial statements issued for fiscal years beginning after
    November&#160;15, 2007. The Company has not elected to measure
    any financial assets or liabilities at fair value, and
    therefore, the consolidated financial statements were not
    affected by adoption of SFAS&#160;No.&#160;159.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In December 2007, the FASB issued SFAS&#160;No.&#160;160,
    <I>Noncontrolling Interests in Consolidated Financial
    Statements&#160;&#151; an amendment of ARB No.&#160;51
    </I>(&#147;SFAS&#160;No.&#160;160&#148;). SFAS&#160;No.&#160;160
    is effective for fiscal years, and interim periods within those
    fiscal years, beginning on or after December&#160;15, 2008. The
    objective of this Statement is to improve the relevance,
    comparability and transparency of the financial information that
    a reporting entity provides in its consolidated financial
    statements. The Company anticipates that the adoption of
    SFAS&#160;No.&#160;160 will not have a significant impact on the
    consolidated financial statements.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In December 2007, the FASB issued SFAS&#160;No.&#160;141R,
    <I>Business Combinations</I> (SFAS&#160;No.&#160;141R), which
    changes how business acquisitions are accounted for.
    SFAS&#160;No.&#160;141R requires the acquiring entity in a
    business combination to recognize all (and only) the assets
    acquired and liabilities assumed in the transaction and
    establishes the acquisition-date fair value as the measurement
    objective for all assets acquired and liabilities assumed in a
    business combination. Certain provisions of this standard will,
    among other things, impact the determination of acquisition-date
    fair value of consideration paid in a business combination
    (including contingent consideration); exclude transaction costs
    from acquisition accounting; and change accounting practices for
    acquired contingencies, acquisition-related restructuring costs,
    in-process research and development, indemnification assets and
    tax benefits. SFAS&#160;No.&#160;141R is effective for business
    combinations and adjustments to an acquired entity&#146;s
    deferred tax asset and liability balances occurring after
    December&#160;31, 2008. The Company is currently evaluating the
    future impacts and disclosures of this standard.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In March 2008, the FASB issued SFAS&#160;No.&#160;161,
    <I>Disclosures about Derivative Instruments and Hedging
    Activities&#160;&#151; an amendment of FASB Statement
    No.&#160;133</I> (SFAS&#160;No.&#160;161).
    SFAS&#160;No.&#160;161 requires enhanced disclosures about an
    entity&#146;s derivative instruments and hedging activities with
    a view toward improving the transparency of financial reporting
    and is effective for financial statements issued for fiscal
    years and interim periods beginning after November&#160;15,
    2008, with early application encouraged. SFAS&#160;No.&#160;161
    encourages, but
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-11
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    does not require, comparative disclosures for earlier periods at
    initial adoption. The Company anticipates that the adoption of
    SFAS&#160;No.&#160;161 will not have a significant impact on the
    consolidated financial statements.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In April 2008, the FASB issued FASB Staff Position (FSP)
    <FONT style="white-space: nowrap">No.&#160;FAS&#160;142-3,</FONT>
    <I>Determination of the Useful Life of Intangible Assets</I>.
    This FSP amends the factors that should be considered in
    developing renewal or extension assumptions used to determine
    the useful life of a recognized asset under
    SFAS&#160;No.&#160;142, <I>Goodwill and Other Intangible Assets
    </I>(&#147;SFAS&#160;No.&#160;142). The objective of this FSP is
    to improve the consistency between the useful life of a
    recognized intangible asset under SFAS&#160;No.&#160;142 and the
    period of expected cash flows used to measure the fair value of
    the asset under SFAS&#160;No.&#160;141R and other accounting
    principles generally accepted in the United States of America.
    This FSP applies to all intangible assets, whether acquired in a
    business combination or otherwise; and shall be effective for
    financial statements issued for fiscal years beginning after
    December&#160;15, 2008 and interim periods within those fiscal
    years and applied prospectively to intangible assets acquired
    after the effective date. Early adoption is prohibited. The
    Company is currently evaluating this new FSP and anticipates
    that it will not have a significant impact on the consolidated
    financial statements.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">EARNINGS
    (LOSS) PER SHARE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Basic earnings (loss) per share (&#147;EPS&#148;) is computed by
    dividing the net income (loss) attributable to the common
    stockholders (the numerator) by the weighted average number of
    shares of common stock outstanding (the denominator) during the
    reporting periods. Diluted income (loss) per share is computed
    by increasing the denominator by the weighted average number of
    additional shares that could have been outstanding from
    securities convertible into common stock, such as stock options
    and warrants (using the &#147;treasury stock&#148; method), and
    convertible preferred stock and debt (using the
    &#147;if-converted&#148; method), unless their effect on net
    income (loss) per share is antidilutive. Under the
    &#147;if-converted&#148; method, convertible instruments are
    assumed to have been converted as of the beginning of the period
    or when issued, if later. The effect of computing the
    Company&#146;s diluted income (loss) per share is antidilutive
    and, as such, basic and diluted earnings (loss) per share are
    the same for each of the years ended December&#160;31, 2008 and
    2007.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PROFIT
    SHARING PLAN</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In November 2007, the Company instituted a 401(k) plan for its
    employees. The plan allows for employees to have a pretax
    deduction of up to 15% of pay set aside for retirement. The plan
    also allows for a Company match and profit sharing contribution.
    As of December&#160;31, 2008 and 2007, the Company has not
    provided a match of employee contributions nor did the Company
    contribute a profit sharing amount to the plan.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">RECLASSIFICATIONS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Certain prior year amounts have been reclassified to conform to
    the current year presentation.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">SEGMENT
    REPORTING</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has no reportable segments as defined by
    SFAS&#160;No.&#160;131, <I>&#147;Disclosure about Segments of an
    Enterprise and Related Information.&#148;</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;4&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">ACQUISITIONS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, the Company acquired the assets,
    including the intellectual property, of Waste Recovery
    Industries, LLC of Paso Robles, CA. This acquisition allows the
    Company to be the exclusive owner of the proprietary technology
    and process known as the High Temperature Liquid Composting
    system, which processes various biodegradable waste products
    into liquid and solid organic-based fertilizer and feed
    products.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-12
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The purchase price of $500,000 was paid with a 7% short term
    note that matured on May&#160;1, 2008 and was repaid on that
    date. Interest on that note was payable monthly. In addition,
    the purchase price provides for future contingent payments of
    $5,500 per ton of capacity, when and if additional tons of
    waste-processing capacity are added to the Company&#146;s
    existing current or planned capacity, using the acquired
    technology.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, Waste Recovery Industries, LLC had begun discussion
    with a third party (prior to the Company acquiring it) to
    explore the possibility of building a facility to convert fish
    waste into organic fertilizer using the HTLC technology. The
    Company has completed those negotiations and has entered into an
    agreement with Pacific Choice Seafoods whereby the Company will
    be required to pay 50% of the Company&#146;s profits (as
    defined) to the former owner, that are earned from the facility.
    The contingent profit-sharing payments under this agreement will
    be accounted for as expenses of the appropriate period, in
    accordance with
    <FONT style="white-space: nowrap">EITF&#160;95-8,</FONT>
    <I>&#147;Accounting for Contingent Consideration Paid to the
    Shareholders of an Acquired Enterprise in a Purchase Business
    Combination.&#148;</I> If the Company becomes obligated to make
    certain technology payments under its purchase agreement with
    WRI, the Company estimated that no such payments will be payable
    in the twelve months following the acquisition. Payments, if
    any, after that will be expensed as incurred. The maximum
    payment due under these arrangements is $7,000,000, with no
    minimum.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, the Company formed Converted Organics
    of California, LLC, a wholly-owned subsidiary of Converted
    Organics Inc. who acquired the net assets of United Organic
    Products, LLC of Gonzales, CA (&#147;UOP&#148;). With this
    acquisition, the Company acquired a liquid fertilizer product
    line, as well as a production facility that services a West
    Coast agribusiness customer base through established
    distribution channels. This facility is operational and began to
    generate revenues for the Company immediately upon acquisition.
    The purchase price of $2,500,000 was paid in cash of $1,500,000
    and a note payable of $1,000,000. This note matures on
    February&#160;1, 2011, has an interest rate of 7%, payable
    monthly in arrears and is convertible to common stock six months
    after the acquisition date for a price equal to the
    <FONT style="white-space: nowrap">five-day</FONT>
    average closing price of the stock on Nasdaq for the five days
    preceding conversion.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The acquisitions have been accounted for in the first quarter of
    2008 using the purchase method of accounting in accordance with
    SFAS&#160;No.&#160;141, <I>&#147;Business
    Combinations&#148;</I>. Accordingly, the net assets have been
    recorded at their estimated fair values, and operating results
    have been included in the Company&#146;s consolidated financial
    statements from the date of acquisition.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The allocation of the purchase price based on the appraisal is
    as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
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    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Inventories
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    11,114
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Accounts receivable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    28,702
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Technological know-how
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    271,812
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Trade name
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    228,188
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Existing customer relationships
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,030,513
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Building
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    111,584
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Equipment and machinery
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    543,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Assumption of liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (224,913
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total allocation of purchase price
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,000,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The assets acquired from UOP were valued separately from the
    assets acquired from WRI. The sum of the amounts assigned to
    assets acquired and liabilities assumed did exceed the cost of
    the acquired assets. The excess was allocated as a pro rata
    reduction of the amounts that otherwise would have been assigned
    to all of the acquired noncurrent assets, including intangibles.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-13
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The unaudited supplemental pro forma information discloses the
    results of operations for the current year and for the preceding
    year as though the business combination had been completed as of
    the beginning of the year reported on.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The pro forma condensed consolidated financial information is
    based upon available information and certain assumptions that
    the Company believes are reasonable. The unaudited supplemental
    pro forma information does not purport to represent what the
    Company&#146;s financial condition or results of operations
    would actually have been had these transactions in fact occurred
    as of the dates indicated above or to project the Company&#146;s
    results of operations for the period indicated or for any other
    period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="79%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Twelve Months Ending December&#160;31,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revenues (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,548
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,423
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    16,269
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,889
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share&#160;&#151; basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2.72
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.04
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Current assets (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,230
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,410
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total assets (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    32,618
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    28,278
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Current liabilities (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (9,474
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,570
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total liabilities (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (27,571
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (25,070
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total equity (deficit) (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,047
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,208
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;5&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">FAIR
    VALUE OF FINANCIAL INSTRUMENTS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CONCENTRATIONS
    OF CREDIT RISK</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s financial instruments that are exposed to a
    concentration of credit risk are cash, including restricted
    cash, and accounts receivable. Currently, the Company maintains
    its cash accounts with balances in excess of the federally
    insured limits. The Company mitigates this risk by selecting
    high quality financial institutions to hold such cash deposits.
    At December&#160;31, 2008 and 2007, the Company&#146;s cash
    balances on deposit exceeded federal depository insurance limits
    by approximately $5,812,000 and $14,500,000.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company maintains allowances for doubtful accounts for
    estimated losses resulting from the inability of its customers
    to make required payments. If the financial condition of the
    Company&#146;s customers were to deteriorate, resulting in an
    impairment of their ability to make such payments, additional
    allowances may be required. An increase in allowances for
    customer non-payment would increase the Company&#146;s expenses
    during the period in which such allowances are made. Based upon
    the Company&#146;s knowledge at December&#160;31, 2008 and 2007,
    a reserve for doubtful accounts was recorded of approximately
    $16,000 and $0, respectively.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">FAIR
    VALUE OF FINANCIAL INSTRUMENTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Statement of Financial Accounting Standards (SFAS) No.&#160;107,
    <I>&#147;Fair Value of Financial Instruments&#148;, </I>requires
    disclosure of the fair value of financial instruments for which
    the determination of fair value is practicable.
    SFAS&#160;No.&#160;107 defines the fair value of a financial
    instrument as the amount at which the instrument could be
    exchanged in a current transaction between willing parties. The
    carrying amount of the Company&#146;s financial instruments
    consisting of cash, accounts receivable, inventories, accounts
    payable, and accrued expenses approximate their fair value
    because of the short maturity of those instruments. The fair
    value of the Company&#146;s convertible notes payable, term
    notes payable and New Jersey Economic Development Authority
    Bonds were estimated by discounting the future cash flows using
    current rates offered by lenders for similar borrowings with
    similar credit ratings. The fair value of the company&#146;s
    convertible notes payable is estimated to approximate its
    carrying value. The fair value of the term notes payable and the
    New Jersey
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-14
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Economic Development Authority bonds approximate their carrying
    value. The Company&#146;s financial instruments are held for
    other than trading purposes.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    SFAS&#160;No.&#160;157, <I>&#147;Fair Value Measurements&#148;
    </I>(SFAS&#160;No.&#160;157), defines fair value as the price
    that would be received to sell an asset or paid to transfer a
    liability in an orderly transaction between market participants,
    as of the measurement date. The standard specifies a hierarchy
    of valuation techniques based upon whether the inputs to those
    valuation techniques reflect assumptions other market
    participants would use based upon market data obtained from
    independent sources (also referred to as observable inputs). In
    accordance with SFAS&#160;No.&#160;157, the following summarizes
    the fair value hierarchy:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Level&#160;1</I>&#160;&#151; Quoted prices in active markets
    that are unadjusted and accessible at the measurement date for
    identical, unrestricted assets or liabilities;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Level&#160;2</I>&#160;&#151; Quoted prices for identical
    assets and liabilities in markets that are not active, quoted
    prices for similar assets and liabilities in active markets or
    financial instruments for which significant observable inputs
    are available, either directly or indirectly such as interest
    rates and yield curves that are observable at commonly quoted
    intervals;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Level&#160;3</I>&#160;&#151; prices or valuations that
    require inputs that are unobservable.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In certain cases, the inputs used to measure fair value may fall
    into different levels of the fair value hierarchy. In such
    cases, the level in the fair value hierarchy within which the
    fair value measurement in its entirety falls has been determined
    based on the lowest level input that is significant to the fair
    value measurement in its entirety. The Company&#146;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.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s financial assets and liabilities that are
    reported at fair value in the accompanying consolidated balance
    sheets as of December&#160;31, 2008 were as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="58%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Balance at<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="left" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Assets</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Level 1</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Level 2</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Level 3</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Certificate of deposit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    534,821
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    534,821
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company does not have any fair value measurements using
    quoted prices in active markets (Level&#160;1)&#160;or
    significant unobservable inputs (Level&#160;3)&#160;as of
    December&#160;31, 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;6&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">INVENTORIES</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s inventories consisted of the following at
    December 31:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="84%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Finished goods
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    214,053
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Raw materials
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18,785
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Packaging materials
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    56,892
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total inventories
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    289,730
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;7&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times"><FONT style="white-space: nowrap">CONSTRUCTION-IN-PROGRESS</FONT></FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is currently constructing an operating facility in
    Woodbridge, New Jersey. The funds for construction of this plant
    came from the issuance of New Jersey Economic Development Bonds
    on February&#160;16, 2007 and a condition of this bond offering
    was that the Company place in trust approximately
    $14&#160;million to be used for plant construction and
    associated equipment purchases. As of December&#160;31, 2007,
    the Company has incurred approximately $4.9&#160;million in
    plant construction costs, equipment purchases and capitalized
    interest
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-15
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    costs. The Company has recorded those costs as
    <FONT style="white-space: nowrap">construction-in-progress</FONT>
    on its consolidated balance sheets as of December&#160;31, 2007.
    At the end of the second quarter of 2008, portions of the
    Woodbridge facility became operational and certain fixed assets
    were placed in service commencing June&#160;30, 2008. During the
    remainder of 2008, approximately $19&#160;million in assets were
    transferred from
    <FONT style="white-space: nowrap">Construction-in-Progress</FONT>
    to Leasehold Improvements and Machinery and equipment accounts
    and depreciation commenced on those assets placed in service.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;8&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">PROPERTY
    AND EQUIPMENT</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s property and equipment at December 31
    consisted of the following:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="77%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="4%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Land and improvements
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    357,692
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#160;&#160;&#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Building and improvements
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,754,163
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Machinery and equipment
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    13,968,134
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Vehicles
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    42,570
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Office equipment and furniture
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,837
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20,130,396
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Less: Accumulated depreciation and amortization
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (405,250
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Property and equipment, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    19,725,146
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Depreciation and amortization of property and equipment totaled
    $411,843 and $0 for the years ended December&#160;31, 2008 and
    2007, respectively.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;9&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">DEFERRED
    AND CAPITALIZED COSTS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">DEFERRED
    FINANCING AND OFFERING COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with its initial public offering (IPO) on
    February&#160;16, 2007, the Company incurred issuance costs
    totaling $1,736,715. The Company had previously capitalized
    issuance costs, consisting of underwriting, legal and accounting
    fees and printing costs cumulatively totaling $696,499 in
    anticipation of its initial public offering. The Company also
    incurred additional issuance costs of $1,040,216 that was paid
    from the proceeds of the initial public offering. The total
    issuance costs of $1,736,715 have been netted against the
    $9.9&#160;million of gross proceeds of the IPO in the statements
    of changes in owners&#146; equity (deficit).
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with its repayment of the bridge notes, the
    Company paid to the bridge lender a Letter of Credit fee of
    $27,375. The fee has been recorded as a deferred financing fee
    to be amortized over the term of the Letter of Credit. The
    Letter of Credit was nullified by the Company&#146;s borrowing
    of funds from a private investor in January, 2008. Amortization
    of these deferred financing fees totaled $8,642 and $18,733 for
    the years ended December&#160;31, 2008 and 2007, respectively.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with its private financing in January of 2008, the
    Company incurred fees of $345,000 which were capitalized and
    which are being amortized over the one year term of the loan.
    Amortization expense associated with these fees of $322,958 was
    recorded during the year ended December&#160;31, 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CAPITALIZED
    BOND COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with its $17.5&#160;million bond financing on
    February&#160;16, 2007, the Company has capitalized bond
    issuance costs of $953,375 and is amortizing those costs over
    the life of the bond. Amortization of capitalized bond issuance
    costs totaled $47,669 and $43,696 for the years ended
    December&#160;31, 2008 and 2007, respectively.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-16
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;10&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">INTANGIBLE
    ASSETS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to a license agreement with an effective date of
    July&#160;15, 2003 and amended effective February&#160;9, 2006,
    by and between the Company and International Bio-Recovery
    Corporation (&#147;IBRC&#148;), the Company entered into an
    exclusive license to use IBRC&#146;s Enhanced Autogenous
    Thermophylic Aerobic Digestion process (EATAD) technology for
    the design, construction and operation of facilities for the
    conversion of food waste into solid and liquid organic material.
    The license is recorded at its acquisition cost of $660,000 less
    accumulated amortization of $90,750 and $74,250 as of
    December&#160;31, 2008 and 2007, respectively. Amortization is
    provided using the straight-line method over the life of the
    license. Amortization expense for the years ended
    December&#160;31, 2008 and 2007 was $16,500 and $16,500,
    respectively. The Company expects the license&#146;s annual
    amortization expense to be $16,500 until fully amortized at the
    end of the 40&#160;year license period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is obligated to pay IBRC an aggregate royalty equal
    to nine percent of the gross revenues from the sale of product
    produced by the Woodbridge facility. The Company will begin to
    pay royalties during the first quarter of 2009, as product sales
    commenced during that quarter. The Company is also obligated to
    purchase IBRC&#146;s patented macerators and shearators as
    specified by or supplied by IBRC or Shearator Corporation for
    use at the Woodbridge facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition, the Company paid a non-refundable deposit of
    $139,978 to IBRC in 2007 on a second plant licensing agreement,
    which is included in non-current deposits on the Company&#146;s
    consolidated balance sheets at December&#160;31, 2008 and 2007.
    The Company also agreed to pay IBRC approximately $338,000 in
    twelve monthly installments for market research, growth trails
    and other services. For the year ended December&#160;31, 2008
    and 2007, the Company had paid approximately $22,000 and
    $276,000, respectively, of this amount which has been included
    in research and development in the Company&#146;s consolidated
    statements of operations. The Company is currently negotiating
    the remainder of the payments with IBRC.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company identified certain intangible assets as a part of
    its valuation performed pursuant to SFAS&#160;No.&#160;141,
    <I>&#147;Business Combinations.&#148;</I> The following
    intangible assets were identified and values and estimated
    useful lives were assigned as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="76%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Assigned<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Estimated<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Value</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Useful Life</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Existing customer relationships
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,030,513
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8&#160;years
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Technological know-how
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    271,812
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8&#160;years
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Trade name
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    228,188
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    Indefinite
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Intangibles acquired
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,530,513
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The consolidated statements of operations include amortization
    expense of $246,887 related to these intangible assets for the
    year ending December&#160;31, 2008. Accumulated amortization at
    December&#160;31, 2008 was $246,887.
</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;11&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">DEBT</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">TERM
    NOTES&#160;PAYABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company had three term notes payable: (1)&#160;$250,000
    unsecured term note dated August&#160;27, 2004, due
    December&#160;31, 2008, with interest at 12%, (2)&#160;$125,000
    unsecured term note dated September&#160;6, 2005, due
    December&#160;31, 2008, with interest at 15%, and
    (3)&#160;$89,170 unsecured term note dated May&#160;2, 2007 with
    a maturity of May&#160;2, 2009 and interest at 12%. On all
    notes, interest accrues without payment until maturity. The
    agreement on the term loan dated August&#160;27, 2004 required
    accrued interest of $89,170 to be paid immediately in order to
    refinance and extend the maturity. As the Company was precluded
    under the terms of
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-17
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    the agreement with the bondholders of the New Jersey Economic
    Development Authority Bonds from paying the accrued interest
    available funds, the Company borrowed funds to repay this
    accrued interest by entering into the May&#160;2, 2007 term loan
    in the amount of $89,170 with its CEO, Edward J. Gildea. This
    note is unsecured and subordinate to the bonds, and has a
    two-year term. This interest rate is equal to or less than
    interest paid on the Company&#146;s other term loans. The
    Company obtained the necessary bondholder consents to enter into
    this agreement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During December 2008, the balance of the term note dated
    August&#160;27, 2004, plus accrued interest of $47,500 was paid
    with funds raised through exercise of warrants related to our
    common stock. The Company also negotiated the forgiveness of the
    balance of the unsecured term note dated September&#160;6, 2005,
    plus accrued interest. Total principal and interest forgiven was
    $146,677, and this amount is recorded as other income on the
    consolidated statements of operations for the year ended
    December&#160;31, 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008, the total of unpaid accrued
    interest on the remaining note is $17,834. Accrued interest on
    all notes as of December&#160;31, 2007 was $47,500.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A schedule of outstanding principal amounts of the term notes as
    of December&#160;31, 2008 and 2007 is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="79%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Term note dated August&#160;27, 2004
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    250,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Term note dated September&#160;6, 2005
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    125,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Term note dated May&#160;2, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    464,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Less: current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (375,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">BRIDGE
    LOANS PAYABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On March&#160;2, 2006, the Company completed a $500,000 bridge
    loan (&#147;Bridge Loan&#148;) from lenders (&#147;Bridge
    Noteholders&#148;) to help meet the Company&#146;s working
    capital needs. The bridge loan accrued interest at an annual
    rate of 8%, which was payable in arrears quarterly, and was
    originally due and payable on the earlier of October&#160;16,
    2006 or the completion of a public offering of equity securities
    (&#147;Qualified Public Offering&#148;). The bridge loan was
    refinanced with an extended maturity date of February&#160;19,
    2007 or the completion of a Qualified Public Offering. The
    placement agent for the bridge loan received a commission equal
    to 5% of the gross proceeds. The Company received the $500,000
    bridge loan net of the commission to the placement agent of
    $25,000. The Company classified this cost as a deferred
    financing cost.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In April, May and June 2006, the Company received additional
    proceeds totaling $1,015,000 (net of a $50,750 commission to the
    placement agent) from a series of promissory notes executed with
    the Bridge Noteholders (&#147;Bridge Financing&#148;).
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the Bridge Financing, the Company issued
    bridge notes (&#147;Bridge Notes&#148;) and securities of the
    Company (&#147;Bridge Equity Units&#148;) to the Bridge
    Noteholders, stating that if a Qualified Public Offering
    occurred before October&#160;16, 2006 (extended to
    February&#160;19, 2007), the Bridge Noteholders would be
    entitled to receive Bridge Equity Units consisting of securities
    identical in form to the securities being offered in the
    Qualified Public Offering. Each Bridge Noteholder would be
    entitled to receive Bridge Equity Units equal to the principal
    of the Bridge Noteholder&#146;s bridge loan divided by the
    initial public offering price of the securities comprising the
    Bridge Equity Units.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Bridge Loans and the Bridge Equity Units were allocated for
    accounting purposes based on the relative fair values at the
    time of issuance of (i)&#160;the Bridge Loans without the Bridge
    Equity Units and (ii)&#160;the
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-18
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Bridge Equity Units themselves. The fair value of the Bridge
    Loans and the Bridge Equity Units was computed at $1,515,000
    each. The $1,515,000 fair value was determined since the Company
    obtained $1,515,000 in Bridge Financing from Bridge Noteholders.
    At the closing of a public offering on or before
    February&#160;19, 2007 bridge lenders would be entitled to
    receive units identical to the units being offered in the
    Company&#146;s initial public offering. Each bridge lender would
    be entitled to receive that number of units equal to the
    principal of the lender&#146;s note divided by the initial
    public offering price. Stated differently, upon closing of an
    initial public offering on or before February&#160;19, 2007, the
    Company would be obligated to issue to the bridge lenders a
    number of units commensurate with a market value of $1,515,000.
    Since they were of equal value, the $1,515,000 was allocated 50%
    to the Bridge Loans and 50% to the Bridge Equity Units. The
    Bridge Equity Units of $757,500 were accounted for as paid-in
    capital. The Bridge Loans of $1,515,000 were recorded on the
    balance sheet net of the $757,500 discount on the Bridge Loans.
    The discount for the Bridge Equity Units ($757,500) was
    amortized into interest expense over the original life of the
    Bridge Loans. For the year ended December&#160;31, 2007, the
    Company recorded $757,500 in interest expense related to the
    amortization of this discount.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007 the Company completed its initial
    public offering and issued 293,629 Bridge Equity Units to the
    Bridge Noteholders. In addition, the Company and the Bridge
    Noteholders, agreed under the terms of a concurrent bond
    offering at the time of the initial public offering, not to
    repay the principal or accrued interest on the Bridge Notes at
    that time.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company had $1,515,000 of outstanding Bridge Loans that
    accrued interest at a rate of 18%, and under the terms of the
    loans, were to be repaid on the earlier of February&#160;19,
    2007 or the date of the Company&#146;s initial public offering.
    Due to certain covenants relating to the offering of bonds on
    February&#160;16, 2007, which prohibited the Company from
    repaying these bridge loans, the Company entered into an
    agreement whereby it could repay the Bridge Loans if the Bridge
    Noteholders agreed to obtain a letter of credit in favor of the
    Company. The Company reached agreements with the Bridge
    Noteholders and the demand note lender to repay the entire
    principal and accrued interest on these debts. The principal of
    the Bridge Loans of $1,515,000 plus accrued interest of
    approximately $160,000, along with principal of the demand note
    of $150,000 plus accrued interest of approximately $7,000, was
    repaid by the Company on May&#160;23, 2007 from unrestricted
    cash. In addition, for the various term extensions granted by
    the Bridge Noteholders, the Company issued approximately
    56,000&#160;shares of common stock, which represents 10% of the
    principal and interest repaid, divided by the
    <FONT style="white-space: nowrap">five-day</FONT>
    average share price prior to repayment of the debt. The
    consolidated statements of operations for the year ended
    December&#160;31, 2007 includes interest expense of $178,048
    related to the issuance of this stock.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In order for the repayment of bridge and demand loans to comply
    with the terms of the covenants of the bondholders of the New
    Jersey Economic Development Authority Bonds, the Bridge
    Noteholders obtained a letter of credit in favor of the Company
    for $1,825,000. This letter of credit was due to expire on
    April&#160;7, 2008, and allows for a one-time draw down during
    the thirty days prior to expiration. Subsequent to
    December&#160;31, 2007 and prior to the expiration date of the
    letter of credit (April&#160;7, 2008), in conjunction with the
    private financing described below, the letter of credit
    agreement was terminated with no cost to the Company.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">BOND
    FINANCING</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, concurrent with its initial public
    offering, the Company&#146;s wholly-owned subsidiary, Converted
    Organics of Woodbridge, LLC, (the &#147;Subsidiary&#148;)
    completed the sale of $17,500,000 of New Jersey Economic
    Development Authority Bonds. Direct financing costs related to
    this issuance totaled $953,375, which have been capitalized and
    are being amortized over the term of the bonds. The bonds carry
    a stated interest rate of 8% and mature on August&#160;1, 2027.
    The bonds are secured by a leasehold mortgage and a first lien
    on the equipment of the Subsidiary. In addition, the Subsidiary
    has agreed to, among other things,
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-19
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    establish a fifteen month capitalized interest reserve and to
    comply with certain financial statement ratios. The Company has
    provided a guarantee to the bondholders on behalf of its
    wholly-owned Subsidiary for the entire bond offering.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The New Jersey Economic Development Bonds have certain
    covenants, which among other things, preclude the Company from
    making any dividends, payments or other cash distributions until
    such time as (i)&#160;the Company has achieved, over the course
    of a full fiscal year, a maximum annual debt service coverage
    ratio greater than 1.50, and (ii)&#160;at least $1,200,000 is on
    deposit with the Trustee in the operations and maintenance
    reserve fund and is available to satisfy ongoing maintenance,
    repair and replacement costs associated with the project
    facilities. In addition, the Company is precluded from borrowing
    additional funds under any debt agreements, without the consent
    of the bondholders. During 2007, the Company received consent
    from the bondholder prior to borrowing additional funds for a
    two year term note. During 2008, the Company again received
    consent from the bondholder prior to borrowing additional funds
    in a private investment. Under the terms of the bond agreement,
    the lender has the right, upon 30&#160;days written notice, to
    demand full payment of all outstanding principal and interest
    amounts owed under the agreement if specific covenants are not
    met. As of December&#160;31, 2008 and 2007, the Company is in
    compliance with these covenants of the bond agreement.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PRIVATE
    FINANCING</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, the Company entered into a private
    financing with three investors (the &#147;Investors&#148;) for a
    total amount of $4,500,000 (the &#147;Financing&#148;). The
    Financing was offered at an original issue discount of 10%. The
    Company used the proceeds to fund the acquisitions described
    above, to fund further development activities and to provide
    working capital. As consideration for the Financing, the
    Investors received a note issued by the Company in the amount of
    $4,500,000 with interest accruing at 10% per annum to be paid
    monthly and the principal balance to be paid in full one year
    from the closing date (the &#147;Note&#148;). In addition, the
    Company issued to the Investors 750,000 Class&#160;A Warrants
    and 750,000 Class&#160;B Warrants, which may be exercised at
    $8.25 and $11.00 per warrant share, respectively (the
    &#147;Warrants&#148;). The Company further agreed not to call
    any Warrants until a registration statement registering all of
    the Warrants is declared effective. A placement fee of $225,000
    was paid from the proceeds of this loan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the Financing, the Company had agreed that
    within 75&#160;days of the closing date, the Company would have
    a shareholder vote to seek approval to issue a convertible
    debenture with an interest rate of 10% per annum which would be
    convertible into common stock pursuant to terms of the debenture
    agreement, or such other price as permitted by the debenture
    (the &#147;Convertible Debenture&#148;). Upon shareholder
    approval, the Note was replaced by this Convertible Debenture
    and one half of each of the Class&#160;A Warrants and of the
    Class&#160;B Warrants issued were returned to the Company. Under
    the conversion option, the Investors shall have the option, at
    any time on or before the maturity date (January&#160;24, 2009),
    to convert the outstanding principal of this Convertible
    Debenture into fully-paid and non assessable shares of common
    stock at the conversion price equal to the lowest of
    (i)&#160;the fixed conversion price of $6.00 per share,
    (ii)&#160;the lowest fixed conversion price (the lowest price,
    conversion price or exercise price set by the Company in any
    equity financing transaction, convertible security, or
    derivative instrument issued after January&#160;24, 2008), or
    (iii)&#160;the default conversion price (if and so long as there
    exists an event of default, then 70% of the average of the three
    lowest closing prices of common stock during the twenty day
    trading period immediately prior to the notice of conversion).
    The Company held a special shareholders&#146; meeting on
    April&#160;3, 2008 to vote on this matter, at which time it was
    approved.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the financing, the Company entered into a
    Security Agreement with the Investors whereby the Company
    granted the Investors a security interest in Converted Organics
    of California, LLC and any and all assets that are acquired by
    the use of the funds from the Financing. In addition, the
    Company granted the Investors a security interest in Converted
    Organics of Woodbridge, LLC and all assets subordinate
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-20
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    only to the current lien held by the holder of the bonds issued
    in connection with the Woodbridge facility of approximately
    $17,500,000.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with this borrowing, the Company issued
    1.5&#160;million warrants to purchase common stock, which were
    deemed to have a fair value of $5,497,500. The Company recorded
    the relative fair value of the warrants to the underlying notes
    of $2,227,500 in accordance with Accounting Principles Board
    (&#147;APB&#148;) Opinion No.&#160;14, <I>&#147;Accounting for
    Convertible Debt and Debt Issued with Stock Purchase
    Warrants&#148;</I> as additional paid-in capital and established
    a discount on the debt. The discount was being amortized over
    the life of the note (12&#160;months). On April&#160;17, 2008,
    the Investors returned to the Company 750,000 warrants that had
    been held in escrow. This reduced the value assigned to the
    warrants and, accordingly, the value assigned to the debt
    discount attributable to the warrants by $1,113,750. In
    addition, the remaining original issue discount of approximately
    $366,000 was recognized as expense on April&#160;7, 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On April&#160;7, 2008, the shareholders of the Company approved
    the issuance of additional shares so that convertible notes
    could be issued to the noteholders to replace the original notes
    dated January&#160;24, 2008. The Company is required to
    recognize a discount for the intrinsic value of the beneficial
    conversion feature of the notes which is to be recognized as
    interest expense through the redemption date of the notes, which
    is January&#160;24, 2009. That amount was calculated to be
    $3,675,000, and recognition was limited to $2,936,250 in
    accordance with
    <FONT style="white-space: nowrap">EITF&#160;98-5,</FONT>
    <I>&#147;Accounting for Convertible Securities with Beneficial
    Conversion Features or Contingently Adjustable Conversion
    Ratios,&#148;</I> as the debt discount is limited to the
    proceeds allocated to the convertible instrument of $4,500,000.
    That discount is being amortized over the life of the loan.
    During the year ending December&#160;31, 2008, the Company
    recognized interest expense of $2,705,759 related to this
    discount.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2009 the Company entered into an amendment
    on its $4.5&#160;million convertibles debentures which became
    due on January&#160;24, 2009. The lenders extended the due date
    of these notes until July&#160;24, 2009 and began to convert
    these notes into shares of the Company&#146;s common stock using
    the default conversion rate. The Company and the lenders further
    agreed that no interest would be charged during the six-month
    extension and that it is the lenders&#146; intention to convert
    the loan into shares sufficient to pay off the balance of the
    debt.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On March&#160;6, 2009, the Company entered into an agreement
    with the holders of its $17.5&#160;million of New Jersey
    Economic Development Authority Bonds to release
    $2.0&#160;million for capital expenditures and lease payments on
    its New Jersey facility and to defer interest payments on the
    bonds thru July&#160;30, 2009. These funds had been held in a
    reserve for bond principal and interest payments along with a
    reserve for lease payments. As consideration for the release of
    the reserve funds, the Company issued the bond holders 2,284,409
    Class&#160;B warrants. The Class&#160;B warrants are exercisable
    at $11.00 per warrant share.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">REGISTRATION
    RIGHTS AGREEMENT</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the January&#160;24, 2008 private financing,
    the Company entered into a registration rights agreement with
    the Investors which called for the Company to register the
    securities within certain time periods. The Company had
    10&#160;days from shareholder approval, with an additional
    7&#160;day extension, to register the shares issuable under the
    Convertible Debenture and 90&#160;days from the filing of a
    registration statement (filed on February&#160;13,
    2008)&#160;for the Warrants and the underlying shares to be
    declared effective by the SEC. The Company has filed the
    registration statement relative to the Convertible Debenture as
    of the filing date of this report and the registration statement
    filed for the Warrants has been declared effective. However, the
    registration statement filed for the convertible debt and the
    date the warrant registration statement was declared effective
    by the SEC did not occur within the timelines agreed to in the
    registration rights agreement. The registration rights agreement
    calls for $90,000 per month in liquidated damages, payable in
    cash, if the Company doesn&#146;t file the registration
    statement for the Convertible Debenture and liquidated damages
    equal to the average closing price of 375,000 Class&#160;A
    warrants and 375,000 Class&#160;B warrants for each 30&#160;day
    period,
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-21
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    commencing May&#160;13, 2008, and multiplying that average by 2%
    for each 30&#160;day period that the registration statement is
    not declared effective.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Therefore, on April&#160;24, 2008, the Company began to incur
    liquidated damages in connection with the Convertible Debenture
    of $90,000 per month and as of May&#160;13, 2008 the Company
    began to incur liquidated damage obligations in connection with
    the Warrants according to the formula described above. The
    maximum amount of liquidated damages relative to the Warrant
    Registration Statement and the Convertible Debenture is equal to
    10% of the face amount of the Convertible Debenture or $450,000
    (10% of $4,500,000). The Company paid a total of approximately
    $158,000 in liquidated damages related to the Convertible
    Debentures, which are recorded as interest expense on the
    consolidated statements of operations for year ended
    December&#160;31, 2008. On June&#160;7, 2008 the warrant
    registration statement was declared effective. At this time, the
    Company is not subject to further liquidated damages.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CONVERTIBLE
    NOTE&#160;PAYABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, in conjunction with the purchase of
    the net assets of UOP, the Company issued a note payable to the
    former sole member in the amount of $1,000,000. The note bears
    interest of 7% and matures on February&#160;1, 2011; monthly
    principal and interest payments are $30,877. Interest expense of
    $57,850 has been recorded in the year ending December&#160;31,
    2008 related to this note. The note is convertible by the holder
    six months after issuance. The Company is required to recognize
    a discount related to the intrinsic value of the beneficial
    conversion feature of the note as interest expense through the
    stated redemption date of the note. That amount was calculated
    to be $7,136, and has been recorded as a component of additional
    paid-in capital.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">MORTGAGE
    NOTE&#160;PAYABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has a mortgage note payable on the land upon which
    the California facility resides. The note, in the original
    amount of $250,000, bears interest at 6.75%. Monthly payments of
    principal and interest of $1,638 are due based on an
    amortization of twenty years. The note matures in May, 2013.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">FIVE-YEAR
    MATURITY OF DEBT</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Principal due during the next five years on all the
    Company&#146;s long-term and current debt is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="86%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4,925,328
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2010
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    329,721
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2011
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    28,450
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2012
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,679
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2013
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    234,826
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Thereafter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Subtotal
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    23,022,004
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Less: discount
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (230,492
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    22,791,512
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;12&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">CAPITALIZED
    INTEREST COSTS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has capitalized interest costs, net of certain
    interest income, in accordance with Statement of Financial
    Accounting Standards No.&#160;62, <I>&#147;Capitalization of
    Interest Cost Involving Certain Tax-Exempt Borrowings and
    Certain Gifts and Grants&#148;</I>, related to its New Jersey
    Economic Development Authority Bonds in the amount of $1,317,438
    and $403,572 as of December&#160;31, 2008 and December&#160;31,
    2007, respectively.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-22
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Capitalized interest costs are included in construction in
    progress initially on the consolidated balance sheets. As assets
    are placed in service, the capitalized interest is allocated
    among the cost basis of the assets ratably. During the year
    ending December&#160;31, 2008, capitalized interest of
    $1,245,000 was allocated to assets placed in service and is
    being depreciated with the related assets.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;13&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">OWNERS&#146;
    EQUITY (DEFICIT)</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">AUTHORIZED
    SHARES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At its April&#160;3, 2008 special meeting of shareholders, the
    shareholders approved a resolution to decrease the number of
    common shares that the Company is authorized to issue from
    75,000,000 to 40,000,000, and the number of preferred shares
    that the Company is authorized to issue from 25,000,000 to
    10,000,000. The Company did this to realize saving on certain
    taxes that are based on the number of shares authorized, and the
    Company believes that 40,000,000&#160;shares of common stock
    would be sufficient to meet its future needs.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">STOCK
    ISSUANCES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is authorized to issue 40,000,000&#160;shares of
    $0.0001&#160;par value common stock. Of the authorized shares,
    733,333 of the authorized shares were issued to the founders of
    the Company (&#147;founders&#146; shares&#148;) on
    January&#160;13, 2006. The Company did not receive any
    consideration for the founders&#146; shares. Because the Company
    had a negative estimated value on January&#160;13, 2006, the
    Company recognized compensation expense at par value totaling
    $73 in connection with the issuance of the founders&#146; shares
    as par value represents the statutory minimum share value in the
    state of Delaware.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;21, 2006, the Company merged with Mining
    Organics Management LLC (&#147;MOM&#148;) and Mining Organics
    Harlem River Rail Yard LLC (&#147;HRRY&#148;). At that time, MOM
    was a fifty-percent owner of HRRY. The mergers were accounted
    for as a recapitalization of the Company. As a result of the
    recapitalization, 600,000&#160;shares were issued to the members
    of HRRY.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007 the Company successfully completed an
    initial public offering of 1,800,000 common shares and 3,600,000
    warrants for a total offering of $9,900,000, before issuance
    costs. The Company&#146;s initial public offering is presented
    net of issuance costs and expenses of $1,736,715 in the
    statements of changes in owners&#146; equity (deficit). The
    warrants consist of 1,800,000 redeemable Class&#160;A warrants
    and 1,800,000 non-redeemable Class&#160;B warrants, each warrant
    to purchase one share of common stock. The common stock and
    warrants traded as one unit until March&#160;13, 2007 when they
    began to trade separately.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, as part of its initial public
    offering and under the original terms of the bridge loan
    agreement (Note&#160;11), the Company issued 293,629 Bridge
    Equity Units to the Bridge Noteholders. On May&#160;23, 2007, as
    consideration for extensions of the Bridge Loans, the Company
    issued 55,640&#160;shares of common stock to the Bridge
    Noteholders, which represents 10% of the principal and interest
    repaid, divided by the
    <FONT style="white-space: nowrap">five-day</FONT>
    average share price prior to repayment of the debt. The
    statement of operations reflects an expense of $178,048 related
    to the issuance of these shares.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, as part of its initial public
    offering, the Company agreed to pay a 5% quarterly stock
    dividend, commencing March&#160;31, 2007, and every full quarter
    thereafter until the Woodbridge, New Jersey facility is
    operational. As of December&#160;31, 2007, the Company has
    declared four such quarterly dividends amounting to
    747,296&#160;shares. As of December&#160;31, 2008, the Company
    has declared one additional quarterly dividend in the amount of
    263,239&#160;shares.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On October&#160;1, 2008, the Company issued 45,480&#160;shares
    of its common stock to a consultant as remuneration for services
    rendered. The related services were substantially complete when
    the stock was issued. The Company recognized $212,619 of expense
    related to the fair value of this issuance.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-23
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On October&#160;22, 2008, the Company declared a stock dividend
    of 15% payable to shareholders of record as of November&#160;17,
    2008. This dividend resulted in the issuance of
    969,318&#160;shares of common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">WARRANTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, in connection with the Company&#146;s
    public offering, the Company sold 1,800,000 equity units
    consisting of one share of common stock, one Class&#160;A
    warrant and one Class&#160;B warrant. On March&#160;13, 2007,
    the Class&#160;A and Class&#160;B warrants began to trade as
    separate securities. The Class&#160;A warrants are exercisable
    for one share of common stock, plus accumulated stock dividends,
    for $8.25. The Class&#160;A warrants expire on February&#160;16,
    2012 and, if certain conditions are met, the Company may redeem
    these warrants at a price of $0.25 per warrant prior to the
    expiration date. The Class&#160;B warrants are exercisable for
    one share of common stock, plus accumulated stock dividends, for
    $11.00. The Class&#160;B warrants expire on February&#160;16,
    2012 and there is no provision for the Company to redeem these
    warrants prior to the expiration date.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, in conjunction with the private
    financing arrangement of the Company described in Note&#160;10,
    the Company issued 750,000 Class&#160;A and 750,000 Class&#160;B
    Warrants to the Investors. Such warrants are exercisable for one
    share of the Company&#146;s common stock, adjusted for
    dividends, at $8.25 and $11.00, respectively. Once the
    Company&#146;s registration statement related to the underlying
    shares was declared effective, one-half of the warrants were
    returned to the Company by the Investors, as described in
    Note&#160;11.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">WARRANT
    EXERCISE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has received net proceeds of approximately
    $11,344,000 as a result of the exercise of approximately
    1,381,000 Class&#160;A (which includes the warrant redemption
    discussed below) warrants and 600 Class&#160;B warrants in the
    year ended December&#160;31, 2008. The Company issued
    approximately 1,781,000&#160;shares of common stock in
    connection with the exercise of these warrants due to the
    cumulative effect of the Company&#146;s stock dividends.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">WARRANT
    REDEMPTION</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On September&#160;16, 2008, the Company announced the redemption
    of its outstanding Class&#160;A Warrants. The redemption date
    was set for October&#160;17, 2008, and was subsequently extended
    a total of 31&#160;days voluntarily by the Company to
    November&#160;17, 2008. Any outstanding Class&#160;A warrants
    that had not been exercised before that date expired and are
    redeemable by the Company for $0.25 per warrant.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Until the redemption date, the Class&#160;A warrants were
    convertible into common stock at an exercise price of $8.25.
    Each warrant exercised at this price received 1.276&#160;shares
    of common stock. Prior to the notification of redemption,
    approximately 756,000 Class&#160;A warrants had been exercised.
    After the redemption, an additional 683,000 warrants were
    exercised. In total, from both the exercise and redemption of
    warrants, the Company received proceeds of approximately
    $11,344,000. The Company is obligated to remit to its transfer
    agent funds sufficient to compensate warrant holders for the
    remaining warrants, which may be redeemed for $.25 each for an
    indefinite period. This amount of $284,237 was subtracted from
    the cash received for exercise of the warrants, representing the
    amount necessary to redeem the remaining warrants.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-24
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Class&#160;A warrant activity for the year ended
    December&#160;31, 2008 and 2007 is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="56%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Price per<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Remaining<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Warrants</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Warrant</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Life (Years)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at December&#160;31, 2006
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    February&#160;16, 2007, in conjunction with initial public
    offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,800,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    February&#160;16, 2007, in conjunction With bridge loans
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    293,629
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    February&#160;16, 2007, in conjunction with underwriter units
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    180,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Expired
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at December&#160;31, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,273,629
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4.2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    January&#160;24, 2008, in conjunction with private financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    750,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Returned to the Company upon shareholder approval of exchange of
    term note for convertible note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (375,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,380,768
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Expired
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,267,861
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    8.25
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at December&#160;31, 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The fair value of Class&#160;A warrants totaled $2,387,310 at
    December&#160;31, 2007 based on quoted market prices on that
    date. As of December&#160;31, 2008, the Class&#160;A warrants
    have been removed from market trading.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-25
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Class&#160;B warrant activity for the years ended
    December&#160;31, 2008 and 2007 is as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="52%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Remaining<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Price per<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Life<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Warrants</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Warrant</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>(Years)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at December&#160;31, 2006
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    February&#160;16, 2007, in conjunction with initial public
    offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,800,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    February&#160;16, 2007, in conjunction with bridge loans
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    293,629
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    February&#160;16, 2007, in conjunction with underwriter shares
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    180,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Expired
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at December&#160;31, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,273,629
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4.2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    January&#160;24, 2008, in conjunction with private financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    750,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Returned to the Company upon shareholder approval of exchange of
    term note for convertible note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (375,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    600
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at December&#160;31, 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,648,029
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11.00
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The fair value of Class&#160;B warrants totaled $3,442,438 and
    $3,410,444 at December&#160;31, 2008 and 2007, respectively,
    based on quoted market prices on that date.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">STOCK
    OPTION PLAN</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In June 2006, the Company&#146;s Board of Directors and
    stockholders approved the 2006 Stock Option Plan (the
    &#147;Option Plan&#148;). The Option Plan authorizes the grant
    and issuance of options and other equity compensation to
    employees, officers and consultants. A total of
    666,667&#160;shares of common stock are reserved for issuance
    under the Option Plan. The Option Plan is administered by the
    Compensation Committee of the Board of Directors (the
    &#147;Committee&#148;). Subject to the provisions of the Option
    Plan, the Committee determines who will receive the options, the
    number of options granted, the manner of exercise and the
    exercise price of the options. The term of incentive stock
    options granted under the Option Plan may not exceed ten years,
    or five years for options granted to an optionee owning more
    than 10% of the Company&#146;s voting stock. The exercise price
    of an incentive stock option granted under the Option Plan must
    be equal to or greater than the fair market value of the shares
    of the Company&#146;s common stock on the date the option is
    granted. The exercise price of a non-qualified option granted
    under the Option Plan must be equal to or greater than 85% of
    the fair market value of the shares of the Company&#146;s common
    stock on the date the option is granted. An incentive stock
    option granted to an optionee owning more than 10% of the
    Company&#146;s voting stock must have an exercise price equal to
    or greater than 110% of the fair market value of the
    Company&#146;s common stock on the date the option is granted.
    Stock options issued under the option plan vest immediately upon
    date of grant.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At a Special Meeting of Shareholders on April&#160;3, 2008, the
    shareholders approved an amendment to the 2006 Stock Option Plan
    to include an &#147;evergreen&#148; provision pursuant to which
    on January&#160;1st&#160;of each year, commencing in 2009, the
    number of shares authorized for issuance under the 2006 Stock
    Option Plan shall
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-26
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    automatically be increased to an amount equal to 20% of the
    shares of the common stock outstanding on the last day of the
    prior fiscal year. The Shareholders also approved an amendment
    to the Plan to increase the number of options available under
    the plan from 666,667 to 1,666,667. On June&#160;27, 2008, an
    additional 736,735 options were granted, and vested on that
    date. Taking into account all options issued, the Company has
    276,932 options available to grant under the plan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The options granted on June&#160;27, 2008 have an exercise price
    of $5.02 and expire ten years from the grant date. The exercise
    price was based on the closing price of the stock on the date of
    grant. The fair value of the options was estimated using a
    Black-Scholes pricing model with the following assumptions:
    risk-free interest rate of 3.52%; no dividend yield; volatility
    factor of 52.3%; and an expected term of 5&#160;years. The
    resulting expense of approximately $2.3&#160;million is included
    in general and administrative expenses in the consolidated
    statements of operations for the year ended December&#160;31,
    2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the year ended December&#160;31, 2007, in accordance with
    the director compensation policy of the Committee, an additional
    10,000 options were granted to a Director upon his appointment
    to the Board. The options vested on the grant date, have an
    exercise price of $3.75 per share and expire five years from the
    grant date. The fair value for the 10,000 immediately vesting
    stock options granted in 2007 was estimated at the date of grant
    using a Black-Scholes pricing model with the following
    assumptions: risk-free interest rate of 4.9%; no dividend yield;
    expected volatility factor of 16.9%; and an expected term of
    five years. The Company&#146;s stock option compensation expense
    totaling $5,929 has been included in general and administrative
    expenses in the consolidated statements of operations for the
    year ended December&#160;31, 2007.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Stock option activity for the period January&#160;1, 2007
    through December&#160;31, 2008 is as follows:
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="60%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Stock<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Price per<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Remaining<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Options</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Share</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Life (Years)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding and exercisable at December&#160;31, 2006
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    643,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Granted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    10,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Expired
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding and exercisable at December&#160;31, 2007
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    653,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4.2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Granted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    736,735
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5.02
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Expired
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (143,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding and exercisable at December&#160;31, 2008
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,246,735
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4.50
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4.0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The aggregate intrinsic value of options outstanding and
    exercisable at December&#160;31, 2008 and 2007 is $0 and
    $946,850, respectively. The aggregate intrinsic value represents
    the total pretax intrinsic value, based on options with an
    exercise price less than the Company&#146;s closing stock price
    of $3.54 and $5.20 as of December&#160;31, 2008 and 2007,
    respectively, which would have been received by the option
    holders had those option holders exercised their options as of
    that date.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008 and 2007, there was no unrecognized
    compensation cost related to non-vested share-based compensation
    arrangements granted under the Company&#146;s stock option plan.
    During the year ended December&#160;31, 2008, the Company has
    received approximately $536,000 as a result of the exercise of
    143,000 options.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-27
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;14&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">INCOME
    TAXES</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At December&#160;31, 2008, the Company had accumulated net
    operating losses of approximately $26,553,000, of which
    approximately $16,700,000 may be offset against future taxable
    income, if any, ratably through 2028.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has fully reserved the approximately $7,588,000 tax
    benefit of these losses with a valuation allowance of the same
    amount, because the likelihood of realization of the tax benefit
    cannot be determined to be more likely than not.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There is a minimum current tax provision for the years ended
    December&#160;31, 2008 and 2007.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The effective tax rate based on the federal and state statutory
    rates is reconciled to the actual tax rate for the years ended
    December&#160;31, 2008 and 2007 as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="89%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Statutory federal income tax rate
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Statutory state income tax rate
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Valuation allowance on net deferred tax assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (40
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (40
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Effective tax rate
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
    %
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The components of the net deferred tax asset (liability) at
    December&#160;31, 2008 and 2007 are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="73%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2007</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Deferred tax assets:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Net operating losses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    6,148,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,120,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Accrued compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    120,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    120,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Stock options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,320,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    400,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Valuation allowance
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,588,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,640,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s valuation allowance increased $4,948,000 and
    $1,140,000 for the years ended December&#160;31, 2008 and 2007,
    respectively.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has a tax benefit of approximately $1,320,000
    related to the grant of common stock to certain key employees
    and advisors. Pursuant to SFAS&#160;No.&#160;123(R), the benefit
    will be recognized and recorded to APIC when the benefit is
    realized through the reduction of taxes payable.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company complies with the provisions of FASB Interpretation
    No.&#160;48, <I>&#147;Accounting for Uncertainty in Income
    Taxes&#160;&#151; an interpretation of FASB Statement
    No.&#160;109&#148; </I>(&#147;FIN&#160;No.&#160;48&#148;).
    FIN&#160;48 addresses the determination of whether tax benefits
    claimed or expected to be claimed on a tax return should be
    recorded in the financial statements. Under FIN&#160;48, the
    Company may recognize the tax benefit from an uncertain tax
    position only if it is more likely than not that the tax
    position will be sustained on an examination by the taxing
    authorities, based on the technical merits of the position. The
    Company has determined that the Company has no uncertain tax
    positions requiring recognition under FIN&#160;No.&#160;48.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is subject to U.S.&#160;federal income tax as well
    as income tax of certain state jurisdictions. The Company has
    not been audited by the U.S.&#160;Internal Revenue Service or
    any states in connection with its income taxes. The periods from
    January&#160;1, 2005 to December&#160;31, 2008 remain open to
    examination by the U.S.&#160;Internal Revenue Service and state
    authorities.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company recognizes interest accrued related to unrecognized
    tax benefits and penalties, if incurred, as a component of
    income tax expense.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-28
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;15&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">SEGMENT
    REPORTING</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In June 1997, SFAS&#160;131, <I>&#147;Disclosure about Segments
    of an Enterprise and Related Information&#148;</I> was issued,
    which amends the requirements for a public enterprise to report
    financial and descriptive information about its reportable
    operating segments. Operating segments, as defined in the
    pronouncement, are components of an enterprise about which
    separate financial information is available that is evaluated
    regularly by the Company in deciding how to allocate resources
    and in assessing performance. The financial information is
    required to be reported on the basis that is used internally for
    evaluating segment performance and deciding how to allocate
    resources to segments. The Company has no reportable segments at
    December&#160;31, 2008 and 2007.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;16&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">RELATED
    PARTY TRANSACTIONS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">OPERATING
    LEASE-HEADQUARTERS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is renting the premises under a verbal agreement
    with ECAP, LLC, a related party. The managing member of ECAP,
    LLC was a director and is a shareholder of the Company and is
    also the brother of the Company&#146;s President and CEO. The
    rental agreement provides for rent and support, as agreed
    between the Company and ECAP, LLC and for reimbursement of
    expenses by the Company for office and other expenses. These
    expenses totaled $5,600 for the period from January&#160;1, 2007
    to February&#160;28, 2007.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of March&#160;1, 2007, the Company began to pay the $2,800
    per month rental payment directly to the unrelated landlord for
    this office space. There is no lease term and rental of the
    office space is on a month to month basis. Rent expense for the
    period from March&#160;1, 2007 to December&#160;31, 2007 totaled
    $28,000 relating to this lease. In the year ending
    December&#160;31, 2008, the Company incurred $33,600 of expense
    related to this lease.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">SERVICE
    AGREEMENT</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has entered into a services agreement dated
    May&#160;29, 2003, as modified October&#160;6, 2004, with one of
    its principal stockholders, Weston Solutions, Inc.
    (&#147;Weston&#148;). Weston has been engaged to provide
    engineering and design services in connection with the
    construction of the Woodbridge organic waste conversion
    facility. The total amounts incurred by the Company for services
    provided by Weston were $0 and $116,480 for the years ended
    December&#160;31, 2008 and 2007, respectively.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">LEGAL
    FEES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the year ended 2007, the Company incurred legal fees
    totaling $10,000 to a law firm affiliated with the
    Company&#146;s President and CEO and partially owned by a
    brother of the Company&#146;s CEO. These fees of $10,000 were
    paid in 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">ACCRUED
    COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008 and 2007 the Company has an accrued
    liability totaling $430,748 and $397,781, respectively,
    representing accrued compensation to officers, directors and
    consultants.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS OF RHODE ISLAND, LLC</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics of Rhode Island, LLC was formed for the
    purpose of developing and operating a waste to fertilizer
    facility in Johnston, Rhode Island. A development consultant who
    has provided services to the Company is a 10% minority owner of
    Converted Organics of Rhode Island, LLC. For the years ending
    December&#160;31, 2008 and 2007, the consultant was paid $60,000
    and $60,000, respectively, for services rendered.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-29
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PACKAGING
    VENDOR</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has purchased packaging materials from a vendor
    which is partially owned by an employee of the Company. The
    Company made purchases of $141,000 from this vendor in the year
    ending December&#160;31, 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;17&#160;&#151;
    COMMITMENTS AND CONTINGENCIES</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">LEASES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition to the Company&#146;s IBRC commitment
    (Note&#160;10)&#160;and operating lease commitment for its
    headquarters (Note&#160;16), the Company signed a lease during
    June 2006 for its Woodbridge, New Jersey facility. The lease
    term is for ten years with an option to renew for an additional
    ten years. Future minimum lease payments under this lease are as
    follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="86%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    For years ended December&#160;31,
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    934,820
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2010
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    934,820
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2011
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    946,195
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2012
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    959,097
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2013
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    967,383
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2014 and thereafter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,410,639
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    12,152,954
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    For the years ended December&#160;31, 2008 and 2007, the Company
    has recorded rent expense of $740,351 and $745,633,
    respectively, in relation to this lease.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In September, 2008, the Company entered into a lease agreement
    for 9&#160;acres of land at the central landfill in Johnston,
    RI, with the Rhode Island Resource Recovery Corporation. The
    Company plans to build its next facility at this location. The
    lease requires monthly payments of $9,167. Once the facility is
    operational, the monthly rent will also include a charge of $8
    per ton of fertilizer sold from the facility. The term of the
    lease is twenty years. Future minimum payments under this lease
    are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="88%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    For years ended December&#160;31,
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    110,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2010
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    110,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2011
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    110,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2012
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    110,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2013
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    110,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2014 and thereafter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,613,334
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,163,334
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company recognized $36,667 of expense related to this lease
    in 2008, which is included in Research&#160;&#038; Development
    on the consolidated statement of operations.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">LEGAL
    PROCEEDINGS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is not currently aware of any pending or threatened
    legal proceeding to which it is or would be a party, or any
    proceedings being contemplated by governmental authorities
    against it, or any of its executive officers or directors
    relating to the services performed on the Company&#146;s behalf
    except that the
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-30
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Company received notice that a complaint had been filed in a
    putative class action lawsuit on behalf of 59&#160;persons or
    entities that purchased units pursuant to a financing terms
    agreement dated April&#160;11, 2006 (&#147;FTA&#148;), captioned
    Gerald S. Leeseberg, et al.&#160;v. Converted Organics, Inc.,
    filed in the U.S.&#160;District Court for the District of
    Delaware. The lawsuit alleges breach of contract, conversion,
    unjust enrichment, and breach of the implied covenant of good
    faith in connection with the alleged failure to register certain
    securities issued in the FTA, and the redemption of our
    Class&#160;A warrants in November 2008. The lawsuit seeks
    damages related to the failure to register certain securities,
    including alleged late fee payments, of approximately
    $5.25&#160;million, and unspecified damages related to the
    redemption of the Class&#160;A warrants. In February 2009, the
    Company filed a Motion for Partial Dismissal of Complaint. It is
    uncertain when the Court will rule on this motion. The Company
    plans to vigorously defend itself in this matter and is unable
    to estimate any contingent losses that may or may not be
    incurred as a result of this litigation and its eventual
    disposition. Accordingly, no contingent loss has been recorded
    by the Company related to this matter.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;18&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">SUBSEQUENT
    EVENTS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2009, the Company entered into an amendment
    on its $4.5&#160;million convertibles debentures, which became
    due on January&#160;24, 2009. The lenders extended the due date
    of these notes until July&#160;24, 2009 and began to convert
    these notes into shares of the Company&#146;s common stock using
    the default conversion rate as described in Note&#160;11. The
    Company and the lenders further agreed that no interest would be
    charged during the six-month extension and that it is the
    lenders&#146; intention to convert the loan into shares
    sufficient to pay-off the balance of the debt.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On March&#160;6, 2009, the Company entered into an agreement
    with the holders of its $17.5&#160;million of New&#160;Jersey
    Economic Development Authority Bonds to release
    $2.0&#160;million for capital expenditures and lease payments on
    its New Jersey facility and to defer interest payments on the
    bonds thru July&#160;30, 2009. These funds had been held in a
    reserve for bond principal and interest payments along with a
    reserve for lease payments. As consideration for the release of
    the reserve funds, the Company issued the bond holders 2,284,409
    Class&#160;B warrants. The Class&#160;B warrants are exercisable
    at $11.00 per warrant share.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On March&#160;6, 2009, the Company entered into a into an
    agreement with a private investor under which, upon stockholder
    approval, will issue a series of 10% convertible notes in an
    aggregate principal amount of up to $1,500,000 with a 10%
    original issue discount. The investor placed funds into escrow
    on March&#160;10, 2009 to acquire $500,000 in principal amount
    of the convertible notes to be released upon receiving
    stockholder approval, and will acquire four additional $250,000
    increments in principal amount of the note with the first
    increment occurring on the 30th&#160;day after receiving
    stockholder approval, and the remaining three increments
    occurring monthly, thereafter.
</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-31
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="8%"></TD>
    <TD width="92%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">Item&#160;1.<I>&#160;&#160;</I></FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: 'Times New Roman', Times">Financial
    Statements</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='306'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    BALANCE SHEETS</FONT></B></A>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 9pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="76%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>June&#160;30,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>December&#160;31,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Unaudited)</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>(Audited)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD colspan="9" align="center" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <B>ASSETS</B>
</DIV>
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    CURRENT ASSETS
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Cash and cash equivalents
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,808,156
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,357,940
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Restricted cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    50,941
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,547,557
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Accounts receivable, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    503,998
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    313,650
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Inventories
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    407,973
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    289,730
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Prepaid rent
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    490,286
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    389,930
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Other prepaid expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    128,399
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    73,937
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Deposits
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    92,520
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    141,423
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Other receivables
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    94,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Deferred financing and issuance costs, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22,042
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 27pt">
    Total current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,482,273
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,230,459
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Deposits
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    861,244
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    912,054
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Restricted cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    29,716
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    60,563
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Property and equipment, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22,825,134
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    19,725,146
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    <FONT style="white-space: nowrap">Construction-in-progress</FONT>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    217,564
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    974,900
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Capitalized bond costs, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    838,175
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    862,010
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Intangible assets, net
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,709,961
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,852,876
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 27pt">
    Total assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    30,964,067
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    32,618,008
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="line-height: 9pt">
<TD colspan="9">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="9" align="center" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    <B>LIABILITIES AND OWNERS&#146; EQUITY (DEFICIT)</B>
</DIV>
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    CURRENT LIABILITIES
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Term notes payable &#151; current
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,261,089
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    89,170
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Accounts payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,279,836
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,583,030
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Accrued compensation, officers, directors and consultants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    389,849
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    430,748
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Accrued legal and other expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    363,545
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    164,620
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Accrued interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    616,249
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    601,166
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Convertible notes payable, net of unamortized discount
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    342,984
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,602,660
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Capital lease obligations &#151; current
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,284
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
     Mortgage payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,006
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 27pt">
    Total current liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,264,836
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,474,400
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Capital lease obligation, net of current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34,806
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Term notes payable, net of current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,008,094
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Mortgage payable, net of current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    245,160
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Convertible note payable, net of current portion
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    198,466
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    351,516
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Bonds payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    17,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 27pt">
    Total liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    26,006,202
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    27,571,076
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    COMMITMENTS AND CONTINGENCIES
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 9pt">
    OWNERS&#146; EQUITY (DEFICIT)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Preferred stock, $.0001&#160;par value, authorized 10,000,000
    shares; no shares issued and outstanding
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Common stock, $.0001&#160;par value, authorized
    40,000,000&#160;shares at December&#160;31, 2008 and 75,000,000
    at June&#160;30, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    743
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Additional paid-in capital
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    40,668,709
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    31,031,647
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Member&#146;s equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    619,657
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 18pt">
    Accumulated deficit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (35,712,679
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (26,605,115
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 27pt">
    Total owners&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,957,865
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,046,932
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 27pt">
    Total liabilities and owners&#146; equity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    30,964,067
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    32,618,008
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-32
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='307'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    STATEMENTS OF OPERATIONS</FONT></B></A>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="49%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Three Months Ended</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Six Months Ended</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>June&#160;30,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>June&#160;30,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>June&#160;30,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>June&#160;30,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="14" align="center" valign="bottom">
    <B>(Unaudited)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revenues
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    992,364
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    492,864
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,484,203
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    752,907
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Cost of good sold
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,113,074
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    402,552
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,757,264
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    624,548
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Gross (loss) profit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,120,710
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    90,312
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,273,061
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    128,359
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Operating expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    General and administrative expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,502,643
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,759,197
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,175,661
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,346,419
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Research and development
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    12,116
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    70,540
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    179,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    198,387
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Depreciation expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    306,036
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,051
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    626,216
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,889
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Amortization of capitalized costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    79,251
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    99,834
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    180,542
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    186,083
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Amortization of license
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,125
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,125
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Loss from operations
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,024,881
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,846,435
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (7,443,230
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (5,617,669
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Other income/(expenses)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,952
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    77,807
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22,247
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    206,627
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Derivative gain
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,153,106
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,565,091
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Other income
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    39,201
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    39,201
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Interest expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,202,959
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,374,165
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,109,711
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,127,332
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,001,300
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,296,358
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    516,828
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,920,705
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Loss before provision for income taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,023,581
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,142,793
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926,402
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (8,538,374
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Provision for income taxes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 30pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (3,023,581
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (6,142,793
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926,402
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (8,538,374
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share, basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (0.19
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.02
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (0.58
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.49
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Weighted average common shares outstanding
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    15,937,329
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,009,919
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    11,985,904
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    5,747,616
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-33
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='308'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    STATEMENT OF CHANGES IN OWNERS&#146; EQUITY (DEFICIT)<BR>
    </FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">Six
    Months Ended June&#160;30, 2009</FONT></B></A>
</DIV>
</A>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 8pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="36%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=07 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=07 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=07 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=07 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Common Stock</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Total<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Share Issued and<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Additional<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Member&#146;s<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Accumulated<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Owners&#146; Equity<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Outstanding</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Amount</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Paid-in Capital</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Equity</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Deficit</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>(Deficit)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="22" align="center" valign="bottom">
    <B>(Unaudited)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance, January&#160;1, 2009, before cumulative effect of
    change in accounting principle
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,431,436
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    743
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    31,031,647
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    619,657
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (26,605,115
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5,046,932
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Cumulative effect of change in accounting principle
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,936,250
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (2,146,858
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (5,083,108
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance, January&#160;1, 2009, after cumulative effect of change
    in accounting principle
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,431,436
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    743
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    28,095,397
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    619,657
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (28,751,973
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (36,176
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Member&#146;s contributions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    915,651
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    915,651
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Member&#146;s distributions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (201,630
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (201,630
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Deconsolidation of former variable interest entity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,367,982
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,367,982
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued to holders of convertible notes payable in
    connection with extension
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    200,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    561,980
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    562,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued upon conversion of convertible notes payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7,600,644
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    760
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,224,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,225,595
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued as compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    121,528
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    12
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    120,301
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    120,313
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Warrants issued in connection with release of restricted cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    662,479
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    662,479
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Warrants issued in connection with financing short-term
    non-convertible note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    920,995
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    920,995
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Issuance of stock options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    190,022
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    190,022
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Common stock issued upon exercise of warrants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    150
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,964,850
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,965,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Issuance of common stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    150
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,927,850
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,928,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Net income (loss)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    34,304
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,960,706
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926,402
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Balance, June&#160;30, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18,353,608
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    40,668,709
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (35,712,679
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4,957,865
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-34
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <A name='309'><B><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATED
    STATEMENTS OF CASH FLOWS</FONT></B></A>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 8pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="79%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Six Months Ended</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>June&#160;30,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>June&#160;30,<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom">
    <B>(Unaudited)</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    CASH FLOWS FROM OPERATING ACTIVITIES:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net loss
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926,402
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    (8,538,374
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Adjustments to reconcile net loss to net cash used in operating
    activities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Consolidation of variable interest entity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,164
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Deconsolidation of variable interest entity
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (596,170
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Amortization of intangible asset &#151; license
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    8,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Amortization of capitalized bond costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    23,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    23,835
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Amortization of deferred financing fees
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22,042
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    159,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Amortization of intangible assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    134,665
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Depreciation of fixed assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,015,444
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    98,194
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Beneficial conversion feature
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    230,492
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    858,064
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Amortization of discounts on private financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    147,813
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,563,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Common stock issued for extension of convertible note payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    562,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Common stock issued as compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    120,313
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Stock option compensation expense
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    190,022
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,329,951
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Warrants issued in connection with private financing and equity
    transactions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,583,474
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Derivative gain
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,565,091
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Changes in operating assets and liabilities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    (Increase) decrease in:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Accounts receivable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (262,558
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (238,340
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Inventory
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (118,243
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (265,187
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Prepaid expenses and other current assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (154,818
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (576,152
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Other assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    94,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,115
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Deposits
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    108,713
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (147,397
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Increase (decrease) in:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Accounts payable and other accrued expenses
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,195,195
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    598,309
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Accrued compensation &#151; officers, directors and consultants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (40,899
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (38,423
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Accrued interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    133,467
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    29,729
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 35pt">
    Other
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (39,201
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    25,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 43pt">
    Net cash used in operating activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,133,407
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,094,412
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    CASH FLOWS FROM INVESTING ACTIVITIES
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Release of restricted cash
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,527,463
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,194,617
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Cash paid for acquisitions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Purchase of fixed assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (3,512,559
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (131,222
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Capitalized interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (398,570
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Construction costs
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (5,329,283
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 43pt">
    Net cash used in investing activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (985,096
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,164,458
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    CASH FLOWS FROM FINANCING ACTIVITIES Member&#146;s contributions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    230,983
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    425,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Member&#146;s distributions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (201,630
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net proceeds from exercise of options
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    536,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net proceeds from exercise of warrants
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,965,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,159,580
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net proceeds from stock offering
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,928,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Net proceeds from nonconvertible short-term note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,183,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Repayment of nonconvertible short-term note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,331,313
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Proceeds from private financing, net of original issue discount
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,715,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Repayment of capital lease obligations
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,888
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Repayment of term notes
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (197,990
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (657,276
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 17pt">
    Repayment of mortgage payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (943
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (4,833
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 43pt">
    Net cash provided by financing activities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,568,719
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    10,173,721
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    NET (DECREASE) INCREASE IN CASH
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,549,784
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,914,851
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Cash and cash equivalents, beginning of period
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    3,357,940
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    287,867
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Cash and cash equivalents, end of period
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,808,156
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    5,202,718
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -8pt; margin-left: 8pt">
    Supplemental cash flow information:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Cash paid during the period in:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Interest
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,031,973
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    893,571
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Non-cash financing activities:
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Financing costs paid from proceeds of private financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    335,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Equipment acquired through assumption of capital lease
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52,979
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Equipment acquired through assumption of term note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    118,250
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Common stock issued upon conversion of convertible notes payable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    6,225,595
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Beneficial conversion discount on convertible note
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,943,386
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -9pt; margin-left: 26pt">
    Discount on warrants issued in connection with financing
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,113,750
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying notes are an integral part of these
    consolidated financial statements.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-35
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->
<A name='310'>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL STATEMENTS<BR>
    </FONT></B>
</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">(UNAUDITED)</FONT></B>
</DIV>
</A>
<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;1&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">BASIS OF
    PRESENTATION AND NATURE OF OPERATIONS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying unaudited interim consolidated financial
    statements have been prepared in accordance with accounting
    principles generally accepted in the United States of America
    and the rules and regulations of the Securities and Exchange
    Commission (the &#147;SEC&#148;) for interim financial
    reporting. Certain information and footnote disclosures normally
    included in the annual financial statements of Converted
    Organics Inc. (the &#147;Company&#148;) have been condensed or
    omitted. In the Company&#146;s opinion, the unaudited interim
    consolidated financial statements and accompanying notes reflect
    all adjustments, consisting of normal and recurring adjustments
    that are necessary for a fair presentation of its financial
    position and operating results as of and for the three and six
    month interim periods ended June&#160;30, 2009 and 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The results of operations for the interim periods are not
    necessarily indicative of the results to be expected for the
    entire year. This
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    should be read in conjunction with the audited financial
    statements and notes thereto included in the Company&#146;s
    <FONT style="white-space: nowrap">Form&#160;10-K</FONT>
    as of and for the year ended December&#160;31, 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">NATURE
    OF OPERATIONS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics Inc. uses food and other waste as a raw
    material to manufacture, sell and distribute all-natural soil
    amendment products combining disease suppression and nutrition
    characteristics. The Company generates revenues from two
    sources: product sales and tip fees. Product sales revenue comes
    from the sale of the Company&#146;s fertilizer products. The
    Company&#146;s products possess a combination of nutritional,
    disease suppression and soil amendment characteristics. Tip fee
    revenue is derived from waste haulers who pay the Company
    &#147;tip&#148; fees for accepting food waste generated by food
    distributors such as grocery stores, produce docks and fish
    markets, food processors, and hospitality venues such as hotels,
    restaurants, convention centers and airports.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics of California, LLC (&#147;California&#148;),
    a California limited liability company and wholly-owned
    subsidiary of the Company, was formed when the Company acquired
    the assets of United Organics Products, LLC. California operates
    a plant in Gonzales, California, in the Salinas Valley.
    California produces approximately 25 tons of organic fertilizer
    per day, and sells primarily to the California agricultural
    market. The California facility employs a proprietary method
    called High Temperature Liquid Composting (&#147;HTLC&#148;).
    The facility is currently being upgraded to expand its capacity
    and to enable it to accept larger amounts of food waste from
    waste haulers, thereby increasing revenue.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s second facility, located in Woodbridge, New
    Jersey (&#147;Woodbridge&#148;), is designed to service the New
    York-Northern New Jersey metropolitan area. The Company
    constructed this facility and it became partially operational in
    the second quarter of 2008. Converted Organics of Woodbridge,
    LLC, a New Jersey limited liability company and wholly owned
    subsidiary of the Company, was formed for the purpose of owning,
    constructing and operating the Woodbridge, New Jersey facility.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics of Rhode Island, LLC (&#147;Rhode
    Island&#148;), a Rhode Island limited liability company and
    subsidiary of the Company, was formed in July 2008 for the
    purpose of developing a facility at the Rhode Island central
    landfill.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;2&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">GOING
    CONCERN&#160;&#151; MANAGEMENT&#146;S PLAN OF
    OPERATION</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of December&#160;31, 2008, the Company had incurred a net
    loss of approximately $16.2&#160;million during the year ended
    December&#160;31, 2008, had a working capital deficiency as of
    December&#160;31, 2008 and an accumulated deficit of
    approximately $26.6&#160;million. As of June&#160;30, 2009, the
    Company continued to have a working capital deficiency and for
    the six months ended June&#160;30, 2009 the Company had a net
    loss of $6.9&#160;million and an accumulated deficit of
    approximately $35.7&#160;million. The report of our independent
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-36
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    registered public accounting firm as of and for the year ended
    December&#160;31, 2008 contains an explanatory paragraph raising
    substantial doubt about the Company&#146;s ability to continue
    as a going concern. The consolidated financial statements do not
    include adjustments that might result from the outcome of this
    uncertainty.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company currently has manufacturing capabilities in its
    Woodbridge and Gonzales facilities as a means to generate
    revenues and cash. The Company&#146;s cash requirements on a
    monthly basis are approximately $275,000 at the corporate level,
    $500,000 for Woodbridge and $175,000 for Gonzales. Currently,
    only the Gonzales facility is generating enough cash flow to
    cover its cash requirements, leaving the Company with a cash
    shortfall of approximately $725,000 per month. The Company
    estimates, that at current production capacity, it could provide
    enough product to achieve additional sales of $1,000,000 to
    $1,500,000 per month which, at those levels, would provide
    sufficient cash flow to cover the Company&#146;s operating
    requirements, including additional variable costs associated
    with increased production. Until such sales levels are achieved
    and the Company is cash flow positive, the Company will have to
    seek additional means of financing in order to cover the
    shortfall.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the first six months of 2009, the Company has settled the
    entire $4.5&#160;million convertible debenture balance from the
    Company&#146;s private financing in 2008 (the &#147;2008
    Financing&#148;) by converting the balance into shares of its
    common stock. In addition, during the first six months of 2009,
    the holders of the NJEDA bonds released $2.0&#160;million of
    escrowed funds for the Company to use and the Company has
    secured $1,331,000 of secured debt financing. In addition, the
    Company has filed a shelf registration statement which will
    allow the Company to sell shares into the market to raise
    additional financing. The Company plans to use the proceeds from
    the $1,331,000 secured debt and the shelf registration statement
    to fund working capital requirements, retire debt and to add
    additional sales and marketing personnel in order to achieve
    increased sales levels during the remainder of 2009. During the
    second quarter of 2009, the Company raised approximately
    $4.2&#160;million from the sale of common stock registered under
    the shelf registration statement. These funds were used to
    retire the $1,331,000 secured debt and to provide additional
    working capital for the Company.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    There can be no assurance that the Company can raise additional
    funds from the sale of common stock registered under the shelf
    registration statement or achieve the desired sales levels and,
    if neither were achieved, the Company estimates that it would
    have sufficient cash to last through October 2009. In addition,
    the Company has outstanding amounts due to its New Jersey
    construction vendors of approximately $4.2&#160;million. The
    Company does not anticipate that funds from the sale of common
    stock registered under the shelf registration statement will be
    used towards payment of these amounts. The Company has
    negotiated with all, except one, contractor to issue notes for
    the outstanding amount owed. The Company has not finalized
    negotiations with the remaining contractor who has placed a lien
    on the Woodbridge facility and has commenced a lawsuit in the
    matter.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;3&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">SIGNIFICANT
    ACCOUNTING POLICIES</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CONSOLIDATION</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The accompanying unaudited interim consolidated financial
    statements include the transactions and balances of Converted
    Organics Inc. and its subsidiaries, Converted Organics of
    California, LLC, Converted Organics of Woodbridge, LLC and
    Converted Organics of Rhode Island, LLC. The transactions and
    balances of Valley Land Holdings, LLC, a variable interest
    entity of Converted Organics of California, LLC, were also
    consolidated therein until April&#160;1, 2009. All intercompany
    transactions and balances have been eliminated in consolidation.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The consolidated financial statements included Valley Land
    Holdings, LLC (&#147;VLH&#148;), as VLH had been deemed to be a
    variable interest entity of the Company as it was the primary
    beneficiary of that variable interest entity following the
    acquisition of the net assets of United Organic Products, LLC.
    VLH&#146;s assets and
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-37
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    liabilities consist primarily of cash, land and a mortgage note
    payable on the land on which the California facility is located.
    Its operations consist of rental income on the land from the
    Company and related operating expenses. In 2009, the sole member
    of VLH contributed cash and property to VLH in a
    recapitalization. VLH has henceforth been sufficiently
    capitalized and is no longer considered to be a variable
    interest entity of the Company. The Company has deconsolidated
    VLH as a variable interest entity as of April&#160;1, 2009 in
    its financial statements.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">USE OF
    ESTIMATES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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 the reported amounts and disclosures
    in the consolidated financial statements. Actual results could
    differ from those estimates.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CASH
    AND CASH EQUIVALENTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company considers financial instruments with an original
    maturity date of three months or less from the date of purchase
    to be cash equivalents. The Company had cash equivalents of $0
    at June&#160;30, 2009 and $534,800 at December&#160;31, 2008
    consisting of certificates of deposit. These certificates of
    deposit were held by VLH.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">RESTRICTED
    CASH</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of June&#160;30, 2009, the Company had remaining
    approximately $81,000 of restricted cash as required by its bond
    agreement with the New Jersey Economic Development Authority.
    This cash was raised by the Company in its initial public
    offering and bond financing on February&#160;16, 2007 and is set
    aside in reserve for bond principal and interest payments along
    with a reserve for lease payments. The Company has classified
    this restricted cash as non-current to the extent that such
    funds are to be used to acquire non-current assets or are to be
    used to service non-current liabilities. Third party trustee
    approval is required for disbursement of all restricted funds.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">ACCOUNTS
    RECEIVABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Accounts receivable represents 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 June&#160;30, 2009 and December&#160;31, 2008, an
    allowance for doubtful accounts of $16,000 has been established
    against certain receivables that management has identified as
    uncollectible.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">INVENTORIES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Inventories are valued at the lower of cost or market, with cost
    determined by the first in, first out basis. Inventory consists
    primarily of raw materials and finished goods, which consist of
    soil amendment products. Inventory balances are presented net of
    applicable reserves. There were no inventory reserves deemed
    necessary by management at June&#160;30, 2009 and
    December&#160;31, 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PREPAID
    RENT</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has recorded prepaid rent on its consolidated
    balance sheets which represents the difference between actual
    lease rental payments made as of June&#160;30, 2009 and
    December&#160;31, 2008, and the straight-line rent expense
    recorded in the Company&#146;s consolidated statements of
    operations for the periods then ended relating to the
    Company&#146;s facilities in Woodbridge, New Jersey and
    Gonzales, California.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-38
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">DEFERRED
    FINANCING COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the private financing arrangement of
    January&#160;24, 2008, the Company incurred legal and placement
    fees of $345,000. These fees were amortized over one year.
    Amortization expense of $22,042 and $150,458 was recorded during
    the six months ended June&#160;30, 2009 and 2008, respectively,
    related to these costs. These costs have been fully amortized
    into expense as of June&#160;30, 2009.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">INTANGIBLE
    ASSETS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company accounts for its intangible assets in accordance
    with SFAS&#160;No.&#160;142, <I>&#147;Goodwill and Other
    Intangible Assets.&#148; </I>SFAS&#160;No.&#160;142 requires
    that intangible assets with finite lives, such as the
    Company&#146;s license, 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.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">LONG-LIVED
    ASSETS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In accordance with SFAS&#160;No.&#160;144, <I>&#147;Accounting
    for the Impairment or Disposal of Long-Lived Assets&#148;,
    </I>long-lived assets are reviewed for impairment whenever
    events or changes in circumstances indicate that the carrying
    amount of an asset may not be recoverable. Such reviews are
    based on a comparison of the asset&#146;s undiscounted cash
    flows to the recorded carrying value of the asset. If the
    asset&#146;s recorded carrying value exceeds the sum of the
    undiscounted cash flows expected to result from the use and
    eventual disposition of the asset, the asset is written down to
    its estimated fair value. Impairment charges, if any, are
    recorded in the period in which the impairment is determined. No
    impairment charges were deemed necessary during the three and
    six month periods ended June&#160;30, 2009 or 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PROPERTY
    AND EQUIPMENT</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Property and equipment are stated at cost. Depreciation is
    computed on the straight-line basis over the estimated useful
    lives of seven to twenty years.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CAPITALIZED
    BOND COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with its $17.5&#160;million bond financing on
    February&#160;16, 2007, the Company has capitalized bond
    issuance costs of $953,375 and is amortizing these costs over
    the life of the bond. Amortization expense of $11,917 and
    $23,835 was recorded in each of the three and six month periods
    ended June&#160;30, 2009 and 2008, respectively.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">REVENUE
    RECOGNITION</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In accordance with Staff Accounting Bulletin&#160;104,
    <I>&#147;Revenue Recognition in Financial Statements,&#148;
    </I>(&#147;SAB&#160;104&#148;) revenue is recognized when each
    of the following criteria is met:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Persuasive evidence of a sales arrangement exists;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Delivery of the product has occurred;
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    The sales price is fixed or determinable,&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    Collectability is reasonably assured.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    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.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-39
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">SHIPPING
    AND HANDLING COSTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company records freight billed to customers for shipment of
    product as revenue with an offsetting charge to cost of goods
    sold for freight paid on shipments to customers.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">FAIR
    VALUE MEASUREMENTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has partially implemented SFAS&#160;No.&#160;157,
    <I>&#147;Fair Value Measurements&#148;</I>
    (&#147;SFAS&#160;No.&#160;157&#148;) for assets and liabilities.
    SFAS&#160;No.&#160;157 defines fair value, establishes a
    framework for measuring fair value, and expands disclosure about
    fair value. This standard only applies when other standards
    require or permit the fair value measurement of assets and
    liabilities. It does not increase the use of fair value
    measurement. The standard is effective for fiscal years
    beginning after November&#160;15, 2008. The major categories of
    assets and liabilities that have not been measured and disclosed
    using SFAS&#160;No.&#160;157 fair value guidance are property
    and equipment and goodwill.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">NEWLY
    ADOPTED ACCOUNTING STANDARDS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In January 2009, the Company adopted Statement of Financial
    Accounting Standards (&#147;SFAS&#148;), No.&#160;161,
    <I>&#147;Disclosures about Derivative Instruments and Hedging
    Activities&#148; </I>(&#147;SFAS&#160;161&#148;), which changes
    the disclosure requirements for Derivative instruments and
    hedging activities. SFAS&#160;161 requires enhanced disclosures
    about (a)&#160;how and why an entity uses derivative
    instruments, (b)&#160;how derivative instruments and related
    hedged items are accounted for under SFAS&#160;No.&#160;133,
    <I>&#147;Accounting for Derivative Instruments and Hedging
    Activities&#148; </I>and its related interpretations, and
    (c)&#160;how derivative instruments and related hedged items
    affect an entity&#146;s financial position, financial
    performance, and cash flows. The adoption of SFAS&#160;161 did
    not have a material impact on the condensed consolidated
    financial statements.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In January 2009, the Company adopted Emerging Issues Task Force
    &#147;(EITF&#148;) Issue
    <FONT style="white-space: nowrap">No.&#160;07-5,</FONT>
    <I>Determining Whether an Instrument (or Embedded Feature) is
    Indexed to an Entity&#146;s Own Stock
    </I><FONT style="white-space: nowrap">(&#147;EITF&#160;07-5&#148;)</FONT>
    effective January&#160;1, 2009. The adoption of
    <FONT style="white-space: nowrap">EITF&#160;07-5&#146;s</FONT>
    requirements can affect the accounting for warrants and many
    convertible instruments with certain provisions that protect
    holders from a decline in the stock price (or
    &#147;down-round&#148; provisions). Warrants and convertible
    instruments with such provisions may no longer be recorded in
    equity. The Company evaluated whether its stock warrants and the
    conversion feature in its convertible notes contain provisions
    that protect holders from declines in the stock price or
    otherwise could results in modification of the exercise price
    <FONT style="white-space: nowrap">and/or</FONT>
    shares to be issued under the respective agreements based on a
    variable that is not an input to the fair value of a
    <FONT style="white-space: nowrap">fixed-for-fixed</FONT>
    option. The Company determined that the conversion features in
    the convertible notes issued in the January 2008 private
    financing contain such provisions.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In accordance with
    <FONT style="white-space: nowrap">EITF&#160;07-5,</FONT>
    the Company, beginning on January&#160;1, 2009, bifurcated and
    recognized these embedded conversion features as derivative
    liabilities at their fair value on each reporting date. The
    cumulative effect of the change in accounting for these
    instruments of $5,083,108 was recognized as an adjustment to the
    opening balance of accumulated deficit and additional paid-in
    capital at January&#160;1, 2009. The cumulative effect
    adjustment was the difference between the amounts recognized in
    the consolidated balance sheet before initial adoption of
    <FONT style="white-space: nowrap">EITF&#160;07-5</FONT>
    and the amounts recognized in the consolidated balance sheet
    upon the initial application of
    <FONT style="white-space: nowrap">EITF&#160;07-5.</FONT>
    The amounts recognized in the balance sheet as a result of the
    initial application of
    <FONT style="white-space: nowrap">EITF&#160;07-5</FONT>
    on January&#160;1, 2009 were determined based on the amounts
    that would have been recognized if
    <FONT style="white-space: nowrap">EITF&#160;07-5</FONT>
    had been applied from the issuance date of conversion features.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In April 2009, the FASB issued FASB Staff Position
    <FONT style="white-space: nowrap">No.&#160;FAS&#160;107-1</FONT>
    and APB
    <FONT style="white-space: nowrap">28-1,</FONT>
    <I>Interim Disclosures about Fair Value of Financial Instruments
    </I>(&#147;FSP
    <FONT style="white-space: nowrap">No.&#160;107-1&#148;).</FONT>
    FSP
    <FONT style="white-space: nowrap">No.&#160;107-1</FONT>
    requires summarized disclosure in interim periods of the fair
    value of all financial instruments for which it is practicable
    to estimate that value, whether recognized or not recognized in
    the financial statements, as required by SFAS&#160;No.&#160;107,
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-40
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Disclosures about Fair Value of Financial Instruments </I>and
    Accounting Principles Board Opinion No.&#160;28, <I>Interim
    Financial Reporting. </I>Previous to FSP
    <FONT style="white-space: nowrap">No.&#160;107-1,</FONT>
    such disclosures were required only for annual periods. The
    adoption of FSP
    <FONT style="white-space: nowrap">No.&#160;107-1</FONT>
    on April&#160;1, 2009 resulted in additional disclosures in the
    Company&#146;s consolidated financial statements.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In May 2009, the FASB issued SFAS&#160;No.&#160;165,
    <I>Subsequent Events </I>(&#147;SFAS&#160;No.&#160;165&#148;).
    SFAS&#160;No.&#160;165 establishes general standards of
    accounting for and disclosure of events that occur after the
    balance sheet date but before financial statements are issued or
    are available to be issued. The adoption of
    SFAS&#160;No.&#160;165 on June&#160;30, 2009 required the
    Company to disclose the date through which they have evaluated
    subsequent events and whether that date is the date the
    financials were issued.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">EARNINGS
    (LOSS) PER SHARE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Basic earnings (loss) per share (&#147;EPS&#148;) is computed by
    dividing the net income (loss) attributable to the common
    stockholders (the numerator) by the weighted average number of
    shares of common stock outstanding (the denominator) during the
    reporting periods. Diluted income (loss) per share is computed
    by increasing the denominator by the weighted average number of
    additional shares that could have been outstanding from
    securities convertible into common stock, such as stock options
    and warrants (using the &#147;treasury stock&#148; method), and
    convertible preferred stock and debt (using the
    &#147;if-converted&#148; method), unless their effect on net
    income (loss) per share is antidilutive. Under the
    &#147;if-converted&#148; method, convertible instruments are
    assumed to have been converted as of the beginning of the period
    or when issued, if later. The effect of computing the diluted
    income (loss) per share is antidilutive and, as such, basic and
    diluted earnings (loss) per share are the same for the three and
    six month periods ended June&#160;30, 2009 and 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">SEGMENT
    REPORTING</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has no reportable segments as defined by
    SFAS&#160;No.&#160;131, <I>&#147;Disclosure about Segments of an
    Enterprise and Related Information.&#148;</I>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;4&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">INVENTORIES</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s inventories consisted of the following at
    June&#160;30, 2009 and December&#160;31, 2008:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="79%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="6%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Finished goods
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    114,580
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    214,053
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Raw materials
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    152,016
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18,785
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Packaging materials
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    141,377
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    56,892
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total inventories
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    407,973
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    289,730
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;5&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">FAIR
    VALUE MEASUREMENTS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    SFAS&#160;No.&#160;157, <I>&#147;Fair Value Measurements&#148;
    </I>(SFAS&#160;No.&#160;157), defines fair value as the price
    that would be received to sell an asset or paid to transfer a
    liability in an orderly transaction between market participants,
    as of the measurement date. The standard specifies a hierarchy
    of valuation techniques based upon whether the inputs to those
    valuation techniques reflect assumptions other market
    participants would use based upon market data obtained from
    independent sources (also referred to as observable inputs). In
    accordance with SFAS&#160;No.&#160;157, the following summarizes
    the fair value hierarchy:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Level&#160;1</I>&#160;&#151; Quoted prices in active markets
    that are unadjusted and accessible at the measurement date for
    identical, unrestricted assets or liabilities;
</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-41
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="2%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Level&#160;2</I>&#160;&#151; Quoted prices for identical
    assets and liabilities in markets that are not active, quoted
    prices for similar assets and liabilities in active markets or
    financial instruments for which significant observable inputs
    are available, either directly or indirectly such as interest
    rates and yield curves that are observable at commonly quoted
    intervals;&#160;and
</TD>
</TR>


