The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q and in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.

THIS FILING, INCLUDING BUT NOT LIMITED TO "MANAGEMENT'S DISCUSSION AND ANALYSIS", CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS "ANTICIPATED,"
"BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE," "PROJECT," "WILL,"
"COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD- LOOKING STATEMENTS AS A RESULT OF SEVERAL FACTORS, INCLUDING THE RISKS FACED BY US AS DESCRIBED BELOW AND ELSEWHERE IN THIS FORM 10-Q AS WELL AS IN OUR FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2012. IN LIGHT OF THESE RISKS AND UNCERTAINTIES THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-Q WILL OCCUR. WE HAVE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS AND WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. WE MAY NOT UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN THOUGH OUR SITUATION MAY CHANGE IN THE FUTURE.

OVERVIEW

We have developed and patented a nano-structure polymer technology, which is being commercialized in products based on the functionality of these materials. We believe the applications of our technology have promise in a number of diverse market segments and products.

The initial product focus of the Company is ConsERV, an energy recovery ventilator. Our primary focus is to expand our marketing and sales of our ConsERV products. We also have new product applications in various stages of development. We believe that three of these product applications, including an advanced air conditioning system which is projected to be more energy efficient and have lower emissions compared to current HVAC equipment, a sea-water desalination product and an electrical energy storage device, may be brought to market in the foreseeable future if we receive adequate capital funding.

We expect ConsERV™ to continue to be our focused commercial product through 2012 with a growing emphasis on moving the development of the NanoClear and NanoAir technologies towards commercialization.

REVENUES

We generate our revenues primarily from the sale of our ConsERV™ products in largely commercial HVAC markets with a small amount of revenue coming from residential sales to consumers and HVAC distributors. Sales channels for our ConsERV™ products include OEMs, distributors, retailers, and consumers. We also occasionally license our technology to strategic partners and sell various prototypes of other product applications that use our polymer technology.

Our near term revenue growth is dependent on continued sales from (i) more seasoned independent sales representatives, (ii) a greater number of independent sales representatives (iii) fulfilling the ventilation needs of the growing "energy consultant" marketplace which work to lower their client's energy costs and emissions, and (iv) from the Company's own 'customer direct' sales activities, all of which focus on the sale of product primarily into the commercial user marketplace with a growing emphasis on low rise structures (small commercial buildings, multi-purpose structures, and residences). In addition, the Company and its independent sales representative sales force will work to secure orders for ConsERV™ "core only" sales from HVAC equipment manufacturers and from distribution firms servicing the equipment needs of the HVAC installer community. We are also working to create license/supply relationships with HVAC or ERV OEMs preferably having a dominant presence in existing direct related sales channels.

COST OF SALES

Our cost of sales consists primarily of materials (including freight), direct labor, and outsourced manufacturing expenses incurred to produce our ConsERV™ products.

We are dependent on third parties to manufacture the key components needed for our nano-structured based materials and value added products made with these materials. Accordingly, a supplier's failure to supply components in a timely manner, or to supply components that meet our quality, quantity and cost requirements or our technical specifications, or the inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, would create delays in production of our products or increase our unit costs of production. Certain of the components contain proprietary products of our suppliers, or the processes used by our suppliers to manufacture these components are proprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, it would create a delay in production.

Our cost of sales may fluctuate due to a number of factors, including, but not limited to:

• A change in key suppliers or the prices that they charge for the fundamental components of our ConsERV™ products;

• An increase in the labor resources needed to expand the production of our ConsERV™ products;

• Commercialization of new product applications of our polymer technology;

• Continued technological improvements in key materials or configuration(s) to reduce our 'per unit' cost structure; and

• Additional outsourcing of our manufacturing and assembly processes with strategic partners to reduce our 'per unit' cost structure.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Our selling, general and administrative expenses consist primarily of payroll and related benefits, share-based compensation, professional fees, marketing and channel support costs, and other infrastructure costs such as insurance, information technology and occupancy expenses.

Our selling, general and administrative expenses may fluctuate due to a variety of factors, including, but not limited to:

• Additional expenses as a result of being a reporting company including, but not limited to, director and officer insurance, director fees, SEC reporting and compliance expenses, transfer agent fees, additional staffing, professional fees and similar expenses;

• Additional infrastructure needed to support the expanded commercialization of our ConsERV™ products and/or new product applications of our polymer technology for, among other things, administrative personnel, physical space, marketing and channel support and information technology; and

• The fair value of new share-based awards, which is based on various assumptions including, among other things, the volatility of our stock price

Results of Operations

Summary of Three Months Ended June 30, 2012 Results of Operations

The following table sets forth, for the periods indicated, certain data derived
from our Statements of Operations and certain of such data expressed as a
percentage of revenues:

