Eugene Science (EUSI) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO __________________

Commission file number 000-50601

EUGENE SCIENCE, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0827004
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

8TH FLOOR, LG PALACE BUILDING, 165-8 DONGGYO-DONG, MAPO-GU, SEOUL, KOREA

(Address of principal executive offices)

Registrant’s telephone number, including area code: 82-2-338-6284

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þNoo

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 Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes¨Noþ

The number of shares of the registrant’s common stock outstanding as of June 30, 2008 was 40,315,705 shares.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

CONTENTS	PAGE
FINANCIAL STATEMENTS
Consolidated Interim Balance Sheets	3
Consolidated Interim Statements of Operations and Comprehensive Loss	5
Consolidated Interim Statements of Stockholders’ Deficit	6
Consolidated Interim Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9 - 23

2

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED INTERIM BALANCE SHEETS

JUNE 30, 2008 AND DECEMBER 31, 2007

(UNAUDITED)

ASSETS
	June 30, 2008		Dec. 31, 2007
Current assets:
Cash and cash equivalents (Note 2)	$	7,319	$	32,342
Restricted cash (Note 3)		1,604		6,112
Accounts receivable (Notes 2 and 17)		107,884		175,504
Inventories (Note 2)		35,414		39,952
Due from related parties (Note 4)		-		52,308
Receivable from unsettled contract (Note 6)		568,971		650,959
Prepaid expenses and other current assets (Note 7)		172,538		156,125
Total current assets		893,730		1,113,302
Property, plant and equipment, net (Note 5)		1,158,228		1,482,680
Other assets:
Investments (Note 8)		1		354
Intangible assets		112,606		141,688
Deposits		6,907		8,795
Total other assets		119,514		150,837
Total assets	$	2,171,472	$	2,746,819

The accompanying notes are an integral part of these consolidated financial statements.

3

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED INTERIM BALANCE SHEETS

JUNE 30, 2008 AND DECEMBER 31, 2007

(UNAUDITED)

LIABILITIES AND STOCKHOLDERS’ DEFICIT
	June 30, 2008			Dec. 31, 2007
Current liabilities:
Accounts payable and accrued expense	$	2,971,262		$	2,942,034
Accrued interest payable		4,758,231			4,848,221
Deposit from customers		88,459			98,951
Loan payable, current portion (Note 9)		4,483,926			5,548,996
Convertible debenture (Note 10)		2,683,766			2,250,000
Due to related parties (Note 11)		167,210			65,065
Total current liabilities		15,152,854			15,753,267
Long-term liabilities:
Accrued severance benefits (Note 12)		19,965			316,232
Rental deposits		57,317			64,116
Long-term debt, net of current portion (Note 9)		2,030,721			2,135,087
Long-term liabilities		2,108,003			2,515,435
Total liabilities		17,260,857			18,268,702
Stockholders' deficit:
Common stocks (Note 13)		41,116			41,116
Additional paid-in capital		16,579,251			16,579,251
Accumulated other comprehensive loss		(1,753,483	)		(3,307,874	)
Accumulated deficit		(29,956,269	)		(28,834,376	)
Total stockholders’ deficit		(15,089,385	)		(15,521,883	)
Total liabilities and stockholders' deficit	$	2,171,472		$	2,746,819

The accompanying notes are an integral part of these consolidated financial statements.