<TR style="line-height: 6pt; font-size: 1pt"><TD>&nbsp;</TD></TR>


<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    &#149;&#160;
</TD>
    <TD align="left">
    <I>Level&#160;3</I>&#160;&#151; prices or valuations that
    require inputs that are unobservable.
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In certain cases, the inputs used to measure fair value may fall
    into different levels of the fair value hierarchy. In such
    cases, the level in the fair value hierarchy within which the
    fair value measurement in its entirety falls has been determined
    based on the lowest level input that is significant to the fair
    value measurement in its entirety. The Company&#146;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.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company&#146;s assets and liabilities that are reported at
    fair value in the accompanying consolidated balance sheets as of
    June&#160;30, 2009 and December&#160;31, 2008 were as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="51%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="13%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="9%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="13%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Balance</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Observable Inputs</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>June&#160;30, 2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>December&#160;31, 2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Assets
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Certificate of Deposit
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    Level 2
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    0
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    534,821
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has other non-derivative financial instruments, such
    as cash, accounts receivable, accounts payable, accrued expenses
    and long-term debt, whose carrying amounts approximate fair
    value.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;6&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">DEBT</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">TERM
    NOTES</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has a term note payable to its CEO, Edward J.
    Gildea. The unsecured term note for $89,170 is dated
    April&#160;30, 2007 with an original maturity of April&#160;30,
    2009 and accrues interest at 12% per annum. The note has been
    extended for one year until April&#160;30, 2010. The Company
    paid accrued interest of $21,400 upon extension of the
    note&#146;s due date. This note is subordinate to the New Jersey
    EDA bonds.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company entered into a financing agreement with an equipment
    financing company to acquire equipment for its Woodbridge
    facility. The note is for $118,250, bears an imputed interest
    rate of 9% and has a three year term, maturing January, 2012.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On April&#160;1, 2009, the Company agreed to convert certain
    accounts payable into a 12&#160;month note with its landlord at
    the New Jersey facility, Recycling Technology Development
    Corporation (&#147;Recycling Technology&#148;). The Note bears
    interest at 9%, payable quarterly in arrears commencing
    September&#160;30, 2009. The Note requires payments of $263,573
    on September 30 and December&#160;31, 2009, to be applied first
    to accrued interest and then to principal. A final installment
    of $318,832 is due on March&#160;31, 2010.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On June&#160;17, 2009, the Company agreed to convert certain
    accounts payable into a 24&#160;month note with SNC-Lavalin
    Project Services, Inc. (&#147;SNC-Lavalin&#148;) for $888,000.
    The terms of the Note require a $100,000 down payment, interest
    only payments for six months and the remaining principal balance
    to be repaid in 18&#160;monthly installments of $43,778
    commencing January&#160;16, 2010. The Note has a stated interest
    rate of 6% for the first six months and 0% for months seven
    through twenty four. SNC-Lavalin&#146;s lien will be released
    upon full and final payment of the Note. The Company has
    recorded a discount on the note representing imputed interest of
    $39,200, which will be amortized during the non-interest bearing
    period of the note repayment.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On June&#160;19, 2009, the Company also agreed to convert
    certain accounts payable into a 24&#160;month note with
    Hatzel&#160;&#038; Buehler, Inc. (&#147;Hatzel&#160;&#038;
    Buehler&#148;) for $620,235. The terms of the Note require a
    $65,560 down payment, interest only payments for six months and
    the remaining principal and interest balance to be
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-42
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    repaid in 18&#160;monthly installments of $32,300 commencing
    February&#160;1, 2009. The Note has a stated interest rate of 6%
    for the entire 24&#160;month term. Hatzel&#160;&#038;
    Buehler&#146;s lien will be released upon full and final payment
    of the Note.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company obtained the necessary bondholder consents to enter
    into these agreements.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">BOND
    FINANCING</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, concurrent with its initial public
    offering, the Company&#146;s wholly-owned subsidiary,
    Woodbridge, completed the sale of $17,500,000 of New Jersey
    Economic Development Authority Bonds. Direct financing costs
    related to this issuance totaled approximately $953,000, which
    have been capitalized and are being amortized over the life of
    the bonds. The bonds carry a stated interest rate of 8% and
    mature on August&#160;1, 2027. The bonds are secured by a
    leasehold mortgage and a first lien on the equipment of
    Woodbridge. In addition, Woodbridge had agreed to, among other
    things, establish a fifteen month capitalized interest reserve
    and to comply with certain financial statement ratios. The
    capitalized interest reserve has been depleted and is now being
    funded monthly by the Company. The Company has provided a
    guarantee to the bondholders on behalf of Woodbridge for the
    entire bond offering.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On March&#160;6, 2009, the Company entered into an agreement
    with the holders of the New Jersey Economic Development
    Authority Bonds to release $2.0&#160;million for capital
    expenditures on its New Jersey facility and to defer interest
    payments on the bonds through July&#160;30, 2009. These funds
    had been held in a reserve for bond principal and interest
    payments along with a reserve for lease payments. As
    consideration for the release of the reserve funds, the Company
    issued the bond holders 2,284,409 Class&#160;B warrants. The
    Class&#160;B warrants are exercisable at $11.00 per warrant. The
    expense associated with these warrants of $662,000 is reflected
    as interest expense in the consolidated statements of operations
    for the six months ended June&#160;30, 2009. On July&#160;30,
    2009 the deferred interest payments were paid in full.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CONVERTIBLE
    NOTE&#160;PAYABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, in conjunction with the purchase of
    the net assets of UOP, the Company issued a note payable to the
    former sole member in the amount of $1,000,000. The note bears
    interest of 7% per annum and matures on February&#160;1, 2011;
    monthly principal and interest payments are $30,877. The note
    became convertible by the holder six months after issuance. The
    Company recognized a discount related to the intrinsic value of
    the beneficial conversion feature of the note as interest
    expense through the stated redemption date of the note. That
    amount was calculated to be $7,136, and has been recorded as a
    component of additional paid-in capital. The balance of this
    note and the related interest expense had been eliminated in the
    consolidation of VLH, a variable interest entity, during the
    three month period ended March&#160;31, 2009, as the related
    convertible note receivable was contributed to VLH by its
    member. As of June&#160;30, 2009, VLH is no longer considered to
    be a variable interest entity of the Company, and therefore the
    balance of the note and the related interest are no longer
    eliminated in the consolidation.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the six months ending June&#160;30, 2009, the holder of
    the note commenced converting the principal and interest
    payments to shares of common stock. Accordingly, the Company
    issued 102,500&#160;shares of common stock to the note holder,
    representing principal and interest payments of approximately
    $138,000.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">MORTGAGE
    NOTE&#160;PAYABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company had a mortgage note payable on the land upon which
    the California facility resides, through consolidation of VLH.
    The note is for $250,000, bears interest at 6.75% per annum and
    matures five years from inception. Monthly payments of $2,871
    are based on a ten year amortization. This mortgage payable is
    no longer reflected in the financial statements of the Company
    as the former variable interest entity has been deconsolidated.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-43
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PRIVATE
    FINANCING</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, the Company entered into a private
    financing with three investors (the &#147;Investors&#148;) for a
    total amount of $4,500,000 (the &#147;Financing&#148;). The
    Financing was offered at an original issue discount of 10%. The
    Company used the proceeds to fund the acquisitions described
    above, to fund further development activities and to provide
    working capital. As consideration for the Financing, the
    Investors received a note issued by the Company in the amount of
    $4,500,000 with interest accruing at 10% per annum to be paid
    monthly and the principal balance to be paid in full one year
    from the closing date (the &#147;Note&#148;). In addition, the
    Company issued to the Investors 750,000 Class&#160;A Warrants
    and 750,000 Class&#160;B Warrants, which may be exercised at
    $8.25 and $11.00 per warrant, respectively (the
    &#147;Warrants&#148;). The Company further agreed not to call
    any Warrants until a registration statement registering all of
    the Warrants was declared effective. A placement fee of $225,000
    was paid from the proceeds of this loan.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the Financing, the Company had agreed that
    within 75&#160;days of the closing date, the Company would have
    a shareholder vote to seek approval to issue a convertible
    debenture with an interest rate of 10% per annum, which would be
    convertible into common stock pursuant to terms of the debenture
    agreement, or such other price as permitted by the debenture
    (the &#147;Convertible Debenture&#148;). Upon shareholder
    approval, the Note was replaced by this Convertible Debenture
    and one half of each of the Class&#160;A Warrants and of the
    Class&#160;B Warrants issued were returned to the Company. Under
    the conversion option, the Investors shall have the option, at
    any time on or before the maturity date (January&#160;24, 2009),
    to convert the outstanding principal of this Convertible
    Debenture into fully-paid and non assessable shares of the
    Company&#146;s common stock at the conversion price equal to the
    lowest of (i)&#160;the fixed conversion price of $6.00 per
    share, (ii)&#160;the lowest fixed conversion price (the lowest
    price, conversion price or exercise price set by the Company in
    any equity financing transaction, convertible security, or
    derivative instrument issued after January&#160;24, 2008), or
    (iii)&#160;the default conversion price (if and so long as there
    exists an event of default, then 70% of the average of the three
    lowest closing prices of common stock during the twenty day
    trading period immediately prior to the notice of conversion).
    The Company held a special shareholders&#146; meeting on
    April&#160;3, 2008 to vote on this matter, at which time it was
    approved.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the financing, the Company entered into a
    Security Agreement with the Investors whereby the Company
    granted the Investors a security interest in Converted Organics
    of California, LLC and any and all assets that are acquired by
    the use of the funds from the Financing. In addition, the
    Company granted the Investors a security interest in Converted
    Organics of Woodbridge, LLC and all assets subordinate only to
    the current lien held by the holder of the bonds issued in
    connection with the Woodbridge facility of approximately
    $17,500,000.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with this borrowing, the Company issued
    1.5&#160;million warrants to purchase common stock, which were
    deemed to have a fair value of $5,497,500. The Company recorded
    the relative fair value of the warrants to the underlying notes
    of $2,227,500 in accordance with Accounting Principles Board
    (&#147;APB&#148;) Opinion No.&#160;14, <I>&#147;Accounting for
    Convertible Debt and Debt Issued with Stock Purchase
    Warrants&#148;</I> as additional paid-in capital and established
    a discount on the debt. The discount was being amortized over
    the life of the note (12&#160;months). On April&#160;17, 2008,
    the Investors returned to the Company 750,000 warrants that had
    been held in escrow. This reduced the value assigned to the
    warrants and, accordingly, the value assigned to the debt
    discount attributable to the warrants by $1,113,750. In
    addition, the remaining original issue discount of approximately
    $366,000 was recognized as expense on April&#160;7, 2008.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On April&#160;7, 2008, the shareholders of the Company approved
    the issuance of additional shares so that convertible notes
    could be issued to the note holders to replace the original
    notes dated January&#160;24, 2008. The Company is required to
    recognize a discount for the intrinsic value of the beneficial
    conversion feature of the notes, which is to be recognized as
    interest expense through the redemption date of the notes, which
    is January&#160;24, 2009. That amount was calculated to be
    $3,675,000, and recognition was limited to $2,936,250 in
    accordance with
    <FONT style="white-space: nowrap">EITF&#160;98-5,</FONT>
    <I>&#147;Accounting for Convertible Securities with Beneficial
    Conversion Features or </I>
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-44
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <I>Contingently Adjustable Conversion Ratios,&#148;</I> as the
    debt discount is limited to the proceeds allocated to the
    convertible instrument of $4,500,000. That discount is being
    amortized over the life of the loan. During the six month
    periods ending June&#160;30, 2009 and 2008, the Company
    recognized interest expense of $230,492 and $0 related to this
    discount.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2009 the convertible notes became due.
    Because the Company did not have sufficient cash to repay the
    notes, the Company agreed to convert the notes to shares at the
    default rate, although no event of default had occurred. As of
    March&#160;31, 2009, the note holders had converted the full
    principal amount of $4,500,000 into 7,366,310&#160;shares of
    common stock. In consideration for entering into this agreement,
    the Company granted 200,000&#160;shares of common stock to the
    note holders. An expense of $562,000 is included in the
    statement of operations for the six months ended June&#160;30,
    2009 for this stock grant, which represents the market value of
    200,000&#160;shares on the date they were granted. In addition,
    the notes accrue interest at 10% of their declining balance as
    they are paid off through the issuance of stock. An additional
    131,834&#160;shares of common stock were issued on
    April&#160;23, 2009 for accrued interest. Accrued interest of
    $7,232 has not been converted to shares of common stock.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;7, 2009, the Company entered into an agreement with
    an institutional investor (the &#147;Investor&#148;), wherein
    the Company agreed to sell to the Investor, for the sum of
    $1,200,000, six-month non-convertible original issue discount
    notes with principal amounts totaling $1,331,000 (the
    &#147;Note&#148;). The agreement provides that if the Company
    raises over $1.33&#160;million while the Notes are outstanding,
    the first $1,331,000 must be used to repay the note.
    Additionally, in connection with the Note issued pursuant to the
    agreement, the Investor received five-year warrants to purchase
    750,000&#160;shares and 350,000&#160;shares of Company common
    stock, with exercise prices of $1.00 per share and $1.50 per
    share, respectively, subject to certain anti-dilution rights for
    issuance below the exercise prices. These warrants are not
    registered and cannot be traded. The expense associated with the
    issuance of these warrants was calculated using a Black-Scholes
    model with the following assumptions: risk-free interest rate of
    2.05%; no dividend yield; volatility factor of 96.7%; and a term
    of 5&#160;years. The Company determined that the warrants issued
    have a fair value of $1,557,953. The Company recorded the
    relative fair value of the warrants to the underlying notes of
    $1,330,313 in accordance with Accounting Principles Board
    (&#147;APB&#148;) Opinion No.&#160;14, <I>&#147;Accounting for
    Convertible Debt and Debt Issued with Stock Purchase
    Warrants&#148;</I> as additional-paid-in capital and established
    a discount on the debt. The discount was fully amortized at the
    repayment of the note (12&#160;days later) and at such time the
    entire amortization totaled approximately $637,850 for the three
    months ended June&#160;30, 2009.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Also pursuant to this agreement, the investment banker was
    issued five-year warrants to purchase 135,000 and
    65,000&#160;shares of Company common stock with exercise prices
    of $1.00 per share and $1.50 per share, respectively. The
    expense associated with these warrants was calculated in the
    same manner as described above. The expense of $285,000 is
    included in general and administrative expense on the
    consolidated statements of operations for the three and six
    month periods ending June&#160;30, 2009 and 2008.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">DERIVATIVE
    INSTRUMENTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Upon the adoption of
    <FONT style="white-space: nowrap">EITF&#160;07-5</FONT>
    on January&#160;1, 2009, the Company determined that the
    conversion features within the convertible notes payable issued
    in the January 2008 private financing to be an embedded
    derivative which was required to be bifurcated and shown as a
    derivative liability subject to
    <FONT style="white-space: nowrap">mark-to-market</FONT>
    adjustment each reporting period. The fair value of the
    conversion feature was determined using the Black-Scholes model
    and resulted in a fair value of $5,083,108. The fair value at
    January&#160;1, 2009 was recognized as a cumulative effect of
    accounting change in the Company&#146;s consolidated statement
    of changes in owners&#146; equity (deficit).
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During the six months ended June&#160;30, 2009, all conversion
    features were converted to common stock at the default rate in
    accordance with the agreement dated January&#160;29, 2009 with
    the note holders. The effect of the derivative instruments in
    the six months ended June&#160;30, 2009 was recorded in the
    Company&#146;s consolidated
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-45
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    statements of operations and was a derivative gain of
    $3,565,091. No derivative liability is recorded as of
    June&#160;30, 2009 as all derivative instruments have been
    converted into common stock.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;7&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">CAPITALIZATION
    OF INTEREST COSTS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has capitalized interest costs, net of certain
    interest income, in accordance with SFAS&#160;No.&#160;62,
    <I>&#147;Capitalization of Interest Cost in Situations Involving
    Certain Tax-Exempt Borrowings and Certain Gifts and
    Grants,&#148;</I> related to its New Jersey Economic Development
    Authority Bonds in the amount of $1,077,686 as of June&#160;30,
    2009 and December&#160;31, 2008, respectively. Capitalized
    interest is initially included with
    <FONT style="white-space: nowrap">construction-in-progress</FONT>
    on the consolidated balance sheets. As assets are placed in
    service, the capitalized interest is added to the value of the
    assets on a pro-rata basis.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;8&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">OWNERS&#146;
    EQUITY (DEFICIT)</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;21, 2006, the Company merged with Mining
    Organics Management (MOM) and Mining Organics
    Management&#160;&#151; Harlem River Rail Yard (HRRY). At that
    time, MOM was a fifty-percent owner of HRRY. The mergers were
    accounted for as a recapitalization of the Company. As a result
    of the recapitalization, 600,000&#160;shares were issued to the
    members of HRRY, with 300,000&#160;shares distributed to Weston
    Solutions, Inc. and 300,000&#160;shares distributed among the
    individual members of MOM, each of whom was a founder of the
    Company.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, the Company successfully completed an
    initial public offering of 1,800,000 common shares and 3,600,000
    warrants for a total offering of $9,900,000, before issuance
    costs. The Company&#146;s initial public offering is recorded
    net of issuance costs and expenses of approximately $1,736,715.
    The warrants consist of 1,800,000 redeemable Class&#160;A
    warrants and 1,800,000 non-redeemable Class&#160;B warrants,
    each warrant to purchase one share of common stock. The common
    stock and warrants traded as one unit until March&#160;13, 2007
    when they began to trade separately.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, as part of its initial public
    offering and under the original terms of the bridge loan
    agreement, the Company issued 293,629 Bridge Equity Units to the
    Bridge Noteholders. On May&#160;23, 2007, as part of the
    repayment of the bridge loans, the Company issued
    55,640&#160;shares of common stock to the Bridge Noteholders,
    which represents 10% of the principal and interest repaid,
    divided by the
    <FONT style="white-space: nowrap">five-day</FONT>
    average share price prior to repayment of the debt. The
    statement of operations for the year ended December&#160;31,
    2007 reflects an expense of $178,048 related to the issuance of
    these shares.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, as part of its initial public
    offering, the Company agreed to pay a 5% quarterly stock
    dividend, commencing March&#160;31, 2007, and every full quarter
    thereafter, until Woodbridge is operational. The Company
    declared five such quarterly dividends amounting to
    1,010,535&#160;shares through March, 2008. As the New Jersey
    facility was operating as of June&#160;30, 2008, no further
    dividends were declared under this agreement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At its April&#160;3, 2008 special meeting of shareholders, the
    shareholders approved a resolution to decrease the number of
    common shares that the Company is authorized to issue from
    75,000,000 to 40,000,000, and the number of preferred shares
    that the Company is authorized to issue from 25,000,000 to
    10,000,000. At the time, the Company believed that
    40,000,000&#160;shares of common stock would be sufficient to
    meet its future needs.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On October&#160;1, 2008, the Company issued 45,480&#160;shares
    of its common stock to a consultant as remuneration for services
    rendered. The related services were substantially complete when
    the stock was issued. The Company recognized $212,619 of expense
    related to the fair value of this issuance.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On October&#160;22, 2008, the Company declared a stock dividend
    of 15% payable to shareholders of record as of November&#160;17,
    2008. This dividend resulted in the issuance of
    969,318&#160;shares of common stock.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-46
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2009, the Company issued 200,000&#160;shares
    of its common stock to the holders of its convertible debentures
    as consideration for the refinancing described above. The
    Company recognized interest expense of $562,000 related to this
    issuance.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;19, 2009, the Company entered into an agreement with
    an institutional investor (the &#147;Investor&#148;) whereby the
    Investor agreed to purchase 1,500,000&#160;shares of the
    Company&#146;s common stock under its shelf registration
    statement, for $1.40 per share, providing the Company with
    $2.1&#160;million before fees and expenses of $172,000, which
    were charged to Additional Paid-in Capital. The May&#160;7, 2009
    non-convertible short-term note described in Note&#160;6 was
    immediately paid off with proceeds of this offering. In
    addition, and as an inducement to enter into this transaction,
    the Company issued the Investor 1,500,000 warrants, with a
    strike price of $1.40 and a 90&#160;day term.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    At its June&#160;25, 2009 annual meeting of shareholders, the
    shareholders approved a resolution to increase the number of
    common shares that the Company is authorized to issue from
    40,000,000 to 75,000,000, given that the Company had the
    opportunity to raise capital through the issuance of additional
    shares.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">WARRANTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On February&#160;16, 2007, in connection with the Company&#146;s
    public offering, the Company sold 1,800,000 equity units
    consisting of one share of common stock, one Class&#160;A
    warrant and one Class&#160;B warrant. On March&#160;13, 2007,
    the Class&#160;A and Class&#160;B warrants began to trade as
    separate securities. The Class&#160;A warrants are exercisable
    for one share of common stock, plus accumulated stock dividends,
    for $8.25. The Class&#160;A warrants expire on February&#160;16,
    2012 and, if certain conditions are met, the Company may redeem
    these warrants at a price of $0.25 per warrant prior to the
    expiration date. The Class&#160;B warrants are exercisable for
    one share of common stock, plus accumulated stock dividends, for
    $11.00. The Class&#160;B warrants expire on February&#160;16,
    2012 and there is no provision for the Company to redeem these
    warrants prior to the expiration date.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, in conjunction with the private
    financing arrangement of the Company described in Note&#160;6,
    the Company issued 750,000 Class&#160;A and 750,000 Class&#160;B
    Warrants to the Investors. Such warrants are exercisable for one
    share of the Company&#146;s common stock, adjusted for
    dividends, at $8.25 and $11.00, respectively. Once the
    Company&#146;s registration statement related to the underlying
    shares was declared effective, one-half of the warrants were
    returned to the Company by the Investors, as described in
    Note&#160;6.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">WARRANT
    EXERCISE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company received net proceeds of approximately $11,344,000
    as a result of the exercise of approximately 1,381,000
    Class&#160;A warrants (which includes the warrant redemption
    discussed below) and 600 Class&#160;B warrants in the year ended
    December&#160;31, 2008. The Company issued approximately
    1,781,000&#160;shares of common stock in connection with the
    exercise of these warrants due to the cumulative effect of the
    Company&#146;s stock dividends.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;26, 2009, the Investor exercised its 1,500,000
    warrants at $1.40, providing the Company with $2.1&#160;million
    before fees and expenses of $135,000, which were charged to
    Additional Paid-in Capital. In addition, and as an inducement to
    enter into this transaction, the Company issued the Investor an
    additional 1,500,000 warrants with a strike price of $1.63 and
    an expiration date of May&#160;27, 2014.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">WARRANT
    REDEMPTION</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On September&#160;16, 2008, the Company announced the redemption
    of its outstanding Class&#160;A Warrants. The redemption date
    was set for October&#160;17, 2008, and was subsequently extended
    a total of 31&#160;days voluntarily by the Company to
    November&#160;17, 2008. Any outstanding Class&#160;A warrants
    that had not been exercised before that date expired and are
    redeemable by the Company for $0.25 per warrant.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-47
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Until the redemption date, the Class&#160;A warrants were
    convertible into common stock at an exercise price of $8.25.
    Each warrant exercised at this price received 1.276&#160;shares
    of common stock. Prior to the notification of redemption,
    approximately 756,000 Class&#160;A warrants had been exercised.
    After the redemption, an additional 673,000 warrants were
    exercised. In total, from both the exercise and redemption of
    warrants, the Company received proceeds of approximately
    $11,344,000. The Company was obligated to remit to its transfer
    agent funds sufficient to compensate warrant holders for the
    remaining warrants, which may be redeemed for $.25 each for an
    indefinite period. This amount of $284,237 was subtracted from
    the cash received for exercise of the warrants, representing the
    amount necessary to redeem the remaining warrants.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth the outstanding warrants as of
    June&#160;30, 2009:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="41%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=04 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=04 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=04 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=05 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=05 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=05 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=05 type=hang1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=06 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=06 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=06 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=06 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Class B Warrants<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Warrants<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Warrants<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Warrants<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Warrants<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise Price<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise Price<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise Price<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Exercise Price<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 7pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>$11.00</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price $1.00</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>$1.50</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>$1.40</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>$1.63</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at January&#160;1, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,648,029
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued in connection with agreement with bond holders on
    March&#160;6, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,284,409
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued in connection with securing debt on May&#160;5, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    885,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    415,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued in connection with issuance of shares on May&#160;19, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Warrants exercised May&#160;26, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Issued in connection with May 26 warrants exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at June&#160;30, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4,932,438
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    885,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    415,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,500,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="10%"></TD>
    <TD width="90%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;9&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">STOCK
    OPTION PLAN</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table presents the activity under the 2006 Stock
    Option Plan from January&#160;1, 2009 through June&#160;30, 2009:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="68%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="12%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="11%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
    <B>Weighted Average<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Shares</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Price per Share</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding at January&#160;1, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,246,735
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    4.50
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Granted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    233,500
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1.10
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Exercised
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    &#151;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Canceled
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (231,340
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    4.75
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Outstanding and exercisable at June&#160;30, 2009
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,248,895
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3.82
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On June&#160;27, 2009, the Company granted 233,500 stock options
    under its 2006 Stock Option Plan. The expense associated with
    this option grant was calculated using a Black-Scholes model and
    the following assumptions: risk-free interest rate of 2.85%; no
    dividend yield; volatility of 96.7%. The resulting expense of
    $190,000 is included in general and administrative expense on
    the consolidated statements of operations for the three and six
    month periods ended June&#160;30, 2009 and 2008. As of
    June&#160;30, 2009, there was no unrecognized compensation cost
    related to non-vested share-based compensation arrangements
    granted under the Company&#146;s stock option plan.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;10&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">ACQUISITIONS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, the Company acquired the assets,
    including the intellectual property, of Waste Recovery
    Industries, LLC of Paso Robles, CA. The purchase price was
    $500,000.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-48
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On January&#160;24, 2008, the Company also formed Converted
    Organics of California, LLC, a wholly-owned subsidiary of
    Converted Organics Inc., who acquired the net assets of United
    Organic Products, LLC of Gonzales, CA (&#147;UOP&#148;). This
    facility is operational and began to generate revenues for the
    Company immediately upon acquisition. The purchase price was
    $2,500,000.
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The acquisitions have been accounted for in the first quarter of
    2008 using the purchase method of accounting in accordance with
    SFAS&#160;No.&#160;141, <I>&#147;Business
    Combinations&#148;</I>. Accordingly, the net assets have been
    recorded at their estimated fair values, and operating results
    have been included in the Company&#146;s consolidated financial
    statements from the date of acquisition.
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The allocation of the purchase price based on the appraisal is
    as follows:
</DIV>

<DIV style="margin-top: 4pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="88%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="8%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Inventories
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    11,114
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Accounts receivable
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    28,702
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Technological know-how
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    271,812
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Trade name
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    228,188
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Existing customer relationships
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    2,030,513
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Building
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    111,584
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Equipment and machinery
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    543,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Assumption of liabilities
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (224,913
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Total purchase price
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    3,000,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The unaudited supplemental pro forma information discloses the
    results of operations for the current fiscal year up to the date
    of the most recent interim period presented (and for the
    corresponding period in the preceding year) as though the
    business combination had been completed as of the beginning of
    that period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The pro forma condensed consolidated financial information is
    based upon available information and certain assumptions that
    the Company believes are reasonable. The unaudited supplemental
    pro forma information does not purport to represent what the
    Company&#146;s financial condition or results of operations
    would actually have been had these transactions in fact occurred
    as of the dates indicated above or to project the Company&#146;s
    results of operations for the period indicated or for any other
    period.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="81%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
    <TD width="3%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=03 type=lead -->
    <TD width="5%" align="right">&nbsp;</TD>	<!-- colindex=03 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=03 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="6" align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>Six Months Ended June&#160;30,</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2009</B>
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD colspan="2" nowrap align="center" valign="bottom" style="border-bottom: 1px solid #000000">
    <B>2008</B>
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Revenues (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    1,484
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    753
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss (in thousands)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (6,926
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (8,592
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Net loss per share&#160;&#151; basic and diluted
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (.58
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    (1.56
</TD>
<TD nowrap align="left" valign="bottom">
    )
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;11&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">RELATED
    PARTY TRANSACTIONS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">ACCRUED
    COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of June&#160;30, 2009 and December&#160;31, 2008, the Company
    has an accrued liability totaling approximately $390,000 and
    $431,000, respectively, representing accrued compensation to
    employees, officers, directors and consultants.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS OF RHODE ISLAND, LLC</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Converted Organics of Rhode Island, LLC was formed for the
    purpose of developing and operating a
    <FONT style="white-space: nowrap">waste-to-fertilizer</FONT>
    facility in Johnston, Rhode Island. A development consultant who
    has provided services to the Company is a minority owner of
    Converted Organics of Rhode Island, LLC. For the six month
    period ending June&#160;30, 2009 the consultant was paid
    $60,000, and received 121,528&#160;shares of the Company&#146;s
    common stock for services rendered.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-49
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">PACKAGING
    VENDOR</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has purchased packaging materials from a vendor
    which is partially owned by an employee of the Company. The
    Company made purchases of $28,000 from this vendor in the six
    month period ended June&#160;30, 2009.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;PAYABLE</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has a term note due to its CEO in the amount of
    $89,170 at June&#160;30, 2009 and December&#160;31, 2008. The
    note matured in April, 2009, and the term was extended for one
    year. The Company paid accrued interest of $21,400 upon
    extension of the note.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;12&#160;&#151;
    COMMITMENTS AND CONTINGENCIES</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In addition to the operating lease commitment for its
    headquarters, the Company signed an operating lease during June
    2006 for Woodbridge. The lease term is for ten years and the
    Company has exercised an option to renew for an additional ten
    years. In 2008, the Company signed a ten-year lease for land
    with the Rhode Island Resource Recovery Council. Future minimum
    lease payments under these leases are as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="86%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="10%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    For years ended December&#160;31, 2009 (July 1, 2009 through
    December 31, 2009)
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    522,400
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2010
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,044,800
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2011
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,056,200
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2012
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,069,100
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2013
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1,077,400
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    2014 and thereafter
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    9,024,000
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD style="border-top: 1px solid #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    13,793,900
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">LEGAL
    PROCEEDINGS</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company is not currently aware of any pending or threatened
    legal proceeding to which it is or would be a party, or any
    proceedings being contemplated by governmental authorities
    against it, or any of its executive officers or directors
    relating to the services performed on the Company&#146;s behalf
    except as follows. The Company received notice that a complaint
    had been filed in a putative class action lawsuit on behalf of
    59&#160;persons or entities that purchased units pursuant to a
    financing terms agreement dated April&#160;11, 2006
    (&#147;FTA&#148;), captioned Gerald S. Leeseberg, et al.&#160;v.
    Converted Organics, Inc., filed in the U.S.&#160;District Court
    for the District of Delaware. The lawsuit alleges breach of
    contract, conversion, unjust enrichment, and breach of the
    implied covenant of good faith in connection with the alleged
    failure to register certain securities issued in the FTA, and
    the redemption of our Class&#160;A warrants in November 2008.
    The lawsuit seeks damages related to the failure to register
    certain securities, including alleged late fee payments, of
    approximately $5.25&#160;million, and unspecified damages
    related to the redemption of the Class&#160;A warrants. In
    February 2009, the Company filed a Motion for Partial Dismissal
    of Complaint. It is uncertain when the Court will rule on this
    motion. The Company plans to vigorously defend itself in this
    matter, and is unable to estimate any contingent losses that may
    or may not be incurred as a result of this litigation and its
    eventual disposition. Accordingly, no contingent loss has been
    recorded related to this matter.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;19, 2009, the Company received notice that a
    complaint had been filed in the Middlesex County Superior Court
    of New Jersey, captioned Lefcourt Associates, Ltd., et
    al.&#160;v. Converted Organics of Woodbridge, et al. The lawsuit
    alleges private and public nuisances, negligence, continuing
    trespasses and consumer common-law fraud in connection with the
    odors emanating from the Woodbridge facility and the
    Company&#146;s alleged, intentional failure to disclose to
    adjacent property owners the possibility of the facility causing
    pollution. The lawsuit seeks enjoinment of any and all
    operations which in any way cause or contribute to the alleged
    pollution, compensatory and punitive damages, counsel fees and
    costs of suit and any
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-50
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">CONVERTED
    ORGANICS INC.<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">NOTES&#160;TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS&#160;&#151;&#160;(Continued)</FONT></B>
</DIV>
<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    and all other relief the Court deems equitable and just. In
    response to these allegations, the Company has filed opposition
    papers with the Court and has complied with the plaintiff&#146;s
    requests for information.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On May&#160;28, 2009, the Company received notice that a Lien
    Claim Foreclosure Complaint had been filed in the Middlesex
    County Superior Court of New Jersey, captioned Armistead
    Mechanical, Inc.&#160;v. Converted Organics Inc., et al.
    Armistead filed this Lien Claim Foreclosure Complaint in order
    to perfect its previously filed lien claim. In connection with
    the Complaint, Armistead also filed a Demand for Arbitration in
    order to preserve its status quo and right to submit a contract
    dispute claim to binding arbitration. Armistead has indicated
    that it wishes to continue settlement discussions and has
    offered to cooperate with the Company&#146;s efforts to secure
    financing for a mutually agreeable settlement. The Company
    intends to continue working towards an agreeable settlement with
    Armistead. On July&#160;10, 2009, the Company received an
    Amended Lien Claim Foreclosure Complaint from Armistead
    Mechanical. The amended complaint did not make any substantial
    changes to the suit. On August&#160;3, 2009, the Company filed a
    response to the complaint whereby the Company denied certain
    claims and at this time management is unable to estimate any
    contingent losses.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 2%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><I><FONT style="font-family: 'Times New Roman', Times">OTHER</FONT></I></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Middlesex County Health Department (MCHD) issued a number of
    notices of violation (&#147;NOV&#148;) to the Company for
    alleged violations of New Jersey State Air Pollution Control
    Act, which prohibits certain off-site odors. The NOV alleged
    that odors emanating from the facility had impacted surrounding
    businesses and those odors were of sufficient intensity and
    duration to constitute air pollution under the Act. The
    penalties assessed total $320,250 of which the Company has paid
    $87,750. Of the remaining $232,500 of penalties, the Company is
    either contesting or negotiating individual penalties based on
    the date of issuance. The Company has recorded a liability of
    $75,000 in it financial statements, as of June&#160;30, 2009
    relating to the unpaid potion of the penalties. In addition,
    based on a change in operational procedures and working with two
    outside odor-control consultants, the Company believes it has
    significantly rectified the odor issues.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The NJDEP Bureau of Air Compliance and Enforcement issued an
    Administrative Order (the &#147;A.O.&#148;) to the Company for
    alleged violations of the Company&#146;s Air permit issued
    pursuant to the Air Pollution Control Act. The A.O. alleged that
    the Company was not operating in compliance with its Air Permit.
    No penalties were assessed in the A.O. However, the A.O. remains
    an open matter, because, as NJDEP stated in the A.O., the
    provisions of the order remain in effect during pendency of the
    hearing request. Additionally, any corrective action taken by
    the Company does not preclude the State from initiating a future
    enforcement action or seeking penalties with respect the
    violations listed in the A.O.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The NJDEP Bureau of Solid Waste Compliance and Enforcement
    issued a NOV to the Company for alleged violations of the New
    Jersey State Solid Waste Management Act. The NOV alleged that
    the facility was not operating in accordance with the terms of
    the General Class&#160;C Permit Approval. No penalties were
    assessed by the NOV. However, the NOV is notification that the
    facility is allegedly out of compliance with certain provisions
    of the General Class&#160;C Permit
    <FONT style="white-space: nowrap">and/or</FONT> the
    NJDEP Solid Waste regulations. The NOV remains an open matter,
    because, as NJDEP stated in the NOV, any corrective action taken
    by the Company does not preclude the State from initiating a
    future enforcement action with respect the violations listed in
    the NOV.
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">NOTE&#160;13&#160;&#151;
    </FONT></B>
</TD>
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">SUBSEQUENT
    EVENTS</FONT></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The Company has evaluated subsequent events through
    August&#160;14, 2009, which is the date the accompanying
    financial statements were issued.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On July&#160;16, 2009, the Company sold 1,961,000&#160;shares of
    its common stock at $1.02 per share under its shelf registration
    statement. In addition, the Company issued 585,000 warrants,
    with an exercise price of $1.25 per warrant in association with
    the issuance of stock. These warrants have a five year life from
    the date of issuance and cannot be exercised until six months
    from the date of issuance.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    F-51
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 2pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=0 -->

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=0 -->

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>



<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>Until&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2009, all dealers that effect transactions in these securities,
    whether or not participating in this offering, may be required
    to deliver a prospectus. This is in addition to the
    dealers&#146; obligation to deliver a prospectus when acting as
    underwriters and with respect to their unsold allotments or
    subscriptions.</B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B>No dealer, salespersons or any other person is authorized to
    give any information or make any representations in connection
    with this offering other than those contained in this prospectus
    and, if given or made, the information or representations must
    not be relied upon as having been authorized by us. This
    prospectus does not constitute an offer to sell or a
    solicitation of an offer to buy any securities offered by this
    prospectus, or an offer to sell or a solicitation of an offer to
    buy any securities by anyone in any jurisdiction in which the
    offer or solicitation is not authorized or is unlawful. The
    delivery of this prospectus will not, under any circumstances
    create any implication that the information is correct as of any
    time subsequent to the date of this prospectus.</B>
</DIV>

<DIV style="margin-top: 18pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">TABLE OF
    CONTENTS</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="95%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="4%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadleft -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=quadright -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Prospectus Summary
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    1
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Risk Factors
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    7
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Use of Proceeds
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    18
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Price Range of Common Stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    19
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Capitalization
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    20
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Dilution
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    21
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Management&#146;s Discussion And Analysis Of Financial Condition
    And Results Of Operations
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    22
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Business
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    35
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Management
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    47
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Executive Compensation
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    50
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Principal Stockholders
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    52
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Related Party Transactions
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    53
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Underwriting
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    54
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Description of Capital Stock
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    55
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Legal Matters
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    61
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Experts
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    62
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Where You Can Find Additional Information
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    62
</TD>
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="top">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Index to Financial Statements
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD>&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
    63
</TD>
<TD>&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=0 -->

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 2pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=0 -->

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<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=0 -->

<DIV style="margin-top: 36pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 14pt">$&#160;&#160;&#160;&#160;&#160;</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 20pt">CONVERTED ORGANICS
    INC.</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 14pt">&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;Units</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 14%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=68 -->

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 12pt">PROSPECTUS</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 14%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=68 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <B><FONT style="font-size: 14pt">Chardan Capital Markets,
    LLC</FONT></B>
</DIV>

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;,
    2009
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 1pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=0 -->

<CENTER style="font-size: 1pt; width: 100%; border-bottom: 2pt solid #000000"></CENTER><!-- callerid=999 iwidth=456 length=0 -->

