FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q and other reports that we file with the SEC contain statements that are considered forward-looking statements that involve risks and uncertainties. These include statements about our expectations, plans, objectives, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "estimate," "plans," "potential," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" and similar expressions. Such forward looking statements include statements addressing operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to revenue realization, revenue growth, earnings, earnings per share, or similar projections. These statements estimates involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed for the reasons described in this report. You should not place undue reliance on these forward-looking statements.

You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors such as:

? the successful implementation of research and development programs;

? the ability to demonstrate the effectiveness of our technology;

? the timeline for customer accreditation for product formulations;

? our ability to enter into strategic partnering and joint development agreements;

? our ability to competitively market our Pleximer and filled tube products;

? the terms and timing of product sales and licensing agreements;

? the timing and approval of filed and pending patent applications;

? the ability to raise additional capital to fund our operating and research activities until we generate adequate cash flow from operations;

? our ability to attract and retain key personnel and;

? general market conditions.

Our actual results may differ materially from management's expectations. The following discussion should be read in conjunction with our financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue in the future, or that any conclusion reached herein will necessarily be indicative of actual operating performance in the future. Such discussion represents only the best present assessment of our management.

The forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

General

Since inception, December 22, 2004 the Company has been and in 2009 we will continue to be, a development stage company. Our primary mission is to develop and exploit technologies in the area of advanced materials science, with a special emphasis on additives to polymers and other industrial and consumer products, taking advantage of technological advances we have developed in-house and licensed from third parties. These technologies include a specific focus on nanoscale materials using modifications to tubular and spherical materials found in clay. Our strategy is to develop patentable processes and technologies related to these nanoscale materials and to develop products in the polymers and plastics industries as well as the composites, cosmetics, household products and agrichemical industries. Our near-term goal is to commercialize our core technology and application processes utilizing nanotubes.

NaturalNano is domiciled in the state of Nevada as a result of the merger with Cementitious Materials, Inc. ("CMI"), which was completed on November 29, 2005.

Liquidity and Capital Resources

Going Concern - The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a net loss for the six months ended June 30, 2009 of $504,664 and had negative working capital of $5,700,747 and a stockholders' deficiency of $23,641,096 at June 30, 2009. Since inception the Company's growth has been funded through combination of convertible debt from private investors and from cash advances from its former parent Technology Innovations, LLC. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing and, ultimately, to attain successful operations.

During the first and second quarter of 2009, the Company entered into several 8% Senior Secured Promissory Notes for an aggregate borrowing of $191,126. These notes are referred to as the "2009 Promissory Notes." The proceeds from the 2009 Promissory Notes were provided for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest is due and payable in full on June 30, 2009. The Company paid $137,469 in outstanding principal on the 2009 Promissory Notes in July 2009. Therefore $53,657 remains outstanding. The proceeds of $253,000 from the QETC rebate were used to pay $137,469 in outstanding principal, as required in this debt agreement. The Company has received waivers of defaults relating to the remaining outstanding principal balance of $53,657 extending through October 31, 2009.

Management is actively assessing the Company's operating structure with the objective to reduce ongoing expenses, increasing sources of revenue and is negotiating the terms of additional debt or equity financing. The Company will continually evaluate funding options including additional offerings of its securities to private and institutional investors and other credit facilities as they become available. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.

Operating activities

Net cash used in operating activities during the six months ended June 30, 2009 and 2008 was $152,391 and $320,566, respectively. The net loss generated in the first half of 2009 of $504,664 reflects a reduction of $2,504,428 when compared to the net loss incurred during the first half of 2008.