                                                                 Three Months Ended June 30,
                                                                   2012                2011

Revenues                                                       $     649,015       $  1,124,079
Percentage of revenues                                                 100.0 %            100.0 %
Cost of goods sold                                             $     508,962       $    806,674
Percentage of revenues                                                  78.4 %             71.8 %
Research and development expenses, net grant revenue           $     143,396       $     11,119
Percentage of revenues                                                  22.1 %              1.0 %
Selling, general and administrative expenses                   $     527,573       $    792,606
Percentage of revenues                                                  81.3 %             70.5 %
Interest expense                                               $      81,529       $    416,899
Percentage of revenues                                                  12.6 %             37.1 %
Change in fair value of warrant liability (gain)               $    (911,922 )     $ (1,694,170 )
Percentage of revenues                                                 140.5 %            150.7 %
Net income                                                     $     299,497       $    791,585
Percentage of revenues                                                  46.1 %             70.4 %

REVENUES: Total revenues for the three months ended June 30, 2012 and 2011 were $649,015 and $1,124,079, respectively, a decrease of $475,064 or 42.3%. The decrease in revenues in the 2012 period is primarily attributable to concerns related to our ability to repay the convertible secured promissory note in the principal amount of $1.5 million. The note was repaid on July 13, 2012.

COST OF GOODS SOLD: Cost of goods sold decreased $297,712 to $508,962 and represented 78% of revenues, for the three months ended June 30, 2012 compared to $806,674 or 72% of revenues for the three months ended June 30, 2011. Gross profit margin decreased from 28% in 2011 to 22% in 2012. The decrease in the gross profit margin was due to the relocation of the production of our enthalpy cores to our Odessa location, which required an increase in our materials, labor and training for quality assurance.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $527,573 for the three months ended June 30, 2012 decreased $265,033 from $792,606 in the same period of 2011 or 33%. The decrease was primarily due to a decrease in stock based compensation of approximately $197,000 and a decrease in professional services by approximately $46,000.

INTEREST EXPENSE: Interest expense was $81,529 for the three months ended June 30, 2012 compared to $84,149 for the same period of 2011, a decrease of $2,620.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability decreased by $782,248 for the three months ended June 30, 2012 to ($911,922) from ($1,694,170) in the prior period ended June 30, 2011 due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. See Note 8 in the accompanying Financial Statements.

NET INCOME: Net income for the three months ended June 30, 2012 decreased by $492,088 to $299,497 from $791,585 for the three months ended June 30, 2011. The decrease in net income is primarily due to the decrease in the change in the fair value of the warrant liability as discussed above.

Summary of Six Months Ended June 30, 2012 Results of Operations

The following table sets forth, for the periods indicated, certain data derived
from our Statements of Operations and certain of such data expressed as a
percentage of revenues:

                                                         Six Months Ended June 30,
                                                           2012              2011

Revenues                                               $   1,688,498     $  1,982,773
Percentage of revenues                                         100.0 %          100.0 %
Cost of goods sold                                     $   1,192,099     $  1,507,564
Percentage of revenues                                          70.6 %           76.0 %
Research and development expenses, net grant revenue   $     234,994     $     13,155
Percentage of revenues                                          13.9 %            0.7 %
Selling, general and administrative expenses           $     962,338     $  1,714,903
Percentage of revenues                                          57.0 %           86.5 %
Interest expense                                       $     159,315     $    580,438
Percentage of revenues                                          0.09 %           29.3 %
Change in fair value of warrant liability (gain)       $  (1,499,852 )   $    657,637
Percentage of revenues                                          88.8 %           33.2 %
Net income (loss)                                      $     281,114     $ (2,490,560 )
Percentage of revenues                                          16.6 %          125.6 %

REVENUES: Total revenues for the six months ended June 30, 2012 and 2011 were $1,688,498 and $1,982,773, respectively, a decrease of $294,275 or 14.8%. The decrease in revenues in the 2012 period is primarily attributable to concerns related to our ability to repay the convertible secured promissory note in the principal amount of $1.5 million. The note was repaid on July 13, 2012. During the six months ended June 30, 2012 and 2011, four customers accounted for approximately 61% and 52% of revenues, respectively.

COST OF GOODS SOLD: Cost of goods sold decreased $315,465 to $1,192,099 and represented 70.6% of revenues, for the six months ended June 30, 2012 compared to $1,507,564 or 76% of revenues for the six months ended June 30, 2011. Gross profit margin increased from 24% in 2011 to 29.4% in 2012. The increase in the gross profit margin was due to the recognition of the $150,000 nonrefundable deposit related to the termination of the Genertec and the CAST agreements net of the increase in costs related to the relocation of the production of our enthalpy cores to our Odessa location, which required an increase in labor costs and additional training for quality assurance.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $962,338 for the six months ended June 30, 2012 represented a decrease of $752,565 from $1,714,903 in the same period of 2011. The decrease was primarily due to a decrease of $546,929 in stock based compensation expense as the Company did not approve as many equity awards in 2012. It was also due to a $59,249 decrease in professional fees as the Company entered into fewer consulting agreements. Finally, the Company reduced travel and entertainment expense by $39,191.