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">PART&#160;II<BR>
    </FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">INFORMATION
    NOT REQUIRED IN PROSPECTUS</FONT></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">Item&#160;13.<I>&#160;&#160;</I></FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: 'Times New Roman', Times">Other
    Expenses of Issuance and Distribution</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The following table sets forth the costs and expenses, other
    than underwriting discounts, payable by the registrant in
    connection with the sale of the shares of common stock being
    registered. All amounts are estimates except the fees payable to
    the SEC.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="89%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=02 type=lead -->
    <TD width="7%" align="right">&nbsp;</TD>	<!-- colindex=02 type=body -->
    <TD width="1%" align="left">&nbsp;</TD>	<!-- colindex=02 type=hang1 -->
</TR>
<!-- Table Width Row END -->
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    SEC Registration Fee
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
    $
</TD>
<TD nowrap align="right" valign="bottom">
    2,482.79
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    NASDAQ Filing Fee*
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Printing Expenses*
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Accounting Fees and Expenses*
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Legal Fees and Expenses*
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 10pt">
    Miscellaneous*
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="background: #CCEEFF">
<TD nowrap align="left" valign="bottom">
<DIV style="text-indent: -10pt; margin-left: 20pt">
    Total
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="right" valign="bottom">
&nbsp;
</TD>
<TD nowrap align="left" valign="bottom">
&nbsp;
</TD>
</TR>
<TR valign="bottom" style="font-size: 1pt">
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD style="border-top: 3px double #000000">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD valign="top">
    * </TD>
    <TD></TD>
    <TD valign="bottom">
    To be completed by amendment</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">Item&#160;14.<I>&#160;&#160;</I></FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: 'Times New Roman', Times">Indemnification
    of Directors and Officers</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Section&#160;145 of the Delaware General Corporation Law, or
    DGCL, provides that a corporation may indemnify directors and
    officers as well as other employees and individuals against
    expenses (including attorneys&#146; fees), judgments, fines and
    amounts paid in settlement actually and reasonably incurred by
    such person in connection with any threatened, pending or
    completed actions, suits or proceedings in which such person is
    made a party by reason of such person being or having been a
    director, officer, employee or agent of ours. The DGCL provides
    that Section&#160;145 is not exclusive of other rights to which
    those seeking indemnification may be entitled under any bylaw,
    agreement, vote of stockholders or disinterested directors or
    otherwise.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Section&#160;102(b)(7) of the DGCL permits a corporation to
    provide in its certificate of incorporation that a director of
    the corporation shall not be personally liable to the
    corporation or its stockholders for monetary damages for breach
    of fiduciary duty as a director, except for liability for any
    breach of the director&#146;s duty of loyalty to the corporation
    or its stockholders, for acts or omissions not in good faith or
    which involve intentional misconduct or a knowing violation of
    law, for unlawful payments of dividends or unlawful stock
    repurchases, redemptions or other distributions, or for any
    transaction from which the director derived an improper personal
    benefit.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our certificate of incorporation provides that a director shall
    not be liable to us or our stockholders for monetary damages for
    breach of fiduciary duty as a director to the fullest extent
    permitted by Delaware law. In addition, our bylaws provide that
    each person who was or is a party or is threatened to be made a
    party to, or is involved in any threatened, pending or completed
    action, suit or proceeding, whether civil, criminal,
    administrative or investigative, by reason of the fact that such
    person is or was a director shall be indemnified and held
    harmless to the fullest extent permitted by Delaware law. The
    right to indemnification conferred in our bylaws also includes
    the right to be reimbursed for all expenses incurred in
    connection with any such proceeding in advance of its final
    disposition to the fullest extent authorized by Delaware law.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Our bylaws further provide that we shall have power to purchase
    and maintain insurance on behalf of any person who is or was a
    director, officer, employee or agent of ours against any
    expense, liability or loss incurred by such person in any such
    capacity or arising out of his status as such, whether or not we
    would have the power to indemnify him against such liability
    under Delaware law. We have also obtained directors&#146; and
    officers&#146; liability insurance, which insures against
    liabilities that our directors or officers may incur in such
    capacities.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-1
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">Item&#160;15.<I>&#160;&#160;</I></FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: 'Times New Roman', Times">Recent
    Sales of Unregistered Securities</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In the last three years, the Registrant has sold securities that
    were not registered, as follows:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In connection with the Registrant&#146;s merger with Mining
    Organics Harlem River Rail Yard, LLC (&#147;HRRY&#148;) in
    February 2006, the Registrant issued 600,000&#160;shares to
    HRRY. These securities were issued under Section&#160;4(2) of
    the Securities Act.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In February 2006, the Registrant issued 689,999&#160;shares of
    its common stock to certain members of its management and other
    founders of the Registrant in exchange for past services
    rendered valued at $0.0001 per share. On the same date, the
    Registrant issued 43,334&#160;shares of its common stock to two
    accredited individuals as fees for loans each made to the
    Registrant. These securities were issued under Section&#160;4(2)
    of the Securities Act.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In February 2007, the Registrant completed a $1.515&#160;million
    bridge loan from 59 accredited lenders to help it meet its
    working capital needs. In connection with the bridge loan, the
    Registrant issued units to the bridge lenders. One unit was
    issued for every $5.50 loaned. The bridge lenders received units
    that were identical to the units the Registrant issued in its
    initial public offering. In the aggregate, the bridge lenders
    received 293,629&#160;units, each unit consisting of one share
    of common stock, one redeemable Class&#160;A warrant and one
    non-redeemable Class&#160;B warrant. Included in the
    293,629&#160;units were 18,181&#160;units issued to High Capital
    Funding LLC as reimbursement for costs incurred by it in
    preparing legal documents in connection with the bridge
    transaction. The Class&#160;A warrants and Class&#160;B warrants
    each are exercisable for one share of common stock. In May 2007,
    the Registrant issued 55,640&#160;shares of common stock under
    the terms of the renegotiated bridge loan. These securities were
    issued solely to accredited investors in reliance upon the
    exemption specified in Rule&#160;506 of Regulation&#160;D, and
    Section&#160;4(2) of the Securities Act.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    As of June 2006 and March 2007, the Registrant granted stock
    options to its employees, directors and consultants to purchase
    643,000 and 10,000&#160;shares, respectively, of common stock
    under the Registrant&#146;s 2006 Stock Option Plan. The option
    issuances were made pursuant to Section&#160;4(2) of the
    Securities Act.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In January 2008, the Registrant issued a note payable and
    750,000 Class&#160;A warrants and Class&#160;B warrants (which
    were later reduced to 375,000 Class&#160;A warrants and
    Class&#160;B warrants) to three accredited investors for a total
    amount of $4,500,000. On April&#160;7, 2008, the note was
    exchanged for a convertible debenture. Between January 2009 and
    April 2009, the convertible debenture (including all interest)
    was converted into 7,498,144&#160;shares of common stock with an
    additional 200,000&#160;shares of common stock being issued in
    connection with the amendment of the convertible debenture in
    January 2009. These securities were issued solely to accredited
    investors in reliance upon the exemption specified in
    Rule&#160;506 of Regulation&#160;D, and Section&#160;4(2) of the
    Securities Act.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    During March 2008, the Registrant issued 140,000&#160;shares of
    common stock to three accredited investors as a result of the
    exercise of stock options issued under the Registrant&#146;s
    2006 Stock Option Plan. The issuances were completed pursuant to
    Section&#160;4(2) and Regulation&#160;D of the Securities Act of
    1933, as amended.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    In May 2009, in consideration of $1,182,500, the Registrant
    issued one accredited investor in reliance upon the exemption
    specified in Rule&#160;506 of Regulation&#160;D, and
    Section&#160;4(2) of the Securities Act, (i)&#160;a secured
    promissory note in the principal amount of $1,330,312.50 and
    (ii)&#160;two warrants to purchase shares of the
    Registrant&#146;s common stock: a five-year warrant to purchase
    750,000&#160;shares of the Registrant&#146;s common stock and a
    five-year warrant to purchase 350,000&#160;shares of common
    stock of the Registrant with exercise prices of $1.00 per share
    and $1.02 per share, respectively.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    On July&#160;16, 2009, the Registrant sold 1,961,000&#160;shares
    of its common stock at $1.02 per share under its shelf
    registration statement. In addition, the Registrant issued
    585,000 warrants, with an exercise price of $1.25 per warrant in
    association with the issuance of stock. These warrants have a
    five-year life from the date of issuance and cannot be exercised
    until six months from the date of issuance.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-2
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF"><!-- TABLE 05 -->

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">Item&#160;16.<I>&#160;&#160;</I></FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: 'Times New Roman', Times">Exhibits
    and Financial Statement Schedules</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF"><!-- TABLE 01 -->
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="91%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *1
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Underwriting Agreement
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Asset Purchase Agreement between the Registrant and United
    Organic Products, LLC, dated January&#160;21, 2008 (incorporated
    by reference to Exhibit&#160;2.02 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Asset Purchase Agreement between the Registrant and Waste
    Recovery Industries, LLC, dated January&#160;21, 2008
    (incorporated by reference to Exhibit&#160;2.03 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Certificate of Incorporation (incorporated by reference to
    Exhibit&#160;3.1 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amendment to Certificate of Incorporation
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Registrant&#146;s Bylaws (incorporated by reference to
    Exhibit&#160;3.2 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Common Stock Certificate (incorporated by reference to
    Exhibit&#160;4.1 to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed January&#160;25, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;B Warrant (incorporated by reference to
    Exhibit&#160;B to Exhibit&#160;4.5 on Post-Effective Amendment
    No.&#160;1 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed February&#160;20, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Unit Certificate (incorporated by reference to
    Exhibit&#160;4.4 on Post-Effective Amendment No.&#160;1 to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed February&#160;20, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Warrant Agreement between the Registrant and Computershare
    Shareholder Services, Inc. and Computershare Trust&#160;Company
    N.A., dated February&#160;16, 2007 (incorporated by reference to
    Exhibit&#160;4.5 on Post-Effective Amendment No.&#160;1 to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed February&#160;20, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .5
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Representative&#146;s Purchase Warrant (incorporated by
    reference to Exhibit&#160;4.6 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .6
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;C Warrant (incorporated by reference to
    Exhibit&#160;10.5 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;13, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .7
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;D Warrant (incorporated by reference to
    Exhibit&#160;10.5 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;13, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .8
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;E Warrant (incorporated by reference to
    Exhibit&#160;4.1 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;20, 2009 and to Exhibit&#160;10.1 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;27, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .9
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;F Warrant (incorporated by reference to
    Exhibit&#160;4.1 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed July&#160;16, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .10
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class G Warrant (incorporated by reference to
    Exhibit&#160;10.5 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .11
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note dated September&#160;14,
    2009 payable to Iroquois Master Fund Ltd.  (incorporated by
    reference to Exhibit&#160;10.4 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *4
</TD>
<TD nowrap align="left" valign="top">
    .12
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;H Warrant
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *4
</TD>
<TD nowrap align="left" valign="top">
    .13
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Warrant Agreement between Company and Warrant Agent
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *5
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Opinion of Cozen O&#146;Connor
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Bridge Loan Documents dated March&#160;2, 2006
    (incorporated by reference to Exhibit&#160;10.1 to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .1A
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Bridge Loan Documents dated April&#160;11, 2006
    (incorporated by reference to Exhibit&#160;10.1A to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amended and Restated 2006 Stock Option Plan and Form of Stock
    Option Agreement (incorporated by reference to Exhibit&#160;10.2
    to Annex&#160;A of our Definitive Proxy Statement filed
    March&#160;5, 2008)
</TD>
</TR>
</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-3
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="91%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Service Agreement between the Registrant and ECAP, LLC, dated
    March&#160;1, 2006 (incorporated by reference to
    Exhibit&#160;10.3 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Lease Agreement between the Registrant and Recycling Technology
    Development, LLC, dated June&#160;2, 2006 (incorporated by
    reference to Exhibit&#160;10.4 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .4A
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amendment to the Lease Agreement between the Registrant and
    Recycling Technology Development dated January&#160;18, 2007
    (incorporated by reference to Exhibit&#160;10.4A to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed January&#160;25, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .5
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement between the Registrant and Edward J.
    Gildea, dated March&#160;2, 2006 (incorporated by reference to
    Exhibit&#160;10.5 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .6
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement between the Registrant and John A.
    Walsdorf, dated March&#160;2, 2006 (incorporated by reference to
    Exhibit&#160;10.7 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .7
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Agreement between the Registrant and Weston Solutions, Inc.,
    dated May&#160;29, 2003 and modification dated October&#160;6,
    2004 (incorporated by reference to Exhibit&#160;10.9 to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .8
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    IBR Plant License Agreement between International Bio Recovery
    Corporation and Mining Organics Management LLC, dated
    July&#160;15, 2003 (incorporated by reference to
    Exhibit&#160;10.10 to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed July&#160;5, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .9
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Revision dated February&#160;9, 2006 to IBR Plant License
    Agreement dated July&#160;15, 2003 (incorporated by reference to
    Exhibit&#160;10.11 to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed July&#160;5, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .10
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of United Organic
    Products, LLC, dated January&#160;24, 2008 (incorporated by
    reference to Exhibit&#160;2.04 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .11
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Promissory Note in favor of Waste Recovery Industries,
    LLC, dated January&#160;24, 2008 (incorporated by reference to
    Exhibit&#160;2.05 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .12
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    New Jersey Economic Development Authority $17,500,000 Solid
    Waste Facilities Revenue Bonds (Converted Organics of
    Woodbridge, LLC&#160;&#151; 2007 Project), dated
    February&#160;16, 2007 (incorporated by reference to
    Exhibit&#160;10.13 to our annual report on
    <FONT style="white-space: nowrap">Form&#160;10-K</FONT>
    for the year ended December&#160;31, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .13
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of SNC-Lavalin
    Project Services, Inc., dated June&#160;16, 2009 (incorporated
    by reference to Exhibit&#160;10.14 to our quarterly report on
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    for the quarter ended June&#160;30, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .14
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of
    Hatzel&#160;&#038; Buehler, Inc. (incorporated by reference to
    Exhibit&#160;10.15 to our quarterly report on
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    for the quarter ended June&#160;30, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .15
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of Recycling
    Technology Development, LLC dated March&#160;31, 2009
    (incorporated by reference to Exhibit&#160;10.16 to our
    quarterly report on
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    for the quarter ended June&#160;30, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .16
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subscription Agreement dated September&#160;14, 2009 by and
    among Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.1 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .17
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Security Agreement dated September&#160;14, 2009 by and among
    Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.2 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .18
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiary Security Agreement dated September&#160;14, 2009 by
    and among Converted Organics of California, LLC, Converted
    Organics of Woodbridge, LLC and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.3 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
</TABLE>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-4
</DIV><!-- END PAGE WIDTH -->
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="91%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .19
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiary Guaranty dated September&#160;14, 2009 by Converted
    Organics of California, LLC and Converted Organics of
    Woodbridge, LLC for the benefit of Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.6 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    21
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiaries of the Company
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    23
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of CCR LLP
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    24
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Power of Attorney (included on signature page)
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV style="font-size: 1pt; margin-left: 0%; width: 13%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=60 -->

<DIV style="margin-top: 3pt; font-size: 1pt">&nbsp;</DIV>



<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD valign="top">
    * </TD>
    <TD></TD>
    <TD valign="bottom">
    To be filed by amendment.</TD>
</TR>

</TABLE>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD>
    <B><FONT style="font-family: 'Times New Roman', Times">Item&#160;17.<I>&#160;&#160;</I></FONT></B>
</TD>
    <TD>
    <B><I><FONT style="font-family: 'Times New Roman', Times">Undertakings</FONT></I></B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    The undersigned registrant hereby undertakes:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    1.&#160;To file, during any period in which offers or sales are
    being made, a post-effective amendment to this registration
    statement:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    i.&#160;To include any prospectus required by
    section&#160;10(a)(3) of the Securities Act of 1933;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    ii.&#160;To reflect in the prospectus any facts or events
    arising after the effective date of the registration statement
    (or the most recent post-effective amendment thereof) which,
    individually or in the aggregate, represent a fundamental change
    in the information set forth in the registration statement.
    Notwithstanding the foregoing, any increase or decrease in
    volume of securities offered (if the total dollar value of
    securities offered would not exceed that which was registered)
    and any deviation from the low or high end of the estimated
    maximum offering range may be reflected in the form of
    prospectus filed with the Commission pursuant to
    Rule&#160;424(b) if, in the aggregate, the changes in volume and
    price represent no more than 20% change in the maximum aggregate
    offering price set forth in the &#147;Calculation of
    Registration Fee&#148; table in the effective registration
    statement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    iii.&#160;To include any material information with respect to
    the plan of distribution not previously disclosed in the
    registration statement or any material change to such
    information in the registration statement.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    2.&#160;That, for the purpose of determining any liability under
    the Securities Act of 1933, each such post-effective amendment
    shall be deemed to be a new registration statement relating to
    the securities offered therein, and the offering of such
    securities at that time shall be deemed to be the initial bona
    fide offering thereof.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    3.&#160;To remove from registration by means of a post-effective
    amendment any of the securities being registered which remain
    unsold at the termination of the offering.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    4.&#160;That, for the purpose of determining liability under the
    Securities Act of 1933 to any purchaser:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    i.&#160;If the registrant is relying on Rule&#160;430B:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 8%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    A.&#160;Each prospectus filed by the registrant pursuant to
    Rule&#160;424(b)(3)shall be deemed to be part of the
    registration statement as of the date the filed prospectus was
    deemed part of and included in the registration
    statement;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 8%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    B.&#160;Each prospectus required to be filed pursuant to
    Rule&#160;424(b)(2), (b)(5), or (b)(7) as part of a registration
    statement in reliance on Rule&#160;430B relating to an offering
    made pursuant to Rule&#160;415(a)(1)(i), (vii), or (x)&#160;for
    the purpose of providing the information required by
    section&#160;10(a) of the Securities Act of 1933 shall be deemed
    to be part of and included in the registration statement as of
    the earlier of the date such form of prospectus is first used
    after effectiveness or the date of the first contract of sale of
    securities in the offering described in the prospectus. As
    provided in Rule&#160;430B, for liability purposes of the issuer
    and any person that is at that date an underwriter, such date
    shall be deemed to be a new effective date of the registration
    statement relating to the
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-5
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 8%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    securities in the registration statement to which that
    prospectus relates, and the offering of such securities at that
    time shall be deemed to be the initial bona fide offering
    thereof. Provided, however, that no statement made in a
    registration statement or prospectus that is part of the
    registration statement or made in a document incorporated or
    deemed incorporated by reference into the registration statement
    or prospectus that is part of the registration statement will,
    as to a purchaser with a time of contract of sale prior to such
    effective date, supersede or modify any statement that was made
    in the registration statement or prospectus that was part of the
    registration statement or made in any such document immediately
    prior to such effective date;&#160;or
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    ii.&#160;If the registrant is subject to Rule&#160;430C, each
    prospectus filed pursuant to Rule&#160;424(b) as part of a
    registration statement relating to an offering, other than
    registration statements relying on Rule&#160;430B or other than
    prospectuses filed in reliance on Rule&#160;430A, shall be
    deemed to be part of and included in the registration statement
    as of the date it is first used after effectiveness. Provided,
    however, that no statement made in a registration statement or
    prospectus that is part of the registration statement or made in
    a document incorporated or deemed incorporated by reference into
    the registration statement or prospectus that is part of the
    registration statement will, as to a purchaser with a time of
    contract of sale prior to such first use, supersede or modify
    any statement that was made in the registration statement or
    prospectus that was part of the registration statement or made
    in any such document immediately prior to such date of first use.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    5.&#160;That, for the purpose of determining liability of the
    registrant under the Securities Act of 1933 to any purchaser in
    the initial distribution of the securities: The undersigned
    registrant undertakes that in a primary offering of securities
    of the undersigned registrant pursuant to this registration
    statement, regardless of the underwriting method used to sell
    the securities to the purchaser, if the securities are offered
    or sold to such purchaser by means of any of the following
    communications, the undersigned registrant will be a seller to
    the purchaser and will be considered to offer or sell such
    securities to such purchaser:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    i.&#160;Any preliminary prospectus or prospectus of the
    undersigned registrant relating to the offering required to be
    filed pursuant to Rule&#160;424;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    ii.&#160;Any free writing prospectus relating to the offering
    prepared by or on behalf of the undersigned registrant or used
    or referred to by the undersigned registrant;
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    iii.&#160;The portion of any other free writing prospectus
    relating to the offering containing material information about
    the undersigned registrant or its securities provided by or on
    behalf of the undersigned registrant;&#160;and
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    iv.&#160;Any other communication that is an offer in the
    offering made by the undersigned registrant to the purchaser.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    6&#160;Insofar as indemnification for liabilities arising under
    the Securities Act of 1933&#160;may be permitted to directors,
    officers and controlling persons of the registrant pursuant to
    the foregoing provisions, or otherwise, the registrant has been
    advised that in the opinion of the Securities and Exchange
    Commission such indemnification is against public policy as
    expressed in the Act and is, therefore, unenforceable. In the
    event that a claim for indemnification against such liabilities
    (other than the payment by the registrant of expenses incurred
    or paid by a director, officer or controlling person of the
    registrant in the successful defense of any action, suit or
    proceeding) is asserted by such director, officer or controlling
    person in connection with the securities being registered, the
    registrant will, unless in the opinion of its counsel the matter
    has been settled by controlling precedent, submit to a court of
    appropriate jurisdiction the question whether such
    indemnification by it is against public policy as expressed in
    the Act and will be governed by the final adjudication of such
    issue.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    7.&#160;That:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    i.&#160;For purposes of determining any liability under the
    Securities Act of 1933, the information omitted from the form of
    prospectus filed as part of this registration statement in
    reliance upon Rule&#160;430A and contained in a form of
    prospectus filed by the registrant pursuant to Rule&#160;424(b)
    (1)&#160;or (4)&#160;or 497(h)
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-6
</DIV><!-- END PAGE WIDTH -->
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<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    under the Securities Act shall be deemed to be part of this
    registration statement as of the time it was declared effective.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 4%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    ii.&#160;For the purpose of determining any liability under the
    Securities Act of 1933, each post-effective amendment that
    contains a form of prospectus shall be deemed to be a new
    registration statement relating to the securities offered
    therein, and the offering of such securities at that time shall
    be deemed to be the initial bona fide offering thereof.
</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-7
</DIV><!-- END PAGE WIDTH -->
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">SIGNATURES</FONT></B>
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to the requirements of the Securities Act of 1933, the
    registrant has duly caused this registration statement on
    <FONT style="white-space: nowrap">Form&#160;S-1</FONT>
    to be signed on its behalf by the undersigned, thereunto duly
    authorized, in the City of Boston, Commonwealth of
    Massachusetts, on September&#160;15, 2009
</DIV>

<DIV style="margin-top: 24pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 49%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    CONVERTED ORGANICS INC.
</DIV>

<DIV style="margin-top: 48pt; font-size: 1pt">&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="49%"></TD>
    <TD width="4%"></TD>
    <TD width="47%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    By:&#160;
</TD>
    <TD align="left">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Edward
    J. Gildea</DIV>
</TD>
</TR>

</TABLE>

<DIV style="font-size: 2pt; margin-left: 53%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=999 iwidth=456 length=0 -->

<DIV align="left" style="margin-left: 53%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Name:&#160;&#160;&#160;&#160;&#160;<B>Edward J. Gildea</B>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="53%"></TD>
    <TD width="8%"></TD>
    <TD width="39%"></TD>
</TR>

<TR valign="top" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <TD>&nbsp;</TD>
    <TD>    Title:&#160;
</TD>
    <TD align="left">
    <B>Chairman, President and Chief Executive Officer</B>
</TD>
</TR>

</TABLE>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
    appears below constitutes and appoints Edward J. Gildea, his
    true and lawful attorney-in-fact and agents, with full power of
    substitution and resubstitution for him and in his name, place
    and stead, in any and all capacities, to sign any and all
    amendments (including post-effective amendments) to this
    Registration Statement, and any subsequent registration
    statements pursuant to Rule&#160;462 of the Securities Act of
    1933 and to file the same, with all exhibits thereto, and other
    documents in connection therewith, with the Securities and
    Exchange Commission, granting unto said attorneys-in-fact and
    agents, and each of them, full power and authority to do and
    perform each and every act and thing requisite and necessary to
    be done in and about the premises, as fully to all intents and
    purposes as he might or could do in person, hereby ratifying and
    confirming all that each of said attorney-in-fact or his
    substitute or substitutes, may lawfully do or cause to be done
    by virtue hereof.
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 4%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    Pursuant to the requirements of the Securities Act of 1933, this
    registration statement has been signed by the following persons
    in the capacities and on the dates indicated:
</DIV>

<DIV style="margin-top: 6pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="4%">&nbsp;</TD>	<!-- colindex=01 type=maindata -->
    <TD width="1%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="37%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=03 type=gutter -->
    <TD width="37%">&nbsp;</TD>	<!-- colindex=03 type=maindata -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=04 type=gutter -->
    <TD width="17%">&nbsp;</TD>	<!-- colindex=04 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Signature</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Title</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Date</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 12pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Edward
    J. Gildea</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=201 iwidth=185 length=0 -->Edward
    J. Gildea
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Chairman, President and Chief Executive Officer (Principal
    Executive Officer)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    September&#160;15,&#160;2009
</TD>
</TR>
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;David
    R. Allen</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=201 iwidth=185 length=0 -->David
    R. Allen
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Chief Financial Officer, Executive Vice President of
    Administration<BR>
    (Principal Financial Officer)
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    September&#160;15,&#160;2009
</TD>
</TR>
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Ellen
    P. O&#146;Neil</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=201 iwidth=185 length=0 -->Ellen
    P. O&#146;Neil
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    Chief Accounting Officer
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    September&#160;15,&#160;2009
</TD>
</TR>
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Robert
    E. Cell</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=201 iwidth=185 length=0 -->Robert
    E. Cell
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    Director
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    September 15, 2009
</TD>
</TR>
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;John
    P. DeVillars</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=201 iwidth=185 length=0 -->John
    P. DeVillars
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    Director
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    September 15, 2009
</TD>
</TR>
<TR valign="bottom" style="line-height: 12pt">
<TD colspan="3">
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
<TD>
&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD colspan="3" valign="top">
    <DIV style="display:inline; text-align:left;">/s/&#160;&#160;Edward
    A. Stoltenberg</DIV><BR>
    <DIV style="font-size: 2pt; margin-left: 0%; width: 100%;  align: left; border-bottom: 1pt solid #000000"></DIV><!-- callerid=201 iwidth=185 length=0 -->Edward
    A. Stoltenberg
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="top">
    Director
</TD>
<TD>
&nbsp;
</TD>
<TD align="center" valign="top">
    September 15, 2009
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV>

<P align="center" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
    <BR>
    II-8
</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<DIV align="center" style="margin-left: 0%; margin-right: 0%; font-size: 10pt; font-family: Arial, Helvetica; color: #000000; background: #FFFFFF">

    <B><FONT style="font-family: 'Times New Roman', Times">EXHIBIT&#160;INDEX</FONT></B>
</DIV>

<DIV style="margin-top: 12pt; font-size: 1pt">&nbsp;</DIV>

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="91%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *1
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Underwriting Agreement
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Asset Purchase Agreement between the Registrant and United
    Organic Products, LLC, dated January&#160;21, 2008 (incorporated
    by reference to Exhibit&#160;2.02 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    2
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Asset Purchase Agreement between the Registrant and Waste
    Recovery Industries, LLC, dated January&#160;21, 2008
    (incorporated by reference to Exhibit&#160;2.03 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Certificate of Incorporation (incorporated by reference to
    Exhibit&#160;3.1 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amendment to Certificate of Incorporation
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    3
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Registrant&#146;s Bylaws (incorporated by reference to
    Exhibit&#160;3.2 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Common Stock Certificate (incorporated by reference to
    Exhibit&#160;4.1 to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed January&#160;25, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;B Warrant (incorporated by reference to
    Exhibit&#160;B to Exhibit&#160;4.5 on Post-Effective Amendment
    No.&#160;1 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed February&#160;20, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Unit Certificate (incorporated by reference to
    Exhibit&#160;4.4 on Post-Effective Amendment No.&#160;1 to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed February&#160;20, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Warrant Agreement between the Registrant and Computershare
    Shareholder Services, Inc. and Computershare Trust&#160;Company
    N.A., dated February&#160;16, 2007 (incorporated by reference to
    Exhibit&#160;4.5 on Post-Effective Amendment No.&#160;1 to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed February&#160;20, 2007)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .5
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Representative&#146;s Purchase Warrant (incorporated by
    reference to Exhibit&#160;4.6 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .6
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;C Warrant (incorporated by reference to
    Exhibit&#160;10.5 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;13, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .7
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;D Warrant (incorporated by reference to
    Exhibit&#160;10.5 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;13, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .8
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;E Warrant (incorporated by reference to
    Exhibit&#160;4.1 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;20, 2009 and to Exhibit&#160;10.1 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed May&#160;27, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .9
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;F Warrant (incorporated by reference to
    Exhibit&#160;4.1 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed July&#160;16, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .10
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class G Warrant (incorporated by reference to
    Exhibit&#160;10.5 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    4
</TD>
<TD nowrap align="left" valign="top">
    .11
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note dated September&#160;14,
    2009 payable to Iroquois Master Fund Ltd.  (incorporated by
    reference to Exhibit&#160;10.4 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *4
</TD>
<TD nowrap align="left" valign="top">
    .12
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Form of Class&#160;H Warrant
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *4
</TD>
<TD nowrap align="left" valign="top">
    .13
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Warrant Agreement between Company and Warrant Agent
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    *5
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Opinion of Cozen O&#146;Connor
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amended and Restated 2006 Stock Option Plan and Form of Stock
    Option Agreement (incorporated by reference to Exhibit&#160;10.2
    to Annex&#160;A of our Definitive Proxy Statement filed
    March&#160;5, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .2
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Service Agreement between the Registrant and ECAP, LLC, dated
    March&#160;1, 2006 (incorporated by reference to
    Exhibit&#160;10.3 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .3
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Lease Agreement between the Registrant and Recycling Technology
    Development, LLC, dated June&#160;2, 2006 (incorporated by
    reference to Exhibit&#160;10.4 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .4
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Amendment to the Lease Agreement between the Registrant and
    Recycling Technology Development dated January&#160;18, 2007
    (incorporated by reference to Exhibit&#160;10.4A to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed January&#160;25, 2007)
</TD>
</TR>
</TABLE>

<P align="left" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

</DIV><!-- END PAGE WIDTH -->
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="width: 87%; margin-left: 6%"><!-- BEGIN PAGE WIDTH -->

<TABLE border="0" width="100%" align="center" cellpadding="0" cellspacing="0" style="font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">
<!-- Table Width Row BEGIN -->
<TR style="font-size: 1pt" valign="bottom">
    <TD width="3%" align="right">&nbsp;</TD>	<!-- colindex=01 type=lead -->
    <TD width="1%" align="right">&nbsp;</TD>	<!-- colindex=01 type=body -->
    <TD width="3%" align="left">&nbsp;</TD>	<!-- colindex=01 type=align1 -->
    <TD width="2%">&nbsp;</TD>	<!-- colindex=02 type=gutter -->
    <TD width="91%">&nbsp;</TD>	<!-- colindex=02 type=maindata -->
</TR>
<!-- Table Width Row END -->
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
    <B>Exhibit<BR>
    </B>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
&nbsp;
</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom" align="center">
<TD colspan="3" nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Number</B>
</DIV>
</TD>
<TD>
&nbsp;
</TD>
<TD nowrap align="center" valign="bottom">
<DIV style="border-bottom: 1px solid #000000; width: 1%; padding-bottom: 1px">
    <B>Description</B>
</DIV>
</TD>
</TR>
<TR style="line-height: 3pt; font-size: 1pt">
<TD>&nbsp;
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .5
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement between the Registrant and Edward J.
    Gildea, dated March&#160;2, 2006 (incorporated by reference to
    Exhibit&#160;10.5 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .6
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Employment Agreement between the Registrant and John A.
    Walsdorf, dated March&#160;2, 2006 (incorporated by reference to
    Exhibit&#160;10.7 to our Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .7
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Agreement between the Registrant and Weston Solutions, Inc.,
    dated May&#160;29, 2003 and modification dated October&#160;6,
    2004 (incorporated by reference to Exhibit&#160;10.9 to our
    Registration Statement on
    <FONT style="white-space: nowrap">Form&#160;SB-2</FONT>
    filed June&#160;21, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .8
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    IBR Plant License Agreement between International Bio Recovery
    Corporation and Mining Organics Management LLC, dated
    July&#160;15, 2003 (incorporated by reference to
    Exhibit&#160;10.10 to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed July&#160;5, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .9
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Revision dated February&#160;9, 2006 to IBR Plant License
    Agreement dated July&#160;15, 2003 (incorporated by reference to
    Exhibit&#160;10.11 to our
    <FONT style="white-space: nowrap">Form&#160;SB-2/A</FONT>
    filed July&#160;5, 2006)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .10
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of United Organic
    Products, LLC, dated January&#160;24, 2008 (incorporated by
    reference to Exhibit&#160;2.04 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .11
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Promissory Note in favor of Waste Recovery Industries,
    LLC, dated January&#160;24, 2008 (incorporated by reference to
    Exhibit&#160;2.05 to our current report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed January&#160;29, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .12
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    New Jersey Economic Development Authority $17,500,000 Solid
    Waste Facilities Revenue Bonds (Converted Organics of
    Woodbridge, LLC&#160;&#151; 2007 Project), dated
    February&#160;16, 2007 (incorporated by reference to
    Exhibit&#160;10.13 to our annual report on
    <FONT style="white-space: nowrap">Form&#160;10-K</FONT>
    for the year ended December&#160;31, 2008)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .13
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of SNC-Lavalin
    Project Services, Inc., dated June&#160;16, 2009 (incorporated
    by reference to Exhibit&#160;10.14 to our quarterly report on
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    for the quarter ended June&#160;30, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .14
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of
    Hatzel&#160;&#038; Buehler, Inc. (incorporated by reference to
    Exhibit&#160;10.15 to our quarterly report on
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    for the quarter ended June&#160;30, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .15
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Secured Convertible Promissory Note in favor of Recycling
    Technology Development, LLC dated March&#160;31, 2009
    (incorporated by reference to Exhibit&#160;10.16 to our
    quarterly report on
    <FONT style="white-space: nowrap">Form&#160;10-Q</FONT>
    for the quarter ended June&#160;30, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .16
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subscription Agreement dated September&#160;14, 2009 by and
    among Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.1 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .17
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Security Agreement dated September&#160;14, 2009 by and among
    Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.2 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .18
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiary Security Agreement dated September&#160;14, 2009 by
    and among Converted Organics of California, LLC, Converted
    Organics of Woodbridge, LLC and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.3 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    10
</TD>
<TD nowrap align="left" valign="top">
    .19
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiary Guaranty dated September&#160;14, 2009 by Converted
    Organics of California, LLC and Converted Organics of
    Woodbridge, LLC for the benefit of Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit&#160;10.6 to our current
    report on
    <FONT style="white-space: nowrap">Form&#160;8-K</FONT>
    filed September&#160;14, 2009)
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    21
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Subsidiaries of the Company
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    23
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Consent of CCR LLP
</TD>
</TR>
<TR valign="bottom">
<TD nowrap align="right" valign="top">
&nbsp;
</TD>
<TD nowrap align="right" valign="top">
    24
</TD>
<TD nowrap align="left" valign="top">
    .1
</TD>
<TD>
&nbsp;
</TD>
<TD align="left" valign="top">
    Power of Attorney (included on signature page)
</TD>
</TR>
</TABLE>

<DIV align="left" style="margin-left: 0%; margin-right: 0%; text-indent: 0%; font-size: 10pt; font-family: 'Times New Roman', Times; color: #000000; background: #FFFFFF">