Total adjustments to reconcile net loss for the six months ended June 30, 2009 to cash used in operations (the total of depreciation, amortization, vesting of stock options, non-cash gain on debt forgiveness, fair value adjustment of derivative instruments, deferred income and issuances of warrants and stock) was $1,818,473 lower in 2009 than in the comparable period in 2008. Reductions in depreciation and amortization expense noted in 2009 reflect asset impairment charges taken in the fourth quarter of 2008. The Company realized lower amortization expense on debt discount and deferred financing costs during the first half of 2009 compared with the prior year as a result of the extension of the amortization period to January 31, 2010 coincident with the financing received in the third quarter of 2008. The 2009 decrease in non-cash items also includes a credit during the first half of 2009 for stock option costs due to an increase in forfeitures and cancellations for previously granted unvested stock options resulting from to the employee turnover experienced in the first half of 2009. During the first quarter of 2009, the Company reduced outstanding liabilities through negotiation with certain of its vendors, resulting in a net gain on forgiveness of debt in the amount of $83,667. The current year also reflects a fair value adjustment of $461,270 to the carrying value of derivative liabilities for which there was no comparable activity in 2008. The Company adopted the accounting prescribed under EITF 07-05 in the first quarter of 2009 which relates to the accounting for financial instruments that are potentially settled in the entity's own common stock (See Note 2.)

The decrease in the net loss for the six months ended June 30, 2009 reflects lower net revenues as well as reduced spending in the first half of 2009. The Company continues to evaluate opportunities to reduce expenses and improve its liquidity position. The Company expects that all spending categories will be reduced throughout 2009, although it will continue to make efforts to invest in product and commercialization efforts as our cash position and liquidity allow.

Investing activities

Net cash used in investing activities in the six months ended June 30, 2009 and 2008 was $6,600 and $76,322, respectively. During the first quarter of 2009, the Company bought out certain leased equipment used in its research and development lab. Leasehold improvements of $76,322 made in 2008 related primarily to investments in the Company's production and laboratory facility.

Financing Activities

Net cash provided from financing activities in the six months ended June 30, 2009 and 2008 was $158,386 and $241,394, respectively. The cash flows from financing activities in the half of 2009 reflect the receipt of $191,126 in proceeds from the 8% senior secured promissory notes. During 2009, we also received cash advances of $3,709 from affiliated entities for shared services agreements compared to $108,578 in 2008 representing a reduction in services used by us.

During the six months ended June 30, 2009 and 2008, we made capital lease payments of $32,764 and $43,652, respectively.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. Our actual results may differ from these estimates.

We believe, that of the significant accounting policies described in the notes to our consolidated financial statements, the following policies involve a greater degree of judgment and complexity and accordingly; these policies are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Instruments Indexed to an Entity's Own Stock

Effective January 1, 2009, the Company adopted the provisions of The Emerging Issues Task Force ("EITF") EITF 07-05, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock. EITF 07-05 applies to any free-standing financial instruments or embedded features that have the characteristics of a derivative, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and to any freestanding financial instruments that are potentially settled in an entity's own common stock. The adoption of EITF 07-05 had a material impact on our consolidated financial position and results of operations as the Company has financial instruments with the characteristics which meet the definition of a derivative instrument in accordance with the provisions of this pronouncement.

Revenue Recognition

The Company has earned nominal operating revenue since inception (December 22, 2004). This revenue was generated from funded development and the delivery of Pleximer and sample products specifically formulated for customer applications and as such has been reported as operating revenue for financial reporting purposes. The Company earns and recognizes such revenue to the extent such development activities are completed or when the shipment of the sample products has occurred and when no further performance obligation exists.

Share Based Payments

The Company accounts for stock option awards granted under the Plans in accordance with Statement of Financial Accounting Standard No. 123 (revised 2004), "Share-Based Payment", ("SFAS 123(R)"). Under SFAS 123R, compensation expense related to stock based payments are recorded over the requisite service period based on the grant date fair value of the awards. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option's expected term and the price volatility of the underlying stock.

The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and EITF 00-18, "Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees." The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement

Deferred Taxes

Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS 109") requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company evaluates the realizability of its net deferred tax assets on an annual basis and any additional valuation allowances are provided or released, as necessary. Since the Company has had cumulative losses in recent years, the accounting guidance suggests that we should not look to future earnings to support the realizability of the net deferred tax asset. As a result, as of the years ended December 31, 2008 and 2007, the Company has recorded a valuation allowance to reduce its gross deferred tax assets to zero in accordance with SFAS 109. In addition, as of December 31, 2008 the Company recorded a deferred tax liability of $150,189, which consists of the tax effect of the difference in the basis between GAAP and tax purposes for the beneficial conversion feature. In connection with the Notes entered into during 2008 with the offset recorded through Additional Paid in Capital as an offset to the beneficial conversion feature. This deferred tax liability will decrease with a corresponding increase to Additional Paid in Capital as the beneficial conversion feature is amortized over the term of the Notes. See Note 6 for further analysis.