INTEREST EXPENSE: Interest expense was $159,315 for the six months ended June 30, 2012 compared to $129,870 for the same period of 2011, an increase of $29,445. The increase was primarily due to having the secured and unsecured notes outstanding for the full six months in 2012.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability increased by $2,157,789 for the six months ended June 30, 2012 to ($1,499,852) from $657,937 in the prior period ended June 30, 2011 due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. See Note 8 in the accompanying Financial Statements.

NET INCOME (LOSS): Net income for the six months ended June 30, 2012 increased by $2,771,674 to $281,114 from ($2,490,560) or the six months ended June 30, 2011. The increase in net income is primarily due to the increase in the change in fair value of warrant liability as discussed above.

Liquidity and Capital Resources

The Company finances its operations primarily through sales of its ConsERV™ products, sales of its common stock, the issuance of convertible promissory notes, unsecured promissory notes and license agreements.

Our historical revenues have not been sufficient to sustain our operations. We have not achieved profitability in any year since inception and we expect to continue to incur net losses and negative cash flow from operations until we can produce sufficient revenues to cover our costs, which are not expected for several years. Furthermore, even if we achieve our goal of selling a greater number of ConsERV™ units, we anticipate that we will continue to incur losses until we can cost-effectively produce and sell our products to a wider market. Our profitability will require the successful commercialization of our ConsERV™ products and any future products we develop. No assurances can be given when this will occur.

Unsecured Note
In December 2009, we secured a 10% loan in the principal amount of $1,000,000 from an investor. Pursuant to the terms of the note, we are to pay the holder simple interest at the rate of ten percent per annum commencing on the date of issuance with all interest and principal due and payable in cash on or before June 17, 2010. The note's maturity date was extended to April 30, 2011. On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note ("Convertible Note", collectively "Exchange Agreements") with this investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the investor amended and restated the $1,000,000 unsecured promissory note to, among other things, add a conversion option and extend the maturity date to March 22, 2012 (as amended and restated, the "2011 Convertible Note"). Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 is due in full on March 22, 2012. Subject to the terms and conditions of the 2011 Convertible Note, including limitations on conversion, the outstanding principal and interest under the 2011 Convertible Note shall automatically convert into shares of the Company's common stock at the then-effective conversion price upon the closing of a qualified firm commitment underwritten public offering or may be voluntarily converted by the investor at anytime during the debt term. The initial conversion price is $0.26 per share, which is subject to adjustment for standard anti-dilution provisions. Any principal or interest which is not converted is to be repaid by the Company at the earlier of a qualified offering, (as defined in the 2011 Convertible Note which is filed as an exhibit to the Form 8K filed with the Securities and Exchange Commission on March 28, 2011), or March 22, 2012. Pursuant to and during the term of the 2011 Convertible Note, the Company is not to issue or allow to exist any obligation for borrowed money, except for subordinate indebtedness in payment and priority, trade payables incurred in the ordinary course of business, purchase money secured indebtedness for equipment or inventory, unsecured and subordinate, or unsecured and subordinate working capital guarantees provided by, the Export Import Bank of the United States (the "EXIM Bank"). Effective March 20, 2012, the Company and the investor amended the 2011 Convertible Note and to extend the maturity date to May 7, 2012. Pursuant to the Forbearance Agreement described below, on and after June 14, 2012 interest on the principal amount of the 2011 Convertible Note shall accrue at the rate of 20% per annum. As of the date of this report, the 2011 Convertible Note was outstanding, in default and due and payable in full.

On March 22, 2011, in connection with the above Exchange Agreements, the Company entered into amendments to existing warrant agreements with the investor to extend the terms of the existing stock purchase warrants, dated on or about December 31, 2007 and March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, the Company issued an additional stock purchase warrant to the investor. Subject to the terms of the warrant, the investor may purchase 1,000,000 shares of the Company's common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the 2011 Convertible Note in full, or the date of conversion of the Convertible Note by the investor in the greatest number of shares of the Company's common stock not to exceed 9.99% beneficial ownership of Company outstanding common stock and terminating on March 22, 2016.