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    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD valign="top">
    * </TD>
    <TD></TD>
    <TD valign="bottom">
    To be filed by amendment.</TD>
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sv1
Table of Contents
As filed with the Securities and
    Exchange Commission on September 15, 2009
Registration
    No. 333-
UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
Washington, D.C.
    20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Converted Organics
    Inc.
(Exact name of registrant as
    specified in its charter)
Delaware
2873
20-4075963
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
7A Commercial Wharf
    West
Boston, MA 02110
(617) 624-0111
(Address, including zip code,
    and telephone number, including area code, of registrant's
    principal executive offices)
Edward J. Gildea
Chief Executive
    Officer
7A Commercial Wharf
    West
Boston, MA 02110
(617) 624-0111
(Name, address, including zip
    code, and telephone number, including area code, of agent for
    service)
Copies to:
Ralph V. De Martino, Esq.
Cavas S. Pavri, Esq.
Cozen O'Connor
The Army & Navy Club Building
1627 I Street, NW, Suite 1100
Washington, DC 20006
(202) 912-4800
Facsimile: (202) 912-4830
Kenneth R. Koch, Esq.
Mintz Levin Cohn Ferris Glovsky and Popeo, P.C.
The Chrysler Center
666 Third Avenue
New York, NY 10017
(212) 935-3000
Facsimile: (212) 983-3115
Approximate date of commencement of proposed sale to the
    public:
As soon as practicable after the
    effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
    offered on a delayed or continuous basis pursuant to
    Rule 415 under the Securities Act of 1933, check the
    following
    box.
þ
If this Form is filed to register additional securities for an
    offering pursuant to Rule 462(b) under the Securities Act, check
    the following box and list the Securities Act registration
    statement number of the earlier effective registration statement
    for the same
    offering.
o
If this Form is a post-effective amendment filed pursuant to
    Rule 462(c) under the Securities Act, check the following
    box and list the Securities Act registration statement number of
    the earlier effective registration statement for the same
    offering.
o
If this Form is a post-effective amendment filed pursuant to
    Rule 462(d) under the Securities Act, check the following
    box and list the Securities Act registration statement number of
    the earlier effective registration statement for the same
    offering.
o
Indicate by check mark whether the registrant is a large
    accelerated filer, an accelerated filer, a non-accelerated
    filer, or a smaller reporting company. See the definitions of
    "large accelerated filer," "accelerated
    filer" and "smaller reporting company" in
    Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
    filer
o
Accelerated
    filer
o
Non-accelerated
    filer
o
(Do not check if a smaller reporting company)
Smaller reporting
    company
þ
CALCULATION
    OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum
Amount of
Title of Each Class of
Amount to be
Offering Price per
Aggregate
Registration
Securities to be Registered
Registered
Security(1)
Offering Price(1)
Fee
Units, each consisting of one share of Common Stock,
    $.0001 par value, and one Class H Warrant(2)
14,375,000 Units
$1.36
$19,550,000
$
1,090.89
Shares of Common Stock included as part of the Units(2)
14,375,000 Shares
—
—
(3)
Class H Warrants included as part of the Units(2)
14,375,000 Class H Warrants
—
—
(3)
Shares of Common Stock underlying the Class H Warrants
    included in the Units(4)
14,375,000 Shares of
Common Stock
$1.63
$23,431,250
$
1,307.47
Representative's Unit Purchase Option
1
$100.00
$100
$
1.00
Units underlying the Representative's Unit Purchase Option
    ("Underwriters' Units")(4)
500,000 Units
$1.36
$680,000
$
37.95
Shares of Common Stock included as part of the
    Underwriters' Units(4)
500,000 Shares of
Common Stock
—
—
(3)
Class H Warrants included as part of the Underwriters'
    Units(4)
500,000 Class H
Warrants
—
—
(3)
Shares of Common Stock underlying the Class H Warrants
    included in the Underwriters' Units(4)
500,000 Shares of Common Stock
$1.63
$815,000
$
45.48
Total
$44,476,350
$
2,482.79
(1)
Estimated solely for the purpose of
    calculating the registration fee.
(2)
Includes 1,875,000 Units,
    1,875,000 shares of Common Stock and 1,875,000 Class H
    Warrants underlying such Units which may be issued on exercise
    of a
45-day
option granted to the Underwriters to cover over-allotments, if
    any.
(3)
No fee pursuant to Rule 457(g).
(4)
Pursuant to Rule 416, there
    are also being registered such additional securities as may be
    issued to prevent dilution resulting from stock splits, stock
    dividends or similar transactions as a result of the
    anti-dilution provisions contained in the Class H Warrants.
The Registrant hereby amends this Registration Statement on
    such date or dates as may be necessary to delay its effective
    date until the Registrant shall file a further amendment which
    specifically states that this Registration Statement shall
    thereafter become effective in accordance with Section 8(a)
    of the Securities Act of 1933 or until the Registration
    Statement shall become effective on such date as the Commission,
    acting pursuant to Section 8(a), may determine.
Table of Contents
$
Units
We are
    selling          units,
    each unit consisting of one share of our common stock and one
    Class H warrant. Each Class H warrant entitles the
    holder to purchase one share of our common stock at a price of
    $      , and will expire on
    December 31, 2014. The Class H warrants will be
    exercisable 60 days after issuance.
Our common stock and Class B warrants are quoted on the
    NASDAQ Capital Market under the symbols "COIN" and
    "COINZ," respectively. The last sale prices of our
    common stock and Class B warrants on September 13,
    2009 were $1.37 per share and $0.35 per share,
    respectively.
There is presently no public market for our units or
    Class H warrants, and no market for the units will exist.
    Each of the common stock and the Class H warrants
    underlying the units will begin trading separately upon the
    closing of this offering. We have applied to list the
    Class H warrants on the NASDAQ Capital Market under the
    symbol
    "          .
"
We cannot assure you, however, that our securities will
    continue to be listed on the NASDAQ Capital Market.
These are speculative securities. Investing in our securities
    involves significant risks. You should purchase these securities
    only if you can afford a complete loss of your investment. See
    "Risk Factors" beginning on page 7.
Neither the Securities and Exchange Commission nor any state
    securities commission has approved or disapproved of these
    securities or passed upon the adequacy or accuracy of this
    prospectus. Any representation to the contrary is a criminal
    offense.
Underwriting
Proceeds to
Price to
Discounts and
Converted
Public
Commissions(1)
Organics
Per Unit
$
$
$
Total
$
$
$
(1)
This amount does not include a non-accountable expense allowance
    in the amount of 3% of the gross proceeds, or
    $      ($     
    per unit) payable to Chardan Capital Markets, LLC.
Delivery of the units will be made on or
    about          ,
    2009. We have granted the underwriters a
45-day
option to purchase up
    to          
    additional units solely to cover over-allotments, if any.
In connection with this offering, we have also agreed to sell to
    Chardan Capital Markets, LLC an option to purchase up to 4% of
    the units sold for $100. If the underwriter exercises this
    option, each unit may be purchased for
    $      per unit
    (     % of the price of the units sold
    in the offering).
Chardan
    Capital Markets, LLC
The
    date of this prospectus
    is          ,
    2009
TABLE OF
    CONTENTS
Page
Prospectus
    Summary
1
Risk
    Factors
7
Special
    Note Regarding Forward-Looking Statements
17
Use of
    Proceeds
18
Price
    Range of Common Stock
19
Capitalization
20
Dilution
21
Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations
22
Business
35
Management
47
Executive
    Compensation
50
Principal
    Stockholders
52
Related
    Party Transactions
53
Underwriting
54
Description
    of Capital Stock
55
Legal
    Matters
61
Experts
62
Where You
    Can Find More Information
62
EX-3.2 Amendment to Certificate of Incorporation
EX-21.1 Subsidiaries of the Company
EX-23.1 Consent of CCR LLP
You should rely only on the information contained in this
    document or to which we have referred you. We have not
    authorized anyone to provide you with information that is
    different. This document may only be used where it is legal to
    sell these securities. The information contained in this
    document may only be accurate on the date of this document.
Table of Contents
PROSPECTUS
    SUMMARY
The following summary highlights selected information
    contained in this prospectus. This summary does not contain all
    the information that may be important to you. You should read
    the more detailed information contained in this prospectus,
    including but not limited to, the risk factors beginning on
    page 7. References to "we," "us,"
    "our," "Converted Organics" or the
    "Company" mean Converted Organics Inc. and its
    subsidiaries.
Our
    Company
We use food and other food processing waste as a raw material to
    manufacture, sell and distribute all-natural soil amendment and
    fertilizer products combining disease suppression and nutrition
    characteristics.
Our revenue comes from two sources: "tip" fees and
    product sales. Waste haulers pay the tip fees to us for
    accepting food waste generated by food distributors such as
    grocery stores, produce docks, fish markets and food processors,
    and by hospitality venues such as hotels, restaurants,
    convention centers and airports. Revenue also comes from the
    customers who purchase our products. Our products possess a
    combination of nutritional, disease suppression and soil
    amendment characteristics. The products are sold in both dry and
    liquid form and will be stable with an extended shelf life
    compared to other organic fertilizers. Among other uses, the
    liquid product is expected to be used to mitigate powdery
    mildew, a leaf fungus that restricts the flow of water and
    nutrients to plants. These products can be used either on a
    stand-alone basis or in combination with more traditional
    petrochemical-based fertilizers and crop protection products.
    Based on growth trial performance, increased environmental
    awareness, trends in consumer food preferences and
    company-sponsored research, we believe there will be a demand
    for our products in the agribusiness, turf management and retail
    markets. We also expect to benefit from increased regulatory
    focus on organic waste processing and on environmentally
    friendly growing practices.
We operate two manufacturing facilities, one in Woodbridge, New
    Jersey and the other in Gonzales, California, where we use both
    owned and licensed proprietary technology to produce our
    products.
We are positioning ourselves to take advantage of the growing
    market for organic products. We believe there are two primary
    business drivers influencing commercial agriculture. First,
    commercial farmers are focused on improving the economic yield
    of their land: maximizing the value derived from crop output
    (quantity and quality). Second, commercial farmers are focused
    on reducing the use of chemical products, while also meeting the
    demand for cost-effective, environmentally responsible
    alternatives. We believe this change in focus is the result of:
•
Consumer demand for safer, higher quality food;
•
The restriction on use of registered chemical products. Several
    U.S. government authorities, including the Environmental
    Protection Agency, the Food and Drug Administration, and the
    U.S. Department of Agriculture, or USDA, regulate the use
    of fertilizers;
•
Environmental concerns and the demand for sustainable
    technologies;
•
Demand for more food for the growing world population; and
•
The cost effectiveness and efficacy of non-chemical based
    products to growers.
In this connection, according to the Organic Trade Association,
    sales of organic food and beverages in the United States have
    grown from $1 billion in 1990 to approximately
    $20 billion in 2007 and are expected to grow at an average
    of 18% per year through 2010. Furthermore, the Organic Trade
    Association reports that organic foods represented approximately
    2.8% of total food and beverage sales in 2006, growing 20.9% in
    2006, one of the fastest growing categories. According to the
    Nutrition Business Journal, consumer demand is driving organic
    sector expansion, particularly for fruit, vegetables and dairy
    products. This demand, in turn, is driving commercial farmers to
    shift more of their acreage from conventional practices, which
    predominantly use synthetic fertilizers, to organic practices,
    which require the use of certified organic fertilizers or other
    natural organic materials to facilitate crop growth. The
    USDA's Economic Research Service reports that the
1
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number of certified organic farm acres has grown from
    0.9 million in 1992 to 4.1 million in 2005, a compound
    annual growth rate of 12% per year.
We believe farmers are facing pressures to change from
    conventional production practices to more environmentally
    friendly practices. U.S. agricultural producers are turning
    to certified organic farming methods as a potential way to lower
    production costs, decrease reliance on nonrenewable resources
    such as chemical fertilizers, increase market share with an
    "organically grown" label and capture premium prices,
    thereby boosting farm income.
Our long term strategic plan calls for the development and
    construction of facilities in addition to our Gonzales and
    Woodbridge facilities. In this connection, we have already done
    preliminary work aimed at establishing facilities in Rhode
    Island and Massachusetts. Any future expansion is dependent on
    our ability to raise additional financing beyond the proceeds we
    may receive from the offering contemplated by this prospectus.
    We may also seek to expand by licensing third parties to use our
    technology or by building less capital intensive, smaller
    facilities, if they are commercially feasible.
Opening additional facilities should allow us to achieve
    economies of scale in marketing and selling our fertilizer
    products as the cost of these activities would be spread over a
    larger volume of product. If our overall volume of production
    increases, we also believe we may be able to more effectively
    approach larger agribusiness customers requiring larger
    quantities of fertilizer to efficiently utilize their
    distribution systems.
We were incorporated under the laws of the state of Delaware in
    January 2006, and we transitioned from a development stage
    company to an operating company in the second quarter of 2008 as
    operations commenced. We generated approximately
    $1.5 million in revenue for the year ended
    December 31, 2008.
In February 2006, we merged with our predecessor organizations,
    Mining Organics Management, LLC and Mining Organics Harlem River
    Rail Yard, LLC, in transactions accounted for as a
    recapitalization. These predecessor organizations provided
    initial technical and organizational research that led to the
    foundation of the current business plan.
On February 16, 2007, we completed an initial public
    offering of stock and also completed a bond offering with the
    New Jersey Economic Development Authority. The net proceeds of
    the stock offering of $8.9 million, together with the net
    proceeds of the bond offering of $16.5 million, were used
    to develop and construct the Woodbridge facility, fund our
    marketing and administrative expenses during the construction
    period and fund specific principal and interest reserves as
    specified in the bond offering. Of the total net proceeds of the
    stock and bond offerings of $25.4 million,
    $14.6 million was used towards the construction of the
    Woodbridge facility and the remaining $10.8 million was
    used for items detailed above.
On January 24, 2008, we acquired the assets, including the
    intellectual property, of Waste Recovery Industries, LLC, or WRI
    . This acquisition made us the exclusive owner of the
    proprietary technology and process known as the High Temperature
    Liquid Composting or HTLC system, which processes various
    biodegradable waste products into liquid and solid organic-based
    fertilizer and feed products.
Also on January 24, 2008, we acquired the net assets of
    United Organic Products, LLC, which was under common ownership
    with WRI. With this acquisition, we acquired a leading liquid
    fertilizer product line, as well as the operations of the
    Gonzales facility.
Our principal business office is located at 7A Commercial Wharf
    West, Boston, Massachusetts 02110, and our telephone number is
(617) 624-0111.
Our website address is
www.convertedorganics.com
.
    Information contained on our website or any other website does
    not constitute part of this prospectus.
2
Table of Contents
THE
    OFFERING
Securities offered:
units,
    at $      per unit
    (plus          additional
    units if the representative of the underwriters exercise the
    over-allotment option), each unit consisting of:
• one share of common stock; and
• one Class H warrant.
Each of the common stock and the Class H warrants will
    begin trading separately upon the closing of this offering, and
    the units will not be listed on any market.
Common Stock:
Number outstanding before this
offering
20,412,708 shares
Number to be outstanding after this
offering
shares
    (without giving effect to exercise of the Class H warrants,
    or any of our other outstanding options, warrants or convertible
    notes)
Class H Warrants:
Number outstanding before this
offering
None.
Number to be outstanding after this
offering
Exercise price
$
Securities issuable on exercise of Class H warrants
Each Class H warrant is exercisable for one share of common
    stock.
Exercise period
The Class H warrants will be exercisable 60 days after
    issuance. The Class H warrants will expire at
    5:00 p.m., New York City time, on December 31, 2014.
NASDAQ Capital Market symbols for our:
Common stock
COIN
Class B warrants
COINZ
Proposed NASDAQ Capital Market symbols for our Class H
    Warrants
Risk Factors
You should carefully consider all of the risks set forth in the
    section entitled "Risk Factors" beginning on
    page 7 of this prospectus.
The number of shares to be outstanding after this offering
    excludes:
•
1,248,895 shares of common stock issuable upon the exercise
    of outstanding options issued pursuant to our current stock
    option plans;
•
274,772 shares of common stock issuable upon the exercise
    of options available for future grant under our stock option
    plans;
3
Table of Contents
•
393,657 shares of common stock issuable upon the exercise
    of 131,219 underwriter units;
•
1,000,000 shares of common stock issuable upon conversion
    of a $1,540,000 convertible note issued in September 2009;
•
shares underlying a convertible note that is convertible into
    our common stock at the option of the holder at a price equal to
    the average closing price of our common stock on the NASDAQ
    Capital Market for the five days preceding conversion (as of
    September 1, 2009, the note had a remaining principal
    balance of approximately $458,000);
•
4,932,438 Class B warrants. Each Class B warrant
    entitles the holder to purchase one share of common stock at an
    exercise price of $11.00 per share. In addition, the warrant
    provides for anti-dilution protection in connection with our
    issuance of any stock dividends, which we have declared since
    the issuance of the warrants. Accordingly, in the aggregate,
    holders of the Class B warrants may currently purchase a
    total of 6,177,012 shares of our common stock;
•
885,000 shares of common stock reserved for issuance under our
    Class C warrants exercisable at $1.00 per share;
•
415,000 shares of common stock reserved for issuance under our
    Class D warrants exercisable at $1.02 per share;
•
1,500,000 shares of common stock reserved for issuance under our
    Class E warrants exercisable at $1.63 per share;
•
585,000 shares of common stock reserved for issuance under our
    Class F warrants exercisable at $1.25 per share; and
•
2,500,000 shares of common stock reserved for issuance under our
    Class G warrants exercisable at $1.25 per share.
Except where we state otherwise, the information we present in
    this prospectus assumes:
•
no exercise of our outstanding options;
•
no exercise of our outstanding warrants;
•
no conversion of our outstanding convertible notes;
•
no exercise of the underwriters' unit purchase
    option; and
•
no exercise of the underwriters' over-allotment option.
4
Table of Contents
SUMMARY
    CONSOLIDATED AND OTHER FINANCIAL DATA
The following tables summarize our consolidated financial and
    other data. The consolidated statements of operations data for
    the years ended December 31, 2008 and 2007 and the
    consolidated balance sheet data as of December 31, 2008 and
    2007 have been derived from our audited consolidated financial
    statements included elsewhere in this prospectus. The
    consolidated statement of operations data for the six months
    ended June 30, 2009 and 2008, and the consolidated balance
    sheet data as of June 30, 2009, have been derived from our
    unaudited consolidated financial statements included elsewhere
    in this prospectus. The unaudited consolidated financial
    statements have been prepared on a basis consistent with our
    audited financial statements and include, in the opinion of
    management, all adjustments that management considers necessary
    for the fair statement of the financial information set forth in
    those financial statements. The following financial data should
    be read in conjunction with, and is qualified by reference to,
    our consolidated financial statements and related notes and
    schedules included elsewhere in this prospectus and the
    information under "Management's Discussion and
    Analysis of Financial Condition and Results of Operations"
    below. Our historical results are not necessarily indicative of
    the results to be expected in any future period.
Years Ended December 31,
2008
2007
Selected Operating Data:
Revenues
$
1,547,981
$
—
Cost of good sold
1,981,084
—
Gross (loss)
(433,103
)
—
Loss from operations
(10,381,733
)
(3,674,842
)
Other (expenses), net
(5,797,365
)
(409,170
)
Loss before provision for income taxes
(16,179,098
)
(4,084,012
)
Net loss
(16,179,098
)
(4,084,012
)
Net loss per share, basic and diluted
(2.70
)
(0.87
)
Weighted average common shares outstanding
5,985,017
4,716,378
As of December 31,
2008
2007
Selected Balance Sheet Data:
Cash and cash equivalents
$
3,357,940
$
287,867
Property, plant and equipment
19,725,146
—
Other assets
9,534,922
21,888,860
Total assets
32,618,008
22,176,727
Working capital (deficit)
(2,243,941
)
663,050
Total liabilities
27,571,076
20,090,372
Total owners' equity
5,046,932
2,086,355
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Six Months Ended June 30,
2009
2008
Selected Operating Data:
Revenues
$
1,484,023
$
752,907
Cost of good sold
3,757,264
624,548
Gross (loss) profit
(2,273,061
)
128,359
Loss from operations
(7,443,230
)
(5,617,669
)
Other income/(expenses)
516,828
(2,920,705
)
Loss before provision for income taxes
(6,926,402
)
(8,538,374
)
Net loss
(6,926,402
)
(8,538,374
)
Net loss per share, basic and diluted
(0.58
)
(1.49
)
Weighted average common shares outstanding
11,985,904
5,747,616
As of June 30,
2009
2008
Selected Balance Sheet Data:
Cash and cash equivalents
$
1,808,156
$
5,202,718
Property, plant and equipment
22,825,134
7,648,088
Other assets
6,330,777
18,710,416
Total assets
30,964,067
31,561,222
Working capital (deficit)
(3,782,563
)
1,247,785
Total liabilities
26,006,202
24,481,359
Total shareholders' equity
4,957,865
7,079,863
6
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RISK
    FACTORS
If you purchase our securities, you will assume a high degree
    of risk. In deciding whether to invest, you should carefully
    consider the following risk factors, as well as the other
    information contained elsewhere in this prospectus. Any of the
    following risks, as well as other risks and uncertainties
    discussed in this prospectus, could have a material adverse
    effect on our business, financial condition, results of
    operations or prospects and cause the value of our securities to
    decline, which could cause you to lose all or part of your
    investment.
Risks
    Relating to Our Business
We
    received a modified report from our independent registered
    public accounting firm with an emphasis of matter paragraph for
    our year ended December 31, 2008 with respect to our
    ability to continue as a going concern. The existence of such a
    report may adversely affect our stock price and our ability to
    raise capital, and even if we are successfully able to complete
    this offering, there is no assurance that we will not receive a
    similar emphasis of matter paragraph in their opinion for our
    year ending December 31, 2009.
We believe there exists substantial doubt regarding our ability
    to continue as a going concern unless this offering or a similar
    financing is consummated. Our independent registered public
    accounting firm has modified and included in their report for
    our year ended December 31, 2008 an emphasis of matter
    paragraph with respect to our ability to continue as a going
    concern. Even if we are able to complete this offering, there is
    no assurance that our independent registered public accounting
    firm will not again so emphasis this matter in their report for
    our year ending December 31, 2009. Our consolidated
    financial statements have been prepared on the basis of a going
    concern, which contemplates the realization of assets and the
    satisfaction of liabilities in the normal course of business. If
    we became unable to continue as a going concern, we would have
    to liquidate our assets and we might receive significantly less
    than the values at which they are carried on our consolidated
    financial statements. The inclusion of a going concern
    modification in our independent registered public accounting
    firm's audit opinion for the year ended December 31,
    2008 may materially and adversely affect our stock price
    and our ability to raise new capital, as well as adversely
    affect our business. In addition, if our independent registered
    public accounting firm's report for our year ending
    December 31, 2009 again has an emphasis of this matter, it
    may adversely affect our stock price and our ability to raise
    new capital in the future, as well as adversely affect our
    business.
We
    need to raise additional capital to fund our operations through
    the near term, and we do not have any commitments for that
    capital.
For the year ended December 31, 2008, we incurred a net
    loss of approximately $16.2 million, and had an accumulated
    deficit of $26.6 million. For the six months ended
    June 30, 2009, we had a net loss of $6.9 million, an
    accumulated deficit of approximately $35.7 million,
    negative working capital of approximately $3.7 million, and
    we continue to incur such losses. We need additional capital to
    execute our business strategy, and if we are unsuccessful in
    raising additional capital either through this offering or
    otherwise, we will be unable to fully execute our business
    strategy on a timely basis, if at all. If we complete this
    offering, we expect the funds received will be sufficient to
    operate our current business until we are cash flow positive,
    which we expect to occur by the end of the third quarter of
    2010, assuming that our sales levels do not decrease and
    assuming that we do not encounter any unforeseen costs or
    expenses. If our sales levels decrease or if we encounter
    unforeseen costs or expenses, we will require additional
    financing prior to such date for which we have no commitments.
    The proceeds from this offering are intended to fund our current
    business operations, and will not permit us to finance
    additional facilities. If we are unable to complete this
    offering, we will need additional financing immediately, for
    which we have no commitments. We do not know whether any
    financing, if obtained, will be adequate to meet our capital
    needs and to support our growth. If adequate capital cannot be
    obtained on satisfactory terms, we may curtail or delay the
    implementation of updates to our facilities or delay the
    expansion of our sales and marketing capabilities, any of which
    could cause our business to fail.
7
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If we raise additional capital through the issuance of equity
    securities, such issuances will likely cause dilution to our
    stockholders, particularly if we are required to do so during
    periods when our common stock is trading at historically low
    price levels. If we raise additional capital through the
    issuance of debt securities, the debt securities may be secured
    and any interest payments would reduce the amount of cash
    available to operate and grow our business.
We
    will need to obtain additional debt and equity financing to
    complete subsequent stages of our business plan.
Even if this offering is consummated, we will require
    significant additional financing to increase the capacity of our
    Woodbridge facility to its permitted 500 tons per day capacity
    from the current full processing capacity of 250 tons per day
    and to invest in the construction of new facilities. Our
    long-term business strategy contemplates the expansion of our
    Woodbridge facility and the construction of new facilities, and
    we do not have any commitments for the financing required to
    complete such projects. Any new facility will likely be
    individually financed and require considerable debt. While we
    believe state government-sponsored debt programs may be
    available to finance our requirements, public or private debt
    may not be available at all or on terms acceptable to us for the
    development of future facilities. We do not intend to utilize
    the proceeds from this offering to finance any new manufacturing
    facilities or to expand our Woodbridge facility.
To meet our future capital requirements, we may issue additional
    securities in the future with rights, terms and preferences
    designated by our Board of Directors, without a vote of
    stockholders, which could adversely affect stockholder rights.
    Additional financing will likely cause dilution to our
    stockholders and could involve the issuance of securities with
    rights senior to the outstanding shares. There is no assurance
    that such financing will be sufficient, that the financing will
    be available on terms acceptable to us and at such times as
    required, or that we will be able to obtain the additional
    financing required, if any, for the continued operation and
    growth of our business. Any inability to raise necessary capital
    will have a material adverse effect on our ability to implement
    our business strategy and will have a material adverse effect on
    our revenues and net income.
Constructing
    and equipping our Woodbridge facility has taken longer and cost
    more than we expected, which has resulted in significant amounts
    being owed to construction vendors for which we do not have the
    cash resources to satisfy.
Our Woodbridge facility became operational in June 2008. We
    incurred approximately $5.7 million in construction cost
    and design change overruns on an initial budget of
    $19.6 million. These design changes and upgrades are
    substantially complete, but we can offer no assurance that we
    will not experience additional overruns and delays before total
    completion.
Of the $5.7 million in upgrades, design changes and
    construction costs discussed above, we currently estimate that
    we will be able to fund approximately $500,000 in costs. In
    order to finance the additional $5.2 million in upgrades,
    design changes and construction costs, we have entered into
    agreements with all but one of the various construction vendors
    regarding payment plans, which generally provide we pay interest
    only for six months with the remaining principal balance and
    interest thereon to be repaid in 18 monthly installments.
    We owe approximately $2.4 million to one construction
    vendor with whom we are presently negotiating. Such vendor has
    commenced a lawsuit against us. These negotiations and legal
    actions could result in interruptions to the operations of our
    Woodbridge facility, which would adversely effect our business
    results.
We
    have limited operating history, and our prospects are difficult
    to evaluate.
We have not operated any facility other than our Gonzales
    facility, which we purchased in January 2008, and our Woodbridge
    facility, which became operational in June 2008. Our activities
    to date have been limited primarily to developing our business,
    and consequently there is limited historical financial
    information related to operations available upon which you may
    base your evaluation of our business and prospects. The revenue
    and income potential of our business is unproven. If we are
    unable to develop our business, we will not
8
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achieve our goals and could suffer economic loss or collapse,
    which may have a material negative effect on our financial
    performance.
We
    expect to incur significant losses for some time, and we may
    never operate profitably.
From inception through June 30, 2009, we incurred an
    accumulated net loss of approximately $27.2 million. The
    revenues that we began generating from our Gonzales facility in
    February 2008 and from our Woodbridge facility during the first
    half of 2009 have not yet resulted in our earning a profit and
    we will continue to incur significant losses for at least the
    near future. There is no assurance that our operations will ever
    become profitable.
If we
    are unable to manage our transition to an operating company
    effectively, our operating results will be adversely
    affected.
Failure to manage effectively our transition to an operating
    company will harm our business. To date, substantially all of
    our activities and resources have been directed at developing
    our business plan, arranging financing, licensing technology,
    obtaining permits and approvals, securing a lease for our
    Woodbridge facility and options for additional facilities,
    purchasing our Gonzales facility and beginning to operate our
    facilities. The transition to a converter of waste and
    manufacturer and vendor of fertilizer products requires
    effective planning and management. In addition, future expansion
    will be expensive and will likely strain our management and
    other resources. We may not be able to easily transfer our
    skills to operating a facility or otherwise effectively manage
    our transition to an operating company.
We are
    dependent on a small number of major customers for our revenues
    and the loss of any of these major customers would adversely
    affect our results of operations.
Our Gonzales and Woodbridge facilities rely on a few major
    customers for a majority of their revenues. From January 1,
    2009 until August 31, 2009, approximately 71% of the
    revenues generated by the Gonzales facility were from three
    customers. From January 1, 2009 until August 31, 2009,
    approximately 48% of the revenues generated by the Woodbridge
    facility, excluding tip fees, were from two customers. We do not
    have any long-term agreements with any of our customers. The
    loss of any of our major customers could adversely effect our
    results of operations.
We are
    exposed to risks from legislation requiring companies to
    evaluate internal control over financial
    reporting.
Section 404 of the Sarbanes-Oxley Act of 2002
    ("Section 404") required our management to begin
    to report on the operating effectiveness of our internal control
    over financial reporting for the year ended December 31,
    2008. CCR LLP, our independent registered public accounting
    firm, will be required to opine on the effectiveness of our
    internal control over financial reporting beginning with the
    year ending December 31, 2009. We must continue an ongoing
    program to perform the system and process evaluation and testing
    necessary to comply with these requirements. We expect that this
    program will require us to incur significant expenses and to
    devote resources to Section 404 compliance on an ongoing
    annual basis.
It is difficult for us to predict how long it will take to
    complete management's assessment of the effectiveness of
    our internal control over financial reporting each year and to
    remediate any deficiencies in our internal control over
    financial reporting, if any. We are currently completing
    internal assessments in anticipation of our independent
    registered public accounting firm opining on the effectiveness
    of our internal control over financial reporting for the current
    year. Due to financial constraints, we have not yet retained any
    outside consultants to assist us, although we intend to hire
    such consultants if we are able to successfully complete this
    offering. As a result, we may not be able to complete the
    assessment process on a timely basis each year. In the event
    that our Chief Executive Officer, Chief Financial Officer or
    independent registered public accounting firm determines that
    our internal control over financial reporting is not effective
    as defined under Section 404, we cannot predict how
    regulators will react or how the market prices of our securities
    will be affected.
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Our
    future success is dependent on our existing key employees, and
    hiring and assimilating new key employees, and our inability to
    attract or retain key personnel in the future would materially
    harm our business and results of operations.
Our success depends on the continuing efforts and abilities of
    our current management team. In addition, our future success
    will depend, in part, on our ability to attract and retain
    highly skilled employees, including management, technical and
    sales personnel. We may be unable to identify and attract highly
    qualified employees in the future. In addition, we may not be
    able to successfully assimilate these employees or hire
    qualified personnel to replace them. The loss of services of any
    of our key personnel, the inability to attract or retain key
    personnel in the future, or delays in hiring required personnel
    could materially harm our business and results of operations.
We
    have little or no experience in the food waste conversion or
    fertilizer industries, which increases the risk of our inability
    to build our facilities and operate our business.
We are currently, and are likely for some time to continue to
    be, dependent upon our present management team. Most of these
    individuals are experienced in business generally, and in
    governing and operating a public company. However, our present
    management team does not have experience organizing the
    construction, equipping and start up of a food waste conversion
    facility. In addition, none of our directors has any experience
    in the food waste conversion or fertilizer products industries.
    As a result, we may not develop our business successfully.
We
    license certain technology from a third party, and our failure
    to perform under the terms of the license could result in
    material adverse consequences.
We use certain licensed technology and patented pieces of
    process equipment in our Woodbridge facility that have been
    licensed to us by International Bio-Recovery Corporation, or
    IBRC. The license contains various criteria, such as the payment
    of royalties, the branding on packaging and the requirement to
    conduct our processing within certain parameters. If we fail to
    perform under the terms of the license, the license may be
    terminated by the licensor, and we will have to modify our
    process and employ other equipment. We currently own and employ
    an alternative process to that of IBRC, which is utilized at our
    Gonzales facility. If the license agreement is terminated or
    held invalid for any reason, or if it is determined that IBRC
    has improperly licensed its process to us, our Woodbridge
    operations and revenues could be adversely affected.
The
    EATAD technology we will use to operate our Woodbridge facility
    is unproven at the scale on which we intend to
    operate.
While IBRC has operated a facility in British Columbia using the
    Enhanced Autothermal Thermophilic Aerobic Digestion, or EATAD,
    process, its plant there is smaller than our Woodbridge
    facility. IBRC developed the initial drawings for our Woodbridge
    facility, but neither IBRC nor we have operated a plant of the
    proposed size. There is no assurance that we will be able to
scale-up
the
    Woodbridge facility successfully.
Our
    Woodbridge and Gonzales facility sites, as well as future
    facility sites, may have unknown environmental problems that
    could be expensive and time consuming to correct.
There can be no assurance that we will not encounter hazardous
    environmental conditions at the Woodbridge and Gonzales facility
    sites or any additional future facility sites that may delay the
    construction of our future food waste conversion facilities or
    require us to incur significant
clean-up
or
    correction costs. Upon encountering a hazardous environmental
    condition, our contractor may suspend work in the affected area.
    If we receive notice of a hazardous environmental condition, we
    may be required to correct the condition prior to continuing
    construction. The presence of a hazardous environmental
    condition will likely delay construction of the particular
    facility and may require significant expenditures to correct the
    environmental condition. If we encounter any hazardous
    environmental conditions during construction that require time
    or money to correct, such event could delay our ability to
    generate revenue.
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We
    have recently commenced operations and may not be able to
    successfully operate our Woodbridge or Gonzales
    facility.
We believe our Woodbridge facility is the first commercial
    facility of its kind in the United States to recycle food waste
    into fertilizer and may not function as anticipated. We have
    produced our products at our Gonzales facility since February
    2008 and have had limited production from our Woodbridge
    facility since June 2008. As such, we have limited operating
    experience, and may be unable to successfully operate these
    facilities. In addition, the control of the manufacturing
    process will require operators with extensive training and
    experience that may be difficult to attain.
Our
    lack of business diversification may have a material negative
    effect on our financial performance.
We have two products to sell to customers to generate revenue:
    dry and liquid soil fertilizer products. We do not expect to
    have any other products. Although we also expect to receive
    "tip" fees from food waste haulers, our lack of
    business diversification could have a material adverse effect on
    our operations.
We may
    not be able to produce products from our facilities in
    commercial quantities or sell them at competitive
    prices.
We have produced our products at our Gonzales facility since
    February 2008 and have had limited production from our
    Woodbridge facility since June 2008. Accordingly, our ability to
    produce our products in commercial quantities at a competitive
    cost is unproven. We may not be able to produce products from
    our facilities in commercial quantities or sell them at prices
    competitive with other similar products.
We may
    be unable to establish marketing and sales capabilities
    necessary to commercialize and gain market acceptance for our
    products.
We currently have limited resources to expand our sales and
    marketing capabilities. We will need to either hire sales
    personnel with expertise in the markets we intend to address or
    contract with others to provide sales support. Co-promotion or
    other marketing arrangements to commercialize our planned
    products could significantly limit the revenues we derive from
    our products, and the parties with whom we would enter such
    agreements may fail to commercialize our products successfully.
    Our products address different markets and can be offered
    through multiple sales channels. Addressing each market
    effectively will require sales and marketing resources tailored
    to the particular market and to the sales channels that we
    choose to employ, and we may not be able to develop such
    specialized marketing resources.
Pressure
    by our customers to reduce prices and agree to long-term supply
    arrangements may adversely affect our net sales and profit
    margins.
Our current and potential customers, especially large
    agricultural companies, are often under budgetary pressure and
    are very price sensitive. Our customers may negotiate supply
    arrangements with us well in advance of delivery dates, thereby
    requiring us to commit to product prices before we can
    accurately determine our final costs. If this happens, we may
    have to reduce our conversion costs and obtain higher volume
    orders to offset lower average sales prices. If we are unable to
    offset lower sales prices by reducing our costs, our gross
    profit margins will decline, which could have a material
    negative effect on our financial performance.
The
    fertilizer industry is highly competitive, which may adversely
    affect our ability to generate and grow sales.
Chemical fertilizers are manufactured by many companies and are
    plentiful and relatively inexpensive. In addition, there are
    some 1,500 "crop products" registered as
    "organic" with the Organic Materials Review Institute,
    a number that has increased by approximately 50% since 2002. If
    we fail to keep up with changes affecting the markets that we
    intend to serve, we will become less competitive, adversely
    affecting our financial performance.
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Defects
    in our products or failures in quality control could impair our
    ability to sell our products or could result in product
    liability claims, litigation and other significant events with
    substantial additional costs.
Detection of any significant defects in our products or failure
    in our quality control procedures may result in, among other
    things, delay in
time-to-market,
loss of sales and market acceptance of our products, diversion
    of development resources, and injury to our reputation. The
    costs we may incur in correcting any product defects may be
    substantial. Additionally, errors, defects or other performance
    problems could result in financial or other damages to our
    customers, which could result in litigation. Product liability
    litigation, even if we prevail, would be time consuming and
    costly to defend, and if we do not prevail, could result in the
    imposition of a damages award. We presently maintain product
    liability insurance; however, it may not be adequate to cover
    any claims.
Energy
    and fuel cost variations could adversely affect operating
    results and expenses.
Energy costs, particularly electricity and natural gas,
    constitute a substantial portion of our operating expenses. The
    price and supply of energy and natural gas are unpredictable and
    fluctuate based on events outside our control, including demand
    for oil and gas, weather, actions by OPEC and other oil and gas
    producers, and conflict in oil-producing countries. Price
    escalations in the cost of electricity or reductions in the
    supply of natural gas could increase operating expenses and
    negatively affect our results of operations. We may not be able
    to pass through all or part of the increased energy and fuel
    costs to our customers.
We may
    not be able to obtain sufficient material to produce our
    products, and we are dependent on a small number of waste
    haulers to provide the food waste we use to produce our
    products.
Our revenue comes from two sources: "tip" fees and
    product sales. We are dependent on a stable supply of food waste
    in order to produce our products and to utilize our available
    capacity. Waste haulers pay the tip fees to us for accepting
    food waste generated by food distributors such as grocery
    stores, produce docks, fish markets and food processors, and by
    hospitality venues such as hotels, restaurants, convention
    centers and airports. Insufficient food waste feedstock will
    adversely affect our efficiency and may cause us to increase our
    tip fee discount from prevailing rates,, which is the discount
    we pay to haulers that provide larger quantities of food waste,
    likely resulting in reduced revenues and net income. Competing
    disposal outlets for food waste and increased demand for
    applications such as biofuels may develop and adversely affect
    our business. In addition, if alternate uses for food waste are
    developed in the future, these alternate uses could increase the
    competition for food waste.
Our
    license agreement with IBRC restricts the territory into which
    we may sell our products and grants a cooperative a right of
    first refusal to purchase our products.
We have entered into a license agreement with IBRC that, among
    other terms, contains a restriction on our right to sell our
    planned products outside a territory defined generally as the
    Eastern Seaboard of the United States. The license agreement
    also grants a proposed cooperative, which to our knowledge has
    not been formed and of which IBRC will be a member, a right of
    first refusal to purchase the products sold from our Woodbridge
    facility under certain circumstances. While we believe that the
    territory specified in the license agreement is broad enough to
    absorb the amount of product we plan to produce and that the
    right of first refusal will not impair our ability to sell our
    products, these restrictions may have a material adverse effect
    on the volume and price of our product sales. In addition, we
    may become completely dependent on a third party for the sale of
    our products.
Successful
    infringement claims by third parties could result in substantial
    damages, lost product sales and the loss of important
    proprietary rights.
We may have to defend ourselves against patent and other
    infringement claims asserted by third parties regarding the
    technology we have licensed, resulting in diversion of
    management focus and additional expenses for the defense of
    claims. In addition, if a patent infringement suit was brought,
    we might be forced to stop or delay developing, manufacturing or
    selling potential products that are claimed to infringe a patent
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covering a third party's intellectual property unless that
    party grants us rights to use its intellectual property. We may
    be unable to obtain these rights on terms acceptable to us, if
    at all. If we cannot obtain all necessary licenses on
    commercially reasonable terms, we may be unable to continue
    selling such products. Even if we are able to obtain rights to a
    third party's patented intellectual property, these rights
    may be non-exclusive, and therefore our competitors may obtain
    access to the same intellectual property. Ultimately, we may be
    unable to commercialize our potential products or may have to
    cease some or all of our business operations as a result of
    patent infringement claims, which could severely harm our
    business.
Our
    EATAD license agreement with IBRC imposes obligations on us
    related to infringement actions that may become burdensome or
    result in termination of our license agreement.
If our use of the licensed EATAD technology is alleged to
    infringe the intellectual property of a third party, we may
    become obligated to defend such infringement action. Although
    IBRC has agreed to bear the costs of such defense, if the
    licensed EATAD technology is found by a court to be infringing,
    IBRC could terminate the license agreement, which may prevent us
    from continuing to operate our Woodbridge facility. In such an
    event, we may become obligated to find alternative technology or
    to pay a royalty to a party other than IBRC to continue to
    operate.
If a third party is allegedly infringing on any of the licensed
    technology, then either we or IBRC may attempt to enforce the
    IBRC intellectual property rights. In general, our possession of
    rights to use the know-how related to the licensed technology
    will not be sufficient to prevent others from employing similar
    technology that we believe is infringing. Any such enforcement
    action against alleged infringers, whether by us or by IBRC, may
    be required to be maintained at our expense under the terms of
    the license agreement. The costs of such an enforcement action
    may be prohibitive, reduce our net income, if any, or prevent us
    from continuing operations.
Our
    HTLC technology imposes obligations on us related to
    infringement actions that may become burdensome.
If our use of our HTLC technology is alleged to infringe the
    intellectual property of a third party, we may become obligated
    to defend such infringement action. In such an event, we may
    become obligated to find alternative technology or to pay a
    royalty to a third party to continue to operate.
If a third party is allegedly infringing any of our HTLC
    technology, then we may attempt to enforce our intellectual
    property rights. In general, our possession of rights to use the
    know-how related to our HTLC technology will not be sufficient
    to prevent others from employing similar technology that we
    believe is infringing. Any such enforcement action against
    alleged infringers may be required at our expense. The costs of
    such an enforcement action may be prohibitive, reduce our net
    income, if any, or prevent us from continuing operations.
We
    have provided a bond guaranty to the holders of the bonds issued
    in connection with our Woodbridge facility, and the terms of the
    guaranty may hinder our ability to operate our business by
    imposing restrictive covenants, which may prohibit us from
    taking actions to manage or expand our business.
The terms of the bond guaranty executed by us on behalf of
    Converted Organics of Woodbridge LLC, prohibit us from repaying
    debt and other obligations that funded our working capital until
    certain ratios of EBITDA to debt service are met. Specifically,
    we were initially required to achieve a debt service ratio
    coverage of 2.0 to 1 during our first full year of operation,
    which was waived by the bond holders during 2008 and is required
    during 2009. We do not currently expect that we will meet the
    required debt service ratio coverage in 2009, which means that
    our bond guaranty will remain outstanding, and we will continue
    to be prohibited from repaying debt and other obligations that
    funded our working capital. The failure to meet the debt service
    ratio will not result in any defaults on the bonds.
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Mandatory
    redemption of our bonds issued in connection with our Woodbridge
    facility could have a material adverse effect on our liquidity
    and cash resources.
The bonds issued to construct our Woodbridge facility are
    subject to mandatory redemption by us if the Woodbridge facility
    is condemned, we cease to operate the facility, the bonds become
    taxable, a change in control occurs and under certain other
    circumstances. Depending upon the circumstances, such an event
    could require a payment to our bondholders ranging between 100%
    and 110% of the principal amount of the bonds outstanding, plus
    interest. If we are required to redeem our bonds, such
    redemption will have a material adverse effect on our liquidity
    and cash resources, and may impair our ability to continue to
    operate.
The
    communities where our facilities may be located may be averse to
    hosting waste handling and manufacturing
    facilities.
Local residents and authorities in communities where our
    facilities may be located may be concerned about odor, vermin,
    noise, increased truck traffic, air pollution, decreased
    property values, and public health risks associated with
    operating a manufacturing facility in their area. These
    constituencies may oppose our permitting applications or raise
    other issues regarding our proposed facilities or bring legal
    challenges to prevent us from constructing or operating
    facilities.
During the
start-up
phase at the Woodbridge facility, we experienced odor-related
    issues. As a result of these issues, we have been assessed fines
    from the Health Department of Middlesex County, New Jersey, and
    have been named a party in a lawsuit by a neighboring business.
    With respect to the fines assessed by the Health Department, we
    are currently contesting or attempting to negotiate the extent
    of the fines. With respect to the litigation, the plaintiff has
    alleged various causes of action connected to the odors
    emanating from the facility, and in addition to monetary damages
    is seeking enjoinment of any and all operations which in any way
    cause or contribute to the alleged pollution. If we are
    unsuccessful in defending the above litigation or any new
    litigation, we may be subject to judgments or fines, or our
    operations may be interrupted or terminated.
Our
    facilities will require certain permits to operate, which we may
    not be able to obtain or obtain on a timely basis.
For our Woodbridge facility and Gonzales facility, we have
    obtained the permits and approvals required to operate the
    facilities. We may not be able to secure all the necessary
    permits for future facilities on a timely basis or at all, which
    may prevent us from operating the facility according to our
    business plan.
For our facilities, we may need certain permits to operate solid
    waste or recycling facilities, as well as permits for our sewage
    connection, water supply, land use, air emission, and wastewater
    discharge. The specific permit and approval requirements are set
    by the state and the various local jurisdictions, including but
    not limited to city, town, county, township and state agencies
    having control over the specific properties. Permits once given
    may be withdrawn. Inability to obtain or maintain permits to
    construct, operate or maintain our facilities will severely and
    adversely affect our business.
Changes
    in environmental regulations or violations of such regulations
    could result in increased expense and could have a material
    negative effect on our financial performance.
We are subject to extensive air, water and other environmental
    regulations and need to maintain the environmental permits we
    have received to operate our Woodbridge and Gonzales facilities,
    and obtain a number of environmental permits to construct and
    operate our planned facilities. If for any reason any of these
    permits are not maintained or granted, construction costs for
    our food waste conversion facilities may increase, or the
    facilities may not be constructed at all. Additionally, any
    changes in environmental laws and regulations, both at the
    federal and state level, could require us to invest or spend
    considerable resources in order to comply with future
    environmental regulations. We have been fined for alleged
    environmental violations in connection with the operation of our
    Woodbridge facility, and are currently contesting certain
    alleged environmental violations. Our failure to comply with
    environmental regulations could cause us to lose our required
    permits, which could cause the interruption or cessation of our
    operations. Furthermore, the expense
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of compliance could be significant enough to reduce our net
    income and have a material negative effect on our financial
    performance.
Risks
    Related to Investment in Our Securities
We
    have a significant number of warrants outstanding, and while
    these warrants are outstanding, it may be more difficult to
    raise additional equity capital. Additionally, certain of these
    warrants contain anti-dilution provisions that may result in the
    reduction of their exercise prices due to the completion of this
    offering.
In addition to the Class H warrants being issued in this
    offering, we have outstanding:
•
4,932,438 Class B warrants. Each Class B warrant
    entitles the holder to purchase one share of common stock at an
    exercise price of $11.00 per share. In addition, the warrant
    provides for anti-dilution protection in connection with our
    issuance of any stock dividends, which we have declared since
    the issuance of the warrants. Accordingly, in the aggregate,
    holders of the Class B warrants may currently purchase a
    total of 6,177,012 shares of our common stock;;
•
885,000 Class C warrants exercisable at $1.00 per share;
•
415,000 Class D warrants exercisable at $1.02 per share;
•
1,500,000 Class E warrants exercisable at $1.63 per share;
•
585,000 Class F warrants exercisable at $1.25 per
    share; and
•
2,500,000 Class G warrants exercisable at $1.25 per share.
The holders of those warrants are given the opportunity to
    profit from a rise in the market price of our common stock. In
    addition, the Class B, C, D and H warrants are not
    redeemable by us. We may find it more difficult to raise
    additional equity capital while these warrants are outstanding.
    At any time during which these public warrants are likely to be
    exercised, we may be able to obtain additional equity capital on
    more favorable terms from other sources.
Furthermore, the Class C, D and G warrants contain
    anti-dilution provisions under which, if we issue, with certain
    exceptions, securities at a price lower than the exercise price
    of such warrants, the exercise price of the warrants will be
    reduced to the lower price; provided that the Class G
    warrants provide for a minimum exercise price of $1.08 per
    share, unless we receive stockholder approval for a lower price.
    The exercise price of these warrants may be reduced as a result
    of this offering.
The
    common stock and Class H warrants included in the units
    will trade separately upon the closing of this offering, which,
    along with our currently publicly traded warrants, may provide
    investors with an arbitrage opportunity that could adversely
    affect our common stock.
The common stock and Class H warrants included in the units
    will trade separately upon the closing of this offering. Because
    the units will never trade as a unit, and because we also have
    other publicly traded warrants, investors may be provided with
    an arbitrage opportunity that could depress the price of our
    common stock.
If we
    issue shares of preferred stock, your investment could be
    diluted or subordinated to the rights of the holders of
    preferred stock.
Our Board of Directors is authorized by our Certificate of
    Incorporation to establish classes or series of preferred stock
    and fix the designation, powers, preferences and rights of the
    shares of each such class or series without any further vote or
    action by our stockholders. Any shares of preferred stock so
    issued could have priority over our common stock with respect to
    dividend or liquidation rights. The issuance of shares of
    preferred stock, or the issuance of rights to purchase such
    shares, could be used to discourage an unsolicited acquisition
    proposal. For instance, the issuance of a series of preferred
    stock might impede a business combination by including class
    voting rights that would enable a holder to block such a
    transaction. In
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addition, under certain circumstances, the issuance of preferred
    stock could adversely affect the voting power of holders of our
    common stock. Although our Board of Directors is required to
    make any determination to issue preferred stock based on its
    judgment as to the best interests of our stockholders, our Board
    could act in a manner that would discourage an acquisition
    attempt or other transaction that some, or a majority, of our
    stockholders might believe to be in their best interests or in
    which such stockholders might receive a premium for their stock
    over the then-market price of such stock. Presently, our Board
    of Directors does not intend to seek stockholder approval prior
    to the issuance of currently authorized stock, unless otherwise
    required by law or applicable stock exchange rules. Although we
    have no plans to issue any shares of preferred stock or to adopt
    any new series, preferences or other classification of preferred
    stock, any such action by our Board of Directors or issuance of
    preferred stock by us could dilute your investment in our common
    stock and warrants or subordinate your holdings to the shares of
    preferred stock.
You
    will experience immediate dilution in the book value per share
    of the common stock you purchase as part of the
    units.
Because the price per share of the common stock including in the
    units being offered is substantially higher than the book value
    per share of our common stock, you will suffer substantial
    dilution in the net tangible book value of the common stock you
    purchase in this offering. See the section entitled
    "Dilution" below for a more detailed discussion of the
    dilution you will incur if you purchase the units.
Future
    issuances or sales, or the potential for future issuances or
    sales, of shares of our common stock, or the exercise of
    warrants to purchase our common stock, may cause the trading
    price of our securities to decline and could impair our ability
    to raise capital through subsequent equity
    offerings.
During 2009, we have issued a significant number of shares of
    our common stock and warrants to acquire shares of our common
    stock in connection with various financings and the repayment of
    debt, and we anticipate that we will continue to do so in the
    future. The additional shares of our common stock issued and to
    be issued in the future upon the exercise of warrants or options
    could cause the market price of our common stock to decline and
    could have an adverse effect on our earnings per share, if and
    when we become profitable. In addition, future sales of a
    substantial number of shares of our common stock or other
    securities in the public markets, or the perception that these
    sales may occur, could cause the market price of our common
    stock and our Class H warrants to decline, and could
    materially impair our ability to raise capital through the sale
    of additional securities.
If we
    do not maintain an effective registration statement or comply
    with applicable state securities laws, you may not be able to
    exercise the Class H warrants.
For you to be able to exercise the Class H warrants, the
    shares of our common stock to be issued to you upon exercise of
    the Class H warrants must be covered by an effective and
    current registration statement and qualify or be exempt under
    the securities laws of the state or other jurisdiction in which
    you live. We cannot assure you that we will continue to maintain
    a current registration statement relating to the shares of our
    common stock underlying the Class H warrants. As such, you
    may encounter circumstances in which you will be unable to
    exercise the Class H warrants. Consequently, there is a
    possibility that you will never be able to exercise the
    Class H warrants, and that you will never receive shares or
    payment of cash in settlement of the warrants. This potential
    inability to exercise the Class H warrants may have an
    adverse effect on demand for the warrants and the prices that
    can be obtained from reselling them.
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SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS
The SEC encourages companies to disclose forward-looking
    information so that investors can better understand a
    company's future prospects and make informed investment
    decisions. This prospectus contains such "forward-looking
    statements" within the meaning of the Private Securities
    Litigation Reform Act of 1995.
Words such as "may," "potential,"
    "anticipate," "could," "estimate,"
    "expects," "projects," "intends,"
    "plans," "believes" and words and terms of
    similar substance used in connection with any discussion of
    future operating or financial performance identify
    forward-looking statements. All forward-looking statements are
    management's present expectations of future events and are
    subject to a number of risks and uncertainties that could cause
    actual results to differ materially from those described in the
    forward-looking statements. Some of the factors which could
    cause our results to differ materially from our expectations
    include the following:
•
consumer demand for our products;
•
the availability of an adequate supply of food waste stream
    feedstock and the competition for such supply;
•
the unpredictable cost of compliance with environmental and
    other government regulation;
•
the time and cost of obtaining USDA, state or other product
    labeling designations;
•
our ability to manage expenses;
•
the demand for organic fertilizer and the resulting prices
    customers are willing to pay;
•
supply of organic fertilizer products from the use of competing
    or newly developed technologies;
•
our ability to attract and retain key personnel;
•
adoption of new accounting regulations and standards;
•
adverse changes in the securities markets;
•
our ability to comply with continued listing requirements of the
    NASDAQ Capital Market; and
•
the availability of and costs associated with sources of
    liquidity, including our ability to obtain bond financing for
    future facilities.
Please also see the discussion of risks and uncertainties under
    the heading "Risk Factors" above.
In light of these assumptions, risks and uncertainties, the
    results and events discussed in the forward-looking statements
    contained in this prospectus might not occur. Investors are
    cautioned not to place undue reliance on the forward-looking
    statements, which speak only as of the date of this prospectus.
    We are not under any obligation, and we expressly disclaim any
    obligation, to update or alter any forward-looking statements,
    whether as a result of new information, future events or
    otherwise.
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USE OF
    PROCEEDS
We estimate that the net proceeds from the sale of units
    (assuming no exercise of the Class H warrants or the
    over-allotment option) by us in the offering, after deducting
    estimated underwriting discounts and commissions and estimated
    offering expenses payable by us, will be
    $      million, assuming a public
    offering price of $      per unit.
If a Class H warrantholder exercises its warrant, we may
    also receive proceeds from the exercise of the warrants. We
    cannot predict when, or if, the warrants will be exercised. It
    is possible that the warrants may expire and never be exercised.
We anticipate that we will use the net proceeds of this offering
    for:
Working Capital and General Corporate Purposes
$
Upgrading our Gonzales Facility
1,250,000
Investing in the Development of New Facilities
500,000
Continuing the Development of Our Licensing Program
400,000
Continuing the Development of Smaller Capacity Operating Unit
    Line of Business, Including Patent and Intellectual Property
    Development
1,000,000
Repayment of September 2009 Note(1)
1,540,000
(1)
Consists of a note in the principal amount of $1,540,000, which
    was issued at an original issue discount of 10%. The funds from
    the note are being utilized for working capital.
We have no definitive agreements or commitments with respect to
    any of the above activities. Our management may decide to change
    the use of the net proceeds from this offering if opportunities
    or needs arise. Such opportunities and needs could include
    payment of certain contractual obligations, the need to make
    increased capital or operating expenditures if we change our
    business plan, or payment of an unexpected liability. The actual
    use of the proceeds may vary significantly and will depend on a
    number of factors, including our future revenue and cash
    generated by operations and the other factors described in the
    section entitled "Risk Factors" appearing elsewhere in
    this prospectus. Accordingly, our management will have broad
    discretion in applying the net proceeds of this offering.
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Table of Contents
PRICE
    RANGE OF COMMON STOCK
Market
    Information
Our common stock has been listed on the NASDAQ Capital Market
    under the symbol "COIN" since March 16, 2007.
    Prior to March 16, 2007, there was no public market for our
    common stock. The following table sets forth the range of high
    and low sales prices per share as reported on NASDAQ for the
    periods indicated.
2009
High
Low
First Quarter
$
4.16
$
0.66
Second Quarter
$
2.62
$
0.72
Third Quarter (thru September 14, 2009)
$
1.64
$
0.92
2008
High
Low
First Quarter
$
14.17
$
3.93
Second Quarter
$
10.37
$
4.50
Third Quarter
$
7.83
$
2.99
Fourth Quarter
$
6.46
$
2.00
2007
High
Low
First Quarter
$
2.86
$
2.31
Second Quarter
$
2.72
$
2.02
Third Quarter
$
2.83
$
1.86
Fourth Quarter
$
4.39
$
2.05
Dividends
We have not declared or paid any cash dividends and do not
    intend to pay any cash dividends in the foreseeable future. We
    intend to retain any future earnings for use in the operation
    and expansion of our business. Any future decision to pay cash
    dividends on our common stock will be at the discretion of our
    Board of Directors and will depend upon our financial condition,
    results of operation, capital requirements and other factors our
    Board of Directors may deem relevant.
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Table of Contents
CAPITALIZATION
The following table is derived from our unaudited financial
    statements as of June 30, 2009 and sets forth:
•
our actual capitalization as of June 30, 2009;
•
our capitalization on a pro forma as adjusted basis to reflect:
    (a) the sale of the units offered by us at an assumed
    public offering price of $      per
    unit; (b) the sale of 1,961,000 shares of our common
    stock issued in our July 2009 offering at a price of $1.02 per
    share; and (c) the repayment of the $1,540,000 note issued
    in September 2009.
June 30, 2009
Pro Forma
Actual
as Adjusted
DEBT
Term notes payable
$
2,269,183
$
2,269,183
Convertible note payable
541,450
541,450
Bonds payable
17,500,000
17,500,000
Total debt
$
20,310,633
$
20,310,633
OWNERS' EQUITY
Preferred stock, $.0001 par value, authorized
    10,000,000 shares; no shares issued and outstanding
$
—
$
—
Common stock, $.0001 par value, authorized
    75,000,000 shares; 18,353,608 shares outstanding at
    June 30, 2009
    actual;           shares
    issued and outstanding pro forma as adjusted
1,835
Additional paid-in capital
40,668,709
Deficit accumulated during the development stage
(35,712,679
)
Total owners' equity
$
4,957,865
$
This table assumes no exercise by the underwriters of their
    option to purchase up to an
    additional          units
    from us to cover over-allotments.
This table should be considered in conjunction with the sections
    of this prospectus captioned "Use of Proceeds" and
    "Management's Discussion and Analysis of Financial
    Condition and Results of Operations," as well as the
    financial statements and related notes included elsewhere in
    this prospectus.
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Table of Contents
DILUTION
Our unaudited net tangible book value on June 30, 2009 was
    approximately $(1,409,729), or approximately $(0.08) per share
    of common stock. Net tangible book value per share is equal to
    the amount of our total tangible assets, less total liabilities,
    divided by the aggregate number of shares of common stock
    outstanding. Dilution per share represents the difference
    between the amount per unit paid by purchasers of units in this
    offering of $      per unit and the net
    tangible book value per share of our common stock immediately
    after this offering. After giving effect to the sale
    of           units
    in this offering at a price of $     
    per unit (and assuming no exercise of the Class H warrants)
    and the sale of 1,961,000 shares of common stock in our
    July 2009 offering at a price of $1.02 per share, and after
    deducting $1,540,000 for repayment of the note issued in
    September 2009 and estimated offering expenses of
    $      , our net tangible book value as
    of June 30, 2009 would have been approximately
    $     , or approximately
    $      per share. This represents an
    immediate dilution of $      per share
    to new investors purchasing units in this offering. The
    following table illustrates this dilution:
Public offering price per unit
$
Net tangible book value per share as of June 30, 2009
$
(0.08
)
Increase per unit attributable to July 2009 offering and the
    current offering
$
Net tangible book value per share as of June 30, 2009 after
    giving effect to the July 2009 offering and the sale of the
    shares in this offering and after giving effect to the repayment
    of the September 2009 note
$
Dilution per unit to new investors
$
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Table of Contents
MANAGEMENT'S
    DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
    consolidated financial statements and related notes to the
    consolidated financial statements included elsewhere in this
    prospectus. This discussion contains forward-looking statements
    that relate to future events or our future financial
    performance. These statements involve known and unknown risks,
    uncertainties and other factors that may cause our actual
    results, levels of activity, performance or achievements to be
    materially different from any future results, levels of
    activity, performance or achievements expressed or implied by
    these forward-looking statements. These forward-looking
    statements are based largely on our current expectations and are
    subject to a number of uncertainties and risks including those
    set forth in the "Risk Factors" section above. Actual
    results could differ materially from these forward-looking
    statements.
Introduction
Our operating structure is composed of our parent company,
    Converted Organics Inc., two wholly-owned operating subsidiaries
    and a 92.5% owned non-operating subsidiary. The first operating
    subsidiary is Converted Organics of Woodbridge, LLC, which
    includes the operation of our Woodbridge, New Jersey facility.
    The second operating subsidiary is Converted Organics of
    California, LLC, which includes the operation of our Gonzales,
    California facility. The 92.5% owned subsidiary is Converted
    Organics of Rhode Island, LLC, which currently has no operating
    activity. We construct and operate processing facilities that
    use food waste as raw material to manufacture all-natural soil
    amendment and fertilizer products combining nutritional and
    disease suppression characteristics. In addition to our current
    sales in the agribusiness and retail markets, we plan to sell
    and distribute our products in the turf management market. We
    have hired experienced sales and marketing personnel in these
    markets and have begun to introduce the product to the
    marketplace. We plan to hire additional experienced sales
    personnel during 2009. We also hope to achieve additional
    revenue by licensing the use of our technology to others.
Woodbridge
    Facility
We obtained a long-term lease expiring June 2026 for a site in a
    portion of an industrial building in Woodbridge, New Jersey that
    the landlord has modified and that we have equipped as our first
    internally-constructed food waste conversion facility. We are
    currently producing both liquid and dry product at that
    facility. In the first half of 2009, we began to record tip fee
    and product sales revenue; nevertheless, we are currently
    operating at less than full capacity at that facility, or 250
    tons per day. As we have transitioned to an operating company,
    we have experienced operating inefficiencies. We have also
    experienced odor-related issues that have caused interruptions
    in our production. At full capacity, the Woodbridge facility is
    expected to process approximately 78,000 tons of food waste and
    produce approximately 9,900 tons of dry product and
    approximately 10,000 tons of liquid product annually. We have
    substantially completed upgrades to the Woodbridge facility, and
    we are presently bringing equipment on-line to fulfill our
    commitment to overcome operational difficulties that hampered
    the efficiency of the plant at opening. We believe these
    upgrades will allow us to achieve capacity at the facility of
    approximately 70% of full capacity. During the first half of
    2009, we generated revenue from this facility in the form of tip
    fees of approximately $75,000 and product sales of approximately
    $277,000. In order for this facility to be cash flow positive,
    we estimate that total revenues from the facility would need to
    be in a range of $450,000 to $550,000 per month. We estimate
    that our products, both liquid and dry, can be sold for a price
    in the range of $400 to $700 per ton based on the market to
    which it is sold. Therefore, the potential monthly sales from
    this facility at 70% capacity ranges from approximately $700,000
    to $1,100,000. Based on the above, we would have to produce and
    sell approximately
45-55%
of
    the capacity of the Woodbridge facility to be cash flow positive
    at that facility, and, until our sales and production volume
    reach that level, we will not be cash flow positive and may
    therefore require additional funding to subsidize operations at
    that facility. Cash flow generated by exceeding that
    sales/production number would be used to fund operations at the
    corporate level and to pay down approximately $2.4 million
    of the payables related to construction activity at this
    facility.
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Table of Contents
UOP
    Acquisition; Gonzales Facility
On January 24, 2008, we acquired the net assets of United
    Organic Products, LLC, or UOP, which was under common ownership
    with Waste Recovery Industries, LLC, or WRI. With this
    transaction, we acquired a leading liquid fertilizer product
    line, as well as the Gonzales facility, which is a
state-of-the-art
production facility that services a strong West Coast
    agribusiness customer base through established distribution
    channels. This facility is operational and began to generate
    revenues for us in February 2008. The purchase price of
    $2,500,000 was paid in cash of $1,500,000 and notes payable of
    $1,000,000. The note matures on January 1, 2011, has an
    interest rate of 7% per annum, is payable monthly in arrears,
    and is convertible into our common stock at the option of the
    holder at a price equal to the average closing price of our
    common stock on the NASDAQ Capital Market for the five days
    preceding conversion. As of September 1, 2009, the note
    payable had a remaining principal balance of approximately
    $458,000 and the holder had converted approximately $138,000 in
    principal and interest on the note into 102,500 shares of
    our common stock.
The Gonzales facility generated revenue during the first half of
    2009 of approximately $1,079,000 with a negative operating
    margin of approximately $77,000. In the three months ended
    June 30, 2009, the facility generated approximately
    $809,000 in sales, with a positive operating margin of
    approximately $68,000. We plan to continue to improve this
    operating margin by channeling sales into the turf and retail
    markets, which we believe to be more profitable, by generating
    tip fees from receiving additional quantities of food processing
    waste and by reducing the amount of raw material and freight
    costs currently associated with the production process. In
    addition, we have plans to add capacity to the Gonzales plant,
    whereby the plant will produce approximately three times its
    current production and will be capable of producing both liquid
    and solid products. We have completed certain aspects of the
    planned upgrades which allow us to receive solid food waste for
    processing but have delayed the upgrades which would allow us to
    produce dry product. The remaining upgrades have been delayed
    due to cash flow constraints. We intend to use the proceeds from
    this offering to complete the upgrades.
In order for the Gonzales facility to begin to generate cash
    flow from operations, it would need to generate sales levels of
    $200,000 per month for 2009. We estimate that the plant under
    its current configuration could generate monthly sales in the
    range of $350,000 to $400,000. If sales increase above the
    $200,000 per month level, we expect the additional cash flow
    from the Gonzales facility will be used to offset operating
    expenses at the corporate level. Based on sales in the latter
    months of the second quarter of 2009, we have achieved breakeven
    sales levels at the Gonzales facility.
On January 24, 2008, we entered into a
10-year
lease for land in Gonzales, California, where our Gonzales
    facility is located. The land is leased from Valley Land
    Holdings, LLC, or VLH, a California limited liability company
    whose sole member is a former officer and director. The lease
    provides for a monthly rent of $9,000. The lease is also
    renewable for three five-year terms after the expiration of the
    initial
10-year
term. In addition, we own the Gonzales facility and the
    operating equipment used in the facility.
WRI
    Acquisition
On January 24, 2008, we also acquired the net assets,
    including the intellectual property, of WRI. This acquisition
    makes us the exclusive owner of the proprietary technology and
    process known as the High Temperature Liquid Composting, or
    HTLC, system, which processes various biodegradable waste
    products into liquid and solid food waste-based fertilizer and
    feed products. The purchase price of $500,000 was paid with a 7%
    short-term note that matured and was paid on May 1, 2008.
    In addition, the purchase price provides for a technology fee
    payment of $5,500 per ton of waste-processing capacity that is
    added to plants that were not planned at the time of this
    acquisition and that use this new technology. The per ton fee is
    not payable on the Woodbridge facility, the facility that is
    being planned in Rhode Island, or the Gonzales facility acquired
    in the acquisition or the currently planned addition thereto,
    except to the extent that capacity (in excess of the currently
    planned addition) is added to the Gonzales facility in the
    future. Also, the purchase agreement provides that if we decide
    to exercise our right, obtained in the WRI acquisition, to enter
    into a joint venture with Pacific Seafood Inc. for the
    development of a fish waste-processing product, we will pay 50%
    of our net profits, which is less the 50% of net profits paid
    Pacific Seafoods Inc., earned from this product to the seller
23
Table of Contents
of WRI. Combined payments of both the $5,500 per ton technology
    fee and the profits paid from the fish waste-processing product,
    if any, is capped at $7.0 million with no minimum payment
    required. In April 2008, we entered into an agreement with
    Pacific Seafoods Inc. whereby we will pay Pacific Seafoods Inc.
    50% of the net profits from the fish waste-processing product.
    To date, no profits have been earned from the fish
    waste-processing product. It is our intention to expense the
    payments, if any, that are paid on either the profits from the
    fish waste-processing product or the $5,500 per-ton technology
    fee.
Pro Forma
    Financial Information
The unaudited supplemental pro forma information discloses the
    condensed results of operations for the year ended
    December 31, 2008 and for the current fiscal year up to the
    date of the most recent interim period presented, which is the
    six months ended June 30, 2009 (and for the corresponding
    period in the preceding year) as though the business combination
    had been completed as of January 1, 2008 In addition, the
    unaudited supplemental pro forma information discloses the
    condensed balance sheet as of December 31, 2008 as though
    the business combination had been completed as of
    January 1, 2008.
The pro forma condensed consolidated financial information is
    based upon available information and certain assumptions that we
    believe are reasonable. The unaudited supplemental pro forma
    information does not purport to represent what our financial
    condition or results of operations would actually have been had
    these transactions in fact occurred as of the dates indicated
    above or to project our results of operations for the period
    indicated or for any other period.
Twelve Months Ended December 31, 2008
Historical Converted
Organics and
Pro forma
Pro forma
Subsidiaries
Adjustments
Reference
Consolidated
Revenues (in thousands)
$
1,548
$
—
(1
)
$
1,548
Cost of goods sold
1,981
20
(2
)
2,001
General & administrative expenses
9,310
33
(3
)
9,343
Net loss (in thousands)
(16,179
)
(53
)
(16,232
)
Net loss per share — basic and diluted
(2.70
)
(2.71
)
Six Months Ended June 30, 2009
Historical Converted
Organics and
Pro forma
Pro forma
Subsidiaries
Adjustments
Reference
Consolidated
Revenues (in thousands)
$
1,484
$
—
$
1,484
Cost of goods sold
3,757
—
3,757
General & administrative expenses
4,176
—
4,176
Net loss (in thousands)
(6,926
)
—
(6,926
)
Net loss per share — basic and diluted
(0.58
)
—
(0.58
)
Six Months Ended June 30, 2008
Historical Converted
Organics and
Pro forma
Pro forma
Subsidiaries
Adjustments
Reference
Consolidated
Revenues (in thousands)
$
753
$
—
(1
)
$
753
Cost of goods sold
625
20
(2
)
645
General & administrative expenses
5,346
33
(3
)
5,379
Net loss (in thousands)
(8,538
)
(53
)
(8,591
)
Net loss per share — basic and diluted
(1.49
)
(1.49
)
(1)
No revenues are recognized in the pro forma presentation.
24
Table of Contents
(2)
The acquired company incurred Cost of Goods Sold during the
    pre-acquisition period of approximately $20,000.
(3)
The acquired company incurred General & administrative
    expenses of approximately $33,000 during the pre-acquisition
    period.
As of December 31, 2008
Historical Converted
Organics and
Pro forma
Pro forma
Subsidiaries
Adjustments
Reference
Consolidated
Current assets
$
7,230
(1
)
$
7,230
Total assets
32,618
32,618
Current liabilities
9,474
