LIQUIDITY AND FINANCIAL CONDITION

We have had recurring losses from operations of $515,516 and $1,945,608 for the three months ended October 31, 2010 and 2009, respectively and used cash from operations in the amounts of $521,066 and $401,601 for the three months period ended October 31, 2010 and 2009, respectively. At October 31, 2010, the Company had cash and equivalents of $186,040. On August 13, 2010, an event of default occurred on our outstanding convertible debentures. Although, the Company received a waiver from the note holders there can be no assurance that we will not suffer further events of default and that if we do a waiver will be obtained from our note holders.

At October 31, 2010, the Company had total current assets of $1,447,924 and total current liabilities of $972,574, resulting in working capital of $475,350 compared to working capital of $1,508,104 at year ended July 31, 2010. The Company’s current assets consists of $186,040 in cash and cash equivalent, $462,593 in accounts receivable, $757,729 in inventory and $36,562 in prepaid expenses. Accounts receivable increased from $67,603 at July 31, 2010 to $462,593 at October 31, 2010. This increase in our accounts receivable is the result of significant sales ($526,911) in the three months period ended October 31, 2010.

Cash expenditures have exceeded revenues for the prior year and Management expects this consumption of cash to continue into next year. Our operations have been and will continue to be funded from existing cash balances and private placements of equity funding. During our fiscal year ended July 31, 2010, we have raised $2,000,000 from the sale of convertible debentures and $635,070 from the exercise of warrants (See “FINANCING ACTIVITIES”, below). We are dependent on improved operating results and raising additional funds over the next twelve month period. There are no assurances that we will be able to raise additional funding. In the event that we are unable to generate sufficient cash flow or receive proceeds from offerings of debt or equity securities, the Company may be forced to curtail or cease it activities and/or operations.

At various times subsequent to October 31, 2010, $291,809 of convertible debt and $35,769 of accrued interest was converted into 1,108,960 shares of common stock.

OPERATING ACTIVITIES

Net cash used in operating activities was $521,066 for the three months period ended October 31, 2010, as compared to net cash used in operating activities in the amount of $401,601 for the three months period ended October 31, 2009, an increase of $119,465, this increase in use of cash can be attributed to: (1) lower cash collections in our fiscal first quarter 2011 as compared to our first quarter 2010, due to the growth of accounts receivable as a result lower sales in our fiscal fourth quarter 2010. (2) Offsetting the lower cash collection was an increase in accounts payable resulting in approximately $195,000 less cash to pay billings versus the prior year first quarter. (3) The Company also decreased prepaid expenses versus prior year resulting lower cash spending of approximately $137,000. (4) The remaining balance was a result of lower cash operating expenses versus the prior year three month period.

INVESTING ACTIVITIES

Net cash used in investing activities for the three months period ended October 31, 2010 was $5,889 for the purchase of manufacturing equipment. For three months period ended October 31, 2009 net cash used investing activities was $21,625 also for the purchase of equipment.