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2. GOING CONCERN AND MANAGEMENT'S PLAN

February 18, 2014

The Company has sustained significant losses and has an accumulated deficit of $28,648,607 and negative working capital of $7,366,906 as of December 31, 2013. The ability of the Company to continue as a going concern is dependent upon obtaining additional capital and financing, and ultimately generating positive cash flows from operations. Management intends to seek additional capital either through debt or equity offerings. Due to the current economic environment and the Company's current financial condition, management cannot be assured there will be adequate capital available when needed and on acceptable terms. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION The consolidated financial statements of the Company are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year 2013 as reported in the Company's Form 10-K have been omitted. The results of operations for the three month periods ended December 31, 2013 and

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2012 are not necessarily indicative of the results to be expected for the full year. In the opinion of management, the consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly the Company's financial position, results of operations and cash flows. These statements should be read in conjunction with the financial statements and related notes which are part of the Company's Annual Report on Form 10-K for the year ended September 30, 2013.

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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company's significant estimates made in connection with the preparation of the accompanying financial statements include the valuation of inventories and carrying value of the intangible assets.

CONCENTRATION OF CREDIT RISK Accounts receivable from individual customers representing 10% or more of the net accounts receivable balance consists of the following as of December 31:

2013 2012 ---- ---- Percent of accounts 100% 99% Number of customers 1 1



Sales from individual customers representing 10% or more of sales consist of the following customers for the three months ended December 31:

2013 2012 ---- ---- Percent of sales 97% 91% Number of customers 1 1



As a result of the Company's concentration of its customer base, the loss or cancellation of business from, or significant changes in scheduled deliveries of product sold to the above customers or a change in their financial position could materially and adversely affect the Company's consolidated financial position, results of operations and cash flows.

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NET LOSS PER SHARE Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution to basic net income (loss) per share that could occur upon conversion or exercise of securities, options or other such items to common shares using the treasury stock method, based upon the weighted average fair value of our common shares during the period. Series A convertible preferred stock totaling 2,763,699 shares have been included in the calculation of diluted net income (loss) per share.

The following is a summary of outstanding securities which have been excluded from the calculation of diluted net loss per share because the effect would have been antidilutive for the three months ended December 31:

2013 2012 ---------- ---------- Series A convertible preferred stock -- 2,763,699 ---------- ---------- -- 2,763,699 ========== ==========



In addition, the company excluded zero and 1,976,000 options from the computation as of December 31, 2013 and 2012, respectively, as the option exercise prices were in excess of the average market price of the Company's common stock during the respective periods.

NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issues Accounting Standards Updates ("ASUs") to amend the authoritative literature in Accounting Standards Codification ("ASC"). There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.

4. INVENTORIES

Inventories consist of the following at:

December 31, September 30, 2013 2013 ---------- ---------- Raw materials $ -- $ -- Finished goods 4,526 4,526 ---------- ---------- $ 4,526$ 4,526 ========== ========== 8 5. DEBT MITIGATION PROGRAM



The Company has significant liabilities that have been incurred due to continued operating losses and the acquisition of Smart World in 2006. In order to attract potential capital, the Company has conducted analysis on past due obligations to creditors. We determined that the statute of limitations for certain of our creditors to enforce collection of any amounts they might be owed has now elapsed. Based on our determinations and findings, during the three months ended December 31, 2013, we have eliminated $635,903 in creditor liabilities which were all previously included in accounts payable, accrued expenses, notes payable, and notes payable to related parties in the accompanying balance sheet.

The Company will continue to conduct this analysis going forward and eliminate obligations when such obligations are no longer enforceable based on applicable law.

6. ACCRUED EXPENSES

Accrued expenses consist of the following at:

December 31, September 30, 2013 2013 ---------- ---------- Interest $ 331,159$ 460,565 Interest to related parties 210,656 305,602 Compensation and related 2,606,954 2,493,689 ---------- ---------- $3,148,769$3,259,856 ========== ==========



7. NOTES PAYABLES AND RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS During the three months ended December 31, 2013, the Company's secretary, Ms. Visco loaned the Company an additional $15,000 for working capital. The previous note for $913,842 was amended to increase the principal due to $928,842. The principal is due in December 2014 and interest is payable monthly, at prime rate. The note is currently in default for non-payment of interest.

See Note 10 for additional amounts loaned subsequent to quarter end.

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STOCK OPTIONS As of December 31, 2012, all options expired in September and November 2012. There were no issuances of common stock, options or warrants during the periods presented in the accompanying consolidated financial statements.

9. LITIGATION

On or about September 21, 2007, Stockhausen, Inc. ("Stockhausen") filed a Complaint in the United States District Court, for the Middle District of North Carolina, against us seeking damages. The parties entered into a settlement agreement on June 2, 2010. Under the settlement agreement, we agreed to pay Stockhausen $250,000 on or before June 23, 2010 as a compromise to Stockhausen's claims that currently total $603,921. We further agreed that we would consent to the entry of a Judgment against us in favor of Stockhausen in the amount of $603,921 if we failed to make complete and timely payment as agreed. The company was unable to make the agreed upon payment and on July 8, 2010 Stockhausen entered a judgment for the above stated amount against the Company.

On or about October 4, 2007, Raymond J. Nielsen and Cheryl K. Nielsen (collectively, "Plaintiffs"), filed a Complaint in the Circuit Court in the Sixth Judicial District of Pasco County, Florida, against us and Smart World (collectively "Defendants") seeking damages, declaratory, and injunctive relief. Plaintiffs allege that Defendants failed to pay interest when due on the Convertible Debenture from Defendants to Plaintiffs and, thus, the entire amount of the Convertible Debenture is accelerated and Plaintiffs are seeking a judgment in the amount of $1,500,000 plus interest. On December 29, 2009, the matter was settled for $400,000 and the Company had 60 days in which to remit the amount or a judgment in the entire amount claimed will be entered against us. The Company was not able to meet the terms of the settlement and have been actively communicating with the Plaintiffs to extend the terms of the settlement. On February 21, 2011, we agreed to pay interest on the settlement amount at 4% per annum.