9,474
Total liabilities
27,571
27,571
Owners' equity
5,047
5,047
(1)
No pro forma adjustments are made since the balances of the
    acquired entity are included in the balances as of
    December 31, 2008.
Rhode
    Island Facility
The Rhode Island Industrial Facilities Corporation provided
    initial approval to our Revenue Bond Financing Application for
    up to $15.0 million for the construction of a new facility
    in Rhode Island. In addition, the Rhode Island Resource Recovery
    Corporation, or RIRRC, gave us final approval to lease nine
    acres of land in the newly created Lakeside Commerce Industrial
    Park in Johnston, Rhode Island. We previously filed an
    application with the Rhode Island Department of Environmental
    Management for the operation of a Putrescible Waste Recycling
    Center at that site. On September 1, 2008, we entered into
    a twenty-year ground lease with the RIRRC under which we are
    obligated to pay $9,167 per month, plus $8 per ton of fertilizer
    (liquid or solid) sold from the facility.
Recent
    Financing Activities — January 2008, March 2009, May
    2009 and July 2009 Financings
On January 24, 2008, we entered into private financing with
    three investors for a total amount of $4,500,000, referred to
    herein as the 2008 Financing. We used the proceeds to fund the
    acquisition of the assets described above, to fund further
    development activities and to provide working capital. The 2008
    Financing was offered at an original issue discount of 10%. The
    investors were issued convertible debentures in the amount of
    $4,500,000, with interest accruing at 10% per annum and with the
    principal balance to be paid by January 24, 2009, which
    deadline was extended to July 24, 2009. In addition, we
    initially issued to the investors an aggregate of 750,000
    Class A warrants and 750,000 Class B warrants
    exercisable at $8.25 and $11.00 per warrant share, respectively.
    Of these warrants, 50% were returned to us when we obtained
    shareholder approval for the 2008 Financing, which was required
    by the NASDAQ Stock Market. A placement fee of $225,000 was paid
    out of the proceeds of this loan. The investors had the option,
    at any time on or before the extended maturity date of
    July 24, 2009 to convert the outstanding principal of the
    convertible debentures into shares of our common stock at the
    rate per share equal to 70% of the average of the three lowest
    closing prices of common stock during the
20-day
trading period immediately prior to a notice of conversion. As
    of June 30, 2009, the investors converted the entirety of
    the debentures into 7,366,310 shares, reducing the
    principal amount of the debt to $0. In addition, the investors
    received 131,834 shares of common stock as interest on the
    debentures during the pay-off period.
On March 6, 2009, we entered into an agreement with the
    holders of our $17.5 million New Jersey Economic
    Development Authority bonds to release $2.0 million for
    capital expenditures on our Woodbridge facility and to defer
    interest payments on the bonds through July 30, 2009. These
    funds had been held in a reserve for bond principal and interest
    payments along with a reserve for lease payments. As
    consideration for the release of the reserve funds, we issued
    the bond holders 2,284,409 Class B warrants. The
    Class B warrants are exercisable at $11.00 per warrant.
    These warrants are not registered and cannot be traded.
25
Table of Contents
On May 7, 2009, we entered into a formal agreement with an
    institutional investor, wherein we agreed to sell to the
    investor, for the sum of $1,182,500, six-month nonconvertible
    original issue discount notes with an aggregate principal amount
    of $1,331,000. The agreement provided that if we raised over
    $1,330,313 while the notes were outstanding, the first
    $1,330,313 must be used to repay the notes. Additionally, in
    connection with the notes issued pursuant to the agreement, the
    investor received five-year Class C warrants to purchase
    750,000 shares and five-year Class D warrants to
    purchase 350,000 shares of common stock, with exercise
    prices of $1.00 per share and $1.02 per share, respectively,
    subject to certain anti-dilution rights for issuances below the
    exercise prices. These warrants are not registered and cannot be
    traded. The expense associated with the issuance of these
    warrants was calculated using a Black-Scholes model with the
    following assumptions: risk-free interest rate of 2.05%; no
    dividend yield; volatility factor of 96.7%; and a term of five
    years. We determined that the warrants issued have a fair value
    of $1,557,953. We recorded the relative fair value of the
    warrants to the underlying notes of $1,330,313 as
    additional-paid-in capital and established a discount on the
    debt. The discount was fully amortized at repayment of the note
    (12 days later) and at such time the entire amortization
    totaled approximately $637,850 for the three months ended
    June 30, 2009. Also pursuant to this agreement, the
    investment banker we utilized was issued five-year Class C
    warrants to purchase 135,000 shares of common stock and
    Class D warrants to purchase 65,000 shares of common
    stock with exercise prices of $1.00 per share and
    $1.02 per share, respectively. The expense associated
    with these warrants was calculated in the same manner as
    described above. The expense of $285,000 is included in general
    and administrative expense on the consolidated statements of
    operations for the three and six month periods ended
    June 30, 2009 and 2008.
On May 19, 2009, we entered into an agreement with four
    institutional investors whereby the investors agreed to purchase
    1,500,000 shares of our common stock for $1.40 per share,
    providing $2.2 million before fees and expenses. The
    May 7, 2009 nonconvertible short-term note described above
    was immediately repaid with the proceeds of the May 19,
    2009 offering as required under such an instrument. In addition,
    and as an inducement to enter into this transaction, we issued
    the investors 1,500,000 warrants, with a strike price of $1.40
    per share and a
90-day
term.
    We made the offering and sale of these shares and the shares
    underlying the warrants pursuant to a shelf registration
    statement.
On May 26, 2009, we entered into an amended agreement with
    the same four institutional investors, discussed in the prior
    paragraph, pursuant to which the warrants issued at $1.40 per
    share were exercised in full for aggregate proceeds of
    $2.1 million. Pursuant to such amended agreement, we agreed
    to issue to these investors in the aggregate Class E
    warrants to purchase an additional 1,500,000 shares of our
    common stock at an exercise price of $1.63 per share. We may
    redeem these warrants for $.001 per warrant share at any time
    after our common stock has closed at or above $2.42 for five
    consecutive trading days. The Class E warrants are
    exercisable six months after their date of issuance and expire
    on May 27, 2014. We made the offering and sale of these
    warrants and the shares underlying the warrants pursuant to a
    shelf registration statement.
On July 16, 2009, we sold 1,961,000 shares of common
    stock at $1.02 per share under our shelf registration statement.
    In addition, we issued 585,000 Class F warrants with an
    exercise price of $1.25 per share. The Class F warrants
    have a five-year life from the date of issuance and cannot be
    exercised until six months from the date of issuance.
On September 14, 2009, we entered into a formal agreement
    with an institutional investor, wherein we agreed to sell to the
    investor, for the sum of $1,400,000, a six-month convertible
    original issue discount note with a principal amount of
    $1,540,000. The agreement provided that if we raised any debt or
    equity financing while the note was outstanding, the first
    monies raised must be used to repay the note. The principal
    amount of the note is convertible into shares of our common
    stock at $1.54 per share. Additionally, in connection with the
    note issued, the investor received a five-year Class G
    warrant to purchase 2,500,000 shares of common stock, with
    an exercise price of $1.25 per share, subject to certain
    anti-dilution rights for issuances below the exercise price.
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Table of Contents
Construction
    and
Start-up
Period
We commenced plant operations at our Woodbridge facility in June
    2008, where we are processing both liquid and solid waste and
    producing both liquid and solid fertilizer and soil enhancement
    products. Construction has been substantially completed on all
    aspects of the facility, and we are generating both tip fee and
    product sales revenue. Although the plant is operating at less
    than full capacity we have substantially completed all plant
    upgrades, which will allow us to operate at 70% capacity. We had
    budgeted approximately $14.6 million for the design,
    building, and testing of our facility, including related
    non-recurring engineering costs. The capital outlay of
    $14.6 million came from the $25.4 million raised by
    our initial public offering of stock and the issuance of New
    Jersey Economic Development Bonds, both of which closed on
    February 16, 2007, and does not include $4.6 million
    of lease financing provided by the landlord of the Woodbridge
    facility.
The total cost of the plant exceeded the estimate of
    $14.6 million by approximately $2.2 million (which did
    not include $4.6 million of lease financing). Also, we
    purchased additional equipment, which will allow us to produce
    additional dry product, which is in high demand by the retail
    market. The cost of this additional equipment was approximately
    $1.5 million. We decided to incorporate the HTLC technology
    acquired from WRI into the Woodbridge facility. These costs were
    approximately $2.0 million, bringing the total plant cost
    to $20.3 million, not including lease financing.
    Installation of the HTLC technology and additional equipment was
    dependent on our ability to raise additional capital and
    negotiate extended payment terms with our construction vendors.
    We have negotiated revised payment terms with all but one of our
    construction vendors. This vendor has placed a lien on the
    property in New Jersey and commenced a lawsuit against us, which
    are further discussed in the "Liquidity and Capital
    Resources" section. The purpose of adding the HTLC
    technology to the Woodbridge facility is two-fold: first, we
    believe it will significantly lower operating costs, most
    notably utility costs as the need to evaporate significant
    amounts of liquid byproduct would no longer be necessary, and
    second, the non-evaporated liquid can be used in the production
    process and sold as additional product.
During the start up phase at the Woodbridge facility, we
    experienced emissions violations related to odor issues. We were
    fined by the Middlesex County Health Department for these
    violations and we subsequently hired additional consultants to
    assist with the correction process. In late July 2009, we began
    implementing operational procedures at the plant which were
    recommended by the odor control consultants and since then we
    have not experienced significant odor issues; however, we have
    not obtained release from the Middlesex County Health Department
    concerning this issue and there is no assurance that we can
    obtain such a release. As of September 3, 2009, the total
    amount of fines levied by the Middlesex County Health Department
    total $356,250, of which we have paid $87,750, and we are either
    contesting or negotiating the unpaid balance of $268,500, based
    on the date of violation. The financial statements at
    June 30, 2009 include an accrued liability of $75,000
    related to the unpaid balance.
Full-scale
    Operations
Full capacity at the Woodbridge facility would provide
    processing capacity of approximately 250 tons per day. As
    discussed above, we have completed the necessary upgrades to the
    Woodbridge facility, which are expected to allow us to increase
    capacity at the facility to approximately 70% of full capacity.
    We have two revenue streams: (1) tip fees that in our
    potential markets range from $40 to $80 per ton, and
    (2) product sales. Tip fees are paid to us to receive the
    food waste stream from waste haulers; the hauler pays us,
    instead of a landfill, to take the waste. If the haulers source
    separate and pay in advance, they are charged tip fees that are
    up to 20% below market.
Operations at the Gonzales facility began in February 2008 with
    the production of approximately 25 tons per day of liquid
    fertilizer. This output is presently being sold into the
    California agricultural market. We have completed certain
    upgrades to the plant that allow us to accept solid food waste
    for processing. We have not completed the upgrades that allow us
    to produce a solid fertilizer product, as we have delayed those
    enhancements due to cash flow restrictions.
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Critical
    Accounting Policies and Estimates
Our plan of operation is based in part upon our consolidated
    financial statements, which have been prepared in accordance
    with accounting principles generally accepted in the United
    States of America (GAAP). The preparation of financial
    statements in accordance with GAAP requires management to make
    estimates and assumptions that affect the reported amounts of
    assets and liabilities, including the recoverability of tangible
    and intangible assets, disclosure of contingent assets and
    liabilities as of the date of the financial statements, and the
    reported amounts of expenses during the periods covered. A
    summary of accounting policies that have been applied to the
    historical financial statements can be found in the notes to the
    consolidated financial statements.
We evaluate our estimates on an on-going basis. The most
    significant estimates relate to intangible assets, deferred
    financing and issuance costs, and the fair value of financial
    instruments. We base our estimates on our historical and
    industry 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
    values of assets and liabilities that are not readily apparent
    from other sources. Actual results may differ materially from
    those estimates.
The following is a brief discussion of our critical accounting
    policies and methods, and the judgments and estimates used by us
    in their application:
Revenue
    Recognition
Revenue is recognized when each of the following criteria is 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, we defer
    recognition of revenue until the period where these criteria are
    satisfied. Revenue is generally recognized upon shipment.
Share-Based
    Compensation
Share-based compensation issued to employees is measured at the
    grant date, based on the fair value of the award, and is
    recognized as an expense over the requisite service period
    (generally the vesting period of the grant). Share-based
    compensation issued to non-employees is measured at grant date,
    based on the fair value of the consideration received or the
    fair value of the equity instruments issued, whichever is more
    readily measurable, and is recognized as an expense over the
    requisite service period. Stock options granted in 2008 were
    calculated at the date of grant using a Black-Scholes pricing
    model with the following assumptions: risk-free interest rate of
    3.52%; no dividend yield; expected volatility factor of 52.3%;
    and an expected term of five years. The fair value for the
    10,000 immediately vesting stock options granted in 2007 was
    estimated at the date of grant using a Black-Scholes pricing
    model with the following assumptions: risk-free interest rate of
    4.9%; no dividend yield; expected volatility factor of 16.9%;
    and an expected term of five years. Estimates and judgments used
    in the preparation of our financial statements are, by their
    nature, uncertain and unpredictable, and depend upon, among
    other things, many factors outside of our control, such as the
    results of our operations and other economic conditions.
    Accordingly, our estimates and judgments may prove to be
    incorrect and actual results may differ, perhaps significantly,
    from these estimates under different estimates, assumptions or
    conditions.
Other
    Long-Lived Assets
Long-lived assets and certain intangible assets be reviewed for
    impairment whenever events or changes in circumstances indicate
    that the carrying amount may not be recoverable, such as
    technological changes or
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significantly increased competition. If undiscounted expected
    future cash flows are less than the carrying value of the
    assets, an impairment loss is to be recognized based on the fair
    value of the assets, calculated using a discounted cash flow
    model. There is inherent subjectivity and judgments involved in
    cash flow analyses such as estimating revenue and cost growth
    rates, residual or terminal values and discount rates, which can
    have a significant impact on the amount of any impairment.
Other long-lived assets, such as identifiable intangible assets,
    are amortized over their estimated useful lives. These assets
    are reviewed for impairment whenever events or circumstances
    provide evidence that suggests that the carrying amount of the
    assets may not be recoverable, with impairment being based upon
    an evaluation of the identifiable undiscounted cash flows. If
    impaired, the resulting charge reflects the excess of the
    assets' carrying cost over its fair value. As described
    above, there is inherent subjectivity involved in estimating
    future cash flows, which can have a significant impact on the
    amount of any impairment. Also, if market conditions become less
    favorable, future cash flows (the key variable in assessing the
    impairment of these assets) may decrease and as a result we may
    be required to recognize impairment charges in the future.
    Estimates and judgments used in the preparation of our financial
    statements are, by their nature, uncertain and unpredictable,
    and depend upon, among other things, many factors outside of our
    control, such as the results of our operations and other
    economic conditions. Accordingly, our estimates and judgments
    may prove to be incorrect and actual results may differ, perhaps
    significantly, from these estimates under different estimates,
    assumptions or conditions.
Capitalization
    of Interest Costs
We have capitalized interest costs, net of certain interest
    income, related to our New Jersey Economic Development Authority
    bonds in the amount of $1,077,689 and $403,573 as of
    December 31, 2008 and December 31, 2007, respectively.
    Capitalized interest costs during the construction phase of the
    Woodbridge facility are included in
construction-in-progress
on the consolidated balance sheets.
Construction-in-Progress
Construction-in-progress
includes amounts incurred for construction costs, equipment
    purchases and capitalized interest costs for items still under
    construction related to the construction of the Woodbridge
    facility.
Restricted
    Cash
As of December 31, 2008, we had remaining approximately
    $2,608,000 of restricted cash as required by our bond agreement.
    This cash was raised by us in our initial public offering and
    bond financing, both of which closed on February 16, 2007,
    and is set aside in three separate accounts consisting of
    $34,000 for the construction of the Woodbridge facility, $8,000
    for the working capital requirements of the Woodbridge
    subsidiary while the facility is under construction, and
    $2,028,000 in reserve for bond principal and interest payments
    along with a reserve for lease payments. In March 2009, the
    bondholder released $2,000,000 of these restricted funds for us
    to use and therefore we have classified cash as a current asset
    on our balance sheet as of December 31, 2008. We have
    classified this restricted cash as non-current to the extent
    that such funds are to be used to acquire non-current assets or
    are to be used to service non-current liabilities. Third-party
    trustee approval is required for disbursement of all restricted
    funds.
Consolidation
Our consolidated financial statements include the transactions
    and balances of Converted Organics Inc. and its subsidiaries,
    Converted Organics of California, LLC, Converted Organics of
    Woodbridge, LLC and Converted Organics of Rhode Island, LLC. The
    transactions and balances of Valley Land Holdings, LLC, a
    variable interest entity of Converted Organics of California,
    LLC, were also consolidated therein until April 1, 2009.
    All intercompany transactions and balances have been eliminated
    in consolidation.
The consolidated financial statements included Valley Land
    Holdings, LLC, or VLH, as VLH had been deemed to be our variable
    interest entity as it was the primary beneficiary of that
    variable interest entity
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following the acquisition of the net assets of United Organic
    Products, LLC. VLH's assets and liabilities consist
    primarily of cash, land and a mortgage note payable on the land
    on which the California facility is located. Its operations
    consist of rental income on the land from us and related
    operating expenses. In 2009, the sole member of VLH contributed
    cash and property to VLH in a recapitalization. VLH has
    henceforth been sufficiently capitalized and is no longer
    considered to be a variable interest entity of us. We have
    deconsolidated VLH as a variable interest entity as of
    April 1, 2009 in our financial statements.
Fair
    Value Measurements
We have partially implemented SFAS No. 157, "Fair
    Value Measurements" ("SFAS No. 157")
    for assets and liabilities. SFAS No. 157 defines fair
    value, establishes a framework for measuring fair value, and
    expands disclosure about fair value. This standard only applies
    when other standards require or permit the fair value
    measurement of assets and liabilities. It does not increase the
    use of fair value measurement. The standard is effective for
    fiscal years beginning after November 15, 2008. The major
    categories of assets and liabilities that have not been measured
    and disclosed using SFAS No. 157 fair value guidance
    are property and equipment and goodwill.
Earnings
    (Loss) Per Share
Basic earnings (loss) per share, or EPS, is computed by dividing
    the net income (loss) attributable to the common stockholders
    (the numerator) by the weighted average number of shares of
    common stock outstanding (the denominator) during the reporting
    periods. Diluted income (loss) per share is computed by
    increasing the denominator by the weighted average number of
    additional shares that could have been outstanding from
    securities convertible into common stock, such as stock options
    and warrants (using the "treasury stock" method), and
    convertible preferred stock and debt (using the
    "if-converted" method), unless their effect on net
    income (loss) per share is antidilutive. Under the
    "if-converted" method, convertible instruments are
    assumed to have been converted as of the beginning of the period
    or when issued, if later. The effect of computing the diluted
    income (loss) per share is antidilutive and, as such, basic and
    diluted earnings (loss) per share are the same for the three and
    six month periods ended June 30, 2009 and 2008.
Results
    of Operations for the Six Months Ended June 30, 2009 and
    2008
During the six months ended June 30, 2009, we had sales of
    approximately $1,484,000, compared to $753,000 for the same
    period in 2008. During 2009, we had cost of goods sold of
    approximately $3,757,000, leaving a negative gross margin of
    approximately $2,273,000, compared to $625,000 cost of goods
    sold and $128,000 gross margin for the same period in 2008.
    The negative gross margins in 2009 were generated due to high
    production costs (salaries, rents, depreciation, supplies, etc.)
    at both our Woodbridge and Gonzales facilities and low sales and
    production volume. We expect gross margin to improve in the
    future as we increase production and expand our sales efforts
    into the more profitable retail and agricultural markets. Of the
    $2,273,000 negative gross margin in the six months ended
    June 30, 2009, approximately $77,000 was generated at our
    Gonzales facility due to sales volumes not yet being high enough
    to cover all fixed production costs, higher than anticipated
    production and transportation costs, and approximately
    $2,215,000 in negative gross margin was generated at our
    Woodbridge facility due to low sales volume and fixed costs
    associated with the facility.
During the three months ended June 30, 2009, we had sales
    of approximately $992,000, compared to $493,000 for the same
    period in 2008. During 2009, we had cost of goods sold of
    approximately $2,113,000, leaving a negative gross margin of
    approximately $1,120,000, compared to $403,000 cost of goods
    sold and $90,000 gross margin for the same period in 2008.
    Of the $1,120,000 negative gross margin in the three months
    ended June 30, 2009, approximately $68,000 positive gross
    margin was generated at our Gonzales facility, and the
    Woodbridge facility generated $1,180,000 of negative gross
    margin.
We incurred general and administrative expenses of approximately
    $4,175,000 and $5,346,000 for the
six-month
periods ended June 30, 2009 and 2008, respectively. The
    principal components of the approximately $1,171,000 decrease in
    general and administrative expenses is due to allocation of
    rent, production salaries and
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utilities to cost of sales in 2009, along with a decrease in
    compensation expense associated with the issuance of stock
    options of $2,140,000. This was offset by an increase in
    professional fees associated with financing activities and
    general costs of growing the business.
We incurred general and administrative expenses of approximately
    $2,503,000 and $3,759,000 for the three-month periods ended
    June 30, 2009 and 2008, respectively. The principal
    components of the approximately $1,256,000 decrease in general
    and administrative expenses are similar in nature to the
    components of the decrease in the six-month activity described
    above.
We incurred depreciation expense of approximately $626,000 and
    $7,000 for the six months ended June 30, 2009 and 2008,
    respectively, and $306,000 and $3,000 for the three months ended
    June 30, 2009 and 2008, respectively. The increase in
    depreciation expense is due to assets placed in service and
    depreciated, particularly at the Woodbridge facility.
We recognized derivative accounting gains of $3,565,000 and $0
    in the six-month periods ended June 30, 2009 and 2008,
    respectively, and derivative gains of $2,153,000 and $0 in the
    three months ended June 30, 2009 and 2008, respectively.
    These gains are non-cash in nature.
Interest expense for the six months ended June 30, 2009 and
    2008 was $3,110,000 and $3,127,000, respectively. The components
    of interest expense for the period ended June 30, 2009 are:
    (i) recognition of $562,000 of interest expense associated
    with the extension of the convertible debentures issued in
    January 2008, which became due in January 2009 and which were
    extended until July 2009 (200,000 shares of common stock
    were issued in connection with such extension),
    (ii) recognition of approximately $660,000 of interest
    expense associated with the issuance of warrants in connection
    with the March 6, 2009 financing arrangement with the
    holders of our bonds, and approximately $920,000 of interest
    expense associated with the issuances of warrants related to
    short-term non-convertible notes issued in the quarter, and
    (iii) recognition of $700,000 in interest expense on our
    New Jersey Economic Development Authority bonds, and
    approximately $268,000 on our other various borrowings during
    the six months ending June 30, 2009.
Interest expense for the six months ended June 30, 2008
    comprised (i) $176,000 of interest expense on various
    short-term notes; (ii) recognition of approximately
    $2,093,000 in connection with borrowing transactions, primarily
    non-cash items; (iii) $700,000 on our NJ EDA bonds; and
    (iv) approximately $158,000 in penalties associated with
    convertible debt.
As a result of the variances described above, for the six months
    ended June 30, 2009, net loss was $6.9 million,
    compared to $8.5 million for the same period in 2008. For
    the three months ended June 30, 2009, the net loss was
    $3.0 million versus $6.1 million for the same period
    in 2008.
As of June 30, 2009, we had current assets of approximately
    $3.5 million, compared to $7.2 million as of
    December 31, 2008. Our total assets were approximately
    $30.9 million as of June 30, 2009, compared to
    approximately $32.6 million as of December 31, 2008.
    The majority of the decrease in current assets from
    December 31, 2008 to June 30, 2009 is due to the use
    of cash for working capital requirements.
As of June 30, 2009, we had current liabilities of
    approximately $7.3 million, compared to $9.5 million
    at December 31, 2008. This decrease is due largely to the
    conversion of debt into shares of our common stock, and the
    negotiation of term notes with our construction vendors, which
    moved some of that liability from current to non-current. In
    addition, we had long-term liabilities of approximately
    $18.8 million as of June 30, 2009 as compared to
    $18.1 million at December 31, 2008. The increase is
    due to the reclassification of amounts owed to construction
    vendors to long-term liabilities.
For the six months ended June 30, 2009, we had negative
    cash flow from operating activity of approximately
    $4.1 million, comprising primarily loss from operations
    offset by certain non-cash items such as depreciation, non-cash
    interest expense associated with the issuance of warrants,
    amortization of deferred financing fees and amortization of
    discounts on private financing, and an increase in accounts
    payable and accrued expenses. We also had negative cash flow
    from investing activities of $985,000, primarily related to
    construction at the Woodbridge facility, offset by the release
    of restricted cash set aside for that purpose. The
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negative cash flow from both operating and investing activities
    was offset by approximately $3.6 million in positive cash
    flow from financing activities comprising proceeds from our
    various equity transactions.
Results
    of Operations for the Years Ended December 31, 2008 and
    2007
For the period from inception (May 3, 2003) until
    December 31, 2007, we were a development stage company with
    no revenues. We began to earn revenues from our Gonzales and
    Woodbridge facilities during 2008, and therefore we are no
    longer reporting as a development stage company.
During the year ended December 2008, we had sales of
    approximately $1.5 million, compared to $0 for the same
    period in 2007. During 2008, we had cost of goods sold of
    approximately $2.0 million, leaving a negative gross margin
    of approximately $433,000, compared to $0 cost of goods sold and
    $0 gross margin for the same period in 2007. The sales and
    negative gross margins were derived primarily from both our
    Gonzales and Woodbridge facilities. The negative gross margin
    was generated in the third and fourth quarters and is further
    explained below. Of the $433,000 negative gross margin in the
    year ended December 31, 2008, approximately $275,000 was
    generated at our Gonzales facility due to lower than expected
    sales volume and higher than anticipated production and
    transportation costs, and approximately $158,000 in negative
    gross margin was generated at our Woodbridge facility due to low
    sales volume and the start up nature of the facility.
We incurred operating expenses of approximately
    $10.3 million and $3.7 million for the years ended
    December 31, 2008 and 2007, respectively. The principal
    components of the $6.6 million increase in operating
    expenses is an increase in general and administrative expenses
    of $6.3 million (due mainly to an increase in general and
    administrative expenses of $1.4 million for additional
    personnel and other costs associated with the start up of the
    Woodbridge facility, $829,000 in additional expenses associated
    with the Gonzales facility, $500,000 in additional personnel at
    the corporate offices, $290,000 in expense related to the
    issuance of stock for remuneration for services rendered,
    $200,000 in professional fees relating to private placement
    financing, $150,000 relating to recognition of liquidated
    damages associated with the private placement financing, an
    additional $200,000 in amortization of intangible assets
    acquired from UOP and WRI, and $2.3 million recognized as
    compensation expense upon the issuance of employee stock options
    as calculated using the Black-Scholes pricing model), offset by
    a $350,000 reduction in research and development costs.
Interest expense for the years ended December 31, 2008 and
    2007 was $5.8 million and $1.2 million, respectively.
    The increase is due to the interest payments on the convertible
    debentures issued in the 2008 Financing described above;
    amortization of the original issue discount on the convertible
    debentures issued in the 2008 Financing; and amortization of the
    discount related to the beneficial conversion feature of the
    convertible debentures issued in the 2008 Financing and other
    convertible debt. Interest income was $290,000 in the year ended
    December 31, 2008 and $824,000 for the same period in 2007.
    The decrease is due to our declining balances in restricted cash.
Amortization of other intangible assets expense was $399,000 for
    the year ended December 31, 2008 and $62,000 during the
    same period in 2007. The increase is due to amortization of
    costs associated with the convertible debentures issued in the
    2008 Financing, which are being amortized over the life of the
    loan.
For the year ended December 31, 2008, net loss was
    $16.2 million, compared to $4.1 million for the same
    period in 2007. The increase in net loss primarily represents
    the effects of the increase in our operating costs and interest
    expense, as discussed above.
As of December 31, 2008, we had current assets of
    approximately $7.2 million, compared to $3.2 million
    as of December 31, 2007. Our total assets were
    approximately $32.6 million as of December 31, 2008
    compared to approximately $22.2 million as of
    December 31, 2007. The majority of the increase in both
    current and total assets from December 31, 2007 to
    December 31, 2008 is due to receipt of approximately
    $11.3 million in cash from the voluntary exercise of our
    Class A warrants and $3.0 million in net assets
    acquired with our acquisitions of UOP and WRI.
As of December 31, 2008, we had current liabilities of
    approximately $9.5 million, compared to $2.5 million
    at December 31, 2007. This significant increase is due
    largely to the convertible debentures issued
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in the 2008 Financing, net of discounts of $230,000 and loans
    issued in association with our acquisitions of UOP and WRI, and
    an increase in accounts payable to construction-related vendors.
    In addition, we had long-term liabilities of approximately
    $18.1 million as of December 31, 2008, as compared to
    $17.6 million at December 31, 2007. This increase is
    primarily due to the issuance of long-term notes payable in
    association with our acquisition of UOP and WRI.
For the twelve months ended December 31, 2008, we had
    negative cash flow from operating activity of approximately
    $7.3 million, comprising primarily loss from operations
    offset by certain non-cash items such as depreciation,
    amortization of deferred financing fees and amortization of
    discounts on private financing, $2.3 million in expense
    associated with the grant of stock options and an increase in
    accounts payable and accrued expenses. We also had negative cash
    flow from investing activities of $4.7 million, primarily
    related to the purchase of UOP assets and construction at the
    Woodbridge facility, offset by the release of restricted cash
    set aside for that purpose. The negative cash flow from both
    operating and investing activities was offset by approximately
    $15.0 million in positive cash flow from financing
    activities comprising approximately $11.3 million from the
    exercise of warrants, and $3.7 million from the proceeds of
    the January 24, 2008 private financing.
Liquidity
    and Capital Resources
At June 30, 2009, we had total current assets of
    approximately $3.5 million consisting primarily of cash,
    accounts receivable, inventories and prepaid assets, and had
    current liabilities of approximately $7.3 million,
    consisting primarily of accounts payable, accrued expenses and
    notes payable, leaving us with negative working capital of
    approximately $3.8 million. Non-current assets totaled
    $27.4 million and consisted primarily of property and
    equipment, intangible assets and construction in process.
    Non-current liabilities of $18.7 million consist primarily
    of bonds payable of $17.5 million and the long-term portion
    of our term notes payable of $1.2 million at June 30,
    2009. We have an accumulated deficit at June 30, 2009 of
    approximately $35.7 million. Owners' equity at
    June 30, 2009 was approximately $5.0 million. For the
    first half of 2009, we generated revenues from operations of
    approximately $1,484,000.
At June 30, 2009, our current liabilities are greater than
    our current assets by approximately $3.8 million. We have
    trade accounts payable of approximately $4.3 million, of
    which approximately $2.4 million relates to construction at
    the Woodbridge facility. We have come to agreement with three of
    our four construction vendors for extended payment terms with
    interest. Those vendors have agreed to release their liens upon
    receipt of final payment. We continue to negotiate with the
    fourth vendor, who has filed a lien against our assets and has
    commenced a lawsuit for breach of contract. The funds from the
    debt and equity offerings we recently completed have not been
    used towards payment of the construction vendor amounts and we
    are currently negotiating with the vendor to issue a note for
    the outstanding amounts owed.
Our independent registered public accountants have issued a
    going-concern opinion on our financial statements as of
    December 31, 2008. We had incurred a net loss of
    approximately $16.2 million during the year ended
    December 31, 2008, had a working capital deficiency as of
    December 31, 2008, and an accumulated deficit of
    approximately $26.6 million. As of June 30, 2009, we
    continued to have a working capital deficiency, and for the six
    months ended June 30, 2009, we had a net loss of
    $6.9 million and an accumulated deficit of approximately
    $35.7 million.
Our plan to become cash flow positive and to work through our
    current working capital deficit is as follows:
We currently have manufacturing capabilities in our Woodbridge
    and Gonzales facilities as a means to generate revenues and
    cash. Our cash requirements on a monthly basis are approximately
    $275,000 at the corporate level, $500,000 for Woodbridge and
    $200,000 for Gonzales. Currently, only the Gonzales facility is
    generating enough cash flow to cover its cash requirements,
    leaving us with a cash shortfall of approximately $775,000 per
    month. We estimate that at the current production capacity we
    could provide enough product to achieve additional revenues of
    $1,000,000 to $1,500,000 per month, which at those levels would
    provide sufficient cash flow to cover our cash requirements,
    including additional variable costs associated with increased
    production. Until such sales levels are achieved and we are cash
    flow positive, we will have to seek
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additional means of financing in order to cover the shortfall.
    During the first half of 2009, we reduced the entire
    $4.5 million convertible debenture balance from our
    January 24, 2008 financing by converting the balance into
    shares of our common stock. In addition, during the first
    quarter of 2009, the holders of the New Jersey Economic
    Development Authority bonds released $2.0 million of
    escrowed funds for us to use and we obtained $1,331,000 of
    secured debt financing. We raised another $4.2 million in
    capital through the issuance of common stock and the exercise of
    warrants. In September 2009, we raised $1.4 million by the
    issuance of a convertible note in principal amount of
    $1.54 million, which included an original issue discount of
    10%, and the issuance of warrants to purchase
    2,500,000 shares of common stock at an exercise price of
    $1.25 per share. In addition, we have a shelf registration
    statement which would allow us to sell shares into the market to
    raise additional financing of up to $2.0 million, provided
    that pursuant to SEC rules we may not access the
    $2.0 million available under the shelf registration
    statement until our stock price is at or above $1.86. We are
    using the proceeds from the debt and equity offerings we
    completed during the year to fund working capital requirements
    and to add additional sales and marketing personnel in order to
    achieve increased sales levels during the remainder of 2009.
    Specifically, we are seeking sales personnel to assist with
    sales of liquid product into the agricultural market. Also, we
    continue to expand our sales efforts into the retail market by
    increasing the number of sales presentations to the retail
    channel for orders to be placed for early 2010 delivery.
We need additional capital to execute our business strategy, and
    if we are unsuccessful in either raising additional capital
    through this offering or otherwise, we will be unable to fully
    execute our business strategy on a timely basis, if at all. If
    we complete this offering, we expect the funds received will be
    sufficient to operate our current business until we are cash
    flow positive, which we expect to occur by the end of the third
    quarter of 2010, assuming our sales levels do not decrease and
    assuming we do not encounter any unforeseen costs or expenses.
    If our sales levels decrease or if we encounter unforeseen costs
    or expenses, we will require additional financing prior to such
    date for which we have no commitments. The proceeds from this
    offering are intended to fund our current business operations,
    and will not permit us to finance additional facilities. If are
    unable to complete this offering, we will need additional
    financing in the short-term for which we have no commitments. We
    do not know whether any financing, if obtained, will be adequate
    to meet our capital needs and to support our growth. If adequate
    capital cannot be obtained on satisfactory terms, we may curtail
    or delay the implementation of updates to our facilities or
    delay the expansion of our sales and marketing capabilities, any
    of which could cause our business to fail.
During this period of limited cash availability, we have lowered
    costs in the administrative areas of the company and
    concentrated on production in both Woodbridge and Gonzales. In
    addition, we have and will continue to be required to curtail
    certain production and sales costs until sales orders begin to
    increase to the desired levels, and most notably we will have to
    limit the production of product to two variations of liquid and
    dry product and the desired sales level will have to be derived
    from those products.
We do not have any commitments for additional equity or debt
    funding, and there is no assurance that capital in any form
    would be available to us, and if available, on terms and
    conditions that are acceptable. Moreover, we are not permitted
    to borrow any future funds unless we obtain the consent of the
    holders of the New Jersey Economic Development Authority bonds.
    We have obtained such consent for prior financing, but there is
    no guarantee that we can obtain such consent in the future.
Off-Balance
    Sheet Transactions
We do not engage in material off-balance sheet transactions.
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BUSINESS
Overview
During 2008, we transitioned from a development stage company
    (our first reported revenues were in February 2008) to a
    fully operational company that operates processing facilities
    that use food waste as raw material to manufacture all-natural
    soil amendment and fertilizer products combining nutritional and
    disease suppression characteristics. In addition to our sales in
    the agribusiness market, we sell and distribute our products in
    the turf management and retail markets. We currently operate two
    facilities:
•
Woodbridge facility.
A facility in Woodbridge,
    New Jersey that we have equipped as our first
    internally-constructed food waste conversion facility, referred
    to herein as the Woodbridge facility. Operations at the
    Woodbridge facility began in late June of 2008, and include
    processing solid waste and producing both liquid and dry
    fertilizer and soil enhancement products.
•
Gonzales facility.
A facility in Gonzales,
    California, referred to herein as the Gonzales facility, that we
    acquired in January 2008. The Gonzales facility is operational
    and began to generate revenue for us in February 2008.
We were incorporated under the laws of the state of Delaware in
    January 2006. In February 2006, we merged with our predecessor
    organizations, Mining Organics Management, LLC, or MOM, and
    Mining Organics Harlem River Rail Yard, LLC, or HRRY, in
    transactions accounted for as a recapitalization. These
    predecessor organizations provided initial technical and
    organizational research that led to the foundation of the
    current business plan.
On February 16, 2007, we successfully completed an initial
    public offering of stock and successfully completed a bond
    offering with the New Jersey Economic Development Authority. The
    net proceeds of the stock offering of $8.9 million,
    together with the net proceeds of the bond offering of
    $16.5 million, were used to develop and construct the
    Woodbridge facility, fund our marketing and administrative
    expenses during the construction period and fund specific
    principal and interest reserves as specified in the bond
    offering. Of the total net proceeds of the stock and bond
    offerings of $25.4 million, $14.6 million was used
    towards the construction of the Woodbridge facility and the
    remaining $10.8 million was used for items detailed above.
On January 24, 2008, we acquired the assets, including the
    intellectual property, of Waste Recovery Industries, LLC, or
    WRI. This acquisition makes us the exclusive owner of the
    proprietary technology and process known as the High Temperature
    Liquid Composting, or HTLC, system, which processes various
    biodegradable waste products into liquid and solid organic-based
    fertilizer and feed products.
Also on January 24, 2008, we acquired the net assets of
    United Organic Products, LLC, or UOP, which was under common
    ownership with WRI. With this acquisition, we acquired a leading
    liquid fertilizer product line, as well as the Gonzales
    facility, which is a production facility that services a West
    Coast agribusiness customer base through established
    distribution channels.
Our
    Revenue Sources
Our revenue comes from two sources: "tip" fees and
    product sales. Waste haulers pay tip fees to us for accepting
    food waste generated by food distributors such as grocery
    stores, produce docks, fish markets and food processors, and by
    hospitality venues such as hotels, restaurants, convention
    centers and airports. Revenue also comes from the customers who
    purchase our products. Our products possess a combination of
    nutritional, disease suppression and soil amendment
    characteristics. The products are sold in both dry and liquid
    form and will be stable with an extended shelf life compared to
    other organic fertilizers. Among other uses, the liquid product
    is expected to be used to mitigate powdery mildew, a leaf fungus
    that restricts the flow of water and nutrients to plants. Our
    products can be used either on a stand-alone basis or in
    combination with more traditional petrochemical-based
    fertilizers and crop protection products. Based on growth trials
    we have conducted with local farmers, company-sponsored
    research, increased environmental awareness and trends in
    consumer food preferences, we believe our products will have
    demand in the agribusiness, turf management
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and retail markets. We also expect to benefit from increased
    regulatory focus on food waste processing and on environmentally
    friendly growing practices.
Our
    Woodbridge Facility
We obtained a long-term lease expiring June 2026 for a site in a
    portion of an industrial building in Woodbridge, New Jersey that
    the landlord has modified and that we have equipped as our first
    internally-constructed food waste conversion facility. We are
    currently producing both liquid and dry product at that
    facility. In the first half of 2009, we began to record tip fee
    and product sales revenue; nevertheless, we are currently
    operating at less than full capacity at that facility, or 250
    tons per day. As we have transitioned to an operating company,
    we have experienced operating inefficiencies. We have also
    experienced odor-related issues that have caused interruptions
    in our production. At full capacity, the Woodbridge facility is
    expected to process approximately 78,000 tons of food waste and
    produce approximately 9,900 tons of dry product and
    approximately 10,000 tons of liquid product annually. We have
    substantially completed upgrades to the Woodbridge facility, and
    we are presently bringing equipment on-line to fulfill our
    commitment to overcome operational difficulties that hampered
    the efficiency of the plant at opening. We believe these
    upgrades will allow us to achieve capacity at the facility of
    approximately 70% of full capacity. During the first half of
    2009, we generated revenue from this facility in the form of tip
    fees of approximately $75,000 and product sales of approximately
    $277,000. In order for this facility to be cash flow positive,
    we estimate that total revenues from the facility would need to
    be in a range of $450,000 to $550,000 per month. We estimate
    that our products, both liquid and dry, can be sold for a price
    in the range of $400 to $700 per ton based on the market to
    which it is sold. Therefore, the potential monthly sales from
    this facility at 70% capacity ranges from approximately $700,000
    to $1,100,000. Based on the above, we would have to produce and
    sell approximately
45-55%
of
    the capacity of the Woodbridge facility to be cash flow positive
    at that facility, and, until our sales and production volume
    reach that level, we will not be cash flow positive and may
    therefore require additional funding to subsidize operations at
    that facility. Cash flow generated by exceeding that
    sales/production number would be used to fund operations at the
    corporate level and to pay down approximately $2.4 million
    of the payables related to construction activity at this
    facility.
As of June 30, 2009, we have outstanding amounts due to our
    New Jersey construction vendors of approximately
    $4.2 million. With the exception of one contractor, we have
    negotiated with our remaining contractors to issue notes or
    otherwise repay approximately $1.8 million of the
    outstanding amounts owed. We have not been able to negotiate
    payment terms with one contractor owed approximately
    $2.4 million who has placed a lien on the Woodbridge
    facility and has commenced a lawsuit in the matter.
We have agreements with 11 waste-hauling companies to provide
    food waste to the Woodbridge facility. Based on our current
    processing capacity, we are primarily utilizing three haulers
    that provide almost all of the food waste we need for our
    facility. We believe that we have an adequate supply of raw
    material to operate the plant at full processing capacity.
Our Woodbridge facility receives raw material from the New
    York-Northern New Jersey metropolitan area. It is located near
    the confluence of two major highways in northern New Jersey,
    providing efficient access for the delivery of feedstock from
    throughout this geographic area.
Our conversion process has been approved for inclusion in the
    Middlesex County and New Jersey State Solid Waste Management
    Plan. We have been granted our Class C recycling permit,
    which is the primary environmental permit for this project. The
    remaining required permits are primarily those associated with
    the construction and operation of any manufacturing business,
    which we have also obtained.
The Woodbridge facility uses significant amounts of electricity,
    natural gas and steam. We use the services of an energy
    management firm to purchase natural gas and electricity, and
    water is provided by the Town of Woodbridge. Wastewater is
    discharged by permit into the local sewage system.
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Our
    Gonzales Facility
On January 24, 2008, we acquired the net assets of UOP,
    which was under common ownership with WRI. With this
    transaction, we acquired a leading liquid fertilizer product
    line, and ownership of the Gonzales facility, a
state-of-the-art
production facility located in Gonzales, California that
    services a strong West Coast agribusiness customer base through
    established distribution channels. This facility is operational
    and began to generate revenues for us in February 2008. The
    purchase price of $2,500,000 was paid in cash of $1,500,000 and
    a note payable of $1,000,000. The note matures on
    January 1, 2011, has an interest rate of 7% per annum, is
    payable monthly in arrears, and is convertible into our common
    stock at the option of the holder for a price equal to the
    average closing price of the stock on the NASDAQ Capital Market
    for the five days preceding conversion. As of September 1,
    2009, the note payable had a remaining principal balance of
    approximately $458,000.
The Gonzales facility generated revenue during the first half of
    2009 of approximately $1,079,000, with a negative operating
    margin of approximately $77,000. In the three months ended
    June 30, 2009, the facility generated approximately
    $809,000 in sales, with a positive operating margin of
    approximately $68,000. We plan to continue to improve this
    operating margin by channeling sales into the turf and retail
    markets, which we believe to be more profitable, by generating
    tip fees from receiving additional quantities of food waste and
    by reducing the amount of raw material and freight costs
    currently associated with the production process. In addition,
    we have plans to triple the actual production capacity of our
    Gonzales facility, and to make the facility capable of producing
    both liquid and dry products. We have completed certain aspects
    of the planned upgrades that allow us to receive solid food
    waste for processing but have delayed the upgrades that would
    allow us to produce dry product. The remaining upgrades have
    been delayed due to cash flow constraints. We intend to use the
    proceeds from this offering to complete the upgrades.
In order for the Gonzales facility to begin to generate positive
    cash flow from operations, it would need to generate sales
    levels of $200,000 per month for 2009. We estimate that in its
    current configuration the plant has the capacity to generate
    monthly sales in the range of $350,000 to $400,000. If sales
    increase above the $200,000 per month level, we expect the
    additional cash flow from the Gonzales facility will be used to
    offset operating expenses at the corporate level. Based on sales
    in the latter months of the second quarter of 2009, we have
    achieved facility breakeven sales levels at the Gonzales
    facility.
On January 24, 2008, we entered into a
10-year
lease for land in Gonzales, California, where our Gonzales
    facility is located. The land is leased from Valley Land
    Holdings, LLC, or VLH, a California limited liability company
    whose sole member is a former officer and director of ours. The
    lease provided for a monthly rent of $9,000 for 2008, after
    which the lease payments were to increase 3% per year during the
    term of the lease. The lease is also renewable for three
    five-year terms after the expiration of the initial
10-year
term. In addition, we own the Gonzales facility and the
    operating equipment used in the facility.
Future
    Expansion of Business
In addition to our Gonzales and Woodbridge facilities, our
    strategic plan calls for the development and construction of
    facilities in Rhode Island and Massachusetts. We currently are
    planning to operate these new facilities using the technology
    that we acquired in our acquisition of WRI. We anticipate that
    we will be able to use much of the engineering and design work
    used in our Gonzales facility. Any plans to further expand our
    Gonzales facility, or to construct any future facilities, is
    dependent on our ability to raise additional financing in
    addition to the funds from the offering contemplated by this
    prospectus.
In each of our contemplated locations, we have:
•
Engaged a local businessperson well-acquainted with the
    community to assist us in the permitting process and development
    of support from community groups;
•
Participated in numerous meetings with state, county and local
    regulatory bodies as well as environmental and economic
    development authorities; and
•
Identified potential facility sites.
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If we are able to build new facilities, we anticipate we will
    achieve economies of scale in marketing and selling our
    fertilizer products as the cost of these activities is spread
    over a larger volume of product. If our overall volume of
    production increases, we also believe we may be able to more
    effectively approach larger agribusiness customers who may
    require larger quantities of fertilizer to efficiently utilize
    their distribution systems.
To date, we have undertaken the following activities in the
    following markets to prepare to develop additional facilities:
•
The Rhode Island Industrial Facilities Corporation gave initial
    approval to our Revenue Bond Financing Application for up to
    $15.0 million for the construction of our proposed Rhode
    Island facility. In addition, the Rhode Island Resource Recovery
    Corporation gave us final approval to lease nine acres of land
    in the newly created Lakeside Commerce Industrial Park in
    Johnston, Rhode Island. We previously filed an application with
    the Rhode Island Department of Environmental Management for the
    operation of a Putrescible Waste Recycling Center at that site.
    As part of our efforts to establish a Rhode Island facility, we
    have established Converted Organics of Rhode Island, LLC, of
    which we are 92.5% owners. The minority share is owned by a
    local businessman who has assisted us with the process of
    developing a Rhode Island facility.
•
In Massachusetts, we have performed initial development work in
    connection with construction of three manufacturing facilities
    to serve the eastern Massachusetts market. Our proposals to
    develop these facilities are currently under review by the
    property owners. The Massachusetts Strategic Envirotechnology
    Partnership Program has completed a review of our technology.
•
We are actively pursuing the development of a licensing program
    and the production of a smaller capacity operating unit to be
    used by us or sold to third parties. We have begun the
    development of smaller capacity operating units, namely the
    Scalable Modular AeRobic Technology (SMART) units that are
    suitable for processing 5 to 50 tons of waste per day, depending
    on owner/user preference. The semi-portable units will be
    capable of operating indoors or outdoors, depending on certain
    criteria, and may be as sophisticated or as basic in design and
    function as the owner/user requires. The SMART system will be
    delivered to each jobsite in a number of pre-assembled,
    pre-tested components, and will include a license to use the
    HTLC technology. Our target market is users who seek to address
    waste problems on a smaller scale than would be addressed by a
    large processing facility. Our plan contemplates that purchasers
    of the SMART units would receive tip fees for accepting waste
    and would sell fertilizer and soil amendment products in the
    markets where their units operate. We plan to market and sell
    the SMART units in both the United States and abroad.
Conversion
    Process
We use two processes in our Woodbridge facility to convert food
    waste into our solid and liquid fertilizer products. The first
    is based on technology called Enhanced Autothermal Thermophilic
    Aerobic Digestion, or EATAD. The EATAD process was developed by
    International Bio-Recovery Corporation, or IBRC, a British
    Columbia company that possesses technology in the form of
    know-how integral to the process and that has licensed to us
    their technology for food waste conversion in the metropolitan
    New York and Northern New Jersey areas. In addition, we use our
    own HTLC technology. We acquired the proprietary rights to the
    HTLC technology when we purchased UOP in 2008 and began to
    incorporate it into the operations at our Woodbridge facility.
    In simplified terms, both technologies work in a similar fashion
    in that once the prepared foodstock is heated to a certain
    temperature, it self-generates additional heat (autothermal),
    rising to very high, pathogen-destroying temperature levels
    (thermophilic). Bacteria added to the feedstock use vast amounts
    of oxygen (aerobic) to convert the food waste (digestion) to a
    rich blend of nutrients and single cell proteins. Foodstock
    preparation, digestion temperature, rate of oxygen addition,
    acidity and inoculation of the microbial regime are carefully
    controlled to produce products that are highly consistent from
    batch to batch.
We use only the HTLC process at our Gonzales facility.
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The products we manufacture are as follows:
•
A solid base product with plant nutrition, disease suppression
    and soil enhancement (amendment) benefits. The solid base
    product can then be used by us to produce a variety of products
    with various nitrogen (N), phosphorous (P), and potassium
    (K) compositions. In describing the composition of
    fertilizer, the nitrogen (N), phosphorus (P), and potassium
    (K) composition is identified. Presently, we produce both
    an 8-1-4 and a 4-1-8 solid granular product. These figures refer
    to the ratio of nitrogen (N), phosphorus (P), and potassium (K),
    respectively, in the products.
•
A liquid base product with plant nutrition, disease suppression
    and soil enhancement (amendment) benefits. The liquid base
    product can then be used to produce a variety of products with
    various nitrogen, phosphorous and potassium compositions (NPK).
    Presently, we produce both a 1-1-1 and
6-0-0
liquid
    product.
•
We produce a variety of liquid products including: Converted
    Organics 521, Converted Organics GP, Converted Organics XP,
    Converted Organics XK, Converted Organics LC, Converted Organics
    NC, SoilStart 7-1-1, and Aqueous Potash 0-0-10.
The efficacy of our products has been demonstrated both in
    university laboratories and multi-year growth trials funded by
    us and by IBRC. These field trials have been conducted on more
    than a dozen crops including potatoes, tomatoes, squash,
    blueberries, grapes, cotton and turf grass. While these studies
    have not been published, peer-reviewed or otherwise subject to
    third-party scrutiny, we believe the trials and other data show
    our solid and liquid products produced using the EATAD process
    have several valuable attributes:
Plant nutrition.
Historically, growers have
    focused on the nitrogen (N), phosphorous (P) and potassium
    (K) content of fertilizers. As agronomists have gained a
    better understanding of the importance of soil culture, they
    have turned their attention to humic and fulvic acids,
    phytohormones and other micronutrients and growth regulators not
    present in petrochemical-based fertilizers.
Disease suppression.
Based on field trials
    using product produced by the licensed technology, we believe
    our products combine nutrition with disease suppression
    characteristics to eliminate or significantly reduce the need
    for fungicides and other crop protection products. The
    products' disease suppression properties have been observed
    under controlled laboratory conditions and in documented field
    trials. We also have other field reports that have shown the
    liquid concentrate to be effective in reducing the severity of
    powdery mildew on grapes, reducing verticillium pressure on
    tomatoes and reducing scab in potatoes.
Soil amendment.
As a result of its
    slow-release nature, our dry fertilizer product increases the
    organic content of soil, improving granularity and water
    retention and thus reducing NPK leaching and run-off.
Pathogen-free.
Due to high processing
    temperatures, our products are virtually pathogen-free and have
    extended shelf life.
We plan to apply to the U.S. Department of Agriculture, or
    the USDA, and various state agencies to have our products
    produced by the EATAD process labeled as an organic fertilizer
    or separately as an organic fungicide. We expect organic
    labeling, if obtained, to have a significant positive impact on
    pricing. We believe our products are positioned for the
    commercial market as a fertilizer supplement or as a material to
    be blended into traditional nutrition and disease suppression
    applications.
We use the HTLC system at our Gonzales facility to process food
    waste into liquid organic-based fertilizer and feed products.
    The HTLC technology used in our Gonzales facility can be used in
    all of our future operating plants. We have adopted the HTLC
    technology for certain aspects at the Woodbridge facility even
    though that facility and any future facility in the New York
    City metropolitan area is licensed to use the EATAD technology,
    and accordingly, we will be required to pay royalties on sales
    from those facilities to the owners of the EATAD technology. As
    exclusive owner of the HTLC technology, we expect to achieve the
    same or better operating results as we would with the licensed
    EATAD technology at a lower operating cost. Pursuant to the
    terms of the acquisition of the assets of WRI, we pay a fee for
    each ton of additional capacity added to our current or planned
    expansion. We anticipate that over time this fee will be less
    than the royalty expense paid for use of the licensed EATAD
    technology. In addition, we believe the product produced by the
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HTLC technology will be equal to or better in terms of quality
    than products made through the use of the EATAD technology.
IBRC
    License
Pursuant to a know-how license agreement dated July 15,
    2003, as amended, IBRC granted us an exclusive license for a
    term of 40 years to use its proprietary EATAD technology
    for the design, construction and operation of facilities within
    a 31.25 mile radius from City Hall in New York City for the
    conversion of food waste into solid and liquid organic material.
    The license permits us to use the technology at our Woodbridge
    facility site; restricts the ability of IBRC and an affiliated
    company, Shearator Corporation, to grant another know-how or
    patent license related to the EATAD technology within the
    exclusive area; and restricts our ability to advertise or
    contract for a supply of food waste originating outside the same
    exclusive area. The licensed know-how relates to machinery and
    apparatus used in the EATAD process.
We are obligated to pay IBRC an aggregate royalty equal to 9% of
    the gross revenues from the sale of product produced by the
    Woodbridge facility using EATAD technology. We began paying
    royalties in the first half of 2009, as product shipments from
    Woodbridge commenced at that time. We are also obligated to
    purchase IBRC's patented macerators and shearators, as
    specified by or supplied by IBRC or Shearator Corporation for
    use at the Woodbridge facility.
In addition, we paid a non-refundable deposit of $139,978 to
    IBRC in 2007 on a second plant licensing agreement. To date, we
    have not used the second licensing agreement to develop a new
    facility. We have also paid IBRC for market research, growth
    trails and other services.
Also, pursuant to the license agreement, we have granted a
    proposed cooperative called Genica, which has yet to be formed
    and of which IBRC will be a member, a right of first refusal to
    market all of our products in accordance with the terms and upon
    payment to us of the price listed on our then current price
    list. If we propose to sell end products to a third party for a
    price lower or otherwise on terms more favorable than such
    published price and terms, Genica also has a right of first
    refusal to market such products on the terms and upon payment to
    us of the price proposed to the third party. The license
    agreement does not specify the duration of such rights.
Marketing
    and Sales
Target
    Markets
According to the U.S. Fertilizer Institute,
    U.S. fertilizer demand is 58 million tons per year,
    with agribusiness consuming the majority of product and the
    professional turf and retail segments consuming the remainder.
    The concern of farmers, gardeners and landscapers about nutrient
    runoffs, soil health and other long-term effects of conventional
    chemical fertilizers has increased demand for organic
    fertilizer. We have identified three target markets for our
    products:
•
Agribusiness:
conventional farms, organic
    farms, horticulture, hydroponics and aquaculture;
•
Turf management:
professional lawn care and
    landscaping, golf courses, sod farms, commercial, government and
    institutional facilities; and
•
Retail sales:
home improvement outlets, garden
    supply stores, nurseries, Internet sales and shopping networks.
Agribusiness:
We believe there are two primary
    business drivers influencing commercial agriculture. First,
    commercial farmers are focused on improving the economic yield
    of their land: maximizing the value derived from crop output
    (quantity and quality). Second, commercial farmers are focused
    on reducing the use
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of chemical products, while also meeting the demand for
    cost-effective, environmentally responsible alternatives. We
    believe this change in focus is the result of:
•
Consumer demand for safer, higher quality food;
•
The restriction on use of registered chemical products. Several
    U.S. government authorities, including the Environmental
    Protection Agency, the Food and Drug Administration, and the
    USDA regulate the use of fertilizers. There are more than 14
    separate regulations governing the use of fertilizers;
•
Environmental concerns and the demand for sustainable
    technologies;
•
Demand for more food for the growing world population; and
•
The cost effectiveness and efficacy of non-chemical based
    products to growers.
Consumer demand for organic food products increased throughout
    the 1990s to date at approximately 20% or more per annum. In the
    wake of USDA's implementation of national organic standards
    in October 2002, the organic food industry has continued to
    grow. According to the Organic Trade Association,
    United States' sales of organic food and beverages
    have grown from $1 billion in 1990 to approximately
    $20 billion in 2007 and are expected to grow at an average
    of 18% per year through 2010. Furthermore, the Organic Trade
    Association reports that organic foods represented approximately
    2.8% of total food and beverage sales in 2006, growing 20.9% in
    2006, one of the fastest growing categories. According to the
    Nutrition Business Journal, consumer demand is driving organic
    sector expansion, particularly for fruit, vegetables and dairy
    products. This demand, in turn, is driving commercial farmers to
    shift more of their acreage from conventional practices, which
    predominantly use synthetic fertilizers, to organic practices,
    which require the use of certified organic fertilizers or other
    natural organic materials to facilitate crop growth. The
    USDA's National Agricultural Statistics Service reports
    that the number of certified organic farm acres has grown from
    0.9 million in 1992 to 4.1 million in 2005, a compound
    annual growth rate of 12% per year.
We believe farmers are facing pressures to change from
    conventional production practices to more environmentally
    friendly practices. U.S. agricultural producers are turning
    to certified organic farming methods as a potential way to lower
    production costs, decrease reliance on nonrenewable resources
    such as chemical fertilizers, increase market share with an
    "organically grown" label and capture premium prices,
    thereby boosting farm income.
Turf management:
We believe that the more than
    16,000 golf courses in the U.S. will continue to reduce
    their use of chemicals and chemical-based fertilizers to limit
    potentially harmful effects, such as chemical fertilizer runoff.
    The United States Golf Association, or USGA, provides guidelines
    for effective environmental course management. These guidelines
    include using nutrient products and practices that reduce the
    potential for contamination of ground and surface water.
    Strategies include using slow-release fertilizers and selected
    organic products and the application of nutrients through
    irrigation systems. Further, the USGA advises that the selection
    of chemical control strategies should be utilized only when
    other strategies are inadequate. We believe that our
    all-natural, slow-release fertilizer products will be well
    received in this market.
Retail sales:
The Freedonia Group's
    report on Lawn & Garden Consumables indicates that the
    U.S. market for packaged lawn and garden consumables is
    $7.5 billion and is expected to grow 4.5% per year to
    $9.3 billion in 2012. Fertilizers are the largest product
    category, generating $2.85 billion, or 38%, of total lawn
    and garden consumables sales. Fertilizers, mulch and growing
    media will lead gains, especially rubber mulch, colored mulch
    and premium soils. Organic formulations are expected to
    experience more favorable growth than conventional formulations
    across all product segments, due to increased consumer concern
    with regard to how synthetic chemical fertilizers and pesticides
    on lawns and gardens may affect human/pet health and the
    environment. Further, in 2009, The National Gardening
    Association reported that 40% of the nation's
    100 million households with a yard say they are likely to
    use all-natural methods in the future due largely to
    environmental and health concerns.
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Product
    Sales and Distribution
Our license with IBRC restricts the sale of products from our
    Woodbridge facility to the Eastern Seaboard states, including
    Maine, New Hampshire, Vermont, Massachusetts, Rhode Island,
    Connecticut, New York, New Jersey, Pennsylvania, Delaware,
    Maryland, Virginia, District of Columbia, North Carolina, South
    Carolina, Georgia and Florida. Our Gonzales facility and future
    plants will not be subject to these territory restraints as they
    will operate using the HTLC technology that we acquired from WRI.
We sell and distribute our products through our sales
    organization, comprised of six employees and three to four
    independent contractors, which targets large purchasers of
    fertilizer products for distribution in our target geographic
    and product markets. Key activities of the sales organization
    include introduction of our products and the development of
    relationships with targeted clients and us. In addition, we have
    signed distribution agreements with six distributors to sell our
    products to numerous outlets in all of our target markets. Due
    to our small size, we believe the most efficient method for
    distribution of our products is through regional distributors.
    This method of distribution currently accounts for the majority
    of our sales. To the extent we make sales directly to customers,
    we generally require our customers to handle delivery of the
    product. We have also had preliminary discussions with
    manufacturer's representatives to explore sales of our
    products in appropriate retail outlets. In order to develop a
    consistent sales and distribution strategy, we have hired a
    seasoned professional to serve as Vice President of Marketing
    and have hired five in-house salespeople to assist with product
    pull-through into all of our targeted markets. In addition, with
    our acquisition of UOP, we have retained the services of former
    UOP employees who are currently selling product into the
    agribusiness market.
Environmental
    Impact of Our Business Model
Food waste, the raw material of our manufacturing process, comes
    from a variety of sources. Prior to preparation, food must be
    grown or raised, harvested, packaged, shipped, unpacked, sorted,
    selected and repackaged before it finds its way into markets,
    restaurants or home kitchens. Currently, this process creates a
    large amount of food waste, particularly in densely populated
    metropolitan areas such as New York City, Northern New Jersey,
    and Eastern Massachusetts. Traditionally, the majority of food
    waste is disposed of in either landfills or incinerators that do
    not produce a product from this recyclable resource. We use a
    demonstrated technology that is environmentally benign to
    convert waste into valuable all-natural soil amendment and
    fertilizer products.
Food waste comprises 15% to 20% of the nation's waste
    stream. Disposing of or recycling food waste should be simple,
    since organic materials grow and decompose readily in nature.
    However, the large volumes of food wastes generated in urban
    areas combined with a lack of available land for traditional
    recycling methods, such as composting, make disposal of food
    wastes increasingly expensive and difficult. Landfill capacity
    is a significant concern, particularly in densely populated
    areas. In addition, landfills may create negative environmental
    effects including liquid wastes migrating into groundwater,
    landfill gas, consumption of open space, and air pollution
    associated with trucking waste to more remote sites. The
    alternative of incineration may produce toxic air pollutants and
    climate-changing gases, as well as ash containing heavy metals.
    Incineration also fails to recover the useful materials from
    organic wastes that can be recycled. Traditional composting is a
    slow process that uses large tracts of land, may generate
    offensive odors, and may attract vermin. In addition, composting
    usually creates an inconsistent product with lower economic
    value than the fertilizer products we will produce.
Our process occurs in enclosed "digesters" housed
    within a building that uses effective emissions control
    equipment, which results in minimal amounts of dust and noise.
    By turning food waste into a fertilizer product using an
    environmentally benign process, we are able to reduce the total
    amount of solid waste that goes to landfills and incinerators,
    which in turn reduces the release of greenhouse gases such as
    methane and carbon dioxide.
During the
start-up
phase at our Woodbridge facility, we experienced odor-related
    issues. As a result of these issues, we have been assessed fines
    from the Health Department of Middlesex County, New Jersey, and
    have been named a party in a lawsuit by a neighboring business.
    Based on a change in operational procedures
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and working with two outside odor-control consultants, we
    believe we have significantly reduced the odor issues. However,
    if we are unsuccessful in controlling odor-related issues, we
    may be subject to further fines or litigation, and our
    operations may be interrupted or terminated.
The following table summarizes some of the advantages of our
    process compared with currently available methods employed to
    dispose of food waste:
Comparison
    of Methods for Managing Food Waste
Environmental
Method
Impacts
Products
Landfilling
Loss of land
Groundwater threat
Methane gas
Air pollution from trucks
Useful materials not recycled
Undesirable land use
Landfill gas (minimal energy generation at some landfills)
Incineration
Air pollution
Toxic emissions
Useful materials not recycled
Disposal of ash still required
Electricity (only at some facilities)
Composting
Groundwater threat
Odor
Vermin
Substantial land required
Low value compost
Converted Organics
No solid waste
Odor
No harmful by-products
Removal of waste from waste stream
Consumption of electricity and natural gas
Discharge of treated wastewater into sewage system
Natural fertilizer
Environmental regulators and other governmental authorities in
    our target markets have also focused more recently on the
    potential benefits of recycling increased amounts of food waste.
    For example, the New Jersey Department of Environmental
    Protection, or the NJDEP, estimates nearly 1.5 million
    tons, or just over 7.4% of the state's total waste stream,
    is food waste, but in 2003, only 221,000 tons were recycled,
    which represented 15% of the recycled waste. The 2005 NJDEP
    Statewide Solid Waste Management Plan focused particularly on
    the "food waste" recycling stream as one of the most
    effective ways to create significant increases in recycling
    tonnages and rates. In New York, state and local environmental
    agencies are taking measures to encourage the diversion of
    organic materials from landfills and are actively seeking
    processes consistent with health and safety codes. The goal is
    to further reduce the amount of waste going to landfills and
    other traditional disposal facilities, particularly waste that
    is hauled great distances, especially in densely populated areas
    in the Northeast. In 2005, the Rhode Island Resource Recovery
    Corporation, or the RIRRC, began an examination of the bulk food
    waste processing technology of our technology licensor to
    determine whether using our licensed technology would be
    economically feasible, cost-effective, practicable, and an
    appropriate application in Rhode Island. The RIRRC completed its
    review and included the technology in its 2006 Solid Waster
    Master Plan. In 2006 in Massachusetts, the State Solid Waste
    Master Plan has also identified a need for increased
    organics-processing capacity within the state and has called for
    a streamlined regulatory approval path.
Competition
We operate in a very competitive environment in our
    business's three dimensions — organic waste
    stream feedstock, technology and end products — each
    of which is quickly evolving. We believe we will be able to
    compete effectively because of the abundance of the supply of
    food waste in our geographic markets, the pricing of our tip
    fees and the quality of our products and technology.
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Organic Waste Stream Feedstock.
Competition
    for the organic waste stream feedstock includes landfills,
    incinerators, animal feed, land application and traditional
    composting operations. Organic waste streams are generally
    categorized as pre- and post-consumer food waste, lawn and
    garden waste (sometimes called green waste), and bio-solids,
    including sewage sludge or the by-product of wastewater
    treatment. Some states, including New Jersey, have begun to
    regulate the manner in which food waste may be composted. New
    Jersey has created specific requirements for treatment in tanks
    or in-vessel, and we believe our Woodbridge facility is the
    first approved in-vessel processing facility in the state. In
    Massachusetts, state regulators are considering a ban on the
    disposal of organic materials at landfills and incinerators once
    sufficient organic processing capacity exists within the state,
    which, if adopted, would provide a competitive advantage for
    organic processes such as our process.
Technology.
There are a variety of
    technologies used to treat organic wastes including composting,
    digestion, hydrolysis and thermal processing. Companies using
    these technologies may compete with us for organic material.
Composting is a natural process of decomposition that can be
    enhanced by mounding the waste into windrows to retain heat,
    thereby accelerating decomposition. Large-scale compost
    facilities require significant amounts of land for operations
    that may not be readily available or that may be only available
    at significant cost in major metropolitan areas. Given the
    difficulties in controlling the process or the consistent
    ability to achieve germ-killing temperatures, the resulting
    compost is often inconsistent and generally would command a
    lower market price than our product.
Digestion may be either aerobic, like the HTLC or EATAD process,
    or anaerobic. Anaerobic digestion is, in simple terms,
    mechanized in-vessel composting. In addition to compost, most
    anaerobic digestion systems are designed to capture the methane
    generated. While methane has value as a source of energy, it is
    generally limited to
on-site
use,
    as it is not readily transported.
Hydrolysis is an energy-intensive chemical process that produces
    a by-product, most commonly ethanol. Thermal technologies
    extract the British thermal unit, or BTU, content of the waste
    to generate electricity. Food waste, which is typically 75%-90%
    water, is generally not a preferred feedstock. Absent
    technological breakthroughs, neither hydrolysis nor thermal
    technologies are expected to be accepted for food waste
    processing on a large-scale in the near term.
End Products.
The organic fertilizer business
    is relatively new, highly fragmented, under-capitalized and
    growing rapidly. We are not aware of any dominant producers or
    products currently in the market. There are a number of single
    input, protein-based products, such as fish, bone and cottonseed
    meal, that can be used alone or mixed with chemical additives to
    create highly formulated fertilizer blends that target specific
    soil and crop needs. In this sense they are similar to our
    products, and provide additional competition in the organic
    fertilizer market. In the future, large producers of non-organic
    fertilizer may also increase their presence in the organic
    fertilizer market. These companies are generally better
    capitalized than us and have greater financial and marketing
    resources than us.
Most of the 58 million tons of fertilizer consumed annually
    in North America is mined or derived from petroleum. These
    petroleum-based products generally have higher nutrient content
    (NPK) and cost less than organic fertilizers. Traditional
    petrochemical fertilizers are highly soluble and readily leach
    from the soil. Slow release products that are coated or
    specially processed command a premium. However, the economic
    value offered by petrochemicals, especially for field crops
    including corn, wheat, hay and soybeans, will not be supplanted
    in the foreseeable future. We compete with large producers of
    non-organics fertilizers, many of which are significantly larger
    and better capitalized than us. In addition, we compete with
    numerous smaller producers of fertilizer.
Despite a large number of new products in the end market, we
    believe that our products have a unique set of characteristics.
    We believe positioning and branding the combination of nutrition
    and disease suppression characteristics will differentiate our
    products from other organic fertilizer products to develop
    market demand, while maintaining or increasing pricing. In view
    of the barriers to entry created by the supply of food waste,
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regulatory controls and the cost of constructing facilities, we
    do not foresee a dominant manufacturer or product emerging in
    the near-term.
Major
    Customers
Our Gonzales and Woodbridge facilities rely on a few major
    customers for a majority of their revenues. From January 1,
    2009 until August 31, 2009, approximately 71% of the
    revenues generated by the Gonzales facility were from three
    customers. From January 1, 2009 until August 31, 2009,
    approximately 48% of the revenues generated by the Woodbridge
    facility, excluding tip fees, were from two customers. We do not
    have any long-term agreements with any of our customers. The
    loss of any of our major customers could adversely effect our
    results of operations.
Government
    Regulation
Certain of our fertilizer end products are regulated or
    controlled by state, county and local governments as well as
    various agencies of the federal government, including the Food
    and Drug Administration and the USDA.
In addition to the regulations governing the sale of our end
    products, our facilities are subject to extensive regulation. We
    need certain permits to operate solid waste or recycling
    facilities as well as permits for our sewage connection, water
    supply, land use, air emission, and wastewater discharge. The
    specific permit and approval requirements are set by the state
    and the various local jurisdictions, including but not limited
    to city, town, county, and township and state agencies having
    control over the specific properties. We have obtained the
    permits and approvals required to operate our Woodbridge
    facility and Gonzales facility.
Environmental regulations also govern the operation of our
    facilities. Our future facilities will most likely be located in
    urban industrial areas where contamination may be present.
    Regulatory agencies may require us to remediate environmental
    conditions at our locations.
We have contracted with a company to explore our ability to
    create carbon credits as a result of our manufacturing process
    and our diverting food waste from landfills. We have not
    determined the value, if any, of the potential carbon credits
    associated with our business.
Legal
    Proceedings
On December 11, 2008, we received notice that a complaint
    had been filed in a putative class action lawsuit on behalf of
    59 persons or entities that purchased units pursuant to a
    financing terms agreement, or FTA, dated April 11, 2006,
    captioned Gerald S. Leeseberg, et al. v. Converted
    Organics, Inc., filed in the U.S. District Court for the
    District of Delaware. The lawsuit alleges breach of contract,
    conversion, unjust enrichment, and breach of the implied
    covenant of good faith in connection with the alleged failure to
    register certain securities issued in the FTA, and the
    redemption of our Class A warrants in November 2008. The
    lawsuit seeks damages related to the failure to register certain
    securities, including alleged late fee payments, of
    approximately $5.25 million, and unspecified damages
    related to the redemption of the Class A warrants. In
    February 2009, we filed a Motion for Partial Dismissal of
    Complaint. It is uncertain when the Court will rule on this
    motion. We plan to vigorously defend this matter and are unable
    to estimate any contingent losses that may or may not be
    incurred as a result of this litigation and its eventual
    disposition. Accordingly, no contingent loss has been recorded
    related to this matter.
On May 19, 2009, we received notice that a complaint had
    been filed in the Middlesex County Superior Court of New Jersey,
    captioned Lefcourt Associates, Ltd., et al. v. Converted
    Organics of Woodbridge, et al. The lawsuit alleges private and
    public nuisances, negligence, continuing trespasses and consumer
    common-law fraud in connection with the odors emanating from our
    Woodbridge facility and our alleged, intentional failure to
    disclose to adjacent property owners the possibility of our
    facility causing pollution. The lawsuit seeks enjoinment of any
    and all operations which in any way cause or contribute to the
    alleged pollution, compensatory and punitive damages, counsel
    fees and costs of suit and any and all other relief the Court
    deems equitable and just. In response to these allegations, we
    have filed opposition papers with the Court and
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have complied with the plaintiff's requests for
    information. We have also paid to the Middlesex County Health
    Department penalties in the amount of $86,000 relating to odor
    emissions. We plan to vigorously defend this matter and are
    unable to estimate any contingent losses that may or may not be
    incurred as a result of this litigation and its eventual
    disposition. Accordingly, no contingent loss has been recorded
    related to this matter.
On May 28, 2009, we received notice that a Lien Claim
    Foreclosure Complaint had been filed in the Middlesex County
    Superior Court of New Jersey, captioned Armistead Mechanical,
    Inc. v. Converted Organics Inc., et al. Armistead filed
    this Lien Claim Foreclosure Complaint in order to perfect its
    previously filed lien claim. In connection with the Complaint,
    Armistead also filed a Demand for Arbitration in order to
    preserve its status quo and right to submit a contract dispute
    claim to binding arbitration. Armistead has indicated to us that
    it wishes to continue settlement discussions and has offered to
    cooperate with our efforts to secure financing for a mutually
    agreeable settlement. We intend to continue working towards an
    agreeable settlement with Armistead. On July 10, 2009, we
    received an Amended Lien Claim Foreclosure Complaint from
    Armistead Mechanical. The amended complaint did not make any
    substantial changes to the suit. On August 4, 2009, we
    filed a response to the complaint whereby we denied certain
    claims and at this time we are unable to estimate any contingent
    losses. On August 28, 2009, the court entered an order
    staying the litigation pending the outcome of arbitration.
The Middlesex County Health Department (MCHD) issued us a number
    of notices of violation, or NOV, following the commencement of
    our operations at our Woodbridge facility in February 2009, for
    alleged violations of New Jersey State Air Pollution Control
    Act, which prohibits certain off-site odors. The NOV alleged
    that odors emanating from our Woodbridge facility had impacted
    surrounding businesses and those odors were of sufficient
    intensity and duration to constitute air pollution under the
    act. As of September 3, 2009, the total amount of fines
    levied by the Middlesex County Health Department equaled
    $356,250, of which we have paid $87,750 (of which $86,000 were
    related to odor emissions), and we are either contesting or
    negotiating the unpaid balance of $268,500, based on the date of
    violation. We recorded a liability of $75,000 in our financial
    statements as of June 30, 2009 relating to the unpaid
    potion of the penalties. In addition, based on a change in
    operational procedures and working with two outside odor-control
    consultants, we believe we have significantly rectified the odor
    issues.
The NJDEP Bureau of Air Compliance and Enforcement issued us an
    Administrative Order in June 2009 for alleged violations of the
    air permit issued to us pursuant to the Air Pollution Control
    Act. The Administrative Order alleged that we were not operating
    in compliance with our air permit. No penalties were assessed in
    the Administrative Order. However, the Administrative Order
    remains an open matter because, as the NJDEP stated in the
    Administrative Order, the provisions of the order remain in
    effect during pendency of the hearing request. Additionally,
    while we have taken corrective actions, such actions do not
    preclude the State from initiating a future enforcement action
    or seeking penalties with respect the violations listed in the
    Administrative Order.
The NJDEP Bureau of Solid Waste Compliance and Enforcement
    issued us a NOV for alleged violations of the New Jersey State
    Solid Waste Management Act in June 2009. The NOV alleged that
    our Woodbridge facility was not operating in accordance with the
    terms of the General Class C Permit Approval. No penalties
    were assessed by the NOV. However, the NOV constituted
    notification that the facility is allegedly out of compliance
    with certain provisions of the General Class C Permit
and/or
the
    NJDEP Solid Waste regulations. The NOV remains an open matter
    because, as NJDEP stated in the NOV, while we have taken
    corrective actions, such actions do not preclude the State from
    initiating a future enforcement action with respect the
    violations listed in the NOV.
Employees
As of September 1, 2009, we had 31 full-time
    employees, 13 of whom are in sales, management and
    administration, seven of whom work in our Gonzales facility and
    11 of whom work in our Woodbridge facility. Once the Woodbridge
    facility reaches its initial design capacity of 250 tons per
    day, we expect to have another seven full-time employees at that
    location, working in the areas of general plant management,
    equipment operation, quality control, maintenance, laborers, and
    administrative support. We are also planning for additional
    employees in the sales, marketing, finance, technology and
    administrative areas of the Company.
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MANAGEMENT
Executive
    Officers and Directors
The following table sets forth information about our executive
    officers and members of our board of directors as of
    September 1, 2009:
Name
Age
Position
Edward J. Gildea
57
President, Chief Executive Officer and Chairman of the Board
David R. Allen
54
Chief Financial Officer and Executive Vice-President of
    Administration
Robert E. Cell(1)(2)(3)
40
Director
John P. DeVillars(1)(2)(3)
60
Director
Edward A. Stoltenberg(1)(2)(3)
70
Director
(1)
Member of the audit committee.
(2)
Member of the compensation committee.
(3)
Member of the nominating committee.
The following is a brief description of the principal occupation
    and recent business experience of each of our directors and
    executive officers:
Edward J. Gildea
has been our Chairman, President and
    Chief Executive Officer since January 2006. From 2001 to 2005,
    he held several executive positions including Chief Operating
    Officer, Executive Vice President, Strategy and Business
    Development, and General Counsel of QualityMetric Incorporated,
    a private health status measurement business. During that
    period, Mr. Gildea was also engaged in the private practice
    of law representing business clients and held management
    positions in our predecessor companies. He holds an A.B. degree
    from the College of the Holy Cross and a J.D. degree from
    Suffolk University Law School. Mr. Gildea is the brother of
    William A. Gildea, a former affiliate of the company.
David R. Allen
has been our Chief Financial Officer since
    March 2007. He was previously a director from June 2006 to March
    2007. Until 2004, he was the Chief Executive Officer and the
    Chief Financial Officer of Millbrook Press Inc., a publicly held
    publisher of children's books. Millbrook Press Inc. filed
    for bankruptcy in the District of Connecticut in February 2004
    in a liquidation proceeding in which all creditors were paid in
    full. Since 2004, Mr. Allen has acted as a management
    consultant and advisor to small public companies. Mr. Allen
    holds a B.S. degree and an M.S. degree from Bentley College in
    Waltham, Massachusetts. Mr. Allen is a Certified Public
    Accountant.
Robert E. Cell
has been a director since June 2006. In
    2006, he became the President and Chief Executive Officer of
    MyBuys.com, a preference-based marketing company. From 2004 to
    2005, he was the Chief Executive Officer of Cool Sign Media
    Inc., a provider of digital advertising and signage. From 2000
    to 2004, he held several executive positions, including Chief
    Operating Officer and Chief Financial Officer, at Blue Martini
    Software, Inc., a publicly held provider of client relationship
    management software applications. Mr. Cell has acted as a
    consultant to several public and private companies.
    Mr. Cell holds a B.S. degree and an M.B.A. from the
    University of Michigan.
John P. DeVillars
has been a director since June 2006. He
    is a founder and managing partner of BlueWave Strategies LLC, an
    environmental and renewable energy consulting firm established
    in 2003, and is a managing partner of its affiliated investment
    group, BlueWave Capital. He is a director of Clean Harbors Inc.,
    a hazardous waste management company. Until 2003,
    Mr. DeVillars held the position of Lecturer in
    Environmental Policy in the Department of Urban Studies and
    Planning at the Massachusetts Institute of Technology.
    Mr. DeVillars continues to lecture at MIT, the Harvard
    Graduate School of Design and the Kennedy School of Government.
    Mr. DeVillars holds a B.A. degree from the University of
    Pennsylvania and an M.P.A. from Harvard University.
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Edward A. Stoltenberg
has been a director since March
    2007. He is a Managing Director of Phoenix Financial Services,
    an investment banking firm which provides financial services to
    middle market public and private companies. He has been with
    Phoenix since 1999. Mr. Stoltenberg is a Certified Public
    Accountant and holds a B.A from Ohio Wesleyan University and an
    M.B.A from the University of Michigan.
There are no family relationships among our officers and
    directors.
Board
    Classifications; Independence
Our Board of Directors is comprised of four members divided into
    three classes as nearly equal in number as possible. Currently,
    Messrs. Stoltenberg and Cell serve as
    Class 1 directors, whose terms expire in 2010,
    Mr. DeVillars serves as a Class 2 director, whose
    term expires in 2011, and Mr. Edward Gildea serves as a
    Class 3 director, whose term expires in 2012.
Our Board of Directors is subject to the independence
    requirements of the NASDAQ Stock Market. In March 2009, our
    Board of Directors undertook its annual review of director
    independence. During this review, the Board considered
    transactions and relationships between each director or any
    member of his or her immediate family and the company and its
    subsidiaries and affiliates. The purpose of this review was to
    determine whether any such relationships or transactions existed
    that were inconsistent with a determination that the director is
    independent. Of the four members of the Board,
    Messrs. Cell, DeVillars and Stoltenberg were determined to
    be independent directors as defined by the NASDAQ Stock Market.
Our Board of Directors has three standing committees: an Audit
    Committee, a Compensation Committee and a Nominating and
    Governance Committee.
Audit Committee.
Our Audit Committee oversees
    our accounting and financial reporting processes, internal
    systems of accounting and financial controls, relationships with
    independent auditors, and audits of financial statements.
    Specific responsibilities include the following:
•
appointing, evaluating and terminating our independent auditors;
•
evaluating the qualifications, independence and performance of
    our independent auditors;
•
approving the audit and any non-audit services to be performed
    by the independent auditors;
•
reviewing the design, implementation, adequacy and effectiveness
    of our internal controls and critical accounting policies;
•
overseeing and monitoring the integrity of our financial
    statements and our compliance with legal and regulatory
    requirements as they relate to financial statements or
    accounting matters;
•
with management and our independent auditors, reviewing any
    earnings announcements and other public announcements regarding
    our results of operations; and
•
preparing the report that the Securities and Exchange Commission
    requires in our annual proxy statement.
Our Audit Committee is comprised of Messrs. Stoltenberg,
    DeVillars and Cell. Mr. Stoltenberg serves as Chairman of
    the Audit Committee. The Board has determined that all members
    of the Audit Committee are independent under the rules of the
    Securities and Exchange Commission and the NASDAQ Stock Market.
    The Board has determined that Mr. Stoltenberg qualifies as
    an "audit committee financial expert," as defined by
    the rules of the Securities and Exchange Commission.
Compensation Committee.
Our Compensation
    Committee assists our Board of Directors in determining the
    development plans and compensation of our officers, directors
    and employees. Specific responsibilities include the following:
•
approving the compensation and benefits of our executive
    officers;
•
reviewing the performance objectives and actual performance of
    our officers; and
•
administering our stock option and other equity compensation
    plans.
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Our Compensation Committee is comprised of Messrs. Cell,
    DeVillars and Stoltenberg. Mr. Cell serves as Chairman of
    the Compensation Committee. The Board has determined that all
    members of the Compensation Committee are independent under the
    rules of the NASDAQ Stock Market.
Nominating and Governance Committee.
Our
    Nominating and Governance Committee assists the Board by
    identifying and recommending individuals qualified to become
    members of our Board of Directors, reviewing correspondence from
    our stockholders, and establishing, evaluating and overseeing
    our corporate governance guidelines. Specific responsibilities
    include the following:
•
evaluating the composition, size and governance of our Board of
    Directors and its committees and making recommendations
    regarding future planning and the appointment of directors to
    our committees;
•
determining procedures for selection of the CEO and other senior
    management; and
•
evaluating and recommending candidates for election to our Board
    of Directors.
Our Nominating and Governance Committee is comprised of
    Messrs. DeVillars, Cell and Stoltenberg. Mr. DeVillars
    serves as Chairman of our Nominating and Governance Committee.
    The Board has determined that all members of the Nominating and
    Governance Committee are independent under the rules of the
    NASDAQ Stock Market.
Compensation
    Committee Interlocks and Insider Participation
None of the members of our Compensation Committee is an officer
    or employee of ours. None of our executive officers currently
    serves, or in the past year has served, as a member of the board
    of directors or compensation committee of any entity that has
    one or more executive officers serving on our Board of Directors
    or Compensation Committee.
Director
    Compensation
In 2008, our independent directors received options to purchase
    an aggregate of 44,000 shares and an aggregate of $69,000
    in fees for their service on the Board of Directors, which
    included meeting fees of $1,000 per meeting per director.
    Directors who are also our employees do not receive compensation
    for their services as directors.
Fees Earned or
Option
Name
Paid in Cash
Awards(1)
Total
Edward A. Stoltenberg(1)
$
25,000
$
139,040
$
164,040
Robert Cell
$
20,000
$
139,040
$
159,040
John DeVillars
$
24,000
$
139,040
$
163,040
(1)
Represents the compensation expense incurred by us in the
    respective fiscal year in connection with grants of stock
    options. The fair value for the stock options was estimated at
    the date of grant using a
Black-Scholes
pricing model with the following assumptions: risk-free interest
    rate of 3.52%; no dividend yield; volatility factor of 52.3%;
    and an expiration period of five years. The price resulting from
    the valuation was $3.16 per share.
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EXECUTIVE
    COMPENSATION
Summary
    Compensation Table
The following table sets forth certain information concerning
    total compensation received by our Chief Executive Officer and
    Chief Financial Officer ("named executives") during
    2008 and 2007 for services rendered to us in all capacities for
    the last two fiscal years.
Summary
    Compensation Table
Option
Salary
Awards
Total
Name and Principal Position
Year
($)
($)
($)
Edward J. Gildea,
2008
215,260
(1)
395,000
610,260
President and Chief Executive Officer
2007
208,923
(2)
—
208,923
David Allen,
2008
139,523
(3)
224,976
364,499
Chief Financial Officer
2007
72,930
(4)
—
72,930
(1)
Includes $22,000 of unpaid salary from 2007 that was paid in
    2008.
(2)
Includes paid salary of $186,923 and unpaid salary of $22,000.
    The unpaid salary was paid in January and February 2008.
(3)
Includes $8,580 of unpaid salary from 2007 that was paid in 2008.
(4)
Includes paid salary of $64,350 and unpaid salary of $8,580. The
    unpaid salary was paid in January and February 2008.
Outstanding
    Equity Awards at Fiscal Year End
Number of Securities Underlying Unexercised
Options
Option Exercise
Option
Name
Exercisable
Unexercisable
Price ($ per share)
Expiration Date
Edward J. Gildea
100,000
0
$
3.75
June 15, 2011
125,000
0
$
5.02
June 27, 2018
David R. Allen
10,000
0
$
3.75
June 15, 2011
71,195
0
$
5.02
June 27, 2018
2006
    Stock Option Plan
In June 2006, our Board of Directors and stockholders approved
    the 2006 Stock Option Plan, or Option Plan. The Option Plan
    authorizes the grant and issuance of options and other equity
    compensation to employees, officers and consultants. A total of
    1,666,667 shares of common stock are reserved for issuance
    under the Option Plan.
The Option Plan is administered by our Compensation Committee.
    Subject to the provisions of the Option Plan, the Compensation
    Committee determines who will receive the options, the number of
    options granted, the manner of exercise and the exercise price
    of the options. The term of incentive stock options granted
    under the Option Plan may not exceed ten years, or five years
    for options granted to an optionee owning more than 10% of our
    voting stock. The exercise price of an incentive stock option
    granted under the Option Plan must be equal to or greater than
    the fair market value of our common stock on the date the option
    is granted. The exercise price of a non-qualified option granted
    under the Option Plan must be equal to or greater than 85% of
    the fair market value of our stock on the date the option is
    granted. An incentive stock option granted to an optionee owning
    more than 10% of our voting stock must have an exercise price
    equal to or greater than 110% of the fair market value of our
    common stock on the date the option is granted. Stock options
    issued under the option plan vest immediately upon date of grant.
At a Special Meeting of Shareholders on April 3, 2008, our
    shareholders approved an amendment to the Option Plan to include
    an "evergreen" provision pursuant to which on
    January 1st of each year, commencing
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in 2009, the number of shares authorized for issuance under the
    Option Plan shall automatically be increased to an amount equal
    to 20% of our outstanding shares of common stock on the last day
    of the prior fiscal year.
Employment
    Agreements
Effective as of February 16, 2007, we entered into an
    employment agreement with Mr. Gildea to ensure the
    continuity of executive leadership, to clarify his roles and
    responsibilities, and to make explicit the terms and conditions
    of executive employment. Provisions concerning a change of
    control, and terms of compensation in that event, are included
    in the employment agreement consistent with what our
    Compensation Committee believes to be best industry practices.
    The change of control provisions in the employment agreement are
    designed to ensure that Mr. Gildea devotes his full energy
    and attention to the best long-term interests of the
    shareholders in the event that business conditions or external
    factors make consideration of a change of control appropriate.
    "Change of Control" is defined in the employment
    agreement to include: (i) the acquisition of any person or
    "group" (as defined by the Securities Exchange Act of
    1934, as amended) of beneficial ownership of 20% of the total
    shares or more than 35% of the then-outstanding shares of common
    stock, except for acquisitions of stock from us, by us or by
    employee benefit plans maintained by us or any of our
    affiliates; (ii) individuals who constitute our Board of
    Directors cease for any reason to constitute at least a majority
    of the Board unless the new members of the Board were nominated
    by the existing Board members for other than an election
    contest; (iii) consummation of a reorganization, merger,
    consolidation or sale or other disposition of all or
    substantially all of our assets, unless the transaction merger,
    consolidation or sale was initiated or approved by the Board of
    Directors; or (iv) approval by our stockholders of a
    complete liquidation or dissolution.
The employment agreement with Mr. Gildea for his service as
    President and Chief Executive Officer provides for a base salary
    of $220,000, which may be increased at the discretion of the
    Board. The employment agreement also provides for participation
    in the various benefit programs provided by us, including group
    life insurance, sick leave and disability, retirement plans and
    medical and dental insurance programs to the extent they are
    offered by us and to the extent that Mr. Gildea is eligible
    to participate in such plans under the terms of such plans.
In the event that Mr. Gildea's employment is
    terminated or in the event that Mr. Gildea resigns for
    "good reason" following a Change of Control,
    Mr. Gildea is entitled to a lump sum of three years base
    salary plus three times his incentive compensation paid in the
    preceding 12 months or the incentive compensation
    plan's target, if any, whichever is greater, plus continued
    participation in the insurance benefits for a three-year period.
    All stock options granted to Mr. Gildea would immediately
    vest and remain exercisable for three months following the date
    of termination.
Resignation for "good reason" under the employment
    agreement, means, among other things, the resignation of
    Mr. Gildea as a result of (i) without the express
    written consent of Mr. Gildea, our materially breach of the
    employment agreement which breach is not cured within
    30 days following written notice by Mr. Gildea;
    (ii) the Board of Directors, without cause, substantially
    changing Mr. Gildea's core duties or removing his
    responsibility for those core duties, so as to effectively cause
    him to no longer be performing the duties of President and CEO;
    (iii) the Board of Directors, without cause, placing
    another executive above Mr. Gildea or one of the named
    officers in the company or requiring Mr. Gildea to be based
    in an office that is more than 100 miles from
    Mr. Gildea's principal place of employment; or
    (iv) a Change of Control. The estimated expense to us of
    Mr. Gildea's termination in the event of a Change of
    Control as of December 31, 2008 was $660,000. The estimated
    expense to us of Mr. Gildea's resignation for good
    reason or termination without cause in the absence of a change
    in control as of December 31, 2008 was $220,000.
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PRINCIPAL
    STOCKHOLDERS
The following table sets forth information regarding the
    beneficial ownership of our outstanding common stock as of
    September 1, 2009, and as adjusted to reflect the sale of
    the shares of common stock offered by us in this offering
    (assuming no exercise of the warrants included in the units),
    for:
•
each person or group of affiliated persons known by us to
    beneficially own more than 5% of our common stock;
•
each of our directors;
•
each of our named executive officers; and
•
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules
    of the SEC. In computing the number of shares beneficially owned
    by a person and the percentage ownership of that person, shares
    of common stock subject to options or warrants held by that
    person that are currently exercisable or exercisable within
    60 days of September 1, 2009 are deemed outstanding,
    but are not deemed outstanding for computing the percentage
    ownership of any other person. These rules generally attribute
    beneficial ownership of securities to persons who possess sole
    or shared voting power or investment power with respect to such
    securities. The percentage of ownership is based on
    20,412,708 shares of common stock outstanding as of
    September 1, 2009.
Except as otherwise indicated below, the persons named in the
    table have sole voting and investment power with respect to all
    shares of common stock held by them, subject to applicable
    community property laws. Unless otherwise indicated, the address
    of each stockholder is
c/o Converted
Organics Inc., 7A Commercial Wharf West, Boston, Massachusetts
    02110.
Shares Beneficially Owned
Shares Beneficially Owned
Prior to this Offering
After this Offering
Name of Beneficial Owner
Number
Percent
Number
Percent
Edward J. Gildea
324,911
(1)
1.6
%
David R. Allen
85,141
(2)
*
Robert E. Cell
54,000
(3)
*
John P. DeVillars
54,000
(3)
*
Edward A. Stoltenberg
63,269
(4)
*
All directors and officers as a group (five persons)
581,321
2.8
%
5% Stockholders
Oppenheimer Funds, Inc.(5)
2,284,409
11.2
%
Oppenheimer Rochester National Municipals(5)
1,631,721
8.0
%
*
Less than 1%.
(1)
Includes 1,400 Class B Warrants and options to purchase
    225,000 shares.
(2)
Includes options to purchase 81,195 shares.
(3)
Consists of options to purchase shares of our common stock.
(4)
Includes options to purchase 44,000 shares. Includes
    2,966 shares beneficially owned and held in trust.
(5)
The following information is based on the Schedule 13G/A
    filed May 4, 2009. Oppenheimer Funds, Inc. is an investment
    adviser in accordance with
Rule 13d-1(b)(1)(ii)(E)
of the Securities Exchange Act of 1934, as amended, or the
    Exchange Act. Oppenheimer Rochester National Municipals is an
    investment company registered under section 8 of the
    Investment Company Act of 1940. All beneficial ownership is
    disclaimed pursuant to
Rule 13d-4
of the Exchange Act). All positions reported reflect the
    exercise of warrants for shares of common stock. The principal
    address of Oppenheimer Funds, Inc. is Two World Financial
    Center, 225 Liberty Street, New York, NY 10289. The principal
    address of Oppenheimer Rochester National Municipals is
    6803 S. Tucson Way, Centennial, CO 80112. Oppenheimer
    Funds, Inc.'s amount of beneficial ownership includes the
    ownership reported Oppenheimer Rochester National Municipals.
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RELATED
    PARTY TRANSACTIONS
As payment for compensation accrued and not paid since
    April 1, 2006 and expenses incurred but not reimbursed
    since April 1, 2006, we intend to pay in the future, out of
    available cash, a total of $250,000 to the following current and
    former executive officers, directors and consultants, each of
    whom will receive $50,000: Edward J. Gildea, Thomas R. Buchanan,
    John A. Walsdorf, William A. Gildea and John E. Tucker.
We paid Mr. William A. Gildea, who was a 5% stockholder
    during 2007 and 2008 and is the brother of our President and
    CEO, for his services in connection with development efforts in
    New Jersey, New York and Rhode Island as well as his services in
    connection with the sale of our common stock. Mr. Gildea
    was paid $155,000 in 2007 and $180,000 in 2008.
We paid Mr. John E. Tucker, who was a 5% stockholder during
    2007 and 2008, and his company, BioVentures LLC, for its
    services in connection with the design and development work for
    our manufacturing facility in Woodbridge, New Jersey.
    BioVentures LLC was paid $76,669 in 2007 and $60,000 in 2008.
We have a term note payable to our CEO, Mr. Edward J.
    Gildea. The unsecured term note for $89,170 is dated
    April 30, 2007 with an original maturity of April 30,
    2009, and accrues interest at 12% per annum. The note has been
    extended for one year until April 30, 2010. We paid accrued
    interest of $21,400 upon extension of the note's due date.
    This note is subordinate to the New Jersey Economic Development
    Authority Bonds.
We believe the transactions described above were made on terms
    at least as favorable as those generally available from
    unaffiliated third parties. The transactions have been ratified
    by a majority of the members of our Board of Directors who are
    independent directors. Future transactions with our officers,
    directors or greater than five percent stockholders will be on
    terms no less favorable to us than could be obtained from
    unaffiliated third parties, and all such transactions will be
    reviewed and subject to approval by our Audit Committee, which
    will have access, at our expense, to our or independent legal
    counsel.
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UNDERWRITING
We and Chardan Capital Markets, LLC have entered into an
    underwriting agreement with respect to the units being offered.
    Subject to certain conditions, Chardan Capital Markets, LLC is
    committed to purchase all of the units offered hereby, other
    than those units covered by the over-allotment option described
    below.
Number of
Underwriters
Units
Chardan Capital Markets, LLC
Units sold by Chardan Capital Markets, LLC to the public will
    initially be offered at the public offering price set forth on
    the cover of this prospectus. Any units sold by Chardan Capital
    Markets, LLC to securities dealers may be sold at a discount of
    up to $      per unit from the public
    offering price. If all the units are not sold at the public
    offering price, Chardan Capital Markets, LLC may change the
    offering price and the other selling terms.
We have granted to the underwriters an over-allotment option to
    purchase up
    to          additional          
    units from us at the same price to the public, less underwriting
    discounts. The underwriters may exercise this option any time
    during the
45-day
period after the date of this prospectus, but only to cover
    over-allotments, if any.
We have agreed to sell to Chardan Capital Markets, LLC, for
    $100, an option to purchase up to a total
    of          
    units (4% of the units sold). The units issuable upon exercise
    of this option are identical to those offered by this
    prospectus. This option is exercisable at
    $      per share
    (     % of the price of the shares sold
    in the offering), commencing on a date which is one year from
    the effective date of the registration statement and expiring
    five years from the effective date of the registration statement.
We estimate that the total fees and expenses payable by us,
    excluding underwriting discounts and commissions, will be
    approximately $     . The following
    table shows the underwriting fees to be paid to the underwriters
    by us in connection with this offering. These amounts are shown
    assuming both no exercise and full exercise of the
    underwriters' over-allotment option.
No Exercise
Full Exercise
Per share paid by us
Total
We have agreed to indemnify the underwriters against certain
    liabilities, including civil liabilities under the Securities
    Act, or to contribute to payments that the underwriters may be
    required to make in respect of those liabilities.
We and each of our directors, executive officers and
    substantially all of our stockholders have agreed to certain
    restrictions on the ability to sell additional shares of our
    common stock for a period ending 180 days after the date of
    this prospectus, subject to extension as described below. We and
    they have agreed not to directly or indirectly offer for sale,
    sell, contract to sell, grant any option for the sale of, or
    otherwise issue or dispose of, any shares of common stock,
    options or warrants to acquire shares of common stock, or any
    related security or instrument, without the prior written
    consent of Chardan Capital Markets, LLC on behalf of the
    underwriters, subject to certain exceptions.
The
lock-up
period described in the preceding paragraph will be extended
    if          ,
    in which case the
lock-up
period will be extended until the expiration of
    the  -day period beginning on the date of issuance of
    the earnings release or the occurrence of the material news or
    material event.
To facilitate the offering, the underwriters may engage in
    transactions that stabilize, maintain or otherwise affect the
    price of our common stock during and after the offering.
    Specifically, the underwriters may over-allot or otherwise
    create a short position in the common stock for their own
    account by selling more shares of common stock than have been
    sold to them by us. Short sales involve the sale by the
    underwriters of a greater number of shares than they are
    required to purchase in this offering. "Covered" short
    sales are sales made in an amount not greater than the
    underwriters' over-allotment option to purchase additional
    shares in this
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offering. The underwriters may close out any covered short
    position by either exercising their option to purchase
    additional shares or purchasing shares in the open market. In
    determining the source of shares to close out the covered short
    position, the underwriters will consider, among other things,
    the price of shares available for purchase in the open market as
    compared to the price at which they may purchase shares through
    the over-allotment option. "Naked" short sales are
    sales in excess of this option. The underwriters must close out
    any naked short position by purchasing shares in the open
    market. A naked short position is more likely to be created if
    the underwriters are concerned that there may be downward
    pressure on the price of the common stock in the open market
    after pricing that could adversely affect investors who purchase
    in this offering.
In addition, the underwriters may stabilize or maintain the
    price of the common stock by bidding for or purchasing shares of
    common stock in the open market and may impose penalty bids. If
    penalty bids are imposed, selling concessions allowed to
    syndicate members or other broker dealers participating in the
    offering are reclaimed if shares of common stock previously
    distributed in the offering are repurchased, whether in
    connection with stabilization transactions or otherwise. The
    effect of these transactions may be to stabilize or maintain the
    market price of the common stock at a level above that which
    might otherwise prevail in the open market. The imposition of a
    penalty bid may also effect the price of the common stock to the
    extent that it discourages resales of the common stock. The
    magnitude or effect of any stabilization or other transactions
    is uncertain. These transactions may be effected on The NASDAQ
    Capital Market or otherwise and, if commenced, may be
    discontinued at any time.
From time to time in the ordinary course of their respective
    business, certain of the underwriters and their affiliates may
    in the future engage in commercial banking or investment banking
    transactions with us and our affiliates.
DESCRIPTION
    OF CAPITAL STOCK
The following information describes our capital stock as well
    as certain provisions of our certificate of incorporation and
    bylaws. This description is only a summary. You should also
    refer to our certificate of incorporation and bylaws, which have
    been filed as exhibits to the registration statement of which
    this prospectus is a part.
Our authorized capital stock consists of 75,000,000 shares
    of common stock, $0.0001 par value per share, and
    10,000,000 shares of preferred stock, $0.0001 par
    value per share. As of September 4, 2009, we had
    20,412,708 shares of common stock and no shares of
    preferred stock outstanding.
Common
    Stock
Each outstanding share of common stock has one vote on all
    matters requiring a vote of the stockholders. There is no right
    to cumulative voting; thus, the holders of 50% or more of the
    shares outstanding can, if they choose to do so, elect all of
    the directors. In the event of a voluntary or involuntary
    liquidation, all stockholders are entitled to a
pro rata
distribution after payment of liabilities and after
    provision has been made for each class of stock, if any, having
    preference over the common stock. The holders of the common
    stock have no preemptive rights with respect to future offerings
    of shares of common stock.
Dividend
    Policy
We have not declared or paid any cash dividends and do not
    intend to pay any cash dividends in the foreseeable future. We
    intend to retain any future earnings for use in the operation
    and expansion of our business. Any future decision to pay cash
    dividends on common stock will be at the discretion of our board
    of directors and will depend upon our financial condition,
    results of operation, capital requirements and other factors our
    board of directors may deem relevant. Holders of common stock
    are entitled to dividends if, as and when declared by the Board
    out of the funds legally available therefor. It is our present
    intention to retain earnings, if any, for use in our business.
    The payment of cash dividends on the common stock included in
    the units is unlikely in the foreseeable future.
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Class H
    Warrants
Each Class H warrant entitles the holder to purchase one
    share of our common stock at a price of
    $      per share, subject to
    adjustment as discussed below, at any time commencing
    60 days after issuance. The Class H warrants will
    expire on December 31, 2014 at 5:00 p.m., New York
    City time. The Class H warrants are not redeemable.
The Class H warrants will be issued in registered form
    under a warrant agreement
    between          ,
    as warrant agent, and us. You should review a copy of the
    warrant agreement, which has been filed as an exhibit to the
    registration statement of which this prospectus is a part, for a
    complete description of the terms and conditions applicable to
    the Class H warrants.
The exercise price and number of shares of common stock issuable
    on exercise of the Class H warrants may be adjusted in
    certain circumstances including in the event of a stock
    dividend, or our recapitalization, reorganization, merger or
    consolidation. However, the Class H warrants will not be
    adjusted for issuances of common stock, preferred stock or other
    securities at a price below their respective exercise prices.
The Class H warrants may be exercised upon surrender of the
    warrant certificate on or prior to the expiration date at the
    offices of the warrant agent, with the exercise form on the
    reverse side of the warrant certificate completed and executed
    as indicated, accompanied by full payment of the exercise price,
    by certified check payable to us, for the number of Class H
    warrants being exercised. The Class H warrantholders do not
    have the rights or privileges of holders of common stock and any
    voting rights until they exercise their Class H warrants
    and receive shares of common stock. After the issuance of shares
    of common stock upon exercise of the Class H warrants, each
    holder will be entitled to one vote for each share held of
    record on all matters to be voted on by stockholders.
No Class H warrants will be exercisable unless at the time
    of exercise a prospectus relating to common stock issuable upon
    exercise of the Class H warrants is current and the common
    stock has been registered or qualified or deemed to be exempt
    under the securities laws of the state of residence of the
    holder of the Class H warrants. We will use our reasonable
    efforts to maintain a current prospectus relating to common
    stock issuable upon exercise of the Class H warrants until
    the expiration of the Class H warrants. However, we cannot
    assure you that we will be able to do so. The Class H
    warrants may be deprived of any value and the market for the
    Class H warrants may be limited if the prospectus relating
    to the common stock issuable upon the exercise of the
    Class H warrants is not current or if the common stock is
    not qualified or exempt from qualification in the jurisdictions
    in which the holders of the Class H warrants reside.
No fractional shares will be issued upon exercise of the
    Class H warrants. However, we will pay to the Class H
    warrantholder, in lieu of the issuance of any fractional share
    that is otherwise issuable to the Class H warrantholder, an
    amount in cash based on the market value of the common stock on
    the last trading day prior to the exercise date.
Purchase
    Option
We have agreed to sell to the representative of the underwriters
    an option to purchase up to a total
    of          
    units at a
per-unit
price of $     . For a more complete
    description of the purchase option, including the terms of the
    units underlying the option, see the section entitled
    "Underwriting — Purchase Option."
Other
    Warrants
Class B
    Warrants
General.
We have 4,932,438 Class B
    warrants outstanding. The Class B warrants may be exercised
    until the expiration date, which is February 13, 2012. Each
    Class B warrant entitles the holder to purchase one share
    of common stock at an exercise price of $11.00 per share.
    Accordingly, holders of the Class B warrants may currently
    purchase 1.276 shares of common stock for each warrant
    exercised, except for approximately 2.2 million
    Class B warrants that are owned by our bond holders, who
    may purchase one share of common stock for each warrant
    exercised. Accordingly, in the aggregate, holders of the
    Class B warrants may currently
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purchase a total of 6,177,012 shares of our common stock.
    The warrant exercise price will be adjusted if specific events,
    summarized below, occur. A holder of warrants will not be deemed
    a holder of the underlying stock for any purpose until the
    warrant is exercised. If at their expiration date the
    Class B warrants are not currently exercisable, the
    expiration date will be extended for 30 days following
    notice to the holders of the warrants that the warrants are
    again exercisable. If we cannot honor the exercise of
    Class B warrants and the securities underlying the warrants
    are listed on a securities exchange or if there are three
    independent market makers for the underlying securities, we may,
    but are not required to, settle the warrants for a price equal
    to the difference between the closing price of the underlying
    securities and the exercise price of the warrants. Because we
    are not required to settle the warrants by payment of cash, and
    because there is a possibility that warrant holders will not be
    able to exercise the warrants when they are
in-the-money
or otherwise, there is a risk that the warrants will never be
    settled in shares or payment of cash.
No Redemption.
The Class B warrants are
    non-redeemable.
Exercise.
The holders of the Class B
    warrants may exercise them only if an appropriate registration
    statement is then in effect. To exercise a warrant, the holder
    must deliver to our transfer agent the warrant certificate on or
    before the expiration date or the redemption date, as
    applicable, with the form on the reverse side of the certificate
    executed as indicated, accompanied by payment of the full
    exercise price for the number of warrants being exercised.
    Fractional shares of common stock will not be issued upon
    exercise of the warrants.
Class C
    Warrants and Class D Warrants
General:
In connection with our financing
    completed in May 2009, we issued Class C warrants to
    purchase an aggregate of 885,000 shares of common stock and
    Class D warrants to purchase an aggregate of
    415,000 shares of common stock. The Class C warrants
    and Class D warrants both expire in May 2014. The initial
    exercise prices of the Class C warrants and Class D
    warrants were $1.00 per share and $1.50 per share, respectively.
    The warrants are subject to anti-dilution rights, which provide
    that the exercise price of the warrants shall be reduced if we
    make new issuances of our securities, with certain exceptions,
    below the warrants exercise prices to the price of such lower
    priced issuances. Pursuant to such provision, the exercise price
    of the Class D warrants has been reduced to and is
    currently at $1.02 per share. The Class C warrants and
    Class D warrants are non-redeemable. The warrant holders
    are entitled to a "cashless exercise" option if, at
    any time of exercise, there is no effective registration
    statement registering, or no current prospectus available for,
    the resale of the shares of common stock underlying the
    warrants. This option entitles the warrant holders to elect to
    receive fewer shares of common stock without paying the cash
    exercise price. The number of shares to be issued would be
    determined by a formula based on the total number of shares with
    respect to which the warrant is being exercised, the volume
    weighted average price per share of our common stock on the
    trading date immediately prior to the date of exercise and the
    applicable exercise price of the warrants.
Fundamental Transaction
s:  If, at any time
    while the warrants are outstanding, we (1) effect any
    merger or consolidation, (2) effect any sale of all or
    substantially all of our assets, (3) are subject to or
    complete a tender offer or exchange offer, (4) effect any
    reclassification of our common stock or any compulsory share
    exchange pursuant to which our common stock is converted into or
    exchanged for other securities, cash or property, or
    (5) engage in one or more transactions with another party
    that results in that party acquiring more than 50% of our
    outstanding shares of common stock, each, a "Fundamental
    Transaction," then the holder shall have the right
    thereafter to receive, upon exercise of the warrant, the same
    amount and kind of securities, cash or property as it would have
    been entitled to receive upon the occurrence of such Fundamental
    Transaction if it had been, immediately prior to such
    Fundamental Transaction, the holder of the number of shares then
    issuable upon exercise of the warrant, and any additional
    consideration payable as part of the Fundamental Transaction.
    Any successor to us or surviving entity shall assume the
    obligations under the warrant.
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Class E
    Warrants and Class F Warrants
General:
In connection with our financings
    completed in May 2009 and July 2009, we issued Class E
    warrants to purchase an aggregate of 1,500,000 shares of
    our common stock and Class F warrants to purchase
    585,000 shares of our common stock. The Class E
    warrants and Class F warrants expire in May 2014 and July
    2014, respectively.
The warrant holders are entitled to a "cashless
    exercise" option if, at any time of exercise, there is no
    effective registration statement registering, or no current
    prospectus available for, the issuance or resale of the shares
    of common stock underlying the warrants. This option entitles
    the warrant holders to elect to receive fewer shares of common
    stock without paying the cash exercise price. The number of
    shares to be issued would be determined by a formula based on
    the total number of shares with respect to which the warrant is
    being exercised, the volume weighted average price per share of
    our common stock on the trading date immediately prior to the
    date of exercise and the applicable exercise price of the
    warrants.
Call Provision:
Subject to certain exceptions,
    if the volume weighted average price per share of our common
    stock for each of five consecutive trading days exceeds $2.10
    (subject to adjustment for forward and reverse stock splits,
    recapitalizations, stock dividends and the like), then we may,
    within one trading day of the end of such period, call for
    cancellation of all or any portion of the unexercised warrants
    for consideration equal to $.001 per share.
Fundamental Transaction:
If, at any time while
    the warrants are outstanding, we (1) consolidate or merge
    with or into another corporation, (2) sell all or
    substantially all of our assets or (3) are subject to or
    complete a tender or exchange offer pursuant to which holders of
    our common stock are permitted to tender or exchange their
    shares for other securities, cash or property, (4) effect
    any reclassification of our common stock or any compulsory share
    exchange pursuant to which our common stock is converted into or
    exchanged for other securities, cash or property, or
    (5) engage in one or more transactions with another party
    that results in that party acquiring more than 50% of our
    outstanding shares of common stock, each, a "Fundamental
    Transaction," then the holder shall have the right
    thereafter to receive, upon exercise of the warrant, the same
    amount and kind of securities, cash or property as it would have
    been entitled to receive upon the occurrence of such Fundamental
    Transaction if it had been, immediately prior to such
    Fundamental Transaction, the holder of the number of warrant
    shares then issuable upon exercise of the warrant, and any
    additional consideration payable as part of the Fundamental
    Transaction. Any successor to us or surviving entity shall
    assume the obligations under the warrant.
Class G
    Warrants
General:
In connection with our financing
    completed in September 2009, we issued Class G warrants to
    purchase an aggregate of 2,500,000 shares of common stock.
    The Class G warrants expire in September 2014. The initial
    exercise price of the Class G warrants is $1.25 per share.
    The warrants are subject to anti-dilution rights, which provide
    that the exercise price of the warrants be reduced if we make
    new issuances of our securities, with certain exceptions, below
    the warrant exercise price to the price of the lower priced
    securities; provided that without stockholder approval, the
    exercise price may not be reduced below $1.08 per share. The
    Class G warrants are non-redeemable. The warrant holders
    are entitled to a "cashless exercise" option if, at
    any time of exercise, there is no effective registration
    statement registering, or no current prospectus available for,
    the resale of the shares of common stock underlying the
    warrants. This option entitles the warrant holders to elect to
    receive fewer shares of common stock without paying the cash
    exercise price. The number of shares to be issued would be
    determined by a formula based on the total number of shares with
    respect to which the warrant is being exercised, the volume
    weighted average price per share of our common stock on the
    trading date immediately prior to the date of exercise and the
    applicable exercise price of the warrants.
Fundamental Transaction
s:  If, at any time
    while the warrants are outstanding, we (1) effect any
    merger or consolidation, (2) effect any sale of all or
    substantially all of our assets, (3) are subject to or
    complete a tender offer or exchange offer, (4) effect any
    reclassification of our common stock or any compulsory share
    exchange pursuant to which our common stock is converted into or
    exchanged for other securities, cash or property, or
    (5) engage in one or more transactions with another party
    that results in that party acquiring more
58
Table of Contents
than 50% of our outstanding shares of common stock, each, a
    "Fundamental Transaction," then the holder shall have
    the right thereafter to receive, upon exercise of the warrant,
    the same amount and kind of securities, cash or property as it
    would have been entitled to receive upon the occurrence of such
    Fundamental Transaction if it had been, immediately prior to
    such Fundamental Transaction, the holder of the number of shares
    then issuable upon exercise of the warrant, and any additional
    consideration payable as part of the Fundamental Transaction.
    Any successor to us or surviving entity shall assume the
    obligations under the warrant.
IPO
    Underwriter's Warrants
In connection with our initial public offering, we issued to the
    underwriter warrants to purchase 131,219 units, consisting
    of 131,219 shares of our common stock, 131,219 Class A
    warrants and 131,219 Class B warrants. The
    underwriter's warrants are exercisable for units until
    February 13, 2012. However, neither the underwriter's
    warrants nor the underlying securities may be sold, transferred,
    assigned, pledged or hypothecated, or be the subject of any
    hedging, short sale, derivative, put or call transaction that
    would result in the effective economic disposition of the
    securities by any person, except to any member participating in
    the offering and the officers or partners thereof, and only if
    all securities so transferred remain subject to the one-year
lock-up
restriction for the remainder of the
lock-up
period. We are obligated to cause a registration statement to
    remain effective until the earlier of February 13, 2012 and
    the time that all the underwriter's warrants have been
    exercised, or will file a new registration statement covering
    the exercise and resale of these securities. If we cannot honor
    the exercise of the underwriter's warrants and the
    securities underlying the warrants are listed on a securities
    exchange or if there are three independent market makers for the
    underlying securities, we may, but are not required to, settle
    the underwriters' warrants for a price equal to the
    difference between the closing price of the underlying
    securities and the exercise price of the warrants. Because we
    are not required to settle the representative's warrants by
    payment of cash, it is possible that the underwriter's
    warrants will never be settled in shares or payment of cash. The
    common stock and public warrants issued to the underwriter upon
    exercise of these underwriter's warrants will be freely
    tradable.
Preferred
    Stock
Our Board of Directors is authorized by our Certificate of
    Incorporation to establish classes or series of preferred stock
    and fix the designation, powers, preferences and rights of the
    shares of each such class or series and the qualifications,
    limitations or restrictions thereof without any further vote or
    action by our stockholders. Any shares of preferred stock so
    issued would have priority over our common stock with respect to
    dividend or liquidation rights. Any future issuance of preferred
    stock may have the effect of delaying, deferring or preventing a
    change in our control without further action by our stockholders
    and may adversely affect the voting and other rights of the
    holders of our common stock. At present we have no plans to
    issue any additional shares of preferred stock or to adopt any
    new series, preferences or other classification of preferred
    stock.
The issuance of shares of preferred stock, or the issuance of
    rights to purchase such shares, could be used to discourage an
    unsolicited acquisition proposal. For instance, the issuance of
    a series of preferred stock might impede a business combination
    by including class voting rights that would enable a holder to
    block such a transaction. In addition, under certain
    circumstances, the issuance of preferred stock could adversely
    affect the voting power of holders of our common stock. Although
    our Board of Directors is required to make any determination to
    issue preferred stock based on its judgment as to the best
    interests of our stockholders, our Board could act in a manner
    that would discourage an acquisition attempt or other
    transaction that some, or a majority, of our stockholders might
    believe to be in their best interests or in which such
    stockholders might receive a premium for their stock over the
    then market price of such stock. Our Board presently does not
    intend to seek stockholder approval prior to the issuance of
    currently authorized stock, unless otherwise required by law or
    applicable stock exchange rules.
59
Table of Contents
2006
    Stock Option Plan
Our 2006 Stock Option Plan, or the Plan, currently authorizes
    the grant of up to 1,666,667 shares, and the Plan provides
    an "evergreen provision" pursuant to which the number
    of shares issuable under the Plan will be automatically
    increased on January 1 of each year to an amount equal to 20% of
    the number of shares of our common stock outstanding on the last
    day of the prior fiscal year. Under the Plan, we may issue
    restricted stock awards, incentive stock option grants and
    non-qualified stock option grants. Employees and, in the case of
    nonqualified stock options, directors, consultants or any
    affiliate are eligible to receive grants under our Plan. As of
    September 4, 2009, there were outstanding options to
    purchase 1,248,895 shares under our Plan.
Anti-Takeover
    Effects of Certain Provisions of Delaware Law and Our
    Certificate of Incorporation and Bylaws
Our Certificate of Incorporation and Bylaws contain a number of
    provisions that could make our acquisition by means of a tender
    or exchange offer, a proxy contest or otherwise more difficult.
    These provisions are summarized below.
Staggered Board.
Staggered terms tend to
    protect against sudden changes in management and may have the
    effect of delaying, deferring or preventing a change in our
    control without further action by our stockholders. Our Board of
    Directors is divided into three classes, with one class of
    directors elected at each year's annual stockholder meeting.
Special Meetings.
Our Bylaws provide that
    special meetings of stockholders can be called by the President,
    at the request of a majority of the Board of Directors or at the
    written request of holders of at least 50% of the shares
    outstanding and entitled to vote.
Undesignated Preferred Stock.
The ability to
    authorize the issuance of our undesignated preferred stock makes
    it possible for our Board of Directors to issue preferred stock
    with voting or other rights or preferences that could impede the
    success of any attempt to acquire us. The ability to issue
    preferred stock may have the effect of deferring hostile
    takeovers or delaying changes in our control or management.
Delaware Anti-Takeover Statute.
We are subject
    to the provisions of Section 203 of the Delaware General
    Corporation Law regulating corporate takeovers. In general,
    Section 203 prohibits a publicly-held Delaware corporation
    from engaging under certain circumstances in a business
    combination with an interested stockholder for a period of three
    years following the date the person became an interested
    stockholder unless:
•
Prior to the date of the transaction, the board of directors of
    the corporation approved either the business combination or the
    transaction which resulted in the stockholder becoming an
    interested stockholder.
•
Upon completion of the transaction that resulted in the
    stockholder becoming an interested stockholder, the stockholder
    owned at least 85% of the voting stock of the corporation
    outstanding at the time the transaction commenced, excluding for
    purposes of determining the number of shares outstanding
    (1) shares owned by persons who are directors and also
    officers and (2) shares owned by employee stock plans in
    which employee participants do not have the right to determine
    confidentially whether shares held subject to the plan will be
    tendered in a tender or exchange offer.
•
On or subsequent to the date of the transaction, the business
    combination is approved by the board and authorized at an annual
    or special meeting of stockholders, and not by written consent,
    by the affirmative vote of at least
    66
2
/
3
%
    of the outstanding voting stock which is not owned by the
    interested stockholder.
Generally, a business combination includes a merger, asset or
    stock sale, or other transaction resulting in a financial
    benefit to the interested stockholder. An interested stockholder
    is a person who, together with affiliates and associates, owns
    or, within three years prior to the determination of interested
    stockholder status, did own 15% or more of a corporation's
    outstanding voting securities. We expect the existence of this
    provision to have an anti-takeover effect with respect to
    transactions our Board of Directors does not approve
60
Table of Contents
in advance. We also anticipate that Section 203 may also
    discourage attempted acquisitions that might result in a premium
    over the market price for the shares of common stock held by
    stockholders.
The provisions of Delaware law, our Certificate of Incorporation
    and our Bylaws could have the effect of discouraging others from
    attempting hostile takeovers and, as a consequence, they may
    also inhibit temporary fluctuations in the market price of our
    common stock that often result from actual or rumored hostile
    takeover attempts. These provisions may also have the effect of
    preventing changes in our management. It is possible that these
    provisions could make it more difficult to accomplish
    transactions that stockholders may otherwise deem to be in their
    best interests.
Limitation
    of Officer and Director Liability
The Delaware General Corporation Law authorizes corporations to
    limit or eliminate the personal liability of officers and
    directors to corporations and their stockholders for monetary
    damages for breach of the officers' and directors'
    fiduciary duty of care. Although the law does not change the
    officers' and directors' duty of care, it enables
    corporations to limit available relief in most cases to
    equitable remedies such as an injunction. Our certificate of
    incorporation limits the liability of officers and directors to
    us or our stockholders to the fullest extent permitted by
    applicable law. Specifically, our officers and directors will
    not be personally liable to us or our stockholders for monetary
    damages for breach of an officer's or a director's
    fiduciary duty as an officer or a director, as applicable,
    except for liability:
•
for any breach of the officer's or director's duty of
    loyalty to us or our stockholders;
•
for acts or omissions not in good faith or which involve
    intentional misconduct or a knowing violation of law;
•
for unlawful payments of dividends or unlawful stock repurchases
    or redemptions as provided in Section 174 of the
    DGCL; or
•
for any transaction from which the officer or director derived
    an improper personal benefit.
Indemnification
To the maximum extent permitted by law, our bylaws provide for
    mandatory indemnification of directors and permit
    indemnification of our employees and agents against all expense,
    liability and loss to which they may become subject or which
    they may incur as a result of being or having been our director,
    officer, employee or agent. In addition, we must advance or
    reimburse directors and officers, and may advance or reimburse
    employees and agents, for expenses incurred by them as a result
    of indemnifiable claims.
Transfer
    Agent, Warrant Agent and Registrar
The transfer agent and registrar for our common stock and
    warrant agent for our public warrants is Computershare
    Shareholder Services, Inc., and its wholly owned subsidiary,
    Computershare Trust Company, N.A., 250 Royall Street,
    Canton, Massachusetts 02021.
Listing
Our common stock and Class B warrants are listed on the
    NASDAQ Capital Market under the trading symbols "COIN"
    and "COINZ," respectively. We intend to apply to list
    our Class H warrants on the NASDAQ Capital Market under the
    trading symbol
    "          ."
LEGAL
    MATTERS
The validity of the securities offered in this prospectus is
    being passed upon for us by Cozen O'Connor. Mintz Levin
    Cohn Ferris Glovsky and Popeo, P.C. is acting as counsel
    for the underwriters in this offering.
61
Table of Contents
EXPERTS
The consolidated financial statements as of December 31,
    2008 and 2007 and for each of the two years then ended, included
    in this prospectus have been audited by CCR LLP, independent
    registered public accountants, to the extent set forth in their
    report appearing herein. Such consolidated financial statements
    have been so included in reliance upon the report of such firm
    given upon their authority as experts in accounting and auditing.
WHERE YOU
    CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1
with the SEC with respect to the units, common stock and
    Class H warrants we are offering by this prospectus. This
    prospectus does not include all of the information contained in
    the registration statement. You should refer to the registration
    statement and its exhibits for additional information. Whenever
    we make reference in this prospectus to any of our contracts,
    agreements or other documents, the references are not
    necessarily complete and you should refer to the exhibits
    attached to the registration statement for copies of the actual
    contract, agreement or other document. We are subject to the
    information reporting requirements of the Securities Exchange
    Act of 1934, and accordingly we are required to file annual,
    quarterly and special reports, proxy statements and other
    information with the SEC.
You can read our SEC filings, including the registration
    statement, on the Internet at the SEC's website at
www.sec.gov
. You can also read and copy any document we
    file with the SEC at its public reference room at
    100 F Street, N.E., Washington, D.C. 20549. You
    can also obtain copies of the documents at prescribed rates by
    writing to the Public Reference Section of the SEC at
    100 F Street, N.E., Washington, D.C. 20549.
    Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
    room.
62
CONVERTED
    ORGANICS INC.
INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public
    Accounting Firm
F-1
Consolidated Balance Sheets at December 31,
    2008 and 2007
F-2
Consolidated Statements of Operations for the
    years ended December 31, 2008 and 2007
F-3
Consolidated Statements of Changes in
    Owners' Equity (Deficit) for the years ended
    December 31, 2008 and 2007
F-4
Consolidated Statements of Cash Flows for the
    years ended December 31, 2008 and 2007
F-5
Notes to Consolidated Financial Statements
F-6
Consolidated Balance Sheets at June 30, 2009
    (unaudited) and December 31, 2008 (audited)
F-32
Consolidated Statements of Operations for the
    three and six month periods ended June 30, 2009 and 2008
    (unaudited)
F-33
Consolidated Statement of Changes in Owners'
    Equity (Deficit) for the six month period ended June 30,
    2009 (unaudited)
F-34
Consolidated Statements of Cash Flows for the six
    month periods ended June 30, 2009 and 2008 (unaudited)
F-35
Notes to Consolidated Interim Financial
    Statements (unaudited)
F-36
63
Table of Contents
REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Converted Organics
    Inc.
We have audited the accompanying consolidated balance sheets of
    Converted Organics Inc. (the "Company") as of
    December 31, 2008 and 2007, and the related consolidated
    statements of operations, changes in owners' equity
    (deficit) and cash flows for the years then ended. These
    consolidated financial statements are the responsibility of the
    Company's management. Our responsibility is to express an
    opinion on these consolidated financial statements based on our
    audits.
We conducted our audits in accordance with the standards of the
    Public Company Accounting Oversight Board (United States). Those
    standards require that we plan and perform the audits to obtain
    reasonable assurance about whether the consolidated financial
    statements are free of material misstatement. The Company is not
    required to have, nor were we engaged to perform, an audit of
    its internal control over financial reporting. Our audits
    included consideration of internal control over financial
    reporting as a basis for designing audit procedures that are
    appropriate in the circumstances, but not for the purpose of
    expressing an opinion on the effectiveness of the Company's
    internal control over financial reporting. Accordingly, we
    express no such opinion. An audit includes examining, on a test
    basis, evidence supporting the amounts and disclosures in the
    consolidated financial statements, assessing the accounting
    principles used and significant estimates made by management, as
    well as evaluating the overall financial statement presentation.
    We believe that our audits provide a reasonable basis for our
    opinion.
In our opinion, the consolidated financial statements referred
    to above present fairly, in all material respects, the financial
    position of Converted Organics Inc. as of December 31, 2008
    and 2007, and the results of their operations and their cash
    flows for the years then ended, in conformity with accounting
    principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been
    prepared assuming that the Company will continue as a going
    concern. As shown in the accompanying consolidated financial
    statements, the Company has incurred a net loss of approximately
    $16.2 million during the year ended December 31, 2008,
    has a working capital deficiency as of December 31, 2008
    and an accumulated deficit of approximately $26.6 million.
    These factors raise substantial doubt about the Company's
    ability to continue as a going concern. Management's plans
    in regards to these matters are described in Note 2. These
    consolidated financial statements do not include any adjustments
    that might result from the outcome of this uncertainty.
/s/
CCR
    LLP
Glastonbury, Connecticut
March 27, 2009
F-1
Table of Contents
Item 8.
Financial
    Statements
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    BALANCE SHEETS
December 31,
December 31,
2008
2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
3,357,940
$
287,867
Restricted cash
2,547,557
2,590,053
Accounts receivable, net
313,650
—
Inventories
289,730
—
Prepaid rent
389,930
190,600
Other prepaid expenses
73,937
40,282
Deposits
141,423
—
Other receivables
94,250
55,450
Deferred financing and issuance costs, net
22,042
—
Total current assets
7,230,459
3,164,252
Deposits
912,054
554,978
Restricted cash
60,563
12,006,359
Property and equipment, net
19,725,146
—
Construction-in-progress
974,900
4,947,067
Capitalized bond costs, net
862,010
909,679
Intangible assets, net
2,852,876
585,750
Deferred financing and issuance costs, net
—
8,642
Total assets
$
32,618,008
$
22,176,727
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Term notes payable — current
$
89,170
$
375,000
Accounts payable
3,583,030
898,270
Accrued compensation — officers, directors and
    consultants
430,748
397,781
Accrued legal and other expenses
164,620
199,261
Accrued interest
601,166
630,890
Convertible notes payable, net of unamortized discount
4,602,660
—
Mortgage payable, current
3,006
—
Total current liabilities
9,474,400
2,501,202
Term note payable, net of current portion
—
89,170
Mortgage payable, net of current portion
245,160
—
Convertible note payable, net of current portion
351,516
—
Bonds payable
17,500,000
17,500,000
Total liabilities
27,571,076
20,090,372
COMMITMENTS 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
    40,000,000 shares; 7,431,436 and 4,229,898 shares
    issued and outstanding at December 31, 2008 and
    December 31, 2007
743
423
Additional paid-in capital
31,031,647
12,460,357
Member's equity
619,657
—
Accumulated deficit
(26,605,115
)
(10,374,425
)
Total owners' equity
5,046,932
2,086,355
Total liabilities and owners' equity
$
32,618,008
$
22,176,727
The accompanying notes are an integral part of these
    consolidated financial statements.
F-2
Table of Contents
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    STATEMENTS OF OPERATIONS
Year Ended
December 31,
December 31,
2008
2007
Revenues
$
1,547,981
$
—
Cost of goods sold
1,981,084
—
Gross loss
(433,103
)
—
Operating expenses
General and administrative expenses
9,309,976
3,009,678
Research and development
375,267
648,664
Amortization of license and intangible assets
263,387
16,500
Loss from operations
(10,381,733
)
(3,674,842
)
Other income/(expenses)
Interest income
290,125
824,466
Other income
146,677
—
Amortization of capitalized costs
(399,269
)
(62,429
)
Interest expense
(5,834,898
)
(1,171,207
)
(5,797,365
)
(409,170
)
Loss before provision for income taxes
(16,179,098
)
(4,084,012
)
Provision for income taxes
—
—
Net loss
(16,179,098
)
(4,084,012
)
Net loss per share, basic and diluted
$
(2.70
)
(0.87
)
Weighted average common shares outstanding
5,985,017
4,716,378
The accompanying notes are an integral part of these
    consolidated financial statements.
F-3
Table of Contents
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    STATEMENTS OF CHANGES IN OWNERS' EQUITY (DEFICIT)
Years
    Ended December 31, 2008 and 2007
Common Stock
Total
Shares Issued
Additional
Owners'
and
Paid-in
Member's
Accumulated
Equity
Outstanding
Amount
Capital
Equity
Deficit
(Deficit)
Balance, December 31, 2006
1,333,333
$
133
$
4,113,385
$
—
$
(6,290,413
)
$
(2,176,895
)
Issuance of common stock and warrants in connection with the
    Company's initial public offering, net of issuance costs of
    $1,736,715
1,800,000
180
8,163,105
—
—
8,163,285
Common stock and warrants issued in connection with bridge units
293,629
29
(29
)
—
—
—
Common stock issued in connection with extension of bridge
    financing
55,640
6
178,042
—
—
178,048
Issuance of stock options
—
—
5,929
—
—
5,929
Stock dividends
747,296
75
(75
)
—
—
—
Net loss
—
—
—
—
(4,084,012
)
(4,084,012
)
Balance, December 31, 2007
4,229,898
423
12,460,357
—
(10,374,425
)
2,086,355
Consolidation of variable interest entity
—
—
—
23,965
—
23,965
Common stock issued upon exercise of warrants
1,780,506
178
11,435,476
—
—
11,435,654
Common stock issued upon exercise of options
143,000
14
536,236
—
—
536,250
Common stock issued for services rendered
45,480
5
212,614
—
—
212,619
Warrants issued in connection with financings, net of
    cancellations
—
—
1,113,750
—
—
1,113,750
Beneficial conversion features on convertible notes
—
—
2,943,386
—
—
2,943,386
Stock dividends
1,232,552
123
(123
)
—
—
—
Issuance of stock options
—
—
2,329,951
—
—
2,329,951
Member's contributions
—
—
—
544,100
—
544,100
Net income (loss)
—
—
—
51,592
(16,230,690
)
(16,179,098
)
Balance, December 31, 2008
7,431,436
$
743
$
31,031,647
$
619,657
$
(26,605,115
)
$
5,046,932
The accompanying notes are an integral part of these
    consolidated financial statements.
F-4
Table of Contents
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    STATEMENTS OF CASH FLOWS
Years Ended
December 31,
December 31,
2008
2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(16,179,098
)
$
(4,084,012
)
Adjustments to reconcile net loss to net cash used in operating
    activities:
Consolidation of variable interest entity
6,164
—
Amortization of intangible asset — license
16,500
16,500
Amortization of other intangible assets
246,887
—
Amortization of capitalized bond costs
47,669
43,696
Amortization of deferred financing fees
331,600
18,733
Depreciation and amortization of property and equipment
411,843
—
Amortization of beneficial conversion features
2,712,009
—
Amortization of discounts on private financing
1,563,750
—
Stock option compensation expense
2,329,951
5,929
Stock issued for services rendered
212,619
—
Forgiveness of debt and accrued interest
(146,677
)
—
Loss on sale of fixed asset
176
—
Stock issued for extension of bridge financing
—
178,048
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable
(284,948
)
—
Inventories
(278,616
)
—
Prepaid expenses and other current assets
(242,983
)
(144,329
)
Other assets
(38,800
)
—
Deposits
(507,500
)
(350,000
)
Increase (decrease) in:
Accounts payable and other accrued expenses
2,425,206
71,191
Accrued compensation — officers, directors and
    consultants
32,967
97,781
Accrued interest
(8,048
)
488,271
Other
25,000
—
Net cash used in operating activities
(7,324,329
)
(3,658,192
)
CASH FLOWS FROM INVESTING ACTIVITIES
Release of restricted cash
11,988,292
6,050,199
Cash paid for acquisitions
(1,500,000
)
—
Purchase of property and equipment
(14,233,823
)
—
Proceeds from sale of fixed assets
24,000
—
Capitalized interest
(72,438
)
(403,572
)
Construction costs
(902,462
)
(4,543,495
)
Restrictions of cash
—
(20,646,611
)
Deposit on license
—
(139,978
)
Net cash used in investing activities
(4,696,431
)
(19,683,457
)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of warrants
11,435,654
—
Proceeds from private financing, net of original issue discount
3,715,000
—
Net proceeds from exercise of options
536,250
—
Member's contributions
544,100
—
Payments made for deferred issuance costs
—
(42,916
)
Payments made on mortgage payable
(6,124
)
—
Repayment of term notes issued for acquisition
(814,447
)
—
Net proceeds from bond financing
—
16,546,625
Net proceeds from initial public offering of stock
—
8,859,784
Proceeds from term notes
—
89,170
Repayment of term notes
(250,000
)
(125,000
)
Repayment of demand notes
(69,600
)
(250,000
)
Repayment of bridge loan
—
(1,515,000
)
Net cash provided by financing activities
15,090,833
23,562,663
NET INCREASE IN CASH
3,070,073
221,014
CASH AND CASH EQUIVALENTS,  beginning of period
287,867
66,853
CASH AND CASH EQUIVALENTS, end of period
$
3,357,940
$
287,867
Supplemental cash flow information:
Cash paid during the period for:
Interest
$
5,864,622
$
908,456
Non-cash financing activities:
Financing costs paid from proceeds of private financing
$
335,000
$
—
Issuance costs paid from proceeds of initial public offering
—
1,040,216
Issuance costs paid from proceeds of bond financing
—
953,375
Beneficial conversion discount on convertible notes
2,943,386
—
Warrants issued in connection with financing
1,113,750
—
The accompanying notes are an integral part of these
    consolidated financial statements.
F-5
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 —
NATURE
    OF OPERATIONS
Converted Organics Inc. (the "Company") uses food and
    other waste as a raw material to manufacture, sell and
    distribute all-natural soil amendment products combining disease
    suppression and nutrition characteristics. The Company
    transitioned from a development stage company to an operating
    company in the second quarter of 2008 as operations commenced
    and the Company has approximately $1.5 million in revenue
    for the year ended December 31, 2008. The Company's
    revenues come from two sources: tip fees and product sales.
    Waste haulers pay the Company "tip" fees for accepting
    food waste generated by food distributors such as grocery
    stores, produce docks and fish markets, food processors, and
    hospitality venues such as hotels, restaurants, convention
    centers and airports. Revenue also comes from the sale of the
    Company's fertilizer products. The Company's products
    possess a combination of nutritional, disease suppression and
    soil amendment characteristics.
Converted Organics of California, LLC, ("California")
    a California limited liability company and
wholly-owned
subsidiary of the Company, was formed when the Company acquired
    the assets of United Organics Products, LLC. The California
    plant is located in Gonzales, California, in the Salinas Valley.
    California produces approximately 25 tons of organic fertilizer
    per day, and sells primarily to the California agricultural
    market. The California facility employs a proprietary method
    called High Temperature Liquid Composting ("HTLC").
    The facility is currently being upgraded to expand its capacity
    and to enable it to accept larger amounts of food waste from
    waste haulers, thereby increasing tip fee revenue.
The Company's second facility, located in Woodbridge, New
    Jersey ("Woodbridge"), is designed to service the New
    York-Northern New Jersey metropolitan area. The Company
    constructed this facility and it became partially operational in
    the second quarter of 2008. Converted Organics of Woodbridge,
    LLC, a New Jersey limited liability company and wholly
    owned subsidiary of the Company, was formed for the purpose of
    owning, constructing and operating the Woodbridge, New Jersey
    facility.
Converted Organics of Rhode Island, LLC ("Rhode Island), a
    Rhode Island limited liability company and subsidiary of the
    Company, was formed for the purpose of developing a facility at
    the Rhode Island central landfill.
NOTE 2 —
MANAGEMENT'S
    PLAN OF OPERATION
The Company currently has manufacturing capabilities in its
    Woodbridge and Gonzales facilities as a means to generate
    revenues and cash, although neither facility is currently
    generating positive cash flow from operations. If the remaining
    $3.6 million of convertible debentures from the
    Company's 2008 Financing is converted into shares of common
    stock, the Company believes the release of $2.0 million of
    escrowed funds by the holders of the NJEDA bonds (Note 18),
    along with the cash from estimated sales from the Woodbridge and
    Gonzales facilities will provide enough working capital until
    the upgrades to the Woodbridge facility are complete and until
    the Company holds a shareholder vote to allow an investor
    (Note 18) to purchase $1,500,000 of convertible term
    notes assuming they receive such approval and achieve the
    $750,000 sales level by May 31, 2009; and provided that the
    Company is able to come to agreements with its construction
    vendors allowing them to delay payments to such vendors. If the
    Company obtains shareholder approval for the purchase of the
    convertible term notes but does not achieve the required sales
    level from Woodbridge and Gonzales, the Company will need to
    seek additional sources of working capital. Currently the
    Company estimates that the monthly breakeven sales for the
    Gonzales and Woodbridge facilities is in the range of $600,000
    to $750,000 and in addition current cash requirement at the
    corporate level is in a range of $250,000 to $300,000 per month
    for a total monthly cash requirement in the range of $850,000 to
    $1,050,000. The Company plans to produce, at Gonzales and
    Woodbridge, sufficient product to generate sales in the range of
    $1,050,000 to $1,550,000. Cash for use as working capital at the
    corporate level would not be available from operations until the
    Company achieved such monthly breakeven sales levels. If
    shareholder approval is received for the issuance of the
    convertible notes the Company would have to achieve breakeven
    sales levels
F-6
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
by July 31, 2009 or the proceeds of the notes would not
    provide sufficient working capital for operations and if
    shareholder approval is not obtained and breakeven sales levels
    are not achieved, the Company will not have sufficient working
    capital to operate past May 31, 2009. Based on 2009 sales
    as of the date of this report, the Company will need to increase
    sales volumes to achieve such break even sales levels, and there
    is no assurance that such efforts will be successful.
During this period of limited cash availability the company
    plans to lower costs in the administrative areas and to
    concentrate on production in both Woodbridge and Gonzales. In
    addition they will also have to curtail certain production and
    sales costs until sales orders begin to increase to the desired
    levels; most notably, the Company will have to limit the
    production of product to two variations of liquid and dry
    product and the desired sales level will have to be derived from
    those products.
The Company does not have any commitments for additional equity
    or debt funding and there is no assurance that capital in any
    form would be available and, if available, on terms and
    conditions that are acceptable. Moreover, the Company is not
    permitted to borrow any future funds unless they obtain the
    consent of the bondholders of the New Jersey Economic
    Development Bond. The Company has obtained such consent for
    prior financing, but there is no guarantee that they can obtain
    such consent in the future.
NOTE 3 —
SIGNIFICANT
    ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the
    transactions and balances of Converted Organics Inc. and its
    subsidiaries, Converted Organics of Woodbridge, LLC, Converted
    Organics of California, LLC, and Converted Organics of Rhode
    Island, LLC. The transactions and balances of Valley Land
    Holdings, LLC, a variable interest entity, have also been
    consolidated therein. All intercompany transactions and balances
    have been eliminated in consolidation.
DEVELOPMENT
    STAGE COMPANY
Until the second quarter of 2008, the Company was a development
    stage company as defined by Statement of Financial Accounting
    Standards (SFAS) No. 7,
"Accounting and Reporting
    by Development Stage Enterprises"
, as it had no
    principal operations or significant revenue. During the second
    quarter of 2008, the Company's California facility was
    operating near capacity and recognized revenue from the sale of
    its product. Also during the second quarter of 2008, the tip
    floor of the New Jersey facility commenced operations and began
    to accept food waste on a limited basis. During the second half
    of 2008, operations have increased at both facilities, and the
    Company is no longer a development stage company.
VARIABLE
    INTEREST ENTITY
The consolidated financial statements include Valley Land
    Holdings, LLC ("VLH"), as VLH has been deemed to be a
    variable interest entity of the Company as it is the primary
    beneficiary of that variable interest entity following the
    acquisition of the net assets of United Organic Products, LLC
    (Note 4). VLH's assets and liabilities consist
    primarily of cash, land and a mortgage note payable on the land
    on which the California facility is located. Its operations
    consist of rental income on the land from the Company and
    related operating expenses. VLH's activities support the
    operations of the California facility and do not have sufficient
    equity at risk to remain viable without the support of the
    Company.
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
F-7
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
the reported amounts and disclosures in the consolidated
    financial statements. Actual results could differ from those
    estimates.
CASH
    AND CASH EQUIVALENTS
The Company considers financial instruments with an original
    maturity date of three months or less from the date of purchase
    to be cash equivalents. The Company had cash equivalents of
    $534,800 and $0 at December 31, 2008 and December 31,
    2007, respectively, consisting of certificates of deposit. These
    certificates of deposit are held by VLH.
RESTRICTED
    CASH
As of December 31, 2008 and 2007, the Company had remaining
    approximately $2,608,000 and $14,596,000, respectively, of cash
    which is restricted under its bond agreement (Note 11).
    This cash was raised by the Company in its initial public
    offering and bond financing on February 16, 2007 and is set
    aside in three separate accounts at December 31, 2008 and
    2007, consisting of $34,000 and $10,032,000, respectively, for
    the construction of the Woodbridge operating facility; $8,000
    and $1,541,000, respectively, for the working capital
    requirements of the Woodbridge subsidiary while the facility is
    under construction; and $2,566,000 and $3,023,000, respectively,
    in reserve for bond principal and interest payments along with a
    reserve for lease payments. The Company has classified this
    restricted cash as non-current to the extent that such funds are
    to be used to acquire non-current assets or are to be used to
    service non-current liabilities. Third party trustee approval is
    required for disbursement of all restricted funds. Subsequent to
    December 31, 2008, $2,000,000 of the restricted cash was
    made available to the Company for use other than its restricted
    purpose (Note 18).
ACCOUNTS
    RECEIVABLE
Accounts receivable represents 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 December 31, 2008, an allowance for doubtful
    accounts of $16,000 has been established against certain
    receivables that management has identified as uncollectible. A
    charge of $16,000 is reflected in the consolidated statements of
    operations for the year ended December 31, 2008. There was
    no allowance for doubtful accounts deemed necessary at
    December 31, 2007.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
    determined by the first in, first out method. Inventory consists
    primarily of raw materials, packaging materials and finished
    goods, which consist of soil amendment products. Inventory
    balances are presented net of applicable reserves. There were no
    inventory reserves at December 31, 2008 and
    December 31, 2007.
PREPAID
    RENT
The Company has recorded prepaid rent on its consolidated
    balance sheets which represents the difference between actual
    lease rental payments made as of December 31, 2008 and 2007
    and the straight line rent expense recorded in the
    Company's consolidated statements of operations for the
    years then ended relating to the Company's facilities in
    Woodbridge, New Jersey and Gonzales, California.
DEPOSITS
The Company has made deposits totaling $415,000 for its
    Woodbridge facility in accordance with the terms of that lease
    and has made a deposit of $139,986 for a license at its planned
    Rhode Island facility. The
F-8
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
Gonzales facility has deposits on equipment of $346,668. The
    Company has various security deposits relating to operating
    leases of $10,400. These amounts are recorded as noncurrent
    assets on the Company's consolidated balance sheets. The
    Company also has made deposits on packaging materials ordered
    for product to be manufactured in its New Jersey facility of
    $141,423, which is recorded as a current asset on the
    Company's consolidated balance sheets.
CONSTRUCTION-IN-PROGRESS
Construction-in-progress
on the consolidated balance sheets includes amounts incurred for
    construction costs, equipment purchases and capitalized interest
    costs related to the construction of the Company's
    Woodbridge, New Jersey facility, and expansion of its Gonzales,
    California plant that have not yet been placed in service.
INTANGIBLE
    ASSETS — LICENSE AND OTHER INTANGIBLES
The Company accounts for its intangible assets in accordance
    with SFAS No. 142,
"Goodwill and Other
    Intangible Assets."
SFAS No. 142 requires
    that intangible assets with finite lives, such as the
    Company's license, 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.
LONG-LIVED
    ASSETS
In accordance with SFAS No. 144,
"Accounting
    for the Impairment or Disposal of Long-Lived Assets",
long-lived assets are reviewed for impairment whenever
    events or changes in circumstances indicate that the carrying
    amount of an asset may not be recoverable. Such reviews are
    based on a comparison of the asset's undiscounted cash
    flows to the recorded carrying value of the asset. If the
    asset's recorded carrying value exceeds the sum of the
    undiscounted cash flows expected to result from the use and
    eventual disposition of the asset, the asset is written down to
    its estimated fair value. Impairment charges, if any, are
    recorded in the period in which the impairment is determined. No
    impairment charges were deemed necessary during the years ended
    December 31, 2008 and 2007.
PROPERTY
    AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
    computed on the straight-line basis over the estimated useful
    lives of 7 to 20 years.
DEFERRED
    FINANCING AND ISSUANCE COSTS
In connection with the private financing arrangement of
    January 24, 2008, the Company incurred legal and placement
    fees of $345,000, $10,000 of which was paid in the year ended
    December 31, 2007, and $335,000 of which was paid from the
    proceeds of the loan. These fees are being amortized over one
    year. Amortization expense totaled $322,958 during the year
    ended December 31, 2008 related to these costs.
CAPITALIZED
    BOND COSTS
In connection with its $17.5 million bond financing on
    February 16, 2007, the Company has capitalized bond
    issuance costs of $953,375 and is amortizing these costs over
    the life of the bond. Amortization expense of $47,669 and
    $43,696 was recorded during the years ended December 31,
    2008 and 2007, respectively, related to these bond issuance
    costs.
F-9
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
REVENUE
    RECOGNITION
In accordance with Staff Accounting Bulletin 104,
"Revenue Recognition in Financial Statements,"
("SAB 104") revenue is recognized when each
    of the following criteria is 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.
SHARE
    BASED COMPENSATION
The Company accounts for share based compensation in accordance
    with Statement of Financial Accounting Standards
    ("SFAS") No. 123(R),
"Share-Based
    Payment."
Under the provisions of
    SFAS No. 123(R), share-based compensation issued to
    employees is measured at the grant date, based on the fair value
    of the award, and is recognized as an expense over the requisite
    service period (generally the vesting period of the grant).
    Share-based compensation issued to non-employees is measured at
    the grant date, based on the fair value of the equity
    instruments issued and is recognized as an expense over the
    requisite service period.
RESEARCH
    AND DEVELOPMENT COSTS
Research and development costs include the costs of engineering,
    design, feasibility studies, outside services, personnel and
    other costs incurred in development of the Company's
    manufacturing facilities. All such costs are charged to expense
    as incurred.
INCOME
    TAXES
Deferred income taxes are computed in accordance with
    SFAS No. 109,
"Accounting for Income
    Taxes"
and reflect the net tax effects of temporary
    differences between the financial reporting carrying amounts of
    assets and liabilities for financial reporting and income tax
    purposes. The Company establishes a valuation allowance if it
    believes that it is more likely than not that some or all of the
    deferred tax assets will not be realized (see Note 14).
The Company is subject to U.S. federal income tax as well
    as income tax of certain state jurisdictions. The Company has
    not been audited by the I.R.S. or any states in connection with
    income taxes. The periods from inception through 2008 remain
    open to examination by the I.R.S. and state authorities.
On January 1, 2007, the Company adopted the provisions of
    FASB interpretation No. 48,
"Accounting for
    Uncertainty in Income Taxes- an interpretation of FASB Statement
    No. 109"
("FIN No. 48"). The
    Interpretation contains a two step approach to recognizing and
    measuring uncertain tax positions accounted for in accordance
    with FASB Statement No. 109. The first step is to evaluate
    the tax position for recognition by determining if the weight of
    the available evidence indicates that it is more likely than not
    that the position will be sustained on audit, including
    resolution of related appeals or litigation process, if any. The
    second step is to measure the tax benefit as the largest amount
    which is more than 50% likely of being realized upon ultimate
    settlement. The adoption of FIN No. 48 did not have
    any material impact on the Company's consolidated financial
    statements.
F-10
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
The Company recognizes interest accrued related to unrecognized
    tax benefits in interest expense. Penalties, if incurred, are
    recognized as a component of income tax expense.
FAIR
    VALUE MEASUREMENTS
The Company has partially implemented SFAS No. 157,
"Fair Value Measurements"
("SFAS No. 157") for financial assets and
    financial liabilities. SFAS No. 157 defines fair
    value, establishes a framework for measuring fair value, expands
    disclosure about fair value measurements and is effective for
    fiscal years beginning after November 15, 2007, except as
    it relates to nonrecurring fair value measurements of
    nonfinancial assets and liabilities. This standard only applies
    when other standards require or permit the fair value
    measurement of assets and liabilities. It does not increase the
    use of fair value measurement. The Company has determined that
    none of its financial assets or liabilities are measured at fair
    value on a recurring basis therefore the disclosures required by
    SFAS No. 157 do not currently apply. With regard to
    nonfinancial assets and liabilities which are not recognized or
    disclosed at fair value in the Company's financial
    statements on a recurring basis (at least annually), the
    standard is effective for fiscal years beginning after
    November 15, 2008. The major categories of assets and
    liabilities that have not been measured and disclosed using
    SFAS No. 157 fair value guidance are property and
    equipment in certain circumstances and goodwill.
ACCOUNTING
    STANDARDS NOT YET ADOPTED
In February 2007, the FASB issued SFAS No. 159,
Fair Value Option for Financial Assets and Financial
    Liabilities
("SFAS No. 159"), which
    permits entities to choose to measure many financial assets and
    financial liabilities at fair value. Unrealized gains and losses
    on items for which the fair value option has been elected would
    be reported in earnings. SFAS No. 159 is effective for
    financial statements issued for fiscal years beginning after
    November 15, 2007. The Company has not elected to measure
    any financial assets or liabilities at fair value, and
    therefore, the consolidated financial statements were not
    affected by adoption of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
    Statements — an amendment of ARB No. 51
("SFAS No. 160"). SFAS No. 160
    is effective for fiscal years, and interim periods within those
    fiscal years, beginning on or after December 15, 2008. The
    objective of this Statement is to improve the relevance,
    comparability and transparency of the financial information that
    a reporting entity provides in its consolidated financial
    statements. The Company anticipates that the adoption of
    SFAS No. 160 will not have a significant impact on the
    consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations
(SFAS No. 141R), which
    changes how business acquisitions are accounted for.
    SFAS No. 141R requires the acquiring entity in a
    business combination to recognize all (and only) the assets
    acquired and liabilities assumed in the transaction and
    establishes the acquisition-date fair value as the measurement
    objective for all assets acquired and liabilities assumed in a
    business combination. Certain provisions of this standard will,
    among other things, impact the determination of acquisition-date
    fair value of consideration paid in a business combination
    (including contingent consideration); exclude transaction costs
    from acquisition accounting; and change accounting practices for
    acquired contingencies, acquisition-related restructuring costs,
    in-process research and development, indemnification assets and
    tax benefits. SFAS No. 141R is effective for business
    combinations and adjustments to an acquired entity's
    deferred tax asset and liability balances occurring after
    December 31, 2008. The Company is currently evaluating the
    future impacts and disclosures of this standard.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
    Activities — an amendment of FASB Statement
    No. 133
(SFAS No. 161).
    SFAS No. 161 requires enhanced disclosures about an
    entity's derivative instruments and hedging activities with
    a view toward improving the transparency of financial reporting
    and is effective for financial statements issued for fiscal
    years and interim periods beginning after November 15,
    2008, with early application encouraged. SFAS No. 161
    encourages, but
F-11
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
does not require, comparative disclosures for earlier periods at
    initial adoption. The Company anticipates that the adoption of
    SFAS No. 161 will not have a significant impact on the
    consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP)
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
.
    This FSP amends the factors that should be considered in
    developing renewal or extension assumptions used to determine
    the useful life of a recognized asset under
    SFAS No. 142,
Goodwill and Other Intangible Assets
("SFAS No. 142). The objective of this FSP is
    to improve the consistency between the useful life of a
    recognized intangible asset under SFAS No. 142 and the
    period of expected cash flows used to measure the fair value of
    the asset under SFAS No. 141R and other accounting
    principles generally accepted in the United States of America.
    This FSP applies to all intangible assets, whether acquired in a
    business combination or otherwise; and shall be effective for
    financial statements issued for fiscal years beginning after
    December 15, 2008 and interim periods within those fiscal
    years and applied prospectively to intangible assets acquired
    after the effective date. Early adoption is prohibited. The
    Company is currently evaluating this new FSP and anticipates
    that it will not have a significant impact on the consolidated
    financial statements.
EARNINGS
    (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed by
    dividing the net income (loss) attributable to the common
    stockholders (the numerator) by the weighted average number of
    shares of common stock outstanding (the denominator) during the
    reporting periods. Diluted income (loss) per share is computed
    by increasing the denominator by the weighted average number of
    additional shares that could have been outstanding from
    securities convertible into common stock, such as stock options
    and warrants (using the "treasury stock" method), and
    convertible preferred stock and debt (using the
    "if-converted" method), unless their effect on net
    income (loss) per share is antidilutive. Under the
    "if-converted" method, convertible instruments are
    assumed to have been converted as of the beginning of the period
    or when issued, if later. The effect of computing the
    Company's diluted income (loss) per share is antidilutive
    and, as such, basic and diluted earnings (loss) per share are
    the same for each of the years ended December 31, 2008 and
    2007.
PROFIT
    SHARING PLAN
In November 2007, the Company instituted a 401(k) plan for its
    employees. The plan allows for employees to have a pretax
    deduction of up to 15% of pay set aside for retirement. The plan
    also allows for a Company match and profit sharing contribution.
    As of December 31, 2008 and 2007, the Company has not
    provided a match of employee contributions nor did the Company
    contribute a profit sharing amount to the plan.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
    the current year presentation.
SEGMENT
    REPORTING
The Company has no reportable segments as defined by
    SFAS No. 131,
"Disclosure about Segments of an
    Enterprise and Related Information."
NOTE 4 —
ACQUISITIONS
On January 24, 2008, the Company acquired the assets,
    including the intellectual property, of Waste Recovery
    Industries, LLC of Paso Robles, CA. This acquisition allows the
    Company to be the exclusive owner of the proprietary technology
    and process known as the High Temperature Liquid Composting
    system, which processes various biodegradable waste products
    into liquid and solid organic-based fertilizer and feed
    products.
F-12
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
The purchase price of $500,000 was paid with a 7% short term
    note that matured on May 1, 2008 and was repaid on that
    date. Interest on that note was payable monthly. In addition,
    the purchase price provides for future contingent payments of
    $5,500 per ton of capacity, when and if additional tons of
    waste-processing capacity are added to the Company's
    existing current or planned capacity, using the acquired
    technology.
In addition, Waste Recovery Industries, LLC had begun discussion
    with a third party (prior to the Company acquiring it) to
    explore the possibility of building a facility to convert fish
    waste into organic fertilizer using the HTLC technology. The
    Company has completed those negotiations and has entered into an
    agreement with Pacific Choice Seafoods whereby the Company will
    be required to pay 50% of the Company's profits (as
    defined) to the former owner, that are earned from the facility.
    The contingent profit-sharing payments under this agreement will
    be accounted for as expenses of the appropriate period, in
    accordance with
EITF 95-8,
"Accounting for Contingent Consideration Paid to the
    Shareholders of an Acquired Enterprise in a Purchase Business
    Combination."
If the Company becomes obligated to make
    certain technology payments under its purchase agreement with
    WRI, the Company estimated that no such payments will be payable
    in the twelve months following the acquisition. Payments, if
    any, after that will be expensed as incurred. The maximum
    payment due under these arrangements is $7,000,000, with no
    minimum.
On January 24, 2008, the Company formed Converted Organics
    of California, LLC, a wholly-owned subsidiary of Converted
    Organics Inc. who acquired the net assets of United Organic
    Products, LLC of Gonzales, CA ("UOP"). With this
    acquisition, the Company acquired a liquid fertilizer product
    line, as well as a production facility that services a West
    Coast agribusiness customer base through established
    distribution channels. This facility is operational and began to
    generate revenues for the Company immediately upon acquisition.
    The purchase price of $2,500,000 was paid in cash of $1,500,000
    and a note payable of $1,000,000. This note matures on
    February 1, 2011, has an interest rate of 7%, payable
    monthly in arrears and is convertible to common stock six months
    after the acquisition date for a price equal to the
five-day
average closing price of the stock on Nasdaq for the five days
    preceding conversion.
The acquisitions have been accounted for in the first quarter of
    2008 using the purchase method of accounting in accordance with
    SFAS No. 141,
"Business
    Combinations"
. Accordingly, the net assets have been
    recorded at their estimated fair values, and operating results
    have been included in the Company's consolidated financial
    statements from the date of acquisition.
The allocation of the purchase price based on the appraisal is
    as follows:
Inventories
$
11,114
Accounts receivable
28,702
Technological know-how
271,812
Trade name
228,188
Existing customer relationships
2,030,513
Building
111,584
Equipment and machinery
543,000
Assumption of liabilities
(224,913
)
Total allocation of purchase price
$
3,000,000
The assets acquired from UOP were valued separately from the
    assets acquired from WRI. The sum of the amounts assigned to
    assets acquired and liabilities assumed did exceed the cost of
    the acquired assets. The excess was allocated as a pro rata
    reduction of the amounts that otherwise would have been assigned
    to all of the acquired noncurrent assets, including intangibles.
F-13
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
The unaudited supplemental pro forma information discloses the
    results of operations for the current year and for the preceding
    year as though the business combination had been completed as of
    the beginning of the year reported on.
The pro forma condensed consolidated financial information is
    based upon available information and certain assumptions that
    the Company believes are reasonable. The unaudited supplemental
    pro forma information does not purport to represent what the
    Company's financial condition or results of operations
    would actually have been had these transactions in fact occurred
    as of the dates indicated above or to project the Company's
    results of operations for the period indicated or for any other
    period.
Twelve Months Ending December 31,
2008
2007
Revenues (in thousands)
$
1,548
$
1,423
Net loss (in thousands)
16,269
(4,889
)
Net loss per share — basic and diluted
(2.72
)
(1.04
)
Current assets (in thousands)
7,230
5,410
Total assets (in thousands)
32,618
28,278
Current liabilities (in thousands)
(9,474
)
(7,570
)
Total liabilities (in thousands)
(27,571
)
(25,070
)
Total equity (deficit) (in thousands)
5,047
3,208
NOTE 5 —
FAIR
    VALUE OF FINANCIAL INSTRUMENTS
CONCENTRATIONS
    OF CREDIT RISK
The Company's financial instruments that are exposed to a
    concentration of credit risk are cash, including restricted
    cash, and accounts receivable. Currently, the Company maintains
    its cash accounts with balances in excess of the federally
    insured limits. The Company mitigates this risk by selecting
    high quality financial institutions to hold such cash deposits.
    At December 31, 2008 and 2007, the Company's cash
    balances on deposit exceeded federal depository insurance limits
    by approximately $5,812,000 and $14,500,000.
The Company maintains allowances for doubtful accounts for
    estimated losses resulting from the inability of its customers
    to make required payments. If the financial condition of the
    Company's customers were to deteriorate, resulting in an
    impairment of their ability to make such payments, additional
    allowances may be required. An increase in allowances for
    customer non-payment would increase the Company's expenses
    during the period in which such allowances are made. Based upon
    the Company's knowledge at December 31, 2008 and 2007,
    a reserve for doubtful accounts was recorded of approximately
    $16,000 and $0, respectively.
FAIR
    VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Fair Value of Financial Instruments",
requires
    disclosure of the fair value of financial instruments for which
    the determination of fair value is practicable.
    SFAS No. 107 defines the fair value of a financial
    instrument as the amount at which the instrument could be
    exchanged in a current transaction between willing parties. The
    carrying amount of the Company's financial instruments
    consisting of cash, accounts receivable, inventories, accounts
    payable, and accrued expenses approximate their fair value
    because of the short maturity of those instruments. The fair
    value of the Company's convertible notes payable, term
    notes payable and New Jersey Economic Development Authority
    Bonds were estimated by discounting the future cash flows using
    current rates offered by lenders for similar borrowings with
    similar credit ratings. The fair value of the company's
    convertible notes payable is estimated to approximate its
    carrying value. The fair value of the term notes payable and the
    New Jersey
F-14
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
Economic Development Authority bonds approximate their carrying
    value. The Company's financial instruments are held for
    other than trading purposes.
SFAS No. 157,
"Fair Value Measurements"
(SFAS No. 157), defines fair value as the price
    that would be received to sell an asset or paid to transfer a
    liability in an orderly transaction between market participants,
    as of the measurement date. The standard specifies a hierarchy
    of valuation techniques based upon whether the inputs to those
    valuation techniques reflect assumptions other market
    participants would use based upon market data obtained from
    independent sources (also referred to as observable inputs). In
    accordance with SFAS No. 157, the following summarizes
    the fair value hierarchy:
•
Level 1
— Quoted prices in active markets
    that are unadjusted and accessible at the measurement date for
    identical, unrestricted assets or liabilities;
•
Level 2
— Quoted prices for identical
    assets and liabilities in markets that are not active, quoted
    prices for similar assets and liabilities in active markets or
    financial instruments for which significant observable inputs
    are available, either directly or indirectly such as interest
    rates and yield curves that are observable at commonly quoted
    intervals; and
•
Level 3
— prices or valuations that
    require inputs that are unobservable.
In certain cases, the inputs used to measure fair value may fall
    into different levels of the fair value hierarchy. In such
    cases, the level in the fair value hierarchy within which the
    fair value measurement in its entirety falls has been determined
    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.
The Company's financial assets and liabilities that are
    reported at fair value in the accompanying consolidated balance
    sheets as of December 31, 2008 were as follows:
Balance at
December 31,
Assets
Level 1
Level 2
Level 3
2008
Certificate of deposit
$
—
$
534,821
—
$
534,821
The Company does not have any fair value measurements using
    quoted prices in active markets (Level 1) or
    significant unobservable inputs (Level 3) as of
    December 31, 2008.
NOTE 6 —
INVENTORIES
The Company's inventories consisted of the following at
    December 31:
2008
2007
Finished goods
$
214,053
$
—
Raw materials
18,785
—
Packaging materials
56,892
—
Total inventories
$
289,730
$
—
NOTE 7 —
CONSTRUCTION-IN-PROGRESS
The Company is currently constructing an operating facility in
    Woodbridge, New Jersey. The funds for construction of this plant
    came from the issuance of New Jersey Economic Development Bonds
    on February 16, 2007 and a condition of this bond offering
    was that the Company place in trust approximately
    $14 million to be used for plant construction and
    associated equipment purchases. As of December 31, 2007,
    the Company has incurred approximately $4.9 million in
    plant construction costs, equipment purchases and capitalized
    interest
F-15
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
costs. The Company has recorded those costs as
construction-in-progress
on its consolidated balance sheets as of December 31, 2007.
    At the end of the second quarter of 2008, portions of the
    Woodbridge facility became operational and certain fixed assets
    were placed in service commencing June 30, 2008. During the
    remainder of 2008, approximately $19 million in assets were
    transferred from
Construction-in-Progress
to Leasehold Improvements and Machinery and equipment accounts
    and depreciation commenced on those assets placed in service.
NOTE 8 —
PROPERTY
    AND EQUIPMENT
The Company's property and equipment at December 31
    consisted of the following:
2008
2007
Land and improvements
$
357,692
$
—
Building and improvements
5,754,163
—
Machinery and equipment
13,968,134
—
Vehicles
42,570
—
Office equipment and furniture
7,837
—
20,130,396
—
Less: Accumulated depreciation and amortization
(405,250
)
—
Property and equipment, net
$
19,725,146
$
—
Depreciation and amortization of property and equipment totaled
    $411,843 and $0 for the years ended December 31, 2008 and
    2007, respectively.
NOTE 9 —
DEFERRED
    AND CAPITALIZED COSTS
DEFERRED
    FINANCING AND OFFERING COSTS
In connection with its initial public offering (IPO) on
    February 16, 2007, the Company incurred issuance costs
    totaling $1,736,715. The Company had previously capitalized
    issuance costs, consisting of underwriting, legal and accounting
    fees and printing costs cumulatively totaling $696,499 in
    anticipation of its initial public offering. The Company also
    incurred additional issuance costs of $1,040,216 that was paid
    from the proceeds of the initial public offering. The total
    issuance costs of $1,736,715 have been netted against the
    $9.9 million of gross proceeds of the IPO in the statements
    of changes in owners' equity (deficit).
In connection with its repayment of the bridge notes, the
    Company paid to the bridge lender a Letter of Credit fee of
    $27,375. The fee has been recorded as a deferred financing fee
    to be amortized over the term of the Letter of Credit. The
    Letter of Credit was nullified by the Company's borrowing
    of funds from a private investor in January, 2008. Amortization
    of these deferred financing fees totaled $8,642 and $18,733 for
    the years ended December 31, 2008 and 2007, respectively.
In connection with its private financing in January of 2008, the
    Company incurred fees of $345,000 which were capitalized and
    which are being amortized over the one year term of the loan.
    Amortization expense associated with these fees of $322,958 was
    recorded during the year ended December 31, 2008.
CAPITALIZED
    BOND COSTS
In connection with its $17.5 million bond financing on
    February 16, 2007, the Company has capitalized bond
    issuance costs of $953,375 and is amortizing those costs over
    the life of the bond. Amortization of capitalized bond issuance
    costs totaled $47,669 and $43,696 for the years ended
    December 31, 2008 and 2007, respectively.
F-16
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
NOTE 10 —
INTANGIBLE
    ASSETS
Pursuant to a license agreement with an effective date of
    July 15, 2003 and amended effective February 9, 2006,
    by and between the Company and International Bio-Recovery
    Corporation ("IBRC"), the Company entered into an
    exclusive license to use IBRC's Enhanced Autogenous
    Thermophylic Aerobic Digestion process (EATAD) technology for
    the design, construction and operation of facilities for the
    conversion of food waste into solid and liquid organic material.
    The license is recorded at its acquisition cost of $660,000 less
    accumulated amortization of $90,750 and $74,250 as of
    December 31, 2008 and 2007, respectively. Amortization is
    provided using the straight-line method over the life of the
    license. Amortization expense for the years ended
    December 31, 2008 and 2007 was $16,500 and $16,500,
    respectively. The Company expects the license's annual
    amortization expense to be $16,500 until fully amortized at the
    end of the 40 year license period.
The Company is obligated to pay IBRC an aggregate royalty equal
    to nine percent of the gross revenues from the sale of product
    produced by the Woodbridge facility. The Company will begin to
    pay royalties during the first quarter of 2009, as product sales
    commenced during that quarter. The Company is also obligated to
    purchase IBRC's patented macerators and shearators as
    specified by or supplied by IBRC or Shearator Corporation for
    use at the Woodbridge facility.
In addition, the Company paid a non-refundable deposit of
    $139,978 to IBRC in 2007 on a second plant licensing agreement,
    which is included in non-current deposits on the Company's
    consolidated balance sheets at December 31, 2008 and 2007.
    The Company also agreed to pay IBRC approximately $338,000 in
    twelve monthly installments for market research, growth trails
    and other services. For the year ended December 31, 2008
    and 2007, the Company had paid approximately $22,000 and
    $276,000, respectively, of this amount which has been included
    in research and development in the Company's consolidated
    statements of operations. The Company is currently negotiating
    the remainder of the payments with IBRC.
The Company identified certain intangible assets as a part of
    its valuation performed pursuant to SFAS No. 141,
"Business Combinations."
The following
    intangible assets were identified and values and estimated
    useful lives were assigned as follows:
Assigned
Estimated
Value
Useful Life
Existing customer relationships
$
2,030,513
8 years
Technological know-how
271,812
8 years
Trade name
228,188
Indefinite
Intangibles acquired
$
2,530,513
The consolidated statements of operations include amortization
    expense of $246,887 related to these intangible assets for the
    year ending December 31, 2008. Accumulated amortization at
    December 31, 2008 was $246,887.
NOTE 11 —
DEBT
TERM
    NOTES PAYABLE
The Company had three term notes payable: (1) $250,000
    unsecured term note dated August 27, 2004, due
    December 31, 2008, with interest at 12%, (2) $125,000
    unsecured term note dated September 6, 2005, due
    December 31, 2008, with interest at 15%, and
    (3) $89,170 unsecured term note dated May 2, 2007 with
    a maturity of May 2, 2009 and interest at 12%. On all
    notes, interest accrues without payment until maturity. The
    agreement on the term loan dated August 27, 2004 required
    accrued interest of $89,170 to be paid immediately in order to
    refinance and extend the maturity. As the Company was precluded
    under the terms of
F-17
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
the agreement with the bondholders of the New Jersey Economic
    Development Authority Bonds from paying the accrued interest
    available funds, the Company borrowed funds to repay this
    accrued interest by entering into the May 2, 2007 term loan
    in the amount of $89,170 with its CEO, Edward J. Gildea. This
    note is unsecured and subordinate to the bonds, and has a
    two-year term. This interest rate is equal to or less than
    interest paid on the Company's other term loans. The
    Company obtained the necessary bondholder consents to enter into
    this agreement.
During December 2008, the balance of the term note dated
    August 27, 2004, plus accrued interest of $47,500 was paid
    with funds raised through exercise of warrants related to our
    common stock. The Company also negotiated the forgiveness of the
    balance of the unsecured term note dated September 6, 2005,
    plus accrued interest. Total principal and interest forgiven was
    $146,677, and this amount is recorded as other income on the
    consolidated statements of operations for the year ended
    December 31, 2008.
As of December 31, 2008, the total of unpaid accrued
    interest on the remaining note is $17,834. Accrued interest on
    all notes as of December 31, 2007 was $47,500.
A schedule of outstanding principal amounts of the term notes as
    of December 31, 2008 and 2007 is as follows:
2008
2007
Term note dated August 27, 2004
$
—
$
250,000
Term note dated September 6, 2005
—
125,000
Term note dated May 2, 2007
89,170
89,170
89,170
464,170
Less: current portion
89,170
(375,000
)
$
—
$
89,170
BRIDGE
    LOANS PAYABLE
On March 2, 2006, the Company completed a $500,000 bridge
    loan ("Bridge Loan") from lenders ("Bridge
    Noteholders") to help meet the Company's working
    capital needs. The bridge loan accrued interest at an annual
    rate of 8%, which was payable in arrears quarterly, and was
    originally due and payable on the earlier of October 16,
    2006 or the completion of a public offering of equity securities
    ("Qualified Public Offering"). The bridge loan was
    refinanced with an extended maturity date of February 19,
    2007 or the completion of a Qualified Public Offering. The
    placement agent for the bridge loan received a commission equal
    to 5% of the gross proceeds. The Company received the $500,000
    bridge loan net of the commission to the placement agent of
    $25,000. The Company classified this cost as a deferred
    financing cost.
In April, May and June 2006, the Company received additional
    proceeds totaling $1,015,000 (net of a $50,750 commission to the
    placement agent) from a series of promissory notes executed with
    the Bridge Noteholders ("Bridge Financing").
In connection with the Bridge Financing, the Company issued
    bridge notes ("Bridge Notes") and securities of the
    Company ("Bridge Equity Units") to the Bridge
    Noteholders, stating that if a Qualified Public Offering
    occurred before October 16, 2006 (extended to
    February 19, 2007), the Bridge Noteholders would be
    entitled to receive Bridge Equity Units consisting of securities
    identical in form to the securities being offered in the
    Qualified Public Offering. Each Bridge Noteholder would be
    entitled to receive Bridge Equity Units equal to the principal
    of the Bridge Noteholder's bridge loan divided by the
    initial public offering price of the securities comprising the
    Bridge Equity Units.
The Bridge Loans and the Bridge Equity Units were allocated for
    accounting purposes based on the relative fair values at the
    time of issuance of (i) the Bridge Loans without the Bridge
    Equity Units and (ii) the
F-18
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
Bridge Equity Units themselves. The fair value of the Bridge
    Loans and the Bridge Equity Units was computed at $1,515,000
    each. The $1,515,000 fair value was determined since the Company
    obtained $1,515,000 in Bridge Financing from Bridge Noteholders.
    At the closing of a public offering on or before
    February 19, 2007 bridge lenders would be entitled to
    receive units identical to the units being offered in the
    Company's initial public offering. Each bridge lender would
    be entitled to receive that number of units equal to the
    principal of the lender's note divided by the initial
    public offering price. Stated differently, upon closing of an
    initial public offering on or before February 19, 2007, the
    Company would be obligated to issue to the bridge lenders a
    number of units commensurate with a market value of $1,515,000.
    Since they were of equal value, the $1,515,000 was allocated 50%
    to the Bridge Loans and 50% to the Bridge Equity Units. The
    Bridge Equity Units of $757,500 were accounted for as paid-in
    capital. The Bridge Loans of $1,515,000 were recorded on the
    balance sheet net of the $757,500 discount on the Bridge Loans.
    The discount for the Bridge Equity Units ($757,500) was
    amortized into interest expense over the original life of the
    Bridge Loans. For the year ended December 31, 2007, the
    Company recorded $757,500 in interest expense related to the
    amortization of this discount.
On February 16, 2007 the Company completed its initial
    public offering and issued 293,629 Bridge Equity Units to the
    Bridge Noteholders. In addition, the Company and the Bridge
    Noteholders, agreed under the terms of a concurrent bond
    offering at the time of the initial public offering, not to
    repay the principal or accrued interest on the Bridge Notes at
    that time.
The Company had $1,515,000 of outstanding Bridge Loans that
    accrued interest at a rate of 18%, and under the terms of the
    loans, were to be repaid on the earlier of February 19,
    2007 or the date of the Company's initial public offering.
    Due to certain covenants relating to the offering of bonds on
    February 16, 2007, which prohibited the Company from
    repaying these bridge loans, the Company entered into an
    agreement whereby it could repay the Bridge Loans if the Bridge
    Noteholders agreed to obtain a letter of credit in favor of the
    Company. The Company reached agreements with the Bridge
    Noteholders and the demand note lender to repay the entire
    principal and accrued interest on these debts. The principal of
    the Bridge Loans of $1,515,000 plus accrued interest of
    approximately $160,000, along with principal of the demand note
    of $150,000 plus accrued interest of approximately $7,000, was
    repaid by the Company on May 23, 2007 from unrestricted
    cash. In addition, for the various term extensions granted by
    the Bridge Noteholders, the Company issued approximately
    56,000 shares of common stock, which represents 10% of the
    principal and interest repaid, divided by the
five-day
average share price prior to repayment of the debt. The
    consolidated statements of operations for the year ended
    December 31, 2007 includes interest expense of $178,048
    related to the issuance of this stock.
In order for the repayment of bridge and demand loans to comply
    with the terms of the covenants of the bondholders of the New
    Jersey Economic Development Authority Bonds, the Bridge
    Noteholders obtained a letter of credit in favor of the Company
    for $1,825,000. This letter of credit was due to expire on
    April 7, 2008, and allows for a one-time draw down during
    the thirty days prior to expiration. Subsequent to
    December 31, 2007 and prior to the expiration date of the
    letter of credit (April 7, 2008), in conjunction with the
    private financing described below, the letter of credit
    agreement was terminated with no cost to the Company.
BOND
    FINANCING
On February 16, 2007, concurrent with its initial public
    offering, the Company's wholly-owned subsidiary, Converted
    Organics of Woodbridge, LLC, (the "Subsidiary")
    completed the sale of $17,500,000 of New Jersey Economic
    Development Authority Bonds. Direct financing costs related to
    this issuance totaled $953,375, which have been capitalized and
    are being amortized over the term of the bonds. The bonds carry
    a stated interest rate of 8% and mature on August 1, 2027.
    The bonds are secured by a leasehold mortgage and a first lien
    on the equipment of the Subsidiary. In addition, the Subsidiary
    has agreed to, among other things,
F-19
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
establish a fifteen month capitalized interest reserve and to
    comply with certain financial statement ratios. The Company has
    provided a guarantee to the bondholders on behalf of its
    wholly-owned Subsidiary for the entire bond offering.
The New Jersey Economic Development Bonds have certain
    covenants, which among other things, preclude the Company from
    making any dividends, payments or other cash distributions until
    such time as (i) the Company has achieved, over the course
    of a full fiscal year, a maximum annual debt service coverage
    ratio greater than 1.50, and (ii) at least $1,200,000 is on
    deposit with the Trustee in the operations and maintenance
    reserve fund and is available to satisfy ongoing maintenance,
    repair and replacement costs associated with the project
    facilities. In addition, the Company is precluded from borrowing
    additional funds under any debt agreements, without the consent
    of the bondholders. During 2007, the Company received consent
    from the bondholder prior to borrowing additional funds for a
    two year term note. During 2008, the Company again received
    consent from the bondholder prior to borrowing additional funds
    in a private investment. Under the terms of the bond agreement,
    the lender has the right, upon 30 days written notice, to
    demand full payment of all outstanding principal and interest
    amounts owed under the agreement if specific covenants are not
    met. As of December 31, 2008 and 2007, the Company is in
    compliance with these covenants of the bond agreement.
PRIVATE
    FINANCING
On January 24, 2008, the Company entered into a private
    financing with three investors (the "Investors") for a
    total amount of $4,500,000 (the "Financing"). The
    Financing was offered at an original issue discount of 10%. The
    Company used the proceeds to fund the acquisitions described
    above, to fund further development activities and to provide
    working capital. As consideration for the Financing, the
    Investors received a note issued by the Company in the amount of
    $4,500,000 with interest accruing at 10% per annum to be paid
    monthly and the principal balance to be paid in full one year
    from the closing date (the "Note"). In addition, the
    Company issued to the Investors 750,000 Class A Warrants
    and 750,000 Class B Warrants, which may be exercised at
    $8.25 and $11.00 per warrant share, respectively (the
    "Warrants"). The Company further agreed not to call
    any Warrants until a registration statement registering all of
    the Warrants is declared effective. A placement fee of $225,000
    was paid from the proceeds of this loan.
In connection with the Financing, the Company had agreed that
    within 75 days of the closing date, the Company would have
    a shareholder vote to seek approval to issue a convertible
    debenture with an interest rate of 10% per annum which would be
    convertible into common stock pursuant to terms of the debenture
    agreement, or such other price as permitted by the debenture
    (the "Convertible Debenture"). Upon shareholder
    approval, the Note was replaced by this Convertible Debenture
    and one half of each of the Class A Warrants and of the
    Class B Warrants issued were returned to the Company. Under
    the conversion option, the Investors shall have the option, at
    any time on or before the maturity date (January 24, 2009),
    to convert the outstanding principal of this Convertible
    Debenture into fully-paid and non assessable shares of common
    stock at the conversion price equal to the lowest of
    (i) the fixed conversion price of $6.00 per share,
    (ii) the lowest fixed conversion price (the lowest price,
    conversion price or exercise price set by the Company in any
    equity financing transaction, convertible security, or
    derivative instrument issued after January 24, 2008), or
    (iii) the default conversion price (if and so long as there
    exists an event of default, then 70% of the average of the three
    lowest closing prices of common stock during the twenty day
    trading period immediately prior to the notice of conversion).
    The Company held a special shareholders' meeting on
    April 3, 2008 to vote on this matter, at which time it was
    approved.
In connection with the financing, the Company entered into a
    Security Agreement with the Investors whereby the Company
    granted the Investors a security interest in Converted Organics
    of California, LLC and any and all assets that are acquired by
    the use of the funds from the Financing. In addition, the
    Company granted the Investors a security interest in Converted
    Organics of Woodbridge, LLC and all assets subordinate
F-20
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
only to the current lien held by the holder of the bonds issued
    in connection with the Woodbridge facility of approximately
    $17,500,000.
In connection with this borrowing, the Company issued
    1.5 million warrants to purchase common stock, which were
    deemed to have a fair value of $5,497,500. The Company recorded
    the relative fair value of the warrants to the underlying notes
    of $2,227,500 in accordance with Accounting Principles Board
    ("APB") Opinion No. 14,
"Accounting for
    Convertible Debt and Debt Issued with Stock Purchase
    Warrants"
as additional paid-in capital and established
    a discount on the debt. The discount was being amortized over
    the life of the note (12 months). On April 17, 2008,
    the Investors returned to the Company 750,000 warrants that had
    been held in escrow. This reduced the value assigned to the
    warrants and, accordingly, the value assigned to the debt
    discount attributable to the warrants by $1,113,750. In
    addition, the remaining original issue discount of approximately
    $366,000 was recognized as expense on April 7, 2008.
On April 7, 2008, the shareholders of the Company approved
    the issuance of additional shares so that convertible notes
    could be issued to the noteholders to replace the original notes
    dated January 24, 2008. The Company is required to
    recognize a discount for the intrinsic value of the beneficial
    conversion feature of the notes which is to be recognized as
    interest expense through the redemption date of the notes, which
    is January 24, 2009. That amount was calculated to be
    $3,675,000, and recognition was limited to $2,936,250 in
    accordance with
EITF 98-5,
"Accounting for Convertible Securities with Beneficial
    Conversion Features or Contingently Adjustable Conversion
    Ratios,"
as the debt discount is limited to the
    proceeds allocated to the convertible instrument of $4,500,000.
    That discount is being amortized over the life of the loan.
    During the year ending December 31, 2008, the Company
    recognized interest expense of $2,705,759 related to this
    discount.
On January 24, 2009 the Company entered into an amendment
    on its $4.5 million convertibles debentures which became
    due on January 24, 2009. The lenders extended the due date
    of these notes until July 24, 2009 and began to convert
    these notes into shares of the Company's common stock using
    the default conversion rate. The Company and the lenders further
    agreed that no interest would be charged during the six-month
    extension and that it is the lenders' intention to convert
    the loan into shares sufficient to pay off the balance of the
    debt.
On March 6, 2009, the Company entered into an agreement
    with the holders of its $17.5 million of New Jersey
    Economic Development Authority Bonds to release
    $2.0 million for capital expenditures and lease payments on
    its New Jersey facility and to defer interest payments on the
    bonds thru July 30, 2009. These funds had been held in a
    reserve for bond principal and interest payments along with a
    reserve for lease payments. As consideration for the release of
    the reserve funds, the Company issued the bond holders 2,284,409
    Class B warrants. The Class B warrants are exercisable
    at $11.00 per warrant share.
REGISTRATION
    RIGHTS AGREEMENT
In connection with the January 24, 2008 private financing,
    the Company entered into a registration rights agreement with
    the Investors which called for the Company to register the
    securities within certain time periods. The Company had
    10 days from shareholder approval, with an additional
    7 day extension, to register the shares issuable under the
    Convertible Debenture and 90 days from the filing of a
    registration statement (filed on February 13,
    2008) for the Warrants and the underlying shares to be
    declared effective by the SEC. The Company has filed the
    registration statement relative to the Convertible Debenture as
    of the filing date of this report and the registration statement
    filed for the Warrants has been declared effective. However, the
    registration statement filed for the convertible debt and the
    date the warrant registration statement was declared effective
    by the SEC did not occur within the timelines agreed to in the
    registration rights agreement. The registration rights agreement
    calls for $90,000 per month in liquidated damages, payable in
    cash, if the Company doesn't file the registration
    statement for the Convertible Debenture and liquidated damages
    equal to the average closing price of 375,000 Class A
    warrants and 375,000 Class B warrants for each 30 day
    period,
F-21
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
commencing May 13, 2008, and multiplying that average by 2%
    for each 30 day period that the registration statement is
    not declared effective.
Therefore, on April 24, 2008, the Company began to incur
    liquidated damages in connection with the Convertible Debenture
    of $90,000 per month and as of May 13, 2008 the Company
    began to incur liquidated damage obligations in connection with
    the Warrants according to the formula described above. The
    maximum amount of liquidated damages relative to the Warrant
    Registration Statement and the Convertible Debenture is equal to
    10% of the face amount of the Convertible Debenture or $450,000
    (10% of $4,500,000). The Company paid a total of approximately
    $158,000 in liquidated damages related to the Convertible
    Debentures, which are recorded as interest expense on the
    consolidated statements of operations for year ended
    December 31, 2008. On June 7, 2008 the warrant
    registration statement was declared effective. At this time, the
    Company is not subject to further liquidated damages.
CONVERTIBLE
    NOTE PAYABLE
On January 24, 2008, in conjunction with the purchase of
    the net assets of UOP, the Company issued a note payable to the
    former sole member in the amount of $1,000,000. The note bears
    interest of 7% and matures on February 1, 2011; monthly
    principal and interest payments are $30,877. Interest expense of
    $57,850 has been recorded in the year ending December 31,
    2008 related to this note. The note is convertible by the holder
    six months after issuance. The Company is required to recognize
    a discount related to the intrinsic value of the beneficial
    conversion feature of the note as interest expense through the
    stated redemption date of the note. That amount was calculated
    to be $7,136, and has been recorded as a component of additional
    paid-in capital.
MORTGAGE
    NOTE PAYABLE
The Company has a mortgage note payable on the land upon which
    the California facility resides. The note, in the original
    amount of $250,000, bears interest at 6.75%. Monthly payments of
    principal and interest of $1,638 are due based on an
    amortization of twenty years. The note matures in May, 2013.
FIVE-YEAR
    MATURITY OF DEBT
Principal due during the next five years on all the
    Company's long-term and current debt is as follows:
2009
$
4,925,328
2010
329,721
2011
28,450
2012
3,679
2013
234,826
Thereafter
17,500,000
Subtotal
23,022,004
Less: discount
(230,492
)
Total
$
22,791,512
NOTE 12 —
CAPITALIZED
    INTEREST COSTS
The Company has capitalized interest costs, net of certain
    interest income, in accordance with Statement of Financial
    Accounting Standards No. 62,
"Capitalization of
    Interest Cost Involving Certain Tax-Exempt Borrowings and
    Certain Gifts and Grants"
, related to its New Jersey
    Economic Development Authority Bonds in the amount of $1,317,438
    and $403,572 as of December 31, 2008 and December 31,
    2007, respectively.
F-22
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
Capitalized interest costs are included in construction in
    progress initially on the consolidated balance sheets. As assets
    are placed in service, the capitalized interest is allocated
    among the cost basis of the assets ratably. During the year
    ending December 31, 2008, capitalized interest of
    $1,245,000 was allocated to assets placed in service and is
    being depreciated with the related assets.
NOTE 13 —
OWNERS'
    EQUITY (DEFICIT)
AUTHORIZED
    SHARES
At its April 3, 2008 special meeting of shareholders, the
    shareholders approved a resolution to decrease the number of
    common shares that the Company is authorized to issue from
    75,000,000 to 40,000,000, and the number of preferred shares
    that the Company is authorized to issue from 25,000,000 to
    10,000,000. The Company did this to realize saving on certain
    taxes that are based on the number of shares authorized, and the
    Company believes that 40,000,000 shares of common stock
    would be sufficient to meet its future needs.
STOCK
    ISSUANCES
The Company is authorized to issue 40,000,000 shares of
    $0.0001 par value common stock. Of the authorized shares,
    733,333 of the authorized shares were issued to the founders of
    the Company ("founders' shares") on
    January 13, 2006. The Company did not receive any
    consideration for the founders' shares. Because the Company
    had a negative estimated value on January 13, 2006, the
    Company recognized compensation expense at par value totaling
    $73 in connection with the issuance of the founders' shares
    as par value represents the statutory minimum share value in the
    state of Delaware.
On February 21, 2006, the Company merged with Mining
    Organics Management LLC ("MOM") and Mining Organics
    Harlem River Rail Yard LLC ("HRRY"). At that time, MOM
    was a fifty-percent owner of HRRY. The mergers were accounted
    for as a recapitalization of the Company. As a result of the
    recapitalization, 600,000 shares were issued to the members
    of HRRY.
On February 16, 2007 the Company successfully completed an
    initial public offering of 1,800,000 common shares and 3,600,000
    warrants for a total offering of $9,900,000, before issuance
    costs. The Company's initial public offering is presented
    net of issuance costs and expenses of $1,736,715 in the
    statements of changes in owners' equity (deficit). The
    warrants consist of 1,800,000 redeemable Class A warrants
    and 1,800,000 non-redeemable Class B warrants, each warrant
    to purchase one share of common stock. The common stock and
    warrants traded as one unit until March 13, 2007 when they
    began to trade separately.
On February 16, 2007, as part of its initial public
    offering and under the original terms of the bridge loan
    agreement (Note 11), the Company issued 293,629 Bridge
    Equity Units to the Bridge Noteholders. On May 23, 2007, as
    consideration for extensions of the Bridge Loans, the Company
    issued 55,640 shares of common stock to the Bridge
    Noteholders, which represents 10% of the principal and interest
    repaid, divided by the
five-day
average share price prior to repayment of the debt. The
    statement of operations reflects an expense of $178,048 related
    to the issuance of these shares.
On February 16, 2007, as part of its initial public
    offering, the Company agreed to pay a 5% quarterly stock
    dividend, commencing March 31, 2007, and every full quarter
    thereafter until the Woodbridge, New Jersey facility is
    operational. As of December 31, 2007, the Company has
    declared four such quarterly dividends amounting to
    747,296 shares. As of December 31, 2008, the Company
    has declared one additional quarterly dividend in the amount of
    263,239 shares.
On October 1, 2008, the Company issued 45,480 shares
    of its common stock to a consultant as remuneration for services
    rendered. The related services were substantially complete when
    the stock was issued. The Company recognized $212,619 of expense
    related to the fair value of this issuance.
F-23
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
On October 22, 2008, the Company declared a stock dividend
    of 15% payable to shareholders of record as of November 17,
    2008. This dividend resulted in the issuance of
    969,318 shares of common stock.
WARRANTS
On February 16, 2007, in connection with the Company's
    public offering, the Company sold 1,800,000 equity units
    consisting of one share of common stock, one Class A
    warrant and one Class B warrant. On March 13, 2007,
    the Class A and Class B warrants began to trade as
    separate securities. The Class A warrants are exercisable
    for one share of common stock, plus accumulated stock dividends,
    for $8.25. The Class A warrants expire on February 16,
    2012 and, if certain conditions are met, the Company may redeem
    these warrants at a price of $0.25 per warrant prior to the
    expiration date. The Class B warrants are exercisable for
    one share of common stock, plus accumulated stock dividends, for
    $11.00. The Class B warrants expire on February 16,
    2012 and there is no provision for the Company to redeem these
    warrants prior to the expiration date.
On January 24, 2008, in conjunction with the private
    financing arrangement of the Company described in Note 10,
    the Company issued 750,000 Class A and 750,000 Class B
    Warrants to the Investors. Such warrants are exercisable for one
    share of the Company's common stock, adjusted for
    dividends, at $8.25 and $11.00, respectively. Once the
    Company's registration statement related to the underlying
    shares was declared effective, one-half of the warrants were
    returned to the Company by the Investors, as described in
    Note 11.
WARRANT
    EXERCISE
The Company has received net proceeds of approximately
    $11,344,000 as a result of the exercise of approximately
    1,381,000 Class A (which includes the warrant redemption
    discussed below) warrants and 600 Class B warrants in the
    year ended December 31, 2008. The Company issued
    approximately 1,781,000 shares of common stock in
    connection with the exercise of these warrants due to the
    cumulative effect of the Company's stock dividends.
WARRANT
    REDEMPTION
On September 16, 2008, the Company announced the redemption
    of its outstanding Class A Warrants. The redemption date
    was set for October 17, 2008, and was subsequently extended
    a total of 31 days voluntarily by the Company to
    November 17, 2008. Any outstanding Class A warrants
    that had not been exercised before that date expired and are
    redeemable by the Company for $0.25 per warrant.
Until the redemption date, the Class A warrants were
    convertible into common stock at an exercise price of $8.25.
    Each warrant exercised at this price received 1.276 shares
    of common stock. Prior to the notification of redemption,
    approximately 756,000 Class A warrants had been exercised.
    After the redemption, an additional 683,000 warrants were
    exercised. In total, from both the exercise and redemption of
    warrants, the Company received proceeds of approximately
    $11,344,000. The Company is obligated to remit to its transfer
    agent funds sufficient to compensate warrant holders for the
    remaining warrants, which may be redeemed for $.25 each for an
    indefinite period. This amount of $284,237 was subtracted from
    the cash received for exercise of the warrants, representing the
    amount necessary to redeem the remaining warrants.
F-24
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
Class A warrant activity for the year ended
    December 31, 2008 and 2007 is as follows:
Weighted
Weighted
Exercise
Average
Average
Price per
Exercise
Remaining
Warrants
Warrant
Price
Life (Years)
Outstanding at December 31, 2006
—
$
—
Issued:
February 16, 2007, in conjunction with initial public
    offering
1,800,000
8.25
8.25
February 16, 2007, in conjunction With bridge loans
293,629
8.25
8.25
February 16, 2007, in conjunction with underwriter units
180,000
8.25
8.25
Expired
—
—
Exercised
—
—
Outstanding at December 31, 2007
2,273,629
8.25
8.25
4.2
Issued:
January 24, 2008, in conjunction with private financing
750,000
8.25
8.25
Returned to the Company upon shareholder approval of exchange of
    term note for convertible note
(375,000
)
$
8.25
Exercised
(1,380,768
)
$
8.25
Expired
(1,267,861
)
$
8.25
Outstanding at December 31, 2008
—
$
—
—
The fair value of Class A warrants totaled $2,387,310 at
    December 31, 2007 based on quoted market prices on that
    date. As of December 31, 2008, the Class A warrants
    have been removed from market trading.
F-25
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
Class B warrant activity for the years ended
    December 31, 2008 and 2007 is as follows:
Weighted
Weighted Average
Exercise
Average
Remaining
Price per
Exercise
Life
Warrants
Warrant
Price
(Years)
Outstanding at December 31, 2006
—
$
0
Issued:
February 16, 2007, in conjunction with initial public
    offering
1,800,000
11.00
11.00
February 16, 2007, in conjunction with bridge loans
293,629
11.00
11.00
February 16, 2007, in conjunction with underwriter shares
180,000
11.00
11.00
Expired
—
0
Exercised
—
0
Outstanding at December 31, 2007
2,273,629
11.00
11.00
4.2
Issued:
January 24, 2008, in conjunction with private financing
750,000
11.00
11.00
Returned to the Company upon shareholder approval of exchange of
    term note for convertible note
(375,000
)
11.00
11.00
Exercised
600
11.00
11.00
Outstanding at December 31, 2008
2,648,029
$
11.00
11.00
3.2
The fair value of Class B warrants totaled $3,442,438 and
    $3,410,444 at December 31, 2008 and 2007, respectively,
    based on quoted market prices on that date.
STOCK
    OPTION PLAN
In June 2006, the Company's Board of Directors and
    stockholders approved the 2006 Stock Option Plan (the
    "Option Plan"). The Option Plan authorizes the grant
    and issuance of options and other equity compensation to
    employees, officers and consultants. A total of
    666,667 shares of common stock are reserved for issuance
    under the Option Plan. The Option Plan is administered by the
    Compensation Committee of the Board of Directors (the
    "Committee"). Subject to the provisions of the Option
    Plan, the Committee determines who will receive the options, the
    number of options granted, the manner of exercise and the
    exercise price of the options. The term of incentive stock
    options granted under the Option Plan may not exceed ten years,
    or five years for options granted to an optionee owning more
    than 10% of the Company's voting stock. The exercise price
    of an incentive stock option granted under the Option Plan must
    be equal to or greater than the fair market value of the shares
    of the Company's common stock on the date the option is
    granted. The exercise price of a non-qualified option granted
    under the Option Plan must be equal to or greater than 85% of
    the fair market value of the shares of the Company's common
    stock on the date the option is granted. An incentive stock
    option granted to an optionee owning more than 10% of the
    Company's voting stock must have an exercise price equal to
    or greater than 110% of the fair market value of the
    Company's common stock on the date the option is granted.
    Stock options issued under the option plan vest immediately upon
    date of grant.
At a Special Meeting of Shareholders on April 3, 2008, the
    shareholders approved an amendment to the 2006 Stock Option Plan
    to include an "evergreen" provision pursuant to which
    on January 1st of each year, commencing in 2009, the
    number of shares authorized for issuance under the 2006 Stock
    Option Plan shall
F-26
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
automatically be increased to an amount equal to 20% of the
    shares of the common stock outstanding on the last day of the
    prior fiscal year. The Shareholders also approved an amendment
    to the Plan to increase the number of options available under
    the plan from 666,667 to 1,666,667. On June 27, 2008, an
    additional 736,735 options were granted, and vested on that
    date. Taking into account all options issued, the Company has
    276,932 options available to grant under the plan.
The options granted on June 27, 2008 have an exercise price
    of $5.02 and expire ten years from the grant date. The exercise
    price was based on the closing price of the stock on the date of
    grant. The fair value of the options was estimated using a
    Black-Scholes pricing model with the following assumptions:
    risk-free interest rate of 3.52%; no dividend yield; volatility
    factor of 52.3%; and an expected term of 5 years. The
    resulting expense of approximately $2.3 million is included
    in general and administrative expenses in the consolidated
    statements of operations for the year ended December 31,
    2008.
During the year ended December 31, 2007, in accordance with
    the director compensation policy of the Committee, an additional
    10,000 options were granted to a Director upon his appointment
    to the Board. The options vested on the grant date, have an
    exercise price of $3.75 per share and expire five years from the
    grant date. The fair value for the 10,000 immediately vesting
    stock options granted in 2007 was estimated at the date of grant
    using a Black-Scholes pricing model with the following
    assumptions: risk-free interest rate of 4.9%; no dividend yield;
    expected volatility factor of 16.9%; and an expected term of
    five years. The Company's stock option compensation expense
    totaling $5,929 has been included in general and administrative
    expenses in the consolidated statements of operations for the
    year ended December 31, 2007.
Stock option activity for the period January 1, 2007
    through December 31, 2008 is as follows:
Weighted
Average
Average
Stock
Price per
Exercise
Remaining
Options
Share
Price
Life (Years)
Outstanding and exercisable at December 31, 2006
643,000
$
3.75
$
3.75
Granted
10,000
3.75
3.75
Expired
—
Exercised
—
Outstanding and exercisable at December 31, 2007
653,000
3.75
3.75
4.2
Granted
736,735
5.02
Expired
—
Exercised
(143,000
)
3.75
Outstanding and exercisable at December 31, 2008
1,246,735
$
$
4.50
4.0
The aggregate intrinsic value of options outstanding and
    exercisable at December 31, 2008 and 2007 is $0 and
    $946,850, respectively. The aggregate intrinsic value represents
    the total pretax intrinsic value, based on options with an
    exercise price less than the Company's closing stock price
    of $3.54 and $5.20 as of December 31, 2008 and 2007,
    respectively, which would have been received by the option
    holders had those option holders exercised their options as of
    that date.
As of December 31, 2008 and 2007, there was no unrecognized
    compensation cost related to non-vested share-based compensation
    arrangements granted under the Company's stock option plan.
    During the year ended December 31, 2008, the Company has
    received approximately $536,000 as a result of the exercise of
    143,000 options.
F-27
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
NOTE 14 —
INCOME
    TAXES
At December 31, 2008, the Company had accumulated net
    operating losses of approximately $26,553,000, of which
    approximately $16,700,000 may be offset against future taxable
    income, if any, ratably through 2028.
The Company has fully reserved the approximately $7,588,000 tax
    benefit of these losses with a valuation allowance of the same
    amount, because the likelihood of realization of the tax benefit
    cannot be determined to be more likely than not.
There is a minimum current tax provision for the years ended
    December 31, 2008 and 2007.
The effective tax rate based on the federal and state statutory
    rates is reconciled to the actual tax rate for the years ended
    December 31, 2008 and 2007 as follows:
2008
2007
Statutory federal income tax rate
34
%
34
%
Statutory state income tax rate
6
6
Valuation allowance on net deferred tax assets
(40
)
(40
)
Effective tax rate
—
%
—
%
The components of the net deferred tax asset (liability) at
    December 31, 2008 and 2007 are as follows:
2008
2007
Deferred tax assets:
Net operating losses
$
6,148,000
$
2,120,000
Accrued compensation
120,000
120,000
Stock options
1,320,000
400,000
Valuation allowance
(7,588,000
)
(2,640,000
)
$
—
$
—
The Company's valuation allowance increased $4,948,000 and
    $1,140,000 for the years ended December 31, 2008 and 2007,
    respectively.
The Company has a tax benefit of approximately $1,320,000
    related to the grant of common stock to certain key employees
    and advisors. Pursuant to SFAS No. 123(R), the benefit
    will be recognized and recorded to APIC when the benefit is
    realized through the reduction of taxes payable.
The Company complies with the provisions of FASB Interpretation
    No. 48,
"Accounting for Uncertainty in Income
    Taxes — an interpretation of FASB Statement
    No. 109"
("FIN No. 48").
    FIN 48 addresses the determination of whether tax benefits
    claimed or expected to be claimed on a tax return should be
    recorded in the financial statements. Under FIN 48, the
    Company may recognize the tax benefit from an uncertain tax
    position only if it is more likely than not that the tax
    position will be sustained on an examination by the taxing
    authorities, based on the technical merits of the position. The
    Company has determined that the Company has no uncertain tax
    positions requiring recognition under FIN No. 48.
The Company is subject to U.S. federal income tax as well
    as income tax of certain state jurisdictions. The Company has
    not been audited by the U.S. Internal Revenue Service or
    any states in connection with its income taxes. The periods from
    January 1, 2005 to December 31, 2008 remain open to
    examination by the U.S. Internal Revenue Service and state
    authorities.
The Company recognizes interest accrued related to unrecognized
    tax benefits and penalties, if incurred, as a component of
    income tax expense.
F-28
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
NOTE 15 —
SEGMENT
    REPORTING
In June 1997, SFAS 131,
"Disclosure about Segments
    of an Enterprise and Related Information"
was issued,
    which amends the requirements for a public enterprise to report
    financial and descriptive information about its reportable
    operating segments. Operating segments, as defined in the
    pronouncement, are components of an enterprise about which
    separate financial information is available that is evaluated
    regularly by the Company in deciding how to allocate resources
    and in assessing performance. The financial information is
    required to be reported on the basis that is used internally for
    evaluating segment performance and deciding how to allocate
    resources to segments. The Company has no reportable segments at
    December 31, 2008 and 2007.
NOTE 16 —
RELATED
    PARTY TRANSACTIONS
OPERATING
    LEASE-HEADQUARTERS
The Company is renting the premises under a verbal agreement
    with ECAP, LLC, a related party. The managing member of ECAP,
    LLC was a director and is a shareholder of the Company and is
    also the brother of the Company's President and CEO. The
    rental agreement provides for rent and support, as agreed
    between the Company and ECAP, LLC and for reimbursement of
    expenses by the Company for office and other expenses. These
    expenses totaled $5,600 for the period from January 1, 2007
    to February 28, 2007.
As of March 1, 2007, the Company began to pay the $2,800
    per month rental payment directly to the unrelated landlord for
    this office space. There is no lease term and rental of the
    office space is on a month to month basis. Rent expense for the
    period from March 1, 2007 to December 31, 2007 totaled
    $28,000 relating to this lease. In the year ending
    December 31, 2008, the Company incurred $33,600 of expense
    related to this lease.
SERVICE
    AGREEMENT
The Company has entered into a services agreement dated
    May 29, 2003, as modified October 6, 2004, with one of
    its principal stockholders, Weston Solutions, Inc.
    ("Weston"). Weston has been engaged to provide
    engineering and design services in connection with the
    construction of the Woodbridge organic waste conversion
    facility. The total amounts incurred by the Company for services
    provided by Weston were $0 and $116,480 for the years ended
    December 31, 2008 and 2007, respectively.
LEGAL
    FEES
During the year ended 2007, the Company incurred legal fees
    totaling $10,000 to a law firm affiliated with the
    Company's President and CEO and partially owned by a
    brother of the Company's CEO. These fees of $10,000 were
    paid in 2008.
ACCRUED
    COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS
As of December 31, 2008 and 2007 the Company has an accrued
    liability totaling $430,748 and $397,781, respectively,
    representing accrued compensation to officers, directors and
    consultants.
CONVERTED
    ORGANICS OF RHODE ISLAND, LLC
Converted Organics of Rhode Island, LLC was formed for the
    purpose of developing and operating a waste to fertilizer
    facility in Johnston, Rhode Island. A development consultant who
    has provided services to the Company is a 10% minority owner of
    Converted Organics of Rhode Island, LLC. For the years ending
    December 31, 2008 and 2007, the consultant was paid $60,000
    and $60,000, respectively, for services rendered.
F-29
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
PACKAGING
    VENDOR
The Company has purchased packaging materials from a vendor
    which is partially owned by an employee of the Company. The
    Company made purchases of $141,000 from this vendor in the year
    ending December 31, 2008.
NOTE 17 —
    COMMITMENTS AND CONTINGENCIES
LEASES
In addition to the Company's IBRC commitment
    (Note 10) and operating lease commitment for its
    headquarters (Note 16), the Company signed a lease during
    June 2006 for its Woodbridge, New Jersey facility. The lease
    term is for ten years with an option to renew for an additional
    ten years. Future minimum lease payments under this lease are as
    follows:
For years ended December 31,
2009
$
934,820
2010
934,820
2011
946,195
2012
959,097
2013
967,383
2014 and thereafter
7,410,639
$
12,152,954
For the years ended December 31, 2008 and 2007, the Company
    has recorded rent expense of $740,351 and $745,633,
    respectively, in relation to this lease.
In September, 2008, the Company entered into a lease agreement
    for 9 acres of land at the central landfill in Johnston,
    RI, with the Rhode Island Resource Recovery Corporation. The
    Company plans to build its next facility at this location. The
    lease requires monthly payments of $9,167. Once the facility is
    operational, the monthly rent will also include a charge of $8
    per ton of fertilizer sold from the facility. The term of the
    lease is twenty years. Future minimum payments under this lease
    are as follows:
For years ended December 31,
2009
$
110,000
2010
110,000
2011
110,000
2012
110,000
2013
110,000
2014 and thereafter
1,613,334
$
2,163,334
The Company recognized $36,667 of expense related to this lease
    in 2008, which is included in Research & Development
    on the consolidated statement of operations.
LEGAL
    PROCEEDINGS
The Company is not currently aware of any pending or threatened
    legal proceeding to which it is or would be a party, or any
    proceedings being contemplated by governmental authorities
    against it, or any of its executive officers or directors
    relating to the services performed on the Company's behalf
    except that the
F-30
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS — (Continued)
Company received notice that a complaint had been filed in a
    putative class action lawsuit on behalf of 59 persons or
    entities that purchased units pursuant to a financing terms
    agreement dated April 11, 2006 ("FTA"), captioned
    Gerald S. Leeseberg, et al. v. Converted Organics, Inc.,
    filed in the U.S. District Court for the District of
    Delaware. The lawsuit alleges breach of contract, conversion,
    unjust enrichment, and breach of the implied covenant of good
    faith in connection with the alleged failure to register certain
    securities issued in the FTA, and the redemption of our
    Class A warrants in November 2008. The lawsuit seeks
    damages related to the failure to register certain securities,
    including alleged late fee payments, of approximately
    $5.25 million, and unspecified damages related to the
    redemption of the Class A warrants. In February 2009, the
    Company filed a Motion for Partial Dismissal of Complaint. It is
    uncertain when the Court will rule on this motion. The Company
    plans to vigorously defend itself in this matter and is unable
    to estimate any contingent losses that may or may not be
    incurred as a result of this litigation and its eventual
    disposition. Accordingly, no contingent loss has been recorded
    by the Company related to this matter.
NOTE 18 —
SUBSEQUENT
    EVENTS
On January 24, 2009, the Company entered into an amendment
    on its $4.5 million convertibles debentures, which became
    due on January 24, 2009. The lenders extended the due date
    of these notes until July 24, 2009 and began to convert
    these notes into shares of the Company's common stock using
    the default conversion rate as described in Note 11. The
    Company and the lenders further agreed that no interest would be
    charged during the six-month extension and that it is the
    lenders' intention to convert the loan into shares
    sufficient to pay-off the balance of the debt.
On March 6, 2009, the Company entered into an agreement
    with the holders of its $17.5 million of New Jersey
    Economic Development Authority Bonds to release
    $2.0 million for capital expenditures and lease payments on
    its New Jersey facility and to defer interest payments on the
    bonds thru July 30, 2009. These funds had been held in a
    reserve for bond principal and interest payments along with a
    reserve for lease payments. As consideration for the release of
    the reserve funds, the Company issued the bond holders 2,284,409
    Class B warrants. The Class B warrants are exercisable
    at $11.00 per warrant share.
On March 6, 2009, the Company entered into a into an
    agreement with a private investor under which, upon stockholder
    approval, will issue a series of 10% convertible notes in an
    aggregate principal amount of up to $1,500,000 with a 10%
    original issue discount. The investor placed funds into escrow
    on March 10, 2009 to acquire $500,000 in principal amount
    of the convertible notes to be released upon receiving
    stockholder approval, and will acquire four additional $250,000
    increments in principal amount of the note with the first
    increment occurring on the 30th day after receiving
    stockholder approval, and the remaining three increments
    occurring monthly, thereafter.
F-31
Table of Contents
Item 1.
Financial
    Statements
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    BALANCE SHEETS
June 30,
December 31,
2009
2008
(Unaudited)
(Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
1,808,156
$
3,357,940
Restricted cash
50,941
2,547,557
Accounts receivable, net
503,998
313,650
Inventories
407,973
289,730
Prepaid rent
490,286
389,930
Other prepaid expenses
128,399
73,937
Deposits
92,520
141,423
Other receivables
—
94,250
Deferred financing and issuance costs, net
—
22,042
Total current assets
3,482,273
7,230,459
Deposits
861,244
912,054
Restricted cash
29,716
60,563
Property and equipment, net
22,825,134
19,725,146
Construction-in-progress
217,564
974,900
Capitalized bond costs, net
838,175
862,010
Intangible assets, net
2,709,961
2,852,876
Total assets
$
30,964,067
$
32,618,008
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Term notes payable — current
$
1,261,089
$
89,170
Accounts payable
4,279,836
3,583,030
Accrued compensation, officers, directors and consultants
389,849
430,748
Accrued legal and other expenses
363,545
164,620
Accrued interest
616,249
601,166
Convertible notes payable, net of unamortized discount
342,984
4,602,660
Capital lease obligations — current
11,284
—
Mortgage payable
—
3,006
Total current liabilities
7,264,836
9,474,400
Capital lease obligation, net of current portion
34,806
—
Term notes payable, net of current portion
1,008,094
—
Mortgage payable, net of current portion
—
245,160
Convertible note payable, net of current portion
198,466
351,516
Bonds payable
17,500,000
17,500,000
Total liabilities
26,006,202
27,571,076
COMMITMENTS 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
    40,000,000 shares at December 31, 2008 and 75,000,000
    at June 30, 2009
1,835
743
Additional paid-in capital
40,668,709
31,031,647
Member's equity
—
619,657
Accumulated deficit
(35,712,679
)
(26,605,115
)
Total owners' equity
4,957,865
5,046,932
Total liabilities and owners' equity
$
30,964,067
$
32,618,008
The accompanying notes are an integral part of these
    consolidated financial statements.
F-32
Table of Contents
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    STATEMENTS OF OPERATIONS
Three Months Ended
Six Months Ended
June 30,
June 30,
June 30,
June 30,
2009
2008
2009
2008
(Unaudited)
Revenues
$
992,364
$
492,864
$
1,484,203
$
752,907
Cost of good sold
2,113,074
402,552
3,757,264
624,548
Gross (loss) profit
(1,120,710
)
90,312
(2,273,061
)
128,359
Operating expenses
General and administrative expenses
2,502,643
3,759,197
4,175,661
5,346,419
Research and development
12,116
70,540
179,500
198,387
Depreciation expense
306,036
3,051
626,216
6,889
Amortization of capitalized costs
79,251
99,834
180,542
186,083
Amortization of license
4,125
4,125
8,250
8,250
Loss from operations
(4,024,881
)
(3,846,435
)
(7,443,230
)
(5,617,669
)
Other income/(expenses)
Interest income
11,952
77,807
22,247
206,627
Derivative gain
2,153,106
—
3,565,091
—
Other income
39,201
—
39,201
—
Interest expense
(1,202,959
)
(2,374,165
)
(3,109,711
)
(3,127,332
)
1,001,300
(2,296,358
)
516,828
(2,920,705
)
Loss before provision for income taxes
(3,023,581
)
(6,142,793
)
(6,926,402
)
(8,538,374
)
Provision for income taxes
—
—
—
—
Net loss
$
(3,023,581
)
$
(6,142,793
)
$
(6,926,402
)
$
(8,538,374
)
Net loss per share, basic and diluted
(0.19
)
(1.02
)
(0.58
)
(1.49
)
Weighted average common shares outstanding
15,937,329
6,009,919
11,985,904
5,747,616
The accompanying notes are an integral part of these
    consolidated financial statements.
F-33
Table of Contents
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    STATEMENT OF CHANGES IN OWNERS' EQUITY (DEFICIT)
Six
    Months Ended June 30, 2009
Common Stock
Total
Share Issued and
Additional
Member's
Accumulated
Owners' Equity
Outstanding
Amount
Paid-in Capital
Equity
Deficit
(Deficit)
(Unaudited)
Balance, January 1, 2009, before cumulative effect of
    change in accounting principle
7,431,436
$
743
$
31,031,647
$
619,657
$
(26,605,115
)
$
5,046,932
Cumulative effect of change in accounting principle
—
—
(2,936,250
)
—
(2,146,858
)
(5,083,108
)
Balance, January 1, 2009, after cumulative effect of change
    in accounting principle
7,431,436
743
28,095,397
619,657
(28,751,973
)
(36,176
)
Member's contributions
—
—
—
915,651
—
915,651
Member's distributions
—
—
—
(201,630
)
—
(201,630
)
Deconsolidation of former variable interest entity
—
—
—
(1,367,982
)
—
(1,367,982
)
Common stock issued to holders of convertible notes payable in
    connection with extension
200,000
20
561,980
—
—
562,000
Common stock issued upon conversion of convertible notes payable
7,600,644
760
6,224,835
—
—
6,225,595
Common stock issued as compensation
121,528
12
120,301
—
—
120,313
Warrants issued in connection with release of restricted cash
—
—
662,479
—
—
662,479
Warrants issued in connection with financing short-term
    non-convertible note
—
—
920,995
—
—
920,995
Issuance of stock options
—
—
190,022
—
—
190,022
Common stock issued upon exercise of warrants
1,500,000
150
1,964,850
—
—
1,965,000
Issuance of common stock
1,500,000
150
1,927,850
—
—
1,928,000
Net income (loss)
—
—
—
34,304
(6,960,706
)
(6,926,402
)
Balance, June 30, 2009
18,353,608
$
1,835
$
40,668,709
$
—
$
(35,712,679
)
$
4,957,865
The accompanying notes are an integral part of these
    consolidated financial statements.
F-34
Table of Contents
CONVERTED
    ORGANICS INC.
CONSOLIDATED
    STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
June 30,
2009
2008
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(6,926,402
)
$
(8,538,374
)
Adjustments to reconcile net loss to net cash used in operating
    activities:
Consolidation of variable interest entity
—
6,164
Deconsolidation of variable interest entity
(596,170
)
—
Amortization of intangible asset — license
8,250
8,250
Amortization of capitalized bond costs
23,835
23,835
Amortization of deferred financing fees
22,042
159,100
Amortization of intangible assets
134,665
—
Depreciation of fixed assets
1,015,444
98,194
Beneficial conversion feature
230,492
858,064
Amortization of discounts on private financing
147,813
1,563,750
Common stock issued for extension of convertible note payable
562,000
—
Common stock issued as compensation
120,313
—
Stock option compensation expense
190,022
2,329,951
Warrants issued in connection with private financing and equity
    transactions
1,583,474
—
Derivative gain
(3,565,091
)
—
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable
(262,558
)
(238,340
)
Inventory
(118,243
)
(265,187
)
Prepaid expenses and other current assets
(154,818
)
(576,152
)
Other assets
94,250
9,115
Deposits
108,713
(147,397
)
Increase (decrease) in:
Accounts payable and other accrued expenses
3,195,195
598,309
Accrued compensation — officers, directors and consultants
(40,899
)
(38,423
)
Accrued interest
133,467
29,729
Other
(39,201
)
25,000
Net cash used in operating activities
(4,133,407
)
(4,094,412
)
CASH FLOWS FROM INVESTING ACTIVITIES
Release of restricted cash
2,527,463
6,194,617
Cash paid for acquisitions
—
(1,500,000
)
Purchase of fixed assets
(3,512,559
)
(131,222
)
Capitalized interest
—
(398,570
)
Construction costs
—
(5,329,283
)
Net cash used in investing activities
(985,096
)
(1,164,458
)
CASH FLOWS FROM FINANCING ACTIVITIES Member's contributions
230,983
425,000
Member's distributions
(201,630
)
—
Net proceeds from exercise of options
—
536,250
Net proceeds from exercise of warrants
1,965,000
6,159,580
Net proceeds from stock offering
1,928,000
—
Net proceeds from nonconvertible short-term note
1,183,500
—
Repayment of nonconvertible short-term note
(1,331,313
)
—
Proceeds from private financing, net of original issue discount
—
3,715,000
Repayment of capital lease obligations
(6,888
)
—
Repayment of term notes
(197,990
)
(657,276
)
Repayment of mortgage payable
(943
)
(4,833
)
Net cash provided by financing activities
3,568,719
10,173,721
NET (DECREASE) INCREASE IN CASH
(1,549,784
)
4,914,851
Cash and cash equivalents, beginning of period
3,357,940
287,867
Cash and cash equivalents, end of period
$
1,808,156
$
5,202,718
Supplemental cash flow information:
Cash paid during the period in:
Interest
$
1,031,973
$
893,571
Non-cash financing activities:
Financing costs paid from proceeds of private financing
$
—
$
335,000
Equipment acquired through assumption of capital lease
52,979
—
Equipment acquired through assumption of term note
118,250
—
Common stock issued upon conversion of convertible notes payable
6,225,595
—
Beneficial conversion discount on convertible note
—
2,943,386
Discount on warrants issued in connection with financing
—
1,113,750
The accompanying notes are an integral part of these
    consolidated financial statements.
F-35
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 —
BASIS OF
    PRESENTATION AND NATURE OF OPERATIONS
The accompanying unaudited interim consolidated financial
    statements have been prepared in accordance with accounting
    principles generally accepted in the United States of America
    and the rules and regulations of the Securities and Exchange
    Commission (the "SEC") for interim financial
    reporting. Certain information and footnote disclosures normally
    included in the annual financial statements of Converted
    Organics Inc. (the "Company") have been condensed or
    omitted. In the Company's opinion, the unaudited interim
    consolidated financial statements and accompanying notes reflect
    all adjustments, consisting of normal and recurring adjustments
    that are necessary for a fair presentation of its financial
    position and operating results as of and for the three and six
    month interim periods ended June 30, 2009 and 2008.
The results of operations for the interim periods are not
    necessarily indicative of the results to be expected for the
    entire year. This
Form 10-Q
should be read in conjunction with the audited financial
    statements and notes thereto included in the Company's
Form 10-K
as of and for the year ended December 31, 2008.
NATURE
    OF OPERATIONS
Converted Organics Inc. uses food and other waste as a raw
    material to manufacture, sell and distribute all-natural soil
    amendment products combining disease suppression and nutrition
    characteristics. The Company generates revenues from two
    sources: product sales and tip fees. Product sales revenue comes
    from the sale of the Company's fertilizer products. The
    Company's products possess a combination of nutritional,
    disease suppression and soil amendment characteristics. Tip fee
    revenue is derived from waste haulers who pay the Company
    "tip" fees for accepting food waste generated by food
    distributors such as grocery stores, produce docks and fish
    markets, food processors, and hospitality venues such as hotels,
    restaurants, convention centers and airports.
Converted Organics of California, LLC ("California"),
    a California limited liability company and wholly-owned
    subsidiary of the Company, was formed when the Company acquired
    the assets of United Organics Products, LLC. California operates
    a plant in Gonzales, California, in the Salinas Valley.
    California produces approximately 25 tons of organic fertilizer
    per day, and sells primarily to the California agricultural
    market. The California facility employs a proprietary method
    called High Temperature Liquid Composting ("HTLC").
    The facility is currently being upgraded to expand its capacity
    and to enable it to accept larger amounts of food waste from
    waste haulers, thereby increasing revenue.
The Company's second facility, located in Woodbridge, New
    Jersey ("Woodbridge"), is designed to service the New
    York-Northern New Jersey metropolitan area. The Company
    constructed this facility and it became partially operational in
    the second quarter of 2008. Converted Organics of Woodbridge,
    LLC, a New Jersey limited liability company and wholly owned
    subsidiary of the Company, was formed for the purpose of owning,
    constructing and operating the Woodbridge, New Jersey facility.
Converted Organics of Rhode Island, LLC ("Rhode
    Island"), a Rhode Island limited liability company and
    subsidiary of the Company, was formed in July 2008 for the
    purpose of developing a facility at the Rhode Island central
    landfill.
NOTE 2 —
GOING
    CONCERN — MANAGEMENT'S PLAN OF
    OPERATION
As of December 31, 2008, the Company had incurred a net
    loss of approximately $16.2 million during the year ended
    December 31, 2008, had a working capital deficiency as of
    December 31, 2008 and an accumulated deficit of
    approximately $26.6 million. As of June 30, 2009, the
    Company continued to have a working capital deficiency and for
    the six months ended June 30, 2009 the Company had a net
    loss of $6.9 million and an accumulated deficit of