4

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

	Three Months  Ended June 30, 2008			Three Months  Ended June 30, 2007			Six Months  Ended June 30, 2008			Six Months  Ended June 30, 2007 (Restated,  Note 18)
Net Sales (Note 15)	$	204,237		$	154,808		$	327,657		$	309,575
Cost of goods sold (Note 15)		48,294			123,131			129,621			160,871
Gross profits		155,943			31,677			198,036			148,704
Operating expenses		360,473			330,174			792,657			738,928
Operating losses		(204,530	)		(298,497	)		(594,621	)		(590,224	)
Other Income (expenses):
Allowance for related party loan		-			(565,794	)		-			(1,921,973	)
Net rental income (expense)		(34,763	)		7,120			(34,763	)		-
Miscellaneous income (expense)		(125,581	)		114,663			(114,736	)		111,681
Net interest expenses		(185,697	)		(294,666	)		(232,657	)		(590,041	)
Loss on sale of property		(145,116	)		(2,600	)		(145,116	)		(479,789	)
Loss on currency transaction		-			(462	)		-			(462	)
Net other expenses		(491,157	)		(741,739	)		(527,272	)		(2,880,584	)
Loss before income taxes		(695,687	)		(1,040,236	)		(1,121,893	)		(3,470,808	)
Income tax provision (Note 14)		-			-			-			-
Net loss		(695,687	)		(1,040,236	)		(1,121,893	)		(3,470,808	)
Other comprehensive loss:
Foreign currency translation adjustment		724,611			95,002			1,554,391			1,185,239
Comprehensive income (loss)	$	28,924		$	(945,234	)	$	432,498		$	(2,285,569	)
Basic loss per share	$	(0.02	)	$	(0.03	)	$	(0.03	)	$	(0.09	)
Weighted average number of shares outstanding during the period-basic and diluted (Note 13)		41,115,705			40,315,705			41,115,705			40,315,705

The accompanying notes are an integral part of these consolidated financial statements.

5

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2008

(UNAUDITED)

	Common stock				Additional  paid-in capital		Cumulative  other  comprehensive income (loss)			Retained  earnings (Accumulated  deficit)			Total
	Shares		Amount
Balance, January 1, 2008		41,115,705	$	41,116	$	16,579,251	$	(3,307,874	)	$	(28,834,376	)	$	(15,521,883	)
Foreign currency translation adjustment		-		-		-		1,554,391			-			1,554,391
Net loss for the period		-		-		-		-			(1,121,893	)		(1,121,893	)
Balance, June 30, 2008		41,115,705	$	41,116	$	16,579,251	$	(1,753,483	)	$	(29,956,269	)	$	(15,089,385	)

The accompanying notes are an integral part of these consolidated financial statements.

6

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

	2008			2007 (Restated, Note 18)
Cash flows from operating activities:
Net loss	$	(1,121,893	)	$	(3,470,808	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		50,008			57,620
Provision for loss on uncollectible related party loans		-			1,921,973
Loss on sale of property		136,539			-
Loss on investment		-			479,512
(Increase) decrease in assets:
Accounts receivable		67,620			(7,695	)
Inventory		4,538			18,344
Due from related parties		52,308			-
Receivable fro unsettled contract		81,988			-
Prepaid expenses and other assets		(16,413	)		70,899
Increase (decrease) in liabilities:
Accounts payable		29,228			661,301
Accrued pension payable		(296,267	)		(236,505	)
Accrued interest payable		(89,990	)		-
Cash used in operating activities		(1,102,334	)		(505,359	)
Cash flows from investing activities:
Investment		353			(146,074	)
Deposits		(4,911	)		(3,435	)
Acquisition of property		137,905			(12,803	)
Intangible assets		29,082			8,268
Cash provide by (used in) investing activities		162,429			(154,044	)
Cash flows from financing activities:
Net advances from (to) shareholder and officers		102,145			(42,548	)
Net advance from related party		-			512,900
Net advance to customers		(10,492	)		(140,070	)
Proceeds from disposition of property		-			270,795
Convertible debenture		433,766			-
Loan payable		(1,169,436	)		56,992
Cash provided by (used in) financing activities		(644,017	)		658,069
Foreign currency translation adjustment		1,554,391			(106	)

(Continued)

The accompanying notes are an integral part of these consolidated financial statements.

7

EUGENE SCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

(Continued)

		2008			2007 (Restated, Note 18	)
Net decrease in cash and cash equivalent		(29,531	)		(1,440	)
Cash and cash equivalent - beginning of period		38,454			14,849
Cash and cash equivalent - end of period	$	8,923		$	13,409
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest	$	49,960		$	-

The accompanying notes are an integral part of these consolidated financial statements.

8

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Note 1 – Nature of Business and Going Concern

Description of Business

Eugene Science Inc. (“the Company”) was incorporated in August 1998 under the laws of state of Delaware, and owns 89.5% of Eugene Science, Inc. in Korea (“the Korean subsidiary”) which manufactures certain cholesterol lowering food ingredients. The Company currently has no other business.