To the best knowledge of our management, there are no other significant legal proceedings pending against us.

10. SUBSEQUENT EVENTS

On January 17, 2014, Ms. Visco loaned the Company an additional $20,000. The terms of the loan are similar to those outlined in Note 7.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Report.

FORWARD-LOOKING STATEMENTS

The following information contains certain forward-looking statements. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may," "could," "expect," "estimate," "anticipate," "plan," "predict," "probable," "possible," "should," "continue," or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

OVERVIEW

We develop, manufacture and market cutting-edge technology that decreases the need for water and improves the soil in the "Green Industry" consisting of agriculture, turf and horticulture.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our selected financial information: Three Months Three Months Ended Ended December 31, December 31, 2013 2012 ------------ ------------ (Unaudited) (Unaudited) STATEMENT OF OPERATIONS DATA: Revenue $ 7,300$ 10,895 Net income (loss) 488,827 (14,621) Net income (loss) per share $ 0.01$ (0.00)

Net income (loss) per share, diluted $ 0.01$ (0.00)

December 31, September 30, 2013 2013 ------------ ------------ (Unaudited) BALANCE SHEET DATA: Current Assets $ 12,782$ 10,379 Total property & equipment, net 39 75 Intellectual property, net 0 10,362 Net deferred tax asset -- -- Total assets 12,821 20,816 Total current liabilities 7,379,688 7,876,510 Accumulated deficit $(28,648,607)$(29,137,434) 11



THREE MONTHS ENDED DECEMBER 31, 2013 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2012

REVENUES

Revenues for the three months ended December 31, 2013 were $7,300 compared to $10,895 for the three months ended December 31, 2012, a decrease of 33%. This decrease in revenue is a direct result of our lack of funds to properly market our products.

COST OF SALES

Cost of goods sold decreased to $1,027 for the three months ended December 31, 2013 from $2,010, for the three months ended December 31, 2012. The decrease in the cost of sales is the result of a decrease in storage costs during the current period. Our gross margins were 86% and 82% for the three months ended December 31, 2013 and 2012, respectively. The increase in our gross margins was due to an increase in the proportion of revenues from royalties as opposed to sales of product in the current period. Revenues associated with royalties have relatively minor costs when compared to the costs of product sales.

OPERATING EXPENSES

Operating expenses decreased 9% to $126,948 from $139,230 for the three month period ended December 31, 2013 and 2012, respectively.

This decrease in operating expenses was a result in decreased operations. Our general and administrative expenses decreased to $116,511 for the three months ended December 31, 2013 from $128,793 for the three months ended December 31, 2012 due to the continued reduction in rent and certain administrative costs.

NET LOSS

We experienced net income from operations of $488,827 for the three months ended December 31, 2013 as compared to a net loss of $14,621 for the three months ended December 31, 2012. The net income was primarily a result of the gain realized in the amount of $635,903 by the extinguishment of debt. As part of our debt mitigation program, we reviewed our long outstanding liabilities for among other things, the expiration of the Statute of Limitations for creditors to make claims on amounts owed. The analysis was based on on applicable law in the state where the liability originated. The Company will continue to analyze past due payables in future periods.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $5,512 and $3,070 at December 31, 2013 and September 30, 2013, respectively. Net cash used in operating activities was $12,588 for the period ended December 31, 2013 compared to $37,300 during the period ended December 31, 2012. Net cash provided by financing activities was $15,000 for the period ended December 31, 2013 compared to $38,000 for the

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comparable period ended December 31, 2012. We have historically relied upon one of our officers and significant shareholders to provide cash to meet short term operating cash requirements.

At December 31, 2013, the outstanding balance of notes payable was $2,814,427. These convertible debentures consisted of: a) $1,500,000, 8% per annum convertible debentures at the closing price on the day immediately preceding the day of conversion which is currently in default and in dispute; (b) various debentures totaling $212,561 with interest per annum from 8-10%; (c) a loan from an officer and shareholder for $928,842 bearing interest at prime; (d) various loans from related parties totaling $173,024 bearing interest from prime to 12%.

Interest expense for the three months ended December 31, 2013 and 2012 was $26,401 and $26,336, respectively.

We have a working capital deficit $7,366,906 as of December 31, 2013 compared to working capital deficit of $7,855,694 as of September 30, 2013. Our decrease in current liabilities is directly related to a decrease in our notes payable and accrued liabilities through our debt mitigation program.

As shown in the accompanying financial statements, we have incurred an accumulated deficit of $28,648,607 and a working capital deficit of approximately $7,366,906 as of December 31, 2013. Our ability to continue as a going concern is dependent on obtaining additional capital and financing and operating at a profitable level. We intend to seek additional capital either through debt or equity offerings and to increase sales volume and operating margins to achieve profitability. Our working capital and other capital requirements during the next fiscal year and thereafter will vary based on the sales revenue generated.

We will consider both the public and private sale of securities and/or debt instruments for expansion of our operations if such expansion would benefit our overall growth and income objectives. Should sales growth not materialize, we may look to these public and private sources of financing. There can be no assurance, however, that we can obtain sufficient capital on acceptable terms, if at all. Under such conditions, failure to obtain such capital likely would at a minimum negatively impact our ability to timely meet our business objectives.

Our auditors issued an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern in our most recent 10-K for the year ended September 30, 2013.

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