The 2011 Convertible Note is a hybrid financial instruments that blends characteristics of both debt and equity securities. The note embodies settlement alternatives to the holder providing for either redemption of principal and interest in cash (forward component) or conversion into the Company's common stock (embedded conversion feature). The forward component was valued using the present value of discounted cash flows arising from the contractual principal and interest payment terms and the embedded conversion feature was valued using the Monte Carlo simulation method. The fair value of the 2011 Convertible Note was estimated to be $1,964,905 on the date of the exchange, which resulted in a loss on extinguishment of debt of $964,905. Further, in accordance with ASC 470-20-25 and ASC 470-50-40, the net premium of $964,905 associated with the 2011 Convertible Note was reclassified to capital in excess of par value under the presumption that such net premium represented a capital contribution. Consequently, the 2011 Convertible Note is being carried at face value. The fair value of the additional warrant to purchase 1,000,000 shares and the value associated with the previously issued warrants that were amended was determined to be $716,890 using the Black-Scholes option model and is included in the aggregate loss on extinguishment of $1,681,795. Since the loan is held by a related party, the loss on extinguishment has been treated as a capital transaction and, as a result, this transaction had no net effect on capital in excess of par value.

Secured Note
Also, on March 22, 2011, the Company entered into a 10% note and warrant purchase agreement, secured convertible promissory note and patent security agreement ("Financing Agreements") with the investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the investor provided a loan in the amount of $1,500,000 to the Company, which was secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and "accounts" with respect to such intellectual property assets. Pursuant to this secured convertible promissory note ("Secured Note"), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 was due and payable on March 22, 2012, subsequently extended to May 7, 2012, but repayment is accelerated upon a qualified offering (as defined in the note). In the event of such qualified offering, and subject to the terms and conditions of the Secured Note, the outstanding principal and interest under the Secured Note was to automatically convert, subject to the limitations on conversion described in the note, into shares of the Company's common stock at the then-effective conversion price upon the closing of such qualified offering. The initial conversion price was $0.26 per share. Any principal or interest which was not converted was to be repaid by the Company at the earlier of a qualified offering or March 22, 2012, subsequently extended to May 7, 2012. No cash fees were paid to any party to the transaction in exchange for lending the money. Effective March 20, 2012, the Company and the investor amended the Secured Note and Convertible Promissory Note to extend the maturity date to May 7, 2012. Pursuant to the Forbearance Agreement described below, on and after June 14, 2012 interest on the principal amount of this note accrued at the rate of 20% per annum. All interest and principal due and owing pursuant to this Secured Note was paid on July 13, 2012.

On March 22, 2011, in connection with the Financing Agreements, the Company issued a Stock Purchase Warrant to the investor to purchase 3,000,000 shares of the Company's common stock at $0.45 per share, exercisable until March 22, 2016. The Warrant was fair valued on the date of issuance, which amounted to $1,204,787. The warrant value was recorded as a debt discount based on the relative fair value of the warrant to the total proceeds received, which amounted to $435,240. The Warrant was fair valued using the Black-Scholes-Merton valuation model. In addition, the debt contained a beneficial conversion feature, which was valued at the date of issuance at $1,762,163; however, since this amount is in excess of the net value of the debt less the warrant discount, the beneficial conversion feature will be limited to $1,064,760 and recorded as a discount on the loan. The total debt discount of $1,500,000 is being amortized using the effective interest method over the 12-month term of the Secured Note. For the three and six months ended June 30, 2012, the Company recognized $358,555 and $358,555, respectively, in additional interest expense representing amortization of this debt discount. For the three and six months ended June 30, 2011, the Company recognized $332,749 and $450,568, respectively, in additional interest expense representing amortization of this debt discount.

The fair value of warrants issued in 2011 related to the above debt transaction were calculated using the Black-Scholes model with the following assumptions:
Expected life in years: 5-10 years; Estimated volatility 115%-117%, Risk-free interest rate: 1.89%-2.07%; Dividend yield: 0%.

Pursuant to the Patent Security Agreement issued in connection with the Note and Warrant Purchase of March 22, 2011, the Company was not, without the investor's prior consent, to sell, dispose or otherwise transfer all or any portion of the Collateral, except for license grants in the ordinary course of business. In addition, the Company was to take all actions reasonably necessary to prosecute to allowance applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.

In connection with a qualified offering, and subject to the terms and conditions of the Secured Note and 2011 Convertible Note, the Company will use reasonable efforts to include the Investor's securities in such offering. Pursuant to the terms and conditions of the Exchange Agreements and Financing Agreements, the investor will not, if requested in writing by the underwriter, sell, offer to sell or otherwise transfer or dispose of (other than to affiliates) any securities of the Company held by it for a period of 180 days from the date of the final prospectus relating to such qualified offering, except for certain limited sales as more fully described in the Exchange Agreements or Financing Agreements.

Forbearance Agreement
On May 18, 2012 we received a notice of default from the Investor with respect to the 2011 Convertible Note, Secured Note and Patent Security Agreement. On June 15, 2012, we entered into a forbearance agreement (the "Forbearance . . .