Initially registered as Orcas, Ltd, the Company changed its name to Ezcomm Inc. in January 2000, and again to Ezcomm Enterprises, Inc. (EEI) in July 2004, and finally to the current name in September 2005 as it acquired the control of the Korean subsidiary.

The control of the Korean subsidiary was acquired in September 2005 by a share exchange transaction. By this exchange, EEI acquired 89.5% of Eugene Science, Inc. by issuing 88.5% of its own common stock to the shareholders of the Korean company. As a result, the Korean company has become 89.5% subsidiary of EEI while the shareholders of the Korean subsidiary hold 88.5% control in EEI in the United States. Immediately following the share exchange, EEI changed its name to Eugene Science, Inc. so that both companies are known under a common name.

The Korean subsidiary, located in Kyunggi-Do, Korea, was organized in July 1997 under the laws of the Republic of Korea, and is in business of manufacturing and selling CZ^TM series cholesterol-lowering functional food ingredients, beverages and capsules, and vegetable oil products that include those ingredients.

Going Concern

The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced recurring losses since 2000 and has negative cash flows from operations. With the loss continuing, the Company’s net loss amounted to $1,121,893 for the period ended June 30, 2008 and its working capital deficiency was $14,259,124 as of June 30, 2008. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The Company's ability to continue as a going concern is also contingent upon its ability to secure additional financing, initiating sale of its product and attaining profitable operations.

In May 2005, plant sterols, the main ingredient of CZ^TM series, was formallyapproved as a health function food ingredient by the Korean Food & Drug Administration, making it possible for the Company to advertise the cholesterol-lowering function of CZ^TM and food enriched with CZ^TM. The Company expects that the favorable change in the regulation will strongly help in selling CZ^TM to major food companies. The Company has also developed new capsule products that are efficient and convenient in delivering the health function of CZ^TM. The Company is actively developing sales channels for CZ^TM and the capsule products.

The Company also plans to strengthen the cooperation with its international partners to restart shipping to overseas markets. The Company expects to sell CZ^TM to major food companies through its international strategic partners. For marketing the CZ^TM capsules, the Company established a distribution channel in the United States in 2006.

In addition, management is pursuing various sources of equity financing, although there can be no assurance that the Company will be able to secure financing when needed or obtain such on terms satisfactory to the Company.

9

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

Note 2 - Significant Accounting Policies

The following summary of significant accounting polices of the Company is presented to assist in understanding the Company’s financial statements. These accounting policies conform to the accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.

Basis of Financial Statement Presentation

These financial statements have been prepared with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business.

Basis of Consolidation

The reverse-takeover transaction between the Company and Eugene Science Inc. in Korea has been recorded as the recapitalization of the Company, with the net assets of the Company brought forward at their historical basis. Since the company is a shell company listed on a U.S. stock market, Eugene Science Inc. in Korea acquired the Company to enter the U.S. market. As such, accounting for the reverse-takeover as the recapitalization of the Company is deemed appropriate.

The consolidated financial statements included the accounts of Eugene Science, Inc. (formerly Ezcomm Enterprises, Inc.) in the United States, Eugene Science, Inc. in Korea and its subsidiary, Ucolebio, Inc. in Korea. Significant inter-company transactions, if any, have been eliminated in consolidation.

Minority interests are recorded to the extent of their equity. Losses in excess of minority interest equity capital are charged against the majority interest and will be reversed when the losses reverse.

Use of Estimates

Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from estimates, although management does not believe such changes will materially affect the financial statements in any individual year.

Revenue Recognition

The Company generates revenues from sales of manufactured goods and merchandise and rental of the Company's buildings.

Revenue from product sales is recognized in accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB No. 101").

For manufactured finished goods, the Company recognizes revenue when there is a definitive sales agreement, and upon shipment of products, when title is passed and the amount collectible can reasonably be determined.

10

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

For merchandise sales, the Company recognizes revenue upon shipment of products, when title is passed and the amount collectible can reasonably be determined.