    approximately $35.7 million. The report of our independent
F-36
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
registered public accounting firm as of and for the year ended
    December 31, 2008 contains an explanatory paragraph raising
    substantial doubt about the Company's ability to continue
    as a going concern. The consolidated financial statements do not
    include adjustments that might result from the outcome of this
    uncertainty.
The Company currently has manufacturing capabilities in its
    Woodbridge and Gonzales facilities as a means to generate
    revenues and cash. The Company's cash requirements on a
    monthly basis are approximately $275,000 at the corporate level,
    $500,000 for Woodbridge and $175,000 for Gonzales. Currently,
    only the Gonzales facility is generating enough cash flow to
    cover its cash requirements, leaving the Company with a cash
    shortfall of approximately $725,000 per month. The Company
    estimates, that at current production capacity, it could provide
    enough product to achieve additional sales of $1,000,000 to
    $1,500,000 per month which, at those levels, would provide
    sufficient cash flow to cover the Company's operating
    requirements, including additional variable costs associated
    with increased production. Until such sales levels are achieved
    and the Company is cash flow positive, the Company will have to
    seek additional means of financing in order to cover the
    shortfall.
During the first six months of 2009, the Company has settled the
    entire $4.5 million convertible debenture balance from the
    Company's private financing in 2008 (the "2008
    Financing") by converting the balance into shares of its
    common stock. In addition, during the first six months of 2009,
    the holders of the NJEDA bonds released $2.0 million of
    escrowed funds for the Company to use and the Company has
    secured $1,331,000 of secured debt financing. In addition, the
    Company has filed a shelf registration statement which will
    allow the Company to sell shares into the market to raise
    additional financing. The Company plans to use the proceeds from
    the $1,331,000 secured debt and the shelf registration statement
    to fund working capital requirements, retire debt and to add
    additional sales and marketing personnel in order to achieve
    increased sales levels during the remainder of 2009. During the
    second quarter of 2009, the Company raised approximately
    $4.2 million from the sale of common stock registered under
    the shelf registration statement. These funds were used to
    retire the $1,331,000 secured debt and to provide additional
    working capital for the Company.
There can be no assurance that the Company can raise additional
    funds from the sale of common stock registered under the shelf
    registration statement or achieve the desired sales levels and,
    if neither were achieved, the Company estimates that it would
    have sufficient cash to last through October 2009. In addition,
    the Company has outstanding amounts due to its New Jersey
    construction vendors of approximately $4.2 million. The
    Company does not anticipate that funds from the sale of common
    stock registered under the shelf registration statement will be
    used towards payment of these amounts. The Company has
    negotiated with all, except one, contractor to issue notes for
    the outstanding amount owed. The Company has not finalized
    negotiations with the remaining contractor who has placed a lien
    on the Woodbridge facility and has commenced a lawsuit in the
    matter.
NOTE 3 —
SIGNIFICANT
    ACCOUNTING POLICIES
CONSOLIDATION
The accompanying unaudited interim consolidated financial
    statements include the transactions and balances of Converted
    Organics Inc. and its subsidiaries, Converted Organics of
    California, LLC, Converted Organics of Woodbridge, LLC and
    Converted Organics of Rhode Island, LLC. The transactions and
    balances of Valley Land Holdings, LLC, a variable interest
    entity of Converted Organics of California, LLC, were also
    consolidated therein until April 1, 2009. All intercompany
    transactions and balances have been eliminated in consolidation.
The consolidated financial statements included Valley Land
    Holdings, LLC ("VLH"), as VLH had been deemed to be a
    variable interest entity of the Company as it was the primary
    beneficiary of that variable interest entity following the
    acquisition of the net assets of United Organic Products, LLC.
    VLH's assets and
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
liabilities consist primarily of cash, land and a mortgage note
    payable on the land on which the California facility is located.
    Its operations consist of rental income on the land from the
    Company and related operating expenses. In 2009, the sole member
    of VLH contributed cash and property to VLH in a
    recapitalization. VLH has henceforth been sufficiently
    capitalized and is no longer considered to be a variable
    interest entity of the Company. The Company has deconsolidated
    VLH as a variable interest entity as of April 1, 2009 in
    its financial statements.
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 the reported amounts and disclosures
    in the consolidated financial statements. Actual results could
    differ from those estimates.
CASH
    AND CASH EQUIVALENTS
The Company considers financial instruments with an original
    maturity date of three months or less from the date of purchase
    to be cash equivalents. The Company had cash equivalents of $0
    at June 30, 2009 and $534,800 at December 31, 2008
    consisting of certificates of deposit. These certificates of
    deposit were held by VLH.
RESTRICTED
    CASH
As of June 30, 2009, the Company had remaining
    approximately $81,000 of restricted cash as required by its bond
    agreement with the New Jersey Economic Development Authority.
    This cash was raised by the Company in its initial public
    offering and bond financing on February 16, 2007 and is set
    aside in reserve for bond principal and interest payments along
    with a reserve for lease payments. The Company has classified
    this restricted cash as non-current to the extent that such
    funds are to be used to acquire non-current assets or are to be
    used to service non-current liabilities. Third party trustee
    approval is required for disbursement of all restricted funds.
ACCOUNTS
    RECEIVABLE
Accounts receivable represents 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 June 30, 2009 and December 31, 2008, an
    allowance for doubtful accounts of $16,000 has been established
    against certain receivables that management has identified as
    uncollectible.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
    determined by the first in, first out basis. Inventory consists
    primarily of raw materials and finished goods, which consist of
    soil amendment products. Inventory balances are presented net of
    applicable reserves. There were no inventory reserves deemed
    necessary by management at June 30, 2009 and
    December 31, 2008.
PREPAID
    RENT
The Company has recorded prepaid rent on its consolidated
    balance sheets which represents the difference between actual
    lease rental payments made as of June 30, 2009 and
    December 31, 2008, and the straight-line rent expense
    recorded in the Company's consolidated statements of
    operations for the periods then ended relating to the
    Company's facilities in Woodbridge, New Jersey and
    Gonzales, California.
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
DEFERRED
    FINANCING COSTS
In connection with the private financing arrangement of
    January 24, 2008, the Company incurred legal and placement
    fees of $345,000. These fees were amortized over one year.
    Amortization expense of $22,042 and $150,458 was recorded during
    the six months ended June 30, 2009 and 2008, respectively,
    related to these costs. These costs have been fully amortized
    into expense as of June 30, 2009.
INTANGIBLE
    ASSETS
The Company accounts for its intangible assets in accordance
    with SFAS No. 142,
"Goodwill and Other
    Intangible Assets."
SFAS No. 142 requires
    that intangible assets with finite lives, such as the
    Company's license, 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.
LONG-LIVED
    ASSETS
In accordance with SFAS No. 144,
"Accounting
    for the Impairment or Disposal of Long-Lived Assets",
long-lived assets are reviewed for impairment whenever
    events or changes in circumstances indicate that the carrying
    amount of an asset may not be recoverable. Such reviews are
    based on a comparison of the asset's undiscounted cash
    flows to the recorded carrying value of the asset. If the
    asset's recorded carrying value exceeds the sum of the
    undiscounted cash flows expected to result from the use and
    eventual disposition of the asset, the asset is written down to
    its estimated fair value. Impairment charges, if any, are
    recorded in the period in which the impairment is determined. No
    impairment charges were deemed necessary during the three and
    six month periods ended June 30, 2009 or 2008.
PROPERTY
    AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
    computed on the straight-line basis over the estimated useful
    lives of seven to twenty years.
CAPITALIZED
    BOND COSTS
In connection with its $17.5 million bond financing on
    February 16, 2007, the Company has capitalized bond
    issuance costs of $953,375 and is amortizing these costs over
    the life of the bond. Amortization expense of $11,917 and
    $23,835 was recorded in each of the three and six month periods
    ended June 30, 2009 and 2008, respectively.
REVENUE
    RECOGNITION
In accordance with Staff Accounting Bulletin 104,
"Revenue Recognition in Financial Statements,"
("SAB 104") revenue is recognized when each
    of the following criteria is 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.
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
SHIPPING
    AND HANDLING COSTS
The Company records freight billed to customers for shipment of
    product as revenue with an offsetting charge to cost of goods
    sold for freight paid on shipments to customers.
FAIR
    VALUE MEASUREMENTS
The Company has partially implemented SFAS No. 157,
"Fair Value Measurements"
("SFAS No. 157") for assets and liabilities.
    SFAS No. 157 defines fair value, establishes a
    framework for measuring fair value, and expands disclosure about
    fair value. This standard only applies when other standards
    require or permit the fair value measurement of assets and
    liabilities. It does not increase the use of fair value
    measurement. The standard is effective for fiscal years
    beginning after November 15, 2008. The major categories of
    assets and liabilities that have not been measured and disclosed
    using SFAS No. 157 fair value guidance are property
    and equipment and goodwill.
NEWLY
    ADOPTED ACCOUNTING STANDARDS
In January 2009, the Company adopted Statement of Financial
    Accounting Standards ("SFAS"), No. 161,
"Disclosures about Derivative Instruments and Hedging
    Activities"
("SFAS 161"), which changes
    the disclosure requirements for Derivative instruments and
    hedging activities. SFAS 161 requires enhanced disclosures
    about (a) how and why an entity uses derivative
    instruments, (b) how derivative instruments and related
    hedged items are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
    Activities"
and its related interpretations, and
    (c) how derivative instruments and related hedged items
    affect an entity's financial position, financial
    performance, and cash flows. The adoption of SFAS 161 did
    not have a material impact on the condensed consolidated
    financial statements.
In January 2009, the Company adopted Emerging Issues Task Force
    "(EITF") Issue
No. 07-5,
Determining Whether an Instrument (or Embedded Feature) is
    Indexed to an Entity's Own Stock
("EITF 07-5")
effective January 1, 2009. The adoption of
EITF 07-5's
requirements can affect the accounting for warrants and many
    convertible instruments with certain provisions that protect
    holders from a decline in the stock price (or
    "down-round" provisions). Warrants and convertible
    instruments with such provisions may no longer be recorded in
    equity. The Company evaluated whether its stock warrants and the
    conversion feature in its convertible notes contain provisions
    that protect holders from declines in the stock price or
    otherwise could results in modification of the exercise price
and/or
shares to be issued under the respective agreements based on a
    variable that is not an input to the fair value of a
fixed-for-fixed
option. The Company determined that the conversion features in
    the convertible notes issued in the January 2008 private
    financing contain such provisions.
In accordance with
EITF 07-5,
the Company, beginning on January 1, 2009, bifurcated and
    recognized these embedded conversion features as derivative
    liabilities at their fair value on each reporting date. The
    cumulative effect of the change in accounting for these
    instruments of $5,083,108 was recognized as an adjustment to the
    opening balance of accumulated deficit and additional paid-in
    capital at January 1, 2009. The cumulative effect
    adjustment was the difference between the amounts recognized in
    the consolidated balance sheet before initial adoption of
EITF 07-5
and the amounts recognized in the consolidated balance sheet
    upon the initial application of
EITF 07-5.
The amounts recognized in the balance sheet as a result of the
    initial application of
EITF 07-5
on January 1, 2009 were determined based on the amounts
    that would have been recognized if
EITF 07-5
had been applied from the issuance date of conversion features.
In April 2009, the FASB issued FASB Staff Position
No. FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial Instruments
("FSP
No. 107-1").
FSP
No. 107-1
requires summarized disclosure in interim periods of the fair
    value of all financial instruments for which it is practicable
    to estimate that value, whether recognized or not recognized in
    the financial statements, as required by SFAS No. 107,
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
Disclosures about Fair Value of Financial Instruments
and
    Accounting Principles Board Opinion No. 28,
Interim
    Financial Reporting.
Previous to FSP
No. 107-1,
such disclosures were required only for annual periods. The
    adoption of FSP
No. 107-1
on April 1, 2009 resulted in additional disclosures in the
    Company's consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events
("SFAS No. 165").
    SFAS No. 165 establishes general standards of
    accounting for and disclosure of events that occur after the
    balance sheet date but before financial statements are issued or
    are available to be issued. The adoption of
    SFAS No. 165 on June 30, 2009 required the
    Company to disclose the date through which they have evaluated
    subsequent events and whether that date is the date the
    financials were issued.
EARNINGS
    (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed by
    dividing the net income (loss) attributable to the common
    stockholders (the numerator) by the weighted average number of
    shares of common stock outstanding (the denominator) during the
    reporting periods. Diluted income (loss) per share is computed
    by increasing the denominator by the weighted average number of
    additional shares that could have been outstanding from
    securities convertible into common stock, such as stock options
    and warrants (using the "treasury stock" method), and
    convertible preferred stock and debt (using the
    "if-converted" method), unless their effect on net
    income (loss) per share is antidilutive. Under the
    "if-converted" method, convertible instruments are
    assumed to have been converted as of the beginning of the period
    or when issued, if later. The effect of computing the diluted
    income (loss) per share is antidilutive and, as such, basic and
    diluted earnings (loss) per share are the same for the three and
    six month periods ended June 30, 2009 and 2008.
SEGMENT
    REPORTING
The Company has no reportable segments as defined by
    SFAS No. 131,
"Disclosure about Segments of an
    Enterprise and Related Information."
NOTE 4 —
INVENTORIES
The Company's inventories consisted of the following at
    June 30, 2009 and December 31, 2008:
2009
2008
Finished goods
$
114,580
$
214,053
Raw materials
152,016
18,785
Packaging materials
141,377
56,892
Total inventories
$
407,973
$
289,730
NOTE 5 —
FAIR
    VALUE MEASUREMENTS
SFAS No. 157,
"Fair Value Measurements"
(SFAS No. 157), defines fair value as the price
    that would be received to sell an asset or paid to transfer a
    liability in an orderly transaction between market participants,
    as of the measurement date. The standard specifies a hierarchy
    of valuation techniques based upon whether the inputs to those
    valuation techniques reflect assumptions other market
    participants would use based upon market data obtained from
    independent sources (also referred to as observable inputs). In
    accordance with SFAS No. 157, the following summarizes
    the fair value hierarchy:
•
Level 1
— Quoted prices in active markets
    that are unadjusted and accessible at the measurement date for
    identical, unrestricted assets or liabilities;
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
•
Level 2
— Quoted prices for identical
    assets and liabilities in markets that are not active, quoted
    prices for similar assets and liabilities in active markets or
    financial instruments for which significant observable inputs
    are available, either directly or indirectly such as interest
    rates and yield curves that are observable at commonly quoted
    intervals; and
•
Level 3
— prices or valuations that
    require inputs that are unobservable.
In certain cases, the inputs used to measure fair value may fall
    into different levels of the fair value hierarchy. In such
    cases, the level in the fair value hierarchy within which the
    fair value measurement in its entirety falls has been determined
    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.
The Company's assets and liabilities that are reported at
    fair value in the accompanying consolidated balance sheets as of
    June 30, 2009 and December 31, 2008 were as follows:
Balance
Observable Inputs
June 30, 2009
December 31, 2008
Assets
Certificate of Deposit
Level 2
$
0
$
534,821
The Company has other non-derivative financial instruments, such
    as cash, accounts receivable, accounts payable, accrued expenses
    and long-term debt, whose carrying amounts approximate fair
    value.
NOTE 6 —
DEBT
TERM
    NOTES
The Company has a term note payable to its CEO, Edward J.
    Gildea. The unsecured term note for $89,170 is dated
    April 30, 2007 with an original maturity of April 30,
    2009 and accrues interest at 12% per annum. The note has been
    extended for one year until April 30, 2010. The Company
    paid accrued interest of $21,400 upon extension of the
    note's due date. This note is subordinate to the New Jersey
    EDA bonds.
The Company entered into a financing agreement with an equipment
    financing company to acquire equipment for its Woodbridge
    facility. The note is for $118,250, bears an imputed interest
    rate of 9% and has a three year term, maturing January, 2012.
On April 1, 2009, the Company agreed to convert certain
    accounts payable into a 12 month note with its landlord at
    the New Jersey facility, Recycling Technology Development
    Corporation ("Recycling Technology"). The Note bears
    interest at 9%, payable quarterly in arrears commencing
    September 30, 2009. The Note requires payments of $263,573
    on September 30 and December 31, 2009, to be applied first
    to accrued interest and then to principal. A final installment
    of $318,832 is due on March 31, 2010.
On June 17, 2009, the Company agreed to convert certain
    accounts payable into a 24 month note with SNC-Lavalin
    Project Services, Inc. ("SNC-Lavalin") for $888,000.
    The terms of the Note require a $100,000 down payment, interest
    only payments for six months and the remaining principal balance
    to be repaid in 18 monthly installments of $43,778
    commencing January 16, 2010. The Note has a stated interest
    rate of 6% for the first six months and 0% for months seven
    through twenty four. SNC-Lavalin's lien will be released
    upon full and final payment of the Note. The Company has
    recorded a discount on the note representing imputed interest of
    $39,200, which will be amortized during the non-interest bearing
    period of the note repayment.
On June 19, 2009, the Company also agreed to convert
    certain accounts payable into a 24 month note with
    Hatzel & Buehler, Inc. ("Hatzel &
    Buehler") for $620,235. The terms of the Note require a
    $65,560 down payment, interest only payments for six months and
    the remaining principal and interest balance to be
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
repaid in 18 monthly installments of $32,300 commencing
    February 1, 2009. The Note has a stated interest rate of 6%
    for the entire 24 month term. Hatzel &
    Buehler's lien will be released upon full and final payment
    of the Note.
The Company obtained the necessary bondholder consents to enter
    into these agreements.
BOND
    FINANCING
On February 16, 2007, concurrent with its initial public
    offering, the Company's wholly-owned subsidiary,
    Woodbridge, completed the sale of $17,500,000 of New Jersey
    Economic Development Authority Bonds. Direct financing costs
    related to this issuance totaled approximately $953,000, which
    have been capitalized and are being amortized over the life of
    the bonds. The bonds carry a stated interest rate of 8% and
    mature on August 1, 2027. The bonds are secured by a
    leasehold mortgage and a first lien on the equipment of
    Woodbridge. In addition, Woodbridge had agreed to, among other
    things, establish a fifteen month capitalized interest reserve
    and to comply with certain financial statement ratios. The
    capitalized interest reserve has been depleted and is now being
    funded monthly by the Company. The Company has provided a
    guarantee to the bondholders on behalf of Woodbridge for the
    entire bond offering.
On March 6, 2009, the Company entered into an agreement
    with the holders of the New Jersey Economic Development
    Authority Bonds to release $2.0 million for capital
    expenditures on its New Jersey facility and to defer interest
    payments on the bonds through July 30, 2009. These funds
    had been held in a reserve for bond principal and interest
    payments along with a reserve for lease payments. As
    consideration for the release of the reserve funds, the Company
    issued the bond holders 2,284,409 Class B warrants. The
    Class B warrants are exercisable at $11.00 per warrant. The
    expense associated with these warrants of $662,000 is reflected
    as interest expense in the consolidated statements of operations
    for the six months ended June 30, 2009. On July 30,
    2009 the deferred interest payments were paid in full.
CONVERTIBLE
    NOTE PAYABLE
On January 24, 2008, in conjunction with the purchase of
    the net assets of UOP, the Company issued a note payable to the
    former sole member in the amount of $1,000,000. The note bears
    interest of 7% per annum and matures on February 1, 2011;
    monthly principal and interest payments are $30,877. The note
    became convertible by the holder six months after issuance. The
    Company recognized a discount related to the intrinsic value of
    the beneficial conversion feature of the note as interest
    expense through the stated redemption date of the note. That
    amount was calculated to be $7,136, and has been recorded as a
    component of additional paid-in capital. The balance of this
    note and the related interest expense had been eliminated in the
    consolidation of VLH, a variable interest entity, during the
    three month period ended March 31, 2009, as the related
    convertible note receivable was contributed to VLH by its
    member. As of June 30, 2009, VLH is no longer considered to
    be a variable interest entity of the Company, and therefore the
    balance of the note and the related interest are no longer
    eliminated in the consolidation.
During the six months ending June 30, 2009, the holder of
    the note commenced converting the principal and interest
    payments to shares of common stock. Accordingly, the Company
    issued 102,500 shares of common stock to the note holder,
    representing principal and interest payments of approximately
    $138,000.
MORTGAGE
    NOTE PAYABLE
The Company had a mortgage note payable on the land upon which
    the California facility resides, through consolidation of VLH.
    The note is for $250,000, bears interest at 6.75% per annum and
    matures five years from inception. Monthly payments of $2,871
    are based on a ten year amortization. This mortgage payable is
    no longer reflected in the financial statements of the Company
    as the former variable interest entity has been deconsolidated.
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
PRIVATE
    FINANCING
On January 24, 2008, the Company entered into a private
    financing with three investors (the "Investors") for a
    total amount of $4,500,000 (the "Financing"). The
    Financing was offered at an original issue discount of 10%. The
    Company used the proceeds to fund the acquisitions described
    above, to fund further development activities and to provide
    working capital. As consideration for the Financing, the
    Investors received a note issued by the Company in the amount of
    $4,500,000 with interest accruing at 10% per annum to be paid
    monthly and the principal balance to be paid in full one year
    from the closing date (the "Note"). In addition, the
    Company issued to the Investors 750,000 Class A Warrants
    and 750,000 Class B Warrants, which may be exercised at
    $8.25 and $11.00 per warrant, respectively (the
    "Warrants"). The Company further agreed not to call
    any Warrants until a registration statement registering all of
    the Warrants was declared effective. A placement fee of $225,000
    was paid from the proceeds of this loan.
In connection with the Financing, the Company had agreed that
    within 75 days of the closing date, the Company would have
    a shareholder vote to seek approval to issue a convertible
    debenture with an interest rate of 10% per annum, which would be
    convertible into common stock pursuant to terms of the debenture
    agreement, or such other price as permitted by the debenture
    (the "Convertible Debenture"). Upon shareholder
    approval, the Note was replaced by this Convertible Debenture
    and one half of each of the Class A Warrants and of the
    Class B Warrants issued were returned to the Company. Under
    the conversion option, the Investors shall have the option, at
    any time on or before the maturity date (January 24, 2009),
    to convert the outstanding principal of this Convertible
    Debenture into fully-paid and non assessable shares of the
    Company's common stock at the conversion price equal to the
    lowest of (i) the fixed conversion price of $6.00 per
    share, (ii) the lowest fixed conversion price (the lowest
    price, conversion price or exercise price set by the Company in
    any equity financing transaction, convertible security, or
    derivative instrument issued after January 24, 2008), or
    (iii) the default conversion price (if and so long as there
    exists an event of default, then 70% of the average of the three
    lowest closing prices of common stock during the twenty day
    trading period immediately prior to the notice of conversion).
    The Company held a special shareholders' meeting on
    April 3, 2008 to vote on this matter, at which time it was
    approved.
In connection with the financing, the Company entered into a
    Security Agreement with the Investors whereby the Company
    granted the Investors a security interest in Converted Organics
    of California, LLC and any and all assets that are acquired by
    the use of the funds from the Financing. In addition, the
    Company granted the Investors a security interest in Converted
    Organics of Woodbridge, LLC and all assets subordinate only to
    the current lien held by the holder of the bonds issued in
    connection with the Woodbridge facility of approximately
    $17,500,000.
In connection with this borrowing, the Company issued
    1.5 million warrants to purchase common stock, which were
    deemed to have a fair value of $5,497,500. The Company recorded
    the relative fair value of the warrants to the underlying notes
    of $2,227,500 in accordance with Accounting Principles Board
    ("APB") Opinion No. 14,
"Accounting for
    Convertible Debt and Debt Issued with Stock Purchase
    Warrants"
as additional paid-in capital and established
    a discount on the debt. The discount was being amortized over
    the life of the note (12 months). On April 17, 2008,
    the Investors returned to the Company 750,000 warrants that had
    been held in escrow. This reduced the value assigned to the
    warrants and, accordingly, the value assigned to the debt
    discount attributable to the warrants by $1,113,750. In
    addition, the remaining original issue discount of approximately
    $366,000 was recognized as expense on April 7, 2008.
On April 7, 2008, the shareholders of the Company approved
    the issuance of additional shares so that convertible notes
    could be issued to the note holders to replace the original
    notes dated January 24, 2008. The Company is required to
    recognize a discount for the intrinsic value of the beneficial
    conversion feature of the notes, which is to be recognized as
    interest expense through the redemption date of the notes, which
    is January 24, 2009. That amount was calculated to be
    $3,675,000, and recognition was limited to $2,936,250 in
    accordance with
EITF 98-5,
"Accounting for Convertible Securities with Beneficial
    Conversion Features or
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CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
Contingently Adjustable Conversion Ratios,"
as the
    debt discount is limited to the proceeds allocated to the
    convertible instrument of $4,500,000. That discount is being
    amortized over the life of the loan. During the six month
    periods ending June 30, 2009 and 2008, the Company
    recognized interest expense of $230,492 and $0 related to this
    discount.
On January 24, 2009 the convertible notes became due.
    Because the Company did not have sufficient cash to repay the
    notes, the Company agreed to convert the notes to shares at the
    default rate, although no event of default had occurred. As of
    March 31, 2009, the note holders had converted the full
    principal amount of $4,500,000 into 7,366,310 shares of
    common stock. In consideration for entering into this agreement,
    the Company granted 200,000 shares of common stock to the
    note holders. An expense of $562,000 is included in the
    statement of operations for the six months ended June 30,
    2009 for this stock grant, which represents the market value of
    200,000 shares on the date they were granted. In addition,
    the notes accrue interest at 10% of their declining balance as
    they are paid off through the issuance of stock. An additional
    131,834 shares of common stock were issued on
    April 23, 2009 for accrued interest. Accrued interest of
    $7,232 has not been converted to shares of common stock.
On May 7, 2009, the Company entered into an agreement with
    an institutional investor (the "Investor"), wherein
    the Company agreed to sell to the Investor, for the sum of
    $1,200,000, six-month non-convertible original issue discount
    notes with principal amounts totaling $1,331,000 (the
    "Note"). The agreement provides that if the Company
    raises over $1.33 million while the Notes are outstanding,
    the first $1,331,000 must be used to repay the note.
    Additionally, in connection with the Note issued pursuant to the
    agreement, the Investor received five-year warrants to purchase
    750,000 shares and 350,000 shares of Company common
    stock, with exercise prices of $1.00 per share and $1.50 per
    share, respectively, subject to certain anti-dilution rights for
    issuance below the exercise prices. These warrants are not
    registered and cannot be traded. The expense associated with the
    issuance of these warrants was calculated using a Black-Scholes
    model with the following assumptions: risk-free interest rate of
    2.05%; no dividend yield; volatility factor of 96.7%; and a term
    of 5 years. The Company determined that the warrants issued
    have a fair value of $1,557,953. The Company recorded the
    relative fair value of the warrants to the underlying notes of
    $1,330,313 in accordance with Accounting Principles Board
    ("APB") Opinion No. 14,
"Accounting for
    Convertible Debt and Debt Issued with Stock Purchase
    Warrants"
as additional-paid-in capital and established
    a discount on the debt. The discount was fully amortized at the
    repayment of the note (12 days later) and at such time the
    entire amortization totaled approximately $637,850 for the three
    months ended June 30, 2009.
Also pursuant to this agreement, the investment banker was
    issued five-year warrants to purchase 135,000 and
    65,000 shares of Company common stock with exercise prices
    of $1.00 per share and $1.50 per share, respectively. The
    expense associated with these warrants was calculated in the
    same manner as described above. The expense of $285,000 is
    included in general and administrative expense on the
    consolidated statements of operations for the three and six
    month periods ending June 30, 2009 and 2008.
DERIVATIVE
    INSTRUMENTS
Upon the adoption of
EITF 07-5
on January 1, 2009, the Company determined that the
    conversion features within the convertible notes payable issued
    in the January 2008 private financing to be an embedded
    derivative which was required to be bifurcated and shown as a
    derivative liability subject to
mark-to-market
adjustment each reporting period. The fair value of the
    conversion feature was determined using the Black-Scholes model
    and resulted in a fair value of $5,083,108. The fair value at
    January 1, 2009 was recognized as a cumulative effect of
    accounting change in the Company's consolidated statement
    of changes in owners' equity (deficit).
During the six months ended June 30, 2009, all conversion
    features were converted to common stock at the default rate in
    accordance with the agreement dated January 29, 2009 with
    the note holders. The effect of the derivative instruments in
    the six months ended June 30, 2009 was recorded in the
    Company's consolidated
F-45
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
statements of operations and was a derivative gain of
    $3,565,091. No derivative liability is recorded as of
    June 30, 2009 as all derivative instruments have been
    converted into common stock.
NOTE 7 —
CAPITALIZATION
    OF INTEREST COSTS
The Company has capitalized interest costs, net of certain
    interest income, in accordance with SFAS No. 62,
"Capitalization of Interest Cost in Situations Involving
    Certain Tax-Exempt Borrowings and Certain Gifts and
    Grants,"
related to its New Jersey Economic Development
    Authority Bonds in the amount of $1,077,686 as of June 30,
    2009 and December 31, 2008, respectively. Capitalized
    interest is initially included with
construction-in-progress
on the consolidated balance sheets. As assets are placed in
    service, the capitalized interest is added to the value of the
    assets on a pro-rata basis.
NOTE 8 —
OWNERS'
    EQUITY (DEFICIT)
On February 21, 2006, the Company merged with Mining
    Organics Management (MOM) and Mining Organics
    Management — Harlem River Rail Yard (HRRY). At that
    time, MOM was a fifty-percent owner of HRRY. The mergers were
    accounted for as a recapitalization of the Company. As a result
    of the recapitalization, 600,000 shares were issued to the
    members of HRRY, with 300,000 shares distributed to Weston
    Solutions, Inc. and 300,000 shares distributed among the
    individual members of MOM, each of whom was a founder of the
    Company.
On February 16, 2007, the Company successfully completed an
    initial public offering of 1,800,000 common shares and 3,600,000
    warrants for a total offering of $9,900,000, before issuance
    costs. The Company's initial public offering is recorded
    net of issuance costs and expenses of approximately $1,736,715.
    The warrants consist of 1,800,000 redeemable Class A
    warrants and 1,800,000 non-redeemable Class B warrants,
    each warrant to purchase one share of common stock. The common
    stock and warrants traded as one unit until March 13, 2007
    when they began to trade separately.
On February 16, 2007, as part of its initial public
    offering and under the original terms of the bridge loan
    agreement, the Company issued 293,629 Bridge Equity Units to the
    Bridge Noteholders. On May 23, 2007, as part of the
    repayment of the bridge loans, the Company issued
    55,640 shares of common stock to the Bridge Noteholders,
    which represents 10% of the principal and interest repaid,
    divided by the
five-day
average share price prior to repayment of the debt. The
    statement of operations for the year ended December 31,
    2007 reflects an expense of $178,048 related to the issuance of
    these shares.
On February 16, 2007, as part of its initial public
    offering, the Company agreed to pay a 5% quarterly stock
    dividend, commencing March 31, 2007, and every full quarter
    thereafter, until Woodbridge is operational. The Company
    declared five such quarterly dividends amounting to
    1,010,535 shares through March, 2008. As the New Jersey
    facility was operating as of June 30, 2008, no further
    dividends were declared under this agreement.
At its April 3, 2008 special meeting of shareholders, the
    shareholders approved a resolution to decrease the number of
    common shares that the Company is authorized to issue from
    75,000,000 to 40,000,000, and the number of preferred shares
    that the Company is authorized to issue from 25,000,000 to
    10,000,000. At the time, the Company believed that
    40,000,000 shares of common stock would be sufficient to
    meet its future needs.
On October 1, 2008, the Company issued 45,480 shares
    of its common stock to a consultant as remuneration for services
    rendered. The related services were substantially complete when
    the stock was issued. The Company recognized $212,619 of expense
    related to the fair value of this issuance.
On October 22, 2008, the Company declared a stock dividend
    of 15% payable to shareholders of record as of November 17,
    2008. This dividend resulted in the issuance of
    969,318 shares of common stock.
F-46
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
On January 24, 2009, the Company issued 200,000 shares
    of its common stock to the holders of its convertible debentures
    as consideration for the refinancing described above. The
    Company recognized interest expense of $562,000 related to this
    issuance.
On May 19, 2009, the Company entered into an agreement with
    an institutional investor (the "Investor") whereby the
    Investor agreed to purchase 1,500,000 shares of the
    Company's common stock under its shelf registration
    statement, for $1.40 per share, providing the Company with
    $2.1 million before fees and expenses of $172,000, which
    were charged to Additional Paid-in Capital. The May 7, 2009
    non-convertible short-term note described in Note 6 was
    immediately paid off with proceeds of this offering. In
    addition, and as an inducement to enter into this transaction,
    the Company issued the Investor 1,500,000 warrants, with a
    strike price of $1.40 and a 90 day term.
At its June 25, 2009 annual meeting of shareholders, the
    shareholders approved a resolution to increase the number of
    common shares that the Company is authorized to issue from
    40,000,000 to 75,000,000, given that the Company had the
    opportunity to raise capital through the issuance of additional
    shares.
WARRANTS
On February 16, 2007, in connection with the Company's
    public offering, the Company sold 1,800,000 equity units
    consisting of one share of common stock, one Class A
    warrant and one Class B warrant. On March 13, 2007,
    the Class A and Class B warrants began to trade as
    separate securities. The Class A warrants are exercisable
    for one share of common stock, plus accumulated stock dividends,
    for $8.25. The Class A warrants expire on February 16,
    2012 and, if certain conditions are met, the Company may redeem
    these warrants at a price of $0.25 per warrant prior to the
    expiration date. The Class B warrants are exercisable for
    one share of common stock, plus accumulated stock dividends, for
    $11.00. The Class B warrants expire on February 16,
    2012 and there is no provision for the Company to redeem these
    warrants prior to the expiration date.
On January 24, 2008, in conjunction with the private
    financing arrangement of the Company described in Note 6,
    the Company issued 750,000 Class A and 750,000 Class B
    Warrants to the Investors. Such warrants are exercisable for one
    share of the Company's common stock, adjusted for
    dividends, at $8.25 and $11.00, respectively. Once the
    Company's registration statement related to the underlying
    shares was declared effective, one-half of the warrants were
    returned to the Company by the Investors, as described in
    Note 6.
WARRANT
    EXERCISE
The Company received net proceeds of approximately $11,344,000
    as a result of the exercise of approximately 1,381,000
    Class A warrants (which includes the warrant redemption
    discussed below) and 600 Class B warrants in the year ended
    December 31, 2008. The Company issued approximately
    1,781,000 shares of common stock in connection with the
    exercise of these warrants due to the cumulative effect of the
    Company's stock dividends.
On May 26, 2009, the Investor exercised its 1,500,000
    warrants at $1.40, providing the Company with $2.1 million
    before fees and expenses of $135,000, which were charged to
    Additional Paid-in Capital. In addition, and as an inducement to
    enter into this transaction, the Company issued the Investor an
    additional 1,500,000 warrants with a strike price of $1.63 and
    an expiration date of May 27, 2014.
WARRANT
    REDEMPTION
On September 16, 2008, the Company announced the redemption
    of its outstanding Class A Warrants. The redemption date
    was set for October 17, 2008, and was subsequently extended
    a total of 31 days voluntarily by the Company to
    November 17, 2008. Any outstanding Class A warrants
    that had not been exercised before that date expired and are
    redeemable by the Company for $0.25 per warrant.
F-47
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
Until the redemption date, the Class A warrants were
    convertible into common stock at an exercise price of $8.25.
    Each warrant exercised at this price received 1.276 shares
    of common stock. Prior to the notification of redemption,
    approximately 756,000 Class A warrants had been exercised.
    After the redemption, an additional 673,000 warrants were
    exercised. In total, from both the exercise and redemption of
    warrants, the Company received proceeds of approximately
    $11,344,000. The Company was obligated to remit to its transfer
    agent funds sufficient to compensate warrant holders for the
    remaining warrants, which may be redeemed for $.25 each for an
    indefinite period. This amount of $284,237 was subtracted from
    the cash received for exercise of the warrants, representing the
    amount necessary to redeem the remaining warrants.
The following table sets forth the outstanding warrants as of
    June 30, 2009:
Class B Warrants
Warrants
Warrants
Warrants
Warrants
Exercise Price
Exercise
Exercise Price
Exercise Price
Exercise Price
$11.00
Price $1.00
$1.50
$1.40
$1.63
Outstanding at January 1, 2009
2,648,029
—
—
—
—
Issued in connection with agreement with bond holders on
    March 6, 2009
2,284,409
—
—
—
—
Issued in connection with securing debt on May 5, 2009
—
885,000
415,000
—
—
Issued in connection with issuance of shares on May 19, 2009
—
—
—
1,500,000
—
Warrants exercised May 26, 2009
—
—
—
(1,500,000
)
—
Issued in connection with May 26 warrants exercised
—
—
—
1,500,000
Outstanding at June 30, 2009
4,932,438
885,000
415,000
—
1,500,000
NOTE 9 —
STOCK
    OPTION PLAN
The following table presents the activity under the 2006 Stock
    Option Plan from January 1, 2009 through June 30, 2009:
Weighted Average
Shares
Price per Share
Outstanding at January 1, 2009
1,246,735
$
4.50
Granted
233,500
1.10
Exercised
—
—
Canceled
(231,340
)
4.75
Outstanding and exercisable at June 30, 2009
1,248,895
$
3.82
On June 27, 2009, the Company granted 233,500 stock options
    under its 2006 Stock Option Plan. The expense associated with
    this option grant was calculated using a Black-Scholes model and
    the following assumptions: risk-free interest rate of 2.85%; no
    dividend yield; volatility of 96.7%. The resulting expense of
    $190,000 is included in general and administrative expense on
    the consolidated statements of operations for the three and six
    month periods ended June 30, 2009 and 2008. As of
    June 30, 2009, there was no unrecognized compensation cost
    related to non-vested share-based compensation arrangements
    granted under the Company's stock option plan.
NOTE 10 —
ACQUISITIONS
On January 24, 2008, the Company acquired the assets,
    including the intellectual property, of Waste Recovery
    Industries, LLC of Paso Robles, CA. The purchase price was
    $500,000.
F-48
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
On January 24, 2008, the Company also formed Converted
    Organics of California, LLC, a wholly-owned subsidiary of
    Converted Organics Inc., who acquired the net assets of United
    Organic Products, LLC of Gonzales, CA ("UOP"). This
    facility is operational and began to generate revenues for the
    Company immediately upon acquisition. The purchase price was
    $2,500,000.
The acquisitions have been accounted for in the first quarter of
    2008 using the purchase method of accounting in accordance with
    SFAS No. 141,
"Business
    Combinations"
. Accordingly, the net assets have been
    recorded at their estimated fair values, and operating results
    have been included in the Company's consolidated financial
    statements from the date of acquisition.
The allocation of the purchase price based on the appraisal is
    as follows:
Inventories
$
11,114
Accounts receivable
28,702
Technological know-how
271,812
Trade name
228,188
Existing customer relationships
2,030,513
Building
111,584
Equipment and machinery
543,000
Assumption of liabilities
(224,913
)
Total purchase price
$
3,000,000
The unaudited supplemental pro forma information discloses the
    results of operations for the current fiscal year up to the date
    of the most recent interim period presented (and for the
    corresponding period in the preceding year) as though the
    business combination had been completed as of the beginning of
    that period.
The pro forma condensed consolidated financial information is
    based upon available information and certain assumptions that
    the Company believes are reasonable. The unaudited supplemental
    pro forma information does not purport to represent what the
    Company's financial condition or results of operations
    would actually have been had these transactions in fact occurred
    as of the dates indicated above or to project the Company's
    results of operations for the period indicated or for any other
    period.
Six Months Ended June 30,
2009
2008
Revenues (in thousands)
$
1,484
$
753
Net loss (in thousands)
(6,926
)
(8,592
)
Net loss per share — basic and diluted
(.58
)
(1.56
)
NOTE 11 —
RELATED
    PARTY TRANSACTIONS
ACCRUED
    COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS
As of June 30, 2009 and December 31, 2008, the Company
    has an accrued liability totaling approximately $390,000 and
    $431,000, respectively, representing accrued compensation to
    employees, officers, directors and consultants.
CONVERTED
    ORGANICS OF RHODE ISLAND, LLC
Converted Organics of Rhode Island, LLC was formed for the
    purpose of developing and operating a
waste-to-fertilizer
facility in Johnston, Rhode Island. A development consultant who
    has provided services to the Company is a minority owner of
    Converted Organics of Rhode Island, LLC. For the six month
    period ending June 30, 2009 the consultant was paid
    $60,000, and received 121,528 shares of the Company's
    common stock for services rendered.
F-49
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
PACKAGING
    VENDOR
The Company has purchased packaging materials from a vendor
    which is partially owned by an employee of the Company. The
    Company made purchases of $28,000 from this vendor in the six
    month period ended June 30, 2009.
NOTES PAYABLE
The Company has a term note due to its CEO in the amount of
    $89,170 at June 30, 2009 and December 31, 2008. The
    note matured in April, 2009, and the term was extended for one
    year. The Company paid accrued interest of $21,400 upon
    extension of the note.
NOTE 12 —
    COMMITMENTS AND CONTINGENCIES
In addition to the operating lease commitment for its
    headquarters, the Company signed an operating lease during June
    2006 for Woodbridge. The lease term is for ten years and the
    Company has exercised an option to renew for an additional ten
    years. In 2008, the Company signed a ten-year lease for land
    with the Rhode Island Resource Recovery Council. Future minimum
    lease payments under these leases are as follows:
For years ended December 31, 2009 (July 1, 2009 through
    December 31, 2009)
522,400
2010
1,044,800
2011
1,056,200
2012
1,069,100
2013
1,077,400
2014 and thereafter
9,024,000
$
13,793,900
LEGAL
    PROCEEDINGS
The Company is not currently aware of any pending or threatened
    legal proceeding to which it is or would be a party, or any
    proceedings being contemplated by governmental authorities
    against it, or any of its executive officers or directors
    relating to the services performed on the Company's behalf
    except as follows. The Company received notice that a complaint
    had been filed in a putative class action lawsuit on behalf of
    59 persons or entities that purchased units pursuant to a
    financing terms agreement dated April 11, 2006
    ("FTA"), captioned Gerald S. Leeseberg, et al. v.
    Converted Organics, Inc., filed in the U.S. District Court
    for the District of Delaware. The lawsuit alleges breach of
    contract, conversion, unjust enrichment, and breach of the
    implied covenant of good faith in connection with the alleged
    failure to register certain securities issued in the FTA, and
    the redemption of our Class A warrants in November 2008.
    The lawsuit seeks damages related to the failure to register
    certain securities, including alleged late fee payments, of
    approximately $5.25 million, and unspecified damages
    related to the redemption of the Class A warrants. In
    February 2009, the Company filed a Motion for Partial Dismissal
    of Complaint. It is uncertain when the Court will rule on this
    motion. The Company plans to vigorously defend itself in this
    matter, and is unable to estimate any contingent losses that may
    or may not be incurred as a result of this litigation and its
    eventual disposition. Accordingly, no contingent loss has been
    recorded related to this matter.
On May 19, 2009, the Company received notice that a
    complaint had been filed in the Middlesex County Superior Court
    of New Jersey, captioned Lefcourt Associates, Ltd., et
    al. v. Converted Organics of Woodbridge, et al. The lawsuit
    alleges private and public nuisances, negligence, continuing
    trespasses and consumer common-law fraud in connection with the
    odors emanating from the Woodbridge facility and the
    Company's alleged, intentional failure to disclose to
    adjacent property owners the possibility of the facility causing
    pollution. The lawsuit seeks enjoinment of any and all
    operations which in any way cause or contribute to the alleged
    pollution, compensatory and punitive damages, counsel fees and
    costs of suit and any
F-50
Table of Contents
CONVERTED
    ORGANICS INC.
NOTES TO
    CONSOLIDATED INTERIM FINANCIAL
    STATEMENTS — (Continued)
and all other relief the Court deems equitable and just. In
    response to these allegations, the Company has filed opposition
    papers with the Court and has complied with the plaintiff's
    requests for information.
On May 28, 2009, the Company received notice that a Lien
    Claim Foreclosure Complaint had been filed in the Middlesex
    County Superior Court of New Jersey, captioned Armistead
    Mechanical, Inc. v. Converted Organics Inc., et al.
    Armistead filed this Lien Claim Foreclosure Complaint in order
    to perfect its previously filed lien claim. In connection with
    the Complaint, Armistead also filed a Demand for Arbitration in
    order to preserve its status quo and right to submit a contract
    dispute claim to binding arbitration. Armistead has indicated
    that it wishes to continue settlement discussions and has
    offered to cooperate with the Company's efforts to secure
    financing for a mutually agreeable settlement. The Company
    intends to continue working towards an agreeable settlement with
    Armistead. On July 10, 2009, the Company received an
    Amended Lien Claim Foreclosure Complaint from Armistead
    Mechanical. The amended complaint did not make any substantial
    changes to the suit. On August 3, 2009, the Company filed a
    response to the complaint whereby the Company denied certain
    claims and at this time management is unable to estimate any
    contingent losses.
OTHER
The Middlesex County Health Department (MCHD) issued a number of
    notices of violation ("NOV") to the Company for
    alleged violations of New Jersey State Air Pollution Control
    Act, which prohibits certain off-site odors. The NOV alleged
    that odors emanating from the facility had impacted surrounding
    businesses and those odors were of sufficient intensity and
    duration to constitute air pollution under the Act. The
    penalties assessed total $320,250 of which the Company has paid
    $87,750. Of the remaining $232,500 of penalties, the Company is
    either contesting or negotiating individual penalties based on
    the date of issuance. The Company has recorded a liability of
    $75,000 in it financial statements, as of June 30, 2009
    relating to the unpaid potion of the penalties. In addition,
    based on a change in operational procedures and working with two
    outside odor-control consultants, the Company believes it has
    significantly rectified the odor issues.
The NJDEP Bureau of Air Compliance and Enforcement issued an
    Administrative Order (the "A.O.") to the Company for
    alleged violations of the Company's Air permit issued
    pursuant to the Air Pollution Control Act. The A.O. alleged that
    the Company was not operating in compliance with its Air Permit.
    No penalties were assessed in the A.O. However, the A.O. remains
    an open matter, because, as NJDEP stated in the A.O., the
    provisions of the order remain in effect during pendency of the
    hearing request. Additionally, any corrective action taken by
    the Company does not preclude the State from initiating a future
    enforcement action or seeking penalties with respect the
    violations listed in the A.O.
The NJDEP Bureau of Solid Waste Compliance and Enforcement
    issued a NOV to the Company for alleged violations of the New
    Jersey State Solid Waste Management Act. The NOV alleged that
    the facility was not operating in accordance with the terms of
    the General Class C Permit Approval. No penalties were
    assessed by the NOV. However, the NOV is notification that the
    facility is allegedly out of compliance with certain provisions
    of the General Class C Permit
and/or
the
    NJDEP Solid Waste regulations. The NOV remains an open matter,
    because, as NJDEP stated in the NOV, any corrective action taken
    by the Company does not preclude the State from initiating a
    future enforcement action with respect the violations listed in
    the NOV.
NOTE 13 —
SUBSEQUENT
    EVENTS
The Company has evaluated subsequent events through
    August 14, 2009, which is the date the accompanying
    financial statements were issued.
On July 16, 2009, the Company sold 1,961,000 shares of
    its common stock at $1.02 per share under its shelf registration
    statement. In addition, the Company issued 585,000 warrants,
    with an exercise price of $1.25 per warrant in association with
    the issuance of stock. These warrants have a five year life from
    the date of issuance and cannot be exercised until six months
    from the date of issuance.
F-51
Table of Contents
Until          ,
    2009, all dealers that effect transactions in these securities,
    whether or not participating in this offering, may be required
    to deliver a prospectus. This is in addition to the
    dealers' obligation to deliver a prospectus when acting as
    underwriters and with respect to their unsold allotments or
    subscriptions.
No dealer, salespersons or any other person is authorized to
    give any information or make any representations in connection
    with this offering other than those contained in this prospectus
    and, if given or made, the information or representations must
    not be relied upon as having been authorized by us. This
    prospectus does not constitute an offer to sell or a
    solicitation of an offer to buy any securities offered by this
    prospectus, or an offer to sell or a solicitation of an offer to
    buy any securities by anyone in any jurisdiction in which the
    offer or solicitation is not authorized or is unlawful. The
    delivery of this prospectus will not, under any circumstances
    create any implication that the information is correct as of any
    time subsequent to the date of this prospectus.
TABLE OF
    CONTENTS
Prospectus Summary
1
Risk Factors
7
Use of Proceeds
18
Price Range of Common Stock
19
Capitalization
20
Dilution
21
Management's Discussion And Analysis Of Financial Condition
    And Results Of Operations
22
Business
35
Management
47
Executive Compensation
50
Principal Stockholders
52
Related Party Transactions
53
Underwriting
54
Description of Capital Stock
55
Legal Matters
61
Experts
62
Where You Can Find Additional Information
62
Index to Financial Statements
63
$
CONVERTED ORGANICS
    INC.
Units
PROSPECTUS
Chardan Capital Markets,
    LLC
,
    2009
Table of Contents
PART II
INFORMATION
    NOT REQUIRED IN PROSPECTUS
Item 13.
Other
    Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other
    than underwriting discounts, payable by the registrant in
    connection with the sale of the shares of common stock being
    registered. All amounts are estimates except the fees payable to
    the SEC.
SEC Registration Fee
$
2,482.79
NASDAQ Filing Fee*
Printing Expenses*
Accounting Fees and Expenses*
Legal Fees and Expenses*
Miscellaneous*
Total
*
To be completed by amendment
Item 14.
Indemnification
    of Directors and Officers
Section 145 of the Delaware General Corporation Law, or
    DGCL, provides that a corporation may indemnify directors and
    officers as well as other employees and individuals against
    expenses (including attorneys' fees), judgments, fines and
    amounts paid in settlement actually and reasonably incurred by
    such person in connection with any threatened, pending or
    completed actions, suits or proceedings in which such person is
    made a party by reason of such person being or having been a
    director, officer, employee or agent of ours. The DGCL provides
    that Section 145 is not exclusive of other rights to which
    those seeking indemnification may be entitled under any bylaw,
    agreement, vote of stockholders or disinterested directors or
    otherwise.
Section 102(b)(7) of the DGCL permits a corporation to
    provide in its certificate of incorporation that a director of
    the corporation shall not be personally liable to the
    corporation or its stockholders for monetary damages for breach
    of fiduciary duty as a director, except for liability for any
    breach of the director's duty of loyalty to the corporation
    or its stockholders, for acts or omissions not in good faith or
    which involve intentional misconduct or a knowing violation of
    law, for unlawful payments of dividends or unlawful stock
    repurchases, redemptions or other distributions, or for any
    transaction from which the director derived an improper personal
    benefit.
Our certificate of incorporation provides that a director shall
    not be liable to us or our stockholders for monetary damages for
    breach of fiduciary duty as a director to the fullest extent
    permitted by Delaware law. In addition, our bylaws provide that
    each person who was or is a party or is threatened to be made a
    party to, or is involved in any threatened, pending or completed
    action, suit or proceeding, whether civil, criminal,
    administrative or investigative, by reason of the fact that such
    person is or was a director shall be indemnified and held
    harmless to the fullest extent permitted by Delaware law. The
    right to indemnification conferred in our bylaws also includes
    the right to be reimbursed for all expenses incurred in
    connection with any such proceeding in advance of its final
    disposition to the fullest extent authorized by Delaware law.
Our bylaws further provide that we shall have power to purchase
    and maintain insurance on behalf of any person who is or was a
    director, officer, employee or agent of ours against any
    expense, liability or loss incurred by such person in any such
    capacity or arising out of his status as such, whether or not we
    would have the power to indemnify him against such liability
    under Delaware law. We have also obtained directors' and
    officers' liability insurance, which insures against
    liabilities that our directors or officers may incur in such
    capacities.
II-1
Table of Contents
Item 15.
Recent
    Sales of Unregistered Securities
In the last three years, the Registrant has sold securities that
    were not registered, as follows:
In connection with the Registrant's merger with Mining
    Organics Harlem River Rail Yard, LLC ("HRRY") in
    February 2006, the Registrant issued 600,000 shares to
    HRRY. These securities were issued under Section 4(2) of
    the Securities Act.
In February 2006, the Registrant issued 689,999 shares of
    its common stock to certain members of its management and other
    founders of the Registrant in exchange for past services
    rendered valued at $0.0001 per share. On the same date, the
    Registrant issued 43,334 shares of its common stock to two
    accredited individuals as fees for loans each made to the
    Registrant. These securities were issued under Section 4(2)
    of the Securities Act.
In February 2007, the Registrant completed a $1.515 million
    bridge loan from 59 accredited lenders to help it meet its
    working capital needs. In connection with the bridge loan, the
    Registrant issued units to the bridge lenders. One unit was
    issued for every $5.50 loaned. The bridge lenders received units
    that were identical to the units the Registrant issued in its
    initial public offering. In the aggregate, the bridge lenders
    received 293,629 units, each unit consisting of one share
    of common stock, one redeemable Class A warrant and one
    non-redeemable Class B warrant. Included in the
    293,629 units were 18,181 units issued to High Capital
    Funding LLC as reimbursement for costs incurred by it in
    preparing legal documents in connection with the bridge
    transaction. The Class A warrants and Class B warrants
    each are exercisable for one share of common stock. In May 2007,
    the Registrant issued 55,640 shares of common stock under
    the terms of the renegotiated bridge loan. These securities were
    issued solely to accredited investors in reliance upon the
    exemption specified in Rule 506 of Regulation D, and
    Section 4(2) of the Securities Act.
As of June 2006 and March 2007, the Registrant granted stock
    options to its employees, directors and consultants to purchase
    643,000 and 10,000 shares, respectively, of common stock
    under the Registrant's 2006 Stock Option Plan. The option
    issuances were made pursuant to Section 4(2) of the
    Securities Act.
In January 2008, the Registrant issued a note payable and
    750,000 Class A warrants and Class B warrants (which
    were later reduced to 375,000 Class A warrants and
    Class B warrants) to three accredited investors for a total
    amount of $4,500,000. On April 7, 2008, the note was
    exchanged for a convertible debenture. Between January 2009 and
    April 2009, the convertible debenture (including all interest)
    was converted into 7,498,144 shares of common stock with an
    additional 200,000 shares of common stock being issued in
    connection with the amendment of the convertible debenture in
    January 2009. These securities were issued solely to accredited
    investors in reliance upon the exemption specified in
    Rule 506 of Regulation D, and Section 4(2) of the
    Securities Act.
During March 2008, the Registrant issued 140,000 shares of
    common stock to three accredited investors as a result of the
    exercise of stock options issued under the Registrant's
    2006 Stock Option Plan. The issuances were completed pursuant to
    Section 4(2) and Regulation D of the Securities Act of
    1933, as amended.
In May 2009, in consideration of $1,182,500, the Registrant
    issued one accredited investor in reliance upon the exemption
    specified in Rule 506 of Regulation D, and
    Section 4(2) of the Securities Act, (i) a secured
    promissory note in the principal amount of $1,330,312.50 and
    (ii) two warrants to purchase shares of the
    Registrant's common stock: a five-year warrant to purchase
    750,000 shares of the Registrant's common stock and a
    five-year warrant to purchase 350,000 shares of common
    stock of the Registrant with exercise prices of $1.00 per share
    and $1.02 per share, respectively.
On July 16, 2009, the Registrant sold 1,961,000 shares
    of its common stock at $1.02 per share under its shelf
    registration statement. In addition, the Registrant issued
    585,000 warrants, with an exercise price of $1.25 per warrant in
    association with the issuance of stock. These warrants have a
    five-year life from the date of issuance and cannot be exercised
    until six months from the date of issuance.
II-2
Table of Contents
Item 16.
Exhibits
    and Financial Statement Schedules
Exhibit
Number
Description
*1
.1
Form of Underwriting Agreement
2
.1
Asset Purchase Agreement between the Registrant and United
    Organic Products, LLC, dated January 21, 2008 (incorporated
    by reference to Exhibit 2.02 to our current report on
Form 8-K
filed January 29, 2008)
2
.2
Asset Purchase Agreement between the Registrant and Waste
    Recovery Industries, LLC, dated January 21, 2008
    (incorporated by reference to Exhibit 2.03 to our current
    report on
Form 8-K
filed January 29, 2008)
3
.1
Certificate of Incorporation (incorporated by reference to
    Exhibit 3.1 to our Registration Statement on
Form SB-2
filed June 21, 2006)
3
.2
Amendment to Certificate of Incorporation
3
.2
Registrant's Bylaws (incorporated by reference to
    Exhibit 3.2 to our Registration Statement on
Form SB-2
filed June 21, 2006)
4
.1
Form of Common Stock Certificate (incorporated by reference to
    Exhibit 4.1 to our
Form SB-2/A
filed January 25, 2007)
4
.2
Form of Class B Warrant (incorporated by reference to
    Exhibit B to Exhibit 4.5 on Post-Effective Amendment
    No. 1 to our Registration Statement on
Form SB-2
filed February 20, 2007)
4
.3
Form of Unit Certificate (incorporated by reference to
    Exhibit 4.4 on Post-Effective Amendment No. 1 to our
    Registration Statement on
Form SB-2
filed February 20, 2007)
4
.4
Warrant Agreement between the Registrant and Computershare
    Shareholder Services, Inc. and Computershare Trust Company
    N.A., dated February 16, 2007 (incorporated by reference to
    Exhibit 4.5 on Post-Effective Amendment No. 1 to our
    Registration Statement on
Form SB-2
filed February 20, 2007)
4
.5
Form of Representative's Purchase Warrant (incorporated by
    reference to Exhibit 4.6 to our Registration Statement on
Form SB-2
filed June 21, 2006)
4
.6
Form of Class C Warrant (incorporated by reference to
    Exhibit 10.5 to our current report on
Form 8-K
filed May 13, 2009)
4
.7
Form of Class D Warrant (incorporated by reference to
    Exhibit 10.5 to our current report on
Form 8-K
filed May 13, 2009)
4
.8
Form of Class E Warrant (incorporated by reference to
    Exhibit 4.1 to our current report on
Form 8-K
filed May 20, 2009 and to Exhibit 10.1 to our current
    report on
Form 8-K
filed May 27, 2009)
4
.9
Form of Class F Warrant (incorporated by reference to
    Exhibit 4.1 to our current report on
Form 8-K
filed July 16, 2009)
4
.10
Form of Class G Warrant (incorporated by reference to
    Exhibit 10.5 to our current report on
Form 8-K
filed September 14, 2009)
4
.11
Secured Convertible Promissory Note dated September 14,
    2009 payable to Iroquois Master Fund Ltd.  (incorporated by
    reference to Exhibit 10.4 to our current report on
Form 8-K
filed September 14, 2009)
*4
.12
Form of Class H Warrant
*4
.13
Warrant Agreement between Company and Warrant Agent
*5
.1
Opinion of Cozen O'Connor
10
.1
Form of Bridge Loan Documents dated March 2, 2006
    (incorporated by reference to Exhibit 10.1 to our
    Registration Statement on
Form SB-2
filed June 21, 2006)
10
.1A
Form of Bridge Loan Documents dated April 11, 2006
    (incorporated by reference to Exhibit 10.1A to our
    Registration Statement on
Form SB-2
filed June 21, 2006)
10
.2
Amended and Restated 2006 Stock Option Plan and Form of Stock
    Option Agreement (incorporated by reference to Exhibit 10.2
    to Annex A of our Definitive Proxy Statement filed
    March 5, 2008)
II-3
Table of Contents
Exhibit
Number
Description
10
.3
Service Agreement between the Registrant and ECAP, LLC, dated
    March 1, 2006 (incorporated by reference to
    Exhibit 10.3 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.4
Lease Agreement between the Registrant and Recycling Technology
    Development, LLC, dated June 2, 2006 (incorporated by
    reference to Exhibit 10.4 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.4A
Amendment to the Lease Agreement between the Registrant and
    Recycling Technology Development dated January 18, 2007
    (incorporated by reference to Exhibit 10.4A to our
Form SB-2/A
filed January 25, 2007)
10
.5
Employment Agreement between the Registrant and Edward J.
    Gildea, dated March 2, 2006 (incorporated by reference to
    Exhibit 10.5 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.6
Employment Agreement between the Registrant and John A.
    Walsdorf, dated March 2, 2006 (incorporated by reference to
    Exhibit 10.7 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.7
Agreement between the Registrant and Weston Solutions, Inc.,
    dated May 29, 2003 and modification dated October 6,
    2004 (incorporated by reference to Exhibit 10.9 to our
    Registration Statement on
Form SB-2
filed June 21, 2006)
10
.8
IBR Plant License Agreement between International Bio Recovery
    Corporation and Mining Organics Management LLC, dated
    July 15, 2003 (incorporated by reference to
    Exhibit 10.10 to our
Form SB-2/A
filed July 5, 2006)
10
.9
Revision dated February 9, 2006 to IBR Plant License
    Agreement dated July 15, 2003 (incorporated by reference to
    Exhibit 10.11 to our
Form SB-2/A
filed July 5, 2006)
10
.10
Secured Convertible Promissory Note in favor of United Organic
    Products, LLC, dated January 24, 2008 (incorporated by
    reference to Exhibit 2.04 to our current report on
Form 8-K
filed January 29, 2008)
10
.11
Secured Promissory Note in favor of Waste Recovery Industries,
    LLC, dated January 24, 2008 (incorporated by reference to
    Exhibit 2.05 to our current report on
Form 8-K
filed January 29, 2008)
10
.12
New Jersey Economic Development Authority $17,500,000 Solid
    Waste Facilities Revenue Bonds (Converted Organics of
    Woodbridge, LLC — 2007 Project), dated
    February 16, 2007 (incorporated by reference to
    Exhibit 10.13 to our annual report on
Form 10-K
for the year ended December 31, 2008)
10
.13
Secured Convertible Promissory Note in favor of SNC-Lavalin
    Project Services, Inc., dated June 16, 2009 (incorporated
    by reference to Exhibit 10.14 to our quarterly report on
Form 10-Q
for the quarter ended June 30, 2009)
10
.14
Secured Convertible Promissory Note in favor of
    Hatzel & Buehler, Inc. (incorporated by reference to
    Exhibit 10.15 to our quarterly report on
Form 10-Q
for the quarter ended June 30, 2009)
10
.15
Secured Convertible Promissory Note in favor of Recycling
    Technology Development, LLC dated March 31, 2009
    (incorporated by reference to Exhibit 10.16 to our
    quarterly report on
Form 10-Q
for the quarter ended June 30, 2009)
10
.16
Subscription Agreement dated September 14, 2009 by and
    among Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.1 to our current
    report on
Form 8-K
filed September 14, 2009)
10
.17
Security Agreement dated September 14, 2009 by and among
    Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.2 to our current
    report on
Form 8-K
filed September 14, 2009)
10
.18
Subsidiary Security Agreement dated September 14, 2009 by
    and among Converted Organics of California, LLC, Converted
    Organics of Woodbridge, LLC and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.3 to our current
    report on
Form 8-K
filed September 14, 2009)
II-4
Table of Contents
Exhibit
Number
Description
10
.19
Subsidiary Guaranty dated September 14, 2009 by Converted
    Organics of California, LLC and Converted Organics of
    Woodbridge, LLC for the benefit of Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.6 to our current
    report on
Form 8-K
filed September 14, 2009)
21
.1
Subsidiaries of the Company
23
.1
Consent of CCR LLP
24
.1
Power of Attorney (included on signature page)
*
To be filed by amendment.
Item 17.
Undertakings
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are
    being made, a post-effective amendment to this registration
    statement:
i. To include any prospectus required by
    section 10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
    arising after the effective date of the registration statement
    (or the most recent post-effective amendment thereof) which,
    individually or in the aggregate, represent a fundamental change
    in the information set forth in the registration statement.
    Notwithstanding the foregoing, any increase or decrease in
    volume of securities offered (if the total dollar value of
    securities offered would not exceed that which was registered)
    and any deviation from the low or high end of the estimated
    maximum offering range may be reflected in the form of
    prospectus filed with the Commission pursuant to
    Rule 424(b) if, in the aggregate, the changes in volume and
    price represent no more than 20% change in the maximum aggregate
    offering price set forth in the "Calculation of
    Registration Fee" table in the effective registration
    statement.
iii. To include any material information with respect to
    the plan of distribution not previously disclosed in the
    registration statement or any material change to such
    information in the registration statement.
2. That, for the purpose of determining any liability under
    the Securities Act of 1933, each such post-effective amendment
    shall be deemed to be a new registration statement relating to
    the securities offered therein, and the offering of such
    securities at that time shall be deemed to be the initial bona
    fide offering thereof.
3. To remove from registration by means of a post-effective
    amendment any of the securities being registered which remain
    unsold at the termination of the offering.
4. That, for the purpose of determining liability under the
    Securities Act of 1933 to any purchaser:
i. If the registrant is relying on Rule 430B:
A. Each prospectus filed by the registrant pursuant to
    Rule 424(b)(3)shall be deemed to be part of the
    registration statement as of the date the filed prospectus was
    deemed part of and included in the registration
    statement; and
B. Each prospectus required to be filed pursuant to
    Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration
    statement in reliance on Rule 430B relating to an offering
    made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
    the purpose of providing the information required by
    section 10(a) of the Securities Act of 1933 shall be deemed
    to be part of and included in the registration statement as of
    the earlier of the date such form of prospectus is first used
    after effectiveness or the date of the first contract of sale of
    securities in the offering described in the prospectus. As
    provided in Rule 430B, for liability purposes of the issuer
    and any person that is at that date an underwriter, such date
    shall be deemed to be a new effective date of the registration
    statement relating to the
II-5
Table of Contents
securities in the registration statement to which that
    prospectus relates, and the offering of such securities at that
    time shall be deemed to be the initial bona fide offering
    thereof. Provided, however, that no statement made in a
    registration statement or prospectus that is part of the
    registration statement or made in a document incorporated or
    deemed incorporated by reference into the registration statement
    or prospectus that is part of the registration statement will,
    as to a purchaser with a time of contract of sale prior to such
    effective date, supersede or modify any statement that was made
    in the registration statement or prospectus that was part of the
    registration statement or made in any such document immediately
    prior to such effective date; or
ii. If the registrant is subject to Rule 430C, each
    prospectus filed pursuant to Rule 424(b) as part of a
    registration statement relating to an offering, other than
    registration statements relying on Rule 430B or other than
    prospectuses filed in reliance on Rule 430A, shall be
    deemed to be part of and included in the registration statement
    as of the date it is first used after effectiveness. Provided,
    however, that no statement made in a registration statement or
    prospectus that is part of the registration statement or made in
    a document incorporated or deemed incorporated by reference into
    the registration statement or prospectus that is part of the
    registration statement will, as to a purchaser with a time of
    contract of sale prior to such first use, supersede or modify
    any statement that was made in the registration statement or
    prospectus that was part of the registration statement or made
    in any such document immediately prior to such date of first use.
5. That, for the purpose of determining liability of the
    registrant under the Securities Act of 1933 to any purchaser in
    the initial distribution of the securities: The undersigned
    registrant undertakes that in a primary offering of securities
    of the undersigned registrant pursuant to this registration
    statement, regardless of the underwriting method used to sell
    the securities to the purchaser, if the securities are offered
    or sold to such purchaser by means of any of the following
    communications, the undersigned registrant will be a seller to
    the purchaser and will be considered to offer or sell such
    securities to such purchaser:
i. Any preliminary prospectus or prospectus of the
    undersigned registrant relating to the offering required to be
    filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering
    prepared by or on behalf of the undersigned registrant or used
    or referred to by the undersigned registrant;
iii. The portion of any other free writing prospectus
    relating to the offering containing material information about
    the undersigned registrant or its securities provided by or on
    behalf of the undersigned registrant; and
iv. Any other communication that is an offer in the
    offering made by the undersigned registrant to the purchaser.
6 Insofar as indemnification for liabilities arising under
    the Securities Act of 1933 may be permitted to directors,
    officers and controlling persons of the registrant pursuant to
    the foregoing provisions, or otherwise, the registrant has been
    advised that in the opinion of the Securities and Exchange
    Commission such indemnification is against public policy as
    expressed in the Act and is, therefore, unenforceable. In the
    event that a claim for indemnification against such liabilities
    (other than the payment by the registrant of expenses incurred
    or paid by a director, officer or controlling person of the
    registrant in the successful defense of any action, suit or
    proceeding) is asserted by such director, officer or controlling
    person in connection with the securities being registered, the
    registrant will, unless in the opinion of its counsel the matter
    has been settled by controlling precedent, submit to a court of
    appropriate jurisdiction the question whether such
    indemnification by it is against public policy as expressed in
    the Act and will be governed by the final adjudication of such
    issue.
7. That:
i. For purposes of determining any liability under the
    Securities Act of 1933, the information omitted from the form of
    prospectus filed as part of this registration statement in
    reliance upon Rule 430A and contained in a form of
    prospectus filed by the registrant pursuant to Rule 424(b)
    (1) or (4) or 497(h)
II-6
Table of Contents
under the Securities Act shall be deemed to be part of this
    registration statement as of the time it was declared effective.
ii. For the purpose of determining any liability under the
    Securities Act of 1933, each post-effective amendment that
    contains a form of prospectus shall be deemed to be a new
    registration statement relating to the securities offered
    therein, and the offering of such securities at that time shall
    be deemed to be the initial bona fide offering thereof.
II-7
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
    registrant has duly caused this registration statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
    authorized, in the City of Boston, Commonwealth of
    Massachusetts, on September 15, 2009
CONVERTED ORGANICS INC.
By:
/s/  Edward
    J. Gildea
Name:
Edward J. Gildea
Title:
Chairman, President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
    appears below constitutes and appoints Edward J. Gildea, his
    true and lawful attorney-in-fact and agents, with full power of
    substitution and resubstitution for him and in his name, place
    and stead, in any and all capacities, to sign any and all
    amendments (including post-effective amendments) to this
    Registration Statement, and any subsequent registration
    statements pursuant to Rule 462 of the Securities Act of
    1933 and to file the same, with all exhibits thereto, and other
    documents in connection therewith, with the Securities and
    Exchange Commission, granting unto said attorneys-in-fact and
    agents, and each of them, full power and authority to do and
    perform each and every act and thing requisite and necessary to
    be done in and about the premises, as fully to all intents and
    purposes as he might or could do in person, hereby ratifying and
    confirming all that each of said attorney-in-fact or his
    substitute or substitutes, may lawfully do or cause to be done
    by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
    registration statement has been signed by the following persons
    in the capacities and on the dates indicated:
Signature
Title
Date
/s/  Edward
    J. Gildea
Edward
    J. Gildea
Chairman, President and Chief Executive Officer (Principal
    Executive Officer)
September 15, 2009
/s/  David
    R. Allen
David
    R. Allen
Chief Financial Officer, Executive Vice President of
    Administration
(Principal Financial Officer)
September 15, 2009
/s/  Ellen
    P. O'Neil
Ellen
    P. O'Neil
Chief Accounting Officer
September 15, 2009
/s/  Robert
    E. Cell
Robert
    E. Cell
Director
September 15, 2009
/s/  John
    P. DeVillars
John
    P. DeVillars
Director
September 15, 2009
/s/  Edward
    A. Stoltenberg
Edward
    A. Stoltenberg
Director
September 15, 2009
II-8
Table of Contents
EXHIBIT INDEX
Exhibit
Number
Description
*1
.1
Form of Underwriting Agreement
2
.1
Asset Purchase Agreement between the Registrant and United
    Organic Products, LLC, dated January 21, 2008 (incorporated
    by reference to Exhibit 2.02 to our current report on
Form 8-K
filed January 29, 2008)
2
.2
Asset Purchase Agreement between the Registrant and Waste
    Recovery Industries, LLC, dated January 21, 2008
    (incorporated by reference to Exhibit 2.03 to our current
    report on
Form 8-K
filed January 29, 2008)
3
.1
Certificate of Incorporation (incorporated by reference to
    Exhibit 3.1 to our Registration Statement on
Form SB-2
filed June 21, 2006)
3
.2
Amendment to Certificate of Incorporation
3
.3
Registrant's Bylaws (incorporated by reference to
    Exhibit 3.2 to our Registration Statement on
Form SB-2
filed June 21, 2006)
4
.1
Form of Common Stock Certificate (incorporated by reference to
    Exhibit 4.1 to our
Form SB-2/A
filed January 25, 2007)
4
.2
Form of Class B Warrant (incorporated by reference to
    Exhibit B to Exhibit 4.5 on Post-Effective Amendment
    No. 1 to our Registration Statement on
Form SB-2
filed February 20, 2007)
4
.3
Form of Unit Certificate (incorporated by reference to
    Exhibit 4.4 on Post-Effective Amendment No. 1 to our
    Registration Statement on
Form SB-2
filed February 20, 2007)
4
.4
Warrant Agreement between the Registrant and Computershare
    Shareholder Services, Inc. and Computershare Trust Company
    N.A., dated February 16, 2007 (incorporated by reference to
    Exhibit 4.5 on Post-Effective Amendment No. 1 to our
    Registration Statement on
Form SB-2
filed February 20, 2007)
4
.5
Form of Representative's Purchase Warrant (incorporated by
    reference to Exhibit 4.6 to our Registration Statement on
Form SB-2
filed June 21, 2006)
4
.6
Form of Class C Warrant (incorporated by reference to
    Exhibit 10.5 to our current report on
Form 8-K
filed May 13, 2009)
4
.7
Form of Class D Warrant (incorporated by reference to
    Exhibit 10.5 to our current report on
Form 8-K
filed May 13, 2009)
4
.8
Form of Class E Warrant (incorporated by reference to
    Exhibit 4.1 to our current report on
Form 8-K
filed May 20, 2009 and to Exhibit 10.1 to our current
    report on
Form 8-K
filed May 27, 2009)
4
.9
Form of Class F Warrant (incorporated by reference to
    Exhibit 4.1 to our current report on
Form 8-K
filed July 16, 2009)
4
.10
Form of Class G Warrant (incorporated by reference to
    Exhibit 10.5 to our current report on
Form 8-K
filed September 14, 2009)
4
.11
Secured Convertible Promissory Note dated September 14,
    2009 payable to Iroquois Master Fund Ltd.  (incorporated by
    reference to Exhibit 10.4 to our current report on
Form 8-K
filed September 14, 2009)
*4
.12
Form of Class H Warrant
*4
.13
Warrant Agreement between Company and Warrant Agent
*5
.1
Opinion of Cozen O'Connor
10
.1
Amended and Restated 2006 Stock Option Plan and Form of Stock
    Option Agreement (incorporated by reference to Exhibit 10.2
    to Annex A of our Definitive Proxy Statement filed
    March 5, 2008)
10
.2
Service Agreement between the Registrant and ECAP, LLC, dated
    March 1, 2006 (incorporated by reference to
    Exhibit 10.3 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.3
Lease Agreement between the Registrant and Recycling Technology
    Development, LLC, dated June 2, 2006 (incorporated by
    reference to Exhibit 10.4 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.4
Amendment to the Lease Agreement between the Registrant and
    Recycling Technology Development dated January 18, 2007
    (incorporated by reference to Exhibit 10.4A to our
Form SB-2/A
filed January 25, 2007)
Table of Contents
Exhibit
Number
Description
10
.5
Employment Agreement between the Registrant and Edward J.
    Gildea, dated March 2, 2006 (incorporated by reference to
    Exhibit 10.5 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.6
Employment Agreement between the Registrant and John A.
    Walsdorf, dated March 2, 2006 (incorporated by reference to
    Exhibit 10.7 to our Registration Statement on
Form SB-2
filed June 21, 2006)
10
.7
Agreement between the Registrant and Weston Solutions, Inc.,
    dated May 29, 2003 and modification dated October 6,
    2004 (incorporated by reference to Exhibit 10.9 to our
    Registration Statement on
Form SB-2
filed June 21, 2006)
10
.8
IBR Plant License Agreement between International Bio Recovery
    Corporation and Mining Organics Management LLC, dated
    July 15, 2003 (incorporated by reference to
    Exhibit 10.10 to our
Form SB-2/A
filed July 5, 2006)
10
.9
Revision dated February 9, 2006 to IBR Plant License
    Agreement dated July 15, 2003 (incorporated by reference to
    Exhibit 10.11 to our
Form SB-2/A
filed July 5, 2006)
10
.10
Secured Convertible Promissory Note in favor of United Organic
    Products, LLC, dated January 24, 2008 (incorporated by
    reference to Exhibit 2.04 to our current report on
Form 8-K
filed January 29, 2008)
10
.11
Secured Promissory Note in favor of Waste Recovery Industries,
    LLC, dated January 24, 2008 (incorporated by reference to
    Exhibit 2.05 to our current report on
Form 8-K
filed January 29, 2008)
10
.12
New Jersey Economic Development Authority $17,500,000 Solid
    Waste Facilities Revenue Bonds (Converted Organics of
    Woodbridge, LLC — 2007 Project), dated
    February 16, 2007 (incorporated by reference to
    Exhibit 10.13 to our annual report on
Form 10-K
for the year ended December 31, 2008)
10
.13
Secured Convertible Promissory Note in favor of SNC-Lavalin
    Project Services, Inc., dated June 16, 2009 (incorporated
    by reference to Exhibit 10.14 to our quarterly report on
Form 10-Q
for the quarter ended June 30, 2009)
10
.14
Secured Convertible Promissory Note in favor of
    Hatzel & Buehler, Inc. (incorporated by reference to
    Exhibit 10.15 to our quarterly report on
Form 10-Q
for the quarter ended June 30, 2009)
10
.15
Secured Convertible Promissory Note in favor of Recycling
    Technology Development, LLC dated March 31, 2009
    (incorporated by reference to Exhibit 10.16 to our
    quarterly report on
Form 10-Q
for the quarter ended June 30, 2009)
10
.16
Subscription Agreement dated September 14, 2009 by and
    among Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.1 to our current
    report on
Form 8-K
filed September 14, 2009)
10
.17
Security Agreement dated September 14, 2009 by and among
    Converted Organics Inc. and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.2 to our current
    report on
Form 8-K
filed September 14, 2009)
10
.18
Subsidiary Security Agreement dated September 14, 2009 by
    and among Converted Organics of California, LLC, Converted
    Organics of Woodbridge, LLC and Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.3 to our current
    report on
Form 8-K
filed September 14, 2009)
10
.19
Subsidiary Guaranty dated September 14, 2009 by Converted
    Organics of California, LLC and Converted Organics of
    Woodbridge, LLC for the benefit of Iroquois Master Fund Ltd.
    (incorporated by reference to Exhibit 10.6 to our current
    report on
Form 8-K
filed September 14, 2009)
21
.1
Subsidiaries of the Company
23
.1
Consent of CCR LLP
24
.1
Power of Attorney (included on signature page)
*
To be filed by amendment.