As of June 30, 2009 the Company had a deferred income tax liability of $81,945, which consisted of the tax effect of the difference in basis between GAAP and tax purposes for the beneficial conversion feature in connection with the Notes entered into during August and September of 2008 with the offset recorded through additional paid-in capital as an offset to the beneficial conversion feature. This deferred tax liability will decrease with a corresponding increase to additional paid-in capital as the beneficial conversion feature is amortized over the term of the Notes.

Comparison of Statement of Operations for the three months ended June 30, 2009 and 2008

Revenue and Gross Profit

During the three months ended June 30, 2009 and 2008, the Company recorded $35,858 and $123,975, respectively in revenue from shipments of halloysite product samples. The related cost of goods sold was $13,486 and $41,311 for the sample shipments completed in the second quarter of each year. Gross margin of $22,372 and $82,644 was realized for the quarters ended June 30, 2009 and 2008, respectively. Realized margin percentages can and have varied significantly among sample shipments. The realized gross margin is highly dependent on the attributes and specialized refining procedures prescribed by each customer requesting the samples as well as by the industry and end product envisioned by the customer.

The Company recognizes revenues through the sales and shipment of samples of Pleximer product, halloysite processing, as well as funding for development of specific applications for our proprietary halloysite technologies in consumer products and other industries.

Operating Expenses

Total research and development expenses for the three months ended June 30, 2009 was $78,836 as compared to $304,504 for the three months ended March 31, 2008. The decrease in spending on research and development reflects the staff and officer resignations in the fourth quarter of 2008. Since the first quarter of 2009, management has been focused on the evaluation of current technology developed and available for market introduction and the assessment of related market opportunities. These conditions resulted in notably reduced expenses for staff salaries and consultant expenses during the first and second quarters of 2009. This staff turnover also resulted in credits in the first quarter of 2009 for unvested stock option forfeited during the period.

                                         For the three months ended       Variance
                                                  June 30,                increase
       Research and Development           2009              2008         (decrease)
   Salaries & benefits                $           -    $       138,312   $  (138,313 )
   Stock option compensation                      -             23,437       (23,437 )
   Consulting services                        1,354             40,163       (38,809 )
   Patent costs                              38,470             76,609       (38,139 )
   Depreciation                              28,590             24,700         3,890
   Rent & utilities                           7,335             21,717       (14,382 )
   Allocation to cost of goods sold               -            (38,010 )      38,010
   All other                                  3,087             17,575       (14,488 )
                                      $      78,836    $       304,504   $  (225,668 )

Total general and administrative expenses for the three months ended June 30, 2009 was $112,295 as compared to $466,669 for the three months ended June 30, 2008. The decrease in spending on general and administrative expenses reflects the staff and officer resignations in the first quarter of 2009. The sole officer of the Company earned compensation during the second quarter of 2009 which has been accrued as of June 30, 2009. No stock option expenses or credits occurred in the second quarter as all outstanding options were vested in prior periods. During the fourth quarter of 2008 and continuing into the second quarter of 2009, management implemented cost reductions. Management will continue to actively assess the Company's operating structure with the objective to reduce ongoing expenses, increase sources of revenue. During the fourth quarter of 2008, the Company recognized asset impairment to its carrying value of its intangible assets, and as a result the amortization expense in 2009 is notably lower than the amounts recognized in 2008.

                                                       For the three months ended         Variance
                                                                June 30,                  increase
           General and Administrative                    2009              2008          (decrease)

Salaries & benefits                                 $       31,380    $      156, 566    $  (125,186 )
Consulting services                                         12,556             16,518         (3,962 )
Stock option compensation                                        -             66,547        (66,547 )
Legal & professional fees                                   14,568            100,000        (85,432 )
Depreciation & amortization of intangible assets             9,843             33,288        (23,445 )
Insurance expense                                            2,751             12,612         (9,861 )
Shareholder expense                                          7,548              4,447          3,101
State tax                                                   17,251                 88         17,163
All other                                                   16,398             76,603        (60,205 )
                                                    $      112,295    $       466,669    $  (354,374 )

Other (Expense) Income

Other expense consists of interest expense on convertible and promissory notes outstanding and other debt related financing and amortization expenses considered components of interest expense for financial reporting.

As described in Note 2 to the condensed consolidated financial statements, interest expense includes the amortization of the debt discount, interest on the 8% Senior Secured Convertible Notes, amortization of related financing costs and the registration rights obligation - of which are associated with the Initial and New Notes issuance on March 7, 2007 and September 29, 2008. Interest costs resulting from capital lease obligations and the 2009 8% Senior Secured Promissory Notes are also included in Other Expense.

On August 1, 2008 in connection of a new financing agreement, TI agreed to cancel and forgive all principal, interest, fees and expenses accrued pursuant it Line of Credit Agreement with the Company (Note 4) thereby resulting in a reduction in interest expense in the first quarter of 2009 when compared to the prior year quarter.

Interest was earned on cash balances held at certain financial institutions during the three months ended March 31, 2008. The decrease in interest income earned reflects the decline in cash on-hand during the first quarter of 2009.

                                                  For the three months ended        Variance
                                                           June 30,                 increase
Other (Expense) Income                              2009              2008         (decrease)
Amortization of debt discount                  $     (236,943 )  $     (406,163 ) $    169,220
Interest to 8% senior convertible and
promissory notes                                      (79,802 )        (211,116 )      131,314
Amortization of financing costs                       (45,135 )         (95,944 )       50,809
Interest to TI note                                         -           (17,951 )       17,951
Interest on financed receivables                            -            (3,709 )        3,709
Interest paid on capital leases                          (801 )          (2,834 )        2,033
Interest earned on cash                                     -               637           (637 )
                                               $     (362,681 )  $     (737,080 ) $    374,399

During the first quarter of 2009 and in accordance with EITF 07-05, certain warrants and the embedded conversion of feature associated with the 8% convertible debt were recognized as a derivative instruments and as such were re-characterized as derivative liabilities. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations. The re-measurement of these derivative liabilities resulted in a credit of $452,872 during the first quarter of 2009.

Comparison of Statement of Operations for the six months ended June 30, 2009 and 2008

Revenue and Gross Profit

During the six months ended June 30, 2009 and 2008, the Company recorded $67,233 and $126,925, respectively in revenue from shipments of halloysite product samples. The related cost of goods sold was $14,960 and $42,754 for the sample shipments completed in the quarter. Gross margin of $ 52,273 and $84,171 was realized for the six month period ended June 30,, 2009 and 2008, respectively. Realized margin percentages can and have varied significantly among sample shipments. The realized gross margin is highly dependent on the attributes and specialized refining procedures prescribed by each customer requesting the samples as well as by the industry and end product envisioned by the customer.

The Company recognizes revenues through the sales and shipment of samples of Pleximer product, halloysite processing, as well as funding for development of specific applications for our proprietary halloysite technologies in consumer products and other industries.

Operating Expenses

Total research and development expenses for the six months ended June 30, 2009 was $142,056 as compared to $940,474 for the six months ended June 30, 2008. The decrease in spending on research and development reflects the staff and officer resignations in the fourth quarter of 2008. This staff turnover also resulted in credits for stock option vesting during the period. During the first half of 2009, the Company has been focused on the evaluation of current technology developed and available for market introduction and the assessment of related market opportunities. These conditions resulted in no salary or consultant related expenses during this first quarter of 2009.

                                          For the six months ended       Variance
                                                  June 30,               increase
        Research and Development           2009             2008        (decrease)
    Salaries & Benefits                            -    $     301,063   $  (301,063 )
    Stock option compensation          $     (28,538 )        288,205      (316,743 )
    Consulting Services                        1,354          120,987      (119,633 )
    Patent Costs                              78,521          124,470       (45,949 )
    Depreciation                              56,865           49,400         7,465
    Rent & Utilities                          23,526           42,301       (18,775 )
    Allocation to cost of goods sold               -          (38,010 )      38,010
    All other                                 10,328           52,058       (41,730 )
                                       $     142,056    $     940,474   $  (798,418 )

. . .