For rental income, the Company retains substantially all of the benefits and risks of ownership of its income properties and therefore recognizes revenue upon receipt of monthly rent.

Government Grants

Government grants are recognized as income over the periods that are necessary to match them with the related costs.

Currency Translation

The Company's functional currency is Korean Won. Adjustments occurring in translating the currency into U.S. dollars at the balance sheet date are recorded as a component of other comprehensive income (loss).

Foreign currency transactions of the Korean operations have been translated to Korean Won at the rate prevailing at the time of the transaction. Realized foreign exchange gains and losses were taken into current period.

Cash and Cash Equivalents

Highly liquid investments with maturities of three months or less when purchased are considered cash equivalents and recorded at cost, which approximates fair value.

Allowance for Doubtful Accounts

Allowance for doubtful accounts is computed based on the Company’s historical experience and management’s analysis of possible bad debts. The Company had no allowance for doubtful accounts at June 30, 2008 and December 31, 2007.

Properties and Equipment

Properties and equipment are stated at cost. Major renewals and betterments are capitalized and expenditures for repairs and maintenance are charges to expense as incurred. Depreciation is computed using the straight-line method over the following periods:

Building and improvements	20-40 years
Machinery and equipment	10 years
Vehicles	5 years
Office furniture and fixtures	3-5 years

Intangible Assets

Intangible assets such as cost of obtaining industrial rights and patents are stated at cost, net of amortization computed using the straight-line method over five to ten years.

11

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Inventories

Inventories are stated at the lower of cost or net realizable value. Net realizable value is determined by deducting selling expenses from selling price.

The cost of inventories is determined on the first-in first-out method, except for materials-in-transit for which the specific identification method is used. The components of inventories were as follows at:

	June 30, 2008		Dec. 31, 2007
Raw materials	$	17,783	$	15,156
Finished goods		17,631		24,796
Total	$	35,414	$	39,952

Investments

Investments in available-for-sale securities are being recorded in accordance with FAS-115 "Accounting for Certain Investments in Debt and Equity Securities". Equity securities that are not held principally for the purpose of selling in the near term are reported at fair market value with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity.

Financial Instruments

Fair values of cash equivalents, short-term and long-term investments and short-term debt approximate their costs. The estimated fair values of other financial instruments, including debt, equity and risk management instruments, have been determined using market information and valuation methodologies, primarily discounted cash flow analysis. These estimates require considerable judgment in interpreting market data, and changes in assumptions or estimation methods could significantly affect the fair value estimates.

Concentration of Credit Risk

SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk, requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company does not have significant off-balance sheet risk or credit concentration. The Company maintains cash, cash equivalents and short-term investments with major Korean financial institutions.

The Company provides credit to its customers in the normal course of operations. It carries out, on a continuing basis, credit checks of its customers, and maintains allowance for credit losses contingent upon management’s forecasts. For other receivables, the Company determines, on a continuing basis, the probable losses and sets up a provision for losses based on the estimated realizable value.

Concentration of credit risk arises when a group of clients having similar characteristics such that their ability to meet their obligations is expected to be affected similarly by changes in economic conditions.

12

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Income Taxes

The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Comprehensive Income

The Company records its other comprehensive income under SFAS No. 130, Reporting of Comprehensive Income. SFAS 130 which establishes standards for reporting and presentation of comprehensive income and its components. The Company’s other comprehensive income represents unrealized gain or loss on available-for-sale marketable securities and foreign currency translation adjustment.

Earnings per Share

SFAS No. 128, “Earnings per Share” requires disclosure on the financial statements of basic and diluted earnings per share. Basic earning (loss) per share is computed by dividing the net earning (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earning (loss) per share is determined using the weighted average number of common shares outstanding during the year, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options and warrants.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonable estimated.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standard Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for the fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have a significant effect on its financial statements.

13

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB No 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. Under SAB No. 108, the Company should quantify errors using both a balance sheet and income statement approach (“dual approach”) and evaluate whether either approach results in a misstatement that is material when all relevant quantitative and qualitative factors are considered. The adoption of SAB 108 did not have any impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"), which permits entities to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and it is applied only to entire instruments and not to portions of instruments. SFAS No. 159 requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year provided the entity also elects to apply the provisions of SFAS No. 157 "Fair Value Measurements.” Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Since the provisions of SFAS No. 159 are applied prospectively, any potential impact will depend on the instruments selected for fair value measurement at the time of implementation. The Company is currently evaluating the impact, if any, adoption of SFAS No. 159 will have on its financial statements.

Reclassification

Certain accounts in the 2007 consolidated financial statements have been reclassified for comparative purposes to conform with the presentation in the current year consolidated financial statements. Total equity and net income are unchanged due to these reclassifications.

Note 3 – Restricted Cash

The Company had a restricted cash of $1,604 at June 30, 2008, and $6,112 at December 31, 2007, which was pledged as security for future purchases from a vendor.

Note 4 – Due from Related Party

Loans receivable from an affiliate by virtue of common ownership was carried at $52,308 at December 31, 2007. The loans were cleared during the first quarter of 2008.

14

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Note 5 - Properties and Equipment

Properties and equipment consisted of the following at:

	June 30, 2008		Dec. 31, 2007
Buildings	$	769,462	$	857,522
Equipment and vehicles		526,365		926,996
Furniture and fixtures		844,341		1,042,348
Construction in progress		231,701		259,184
		2,371,869		3,086,050
Less: accumulated depreciation		1,213,641		1,603,370
Net property and equipment	$	1,158,228	$	1,482,680

Depreciation expenses for the periods ended June 30, 2008 and 2007 were $68,090 and $88,929, respectively.

Note 6 – Receivables from Sale of Assets

The Company had outstanding proceeds receivable of $568,971 and $650,959 at June 30, 2008 and December 31, 2007, respectively, from the sales of real estate property and machinery and equipment in August 2006. The receivable is due on demand and no interest has been accrued on the outstanding balance.

Note 7 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following at:

	June 30, 2008		Dec. 31, 2007
Prepaid fees for certain patent registration and related legal costs	$	57,214	$	64,001
Advance payment		115,324		92,124
Total	$	172,538	$	156,125

Note 8 – Investments

The following is a summary of investments at:

	June 30, 2008		Dec. 31, 2007
Other marketable securities	$	1	$	354

15

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Note 9 - Loans Payable

Loans payable consisted of the following at:

	June 30, 2008		Dec. 31, 2007
Notes payable to Kook Min Bank with interest at 18% to 21%, unsecured, due on demand, and guaranteed by chief executive officer. These loans are in default.	$	1,195,784	$	1,337,620
Note payable to Korea Technology Credit Guarantee Fund (KOTEC), a government operated fund, with interest at 21%, and guaranteed by corporate officer. The loan was restructured in July 2007 and the detail terms are noted below. (A)		1,910,580		2,112,520
Note payable to National Agricultural Cooperative Federation (NACF) with interest at 4.6% to 18%, unsecured, due on demand and guaranteed by KOTEC and corporate officer. The loan is in default.		1,199,033		1,365,934
Note payable to Shinhan Bank with interest at 18% due on demand. The loan is in default.		271,897		304,148
Note payable to a customer (Hokuyo) with interest at 3%, unsecured, and due on demand. The note is in default.		1,799,348		2,012,775
Notes payable to unrelated parties with interest at 9%, unsecured and due on demand.		-		438,066
Notes payable to employees with interest at 9% to 10%, unsecured, and due on demand.		-		70,470
Government loan, non-interest bearing, unsecured, payable on demand.		38,038		42,550
Convertible loan offering creditor option to convert to stocks after maturity.		99,967		-
Total notes payable		6,514,647		7,684,083
Less: current portion		4,483,926		5,548,996
Long-term debt, net of current	$	2,030,721	$	2,135,087

(A) - In July 2007, the Company executed a Debt Rescheduling Agreement with Korea Technology Credit Guarantee Fund (KOTEC), in which the Company made a partial payment of $82,000 and KOTEC agreed to convert the remaining balance into a long term debt. The new loan is payable in monthly installments of $18,527 (KRW 17,093,620) over 10-year period beginning in 2010.

16

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Following is a summary of principal maturities of notes payable over the next five years:

Years ending December 31,	Amount
2008	$	4,679,808
2009		99,967
2010		92,635
2011		222,324
2012 and thereafter		1,419,913
Total	$	6,514,647

Note 10 – Convertible Debenture

In July 2007, the Company issued $2,250,000 secured convertible notes with warrants to purchase 3,200,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The notes bear interest at 10% per annum, and, at the option of the purchasers, are convertible into shares of the common stock during the first six months following the issue date of the notes at a conversion price of $0.65. The Company intends to use the proceeds to complete the build out of its new 22,000-square-foot corporate production and research facility scheduled for opening in late November, restructure bank debt, advance its patented production process toward commercialization, and general corporate purposes.

In November 2007, the Company issued $600,000 secured convertible notes with warrants to purchase 1,560,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The notes bear interest at 10% per annum, and, at the option of the purchaser, are convertible into shares of the common stock during the first six months following the issue date of the notes at a conversion price of $0.65. The Note matures on May 27, 2008, subject to one 6 months extension. The Company intends to use the proceeds to restructure bank debt, advance its patented production process toward commercialization, and general corporate purposes.

Note 11 – Due to Related Parties

Due to shareholders and officer consisted of the following at:

	June 30, 2008		Dec. 31, 2007
Unsecured short term advance payable to shareholders with interest at 9% per annum, due on demand.	$	46,802	$	52,353
Unsecured short-term advances payable to corporate officers and employees with interest at 9% per annum, due on demand.		120,408		12,712
Total	$	167,210	$	65,065

17

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Note 12 – Accrued Severance Benefits

Employees and directors with one year or more of service are entitled to receive a lump-sum payment upon termination of their employment based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors are to terminate their employment as of the balance sheet date. The accrued severance benefits payable at June 30, 2008 and December 31, 2007, were $19,965 and $316,232, respectively.

Severance benefit expenses incurred for the six months ended June 30, 2008 and 2007 were $99,928 and $26,223, respectively.

Note 13 - Capital Stock

Total shares authorized:

480,000,000 shares of Common Stock, par value $0.001

  20,000,000 shares of Preferred Stock, par value $0.001

Shares issued and outstanding:	Shares		Amount
Common stock at,
June 30, 2008		41,115,705	$	41,116
December 31, 2007		41,115,705	$	41,116

On January 13, 2006, the Company had a reverse stock split whereby one new common share was exchanged for ten common shares. The financial statements have been retroactively restated to reflect the reverse split.

On February 21, 2006, the Company issued 1,000,000 shares of common stock for $83,000.

On September 19, 2006, the Company issued 390,000 shares of common stock for consulting services provided.

On October 1, 2006, the Company issued 1,200,000 shares of common stock for various consulting services provided.

On October 1, 2006, in accordance of 2006 Stock Incentive Plan, the Company issued 3,350,000 shares of common stock to employees and directors.

On October 25, 2007, the Company issued 800,000 shares of common stock for various consulting services provided.

Stock Compensation Plan

The Company has accounted for its stock options and warrants in accordance with SFAS 123(R) "Accounting for Stock Based Compensation" and SFAS 148 "Accounting for Stock Based compensation - Transition and Disclosure." Value of options granted has been estimated by the Black Scholes option pricing model. The assumptions are evaluated annually and revised as necessary to reflect market conditions and additional experience. The following weighted-average assumptions were used and a discussion of our methodology for developing each of the assumptions used in the valuation model follows:

18

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

	Period ended June 30,
	2008			2007
Dividend yield		0.0	%		0.0	%
Expected volatility		80	%		80	%
Risk-free interest rate		4.3	%		4.3	%
Expected life of the option term (in years)		10			10
Forfeiture rate		7.0	%		7.0	%

Dividend Yield – The Company has not declared or paid dividends in the past and has no plan for dividend payments in the future.

Expected Volatility – Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility since its expected volatility because the current business strategy, which is not expected to change materially, is fundamentally consistent with past strategy. The volatility has averaged at 80%.

Risk-Free Interest Rate – This is the U.S. Treasury rate for the week of each stock option granted during the quarter having a term that most closely resembles the expected life of the stock option.

Expected Life of the Stock Option Term – This is the period of time that the stock options granted are expected to remain unexercised. Stock options granted during the fiscal year have a maximum term of ten years. The Company estimates the expected life of the stock option term using a lattice model with inputs regarding estimated exercise behavior that are consistent with actual past behavior for similar stock options.

Forfeiture Rate – This is the estimated percentage of the stock options granted and expected to be forfeited or canceled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on past turnover data ranging anywhere from one to three years with further consideration given to the class of employees to whom the options were granted.

In February 2006, the Board of Directors of the Company adopted 2006 Stock Incentive Plan (the “2006 Plan”). Under this Plan, employees and directors of the Company and affiliated company may receive options to purchase common stock. A maximum of 4,000,000 shares have been authorized to be granted under the 2006 Plan.

In May 2006, the Plan granted 3,600,000 stock options for common stock having a $0.01 nominal par value each and exercise price of $0.50 to $1.36. In October 2006, 3,350,000 stock options were exercised, 250,000 options were canceled and no option is outstanding as of June 30, 2008.

The Company issued 300,000 stock options to a non-employee during the year ended December 31, 2006. These stock options had a vesting period of 12 months. The fair value of these stock options was recorded as deferred compensation and was amortized over the performance period. Under variable plan accounting, the value of the unvested stock options was re-measured and recognized in operations at each period reporting date until fully vested.

No option is outstanding as of June 30, 2008 and for disclosure requirements set forth above under SFAS No 123(R), during the period ended June 30, 2008, the Company recognized no additional stock-based compensation for options vested.

19

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Stock Options of the Subsidiary in Korea

The following weighted-average assumptions were used in the valuation model for the stock option of the subsidiary:

	Period ended June 30,
	2008			2007
Dividend yield		0	%		0	%
Expected volatility		80	%		80	%
Risk-free interest rate		4.3	%		7.7	%
Expected life of the option term (in years)		2			3

In 1999 the Board of Directors of the Korea subsidiary adopted an option plan to allow employees to purchase common stock of the Company.

In October 1999, the share option plan granted 928,350 options for the common stock having a $0.0869 nominal par value each and an exercise price of $0.12. In 2000, 236,240 options were cancelled. In 2005, the balance of the 692,110 options was exercised.

In December 1999, 659,169 options were granted having a $0.0869 nominal par value each and an exercise price of $0.26. In 2005, the balance of the 659,169 options was exercised.

In October 2000, 971,999 options were granted having a $0.0869 nominal par value each and an exercise price of $1.93. 5,087, 162,848, 40,712, 244,272 options were cancelled in 2000, 2001, 2002 and 2003, respectively. As of December 31, 2006, 519,080 options are still outstanding.

In May 2001, 71,246 options were granted having a $0.0869 nominal par value each and an exercise price of $1.93. In 2002, 20,356 options were cancelled. As of December 31, 2006, 50,890 options are still outstanding.

In March 2002, 1,000,000 options were granted having a $0.0869 nominal par value each and exercise price of $1.96. 330,000, 110,000, 100,000 options were cancelled in 2002, 2003, and 2005, respectively. In addition, 31,190 options were granted in 2005. There was also a change in the exercise price to $1.84. As of December 31, 2006, 491,190 options are still outstanding.

In September 2002, 220,000 options were granted having a $0.0869 nominal par value each and an exercise price of $1.96. During 2005, 14,916 options were granted. In addition, the exercise price of the options was reduced to $1.84.

In March 2003, 350,000 options were granted having a $0.0869 nominal par value each and an exercise price of $1.96. In 2003 and 2004, 180,000 and 20,000 stock options were cancelled respectively. During 2005, 10,170 options were granted and the exercise price was reduced to $1.84. As of December 31, 2006, 160,170 stock options are still outstanding.

The options vest gradually over a period of 2 to 3 years from the date of grant. The term of each option does not exceed 7 years from the date of grant. 285,806 and 651,360 options have vested in 2004 and 2005 respectively. However, as the exercise price of the options was substantially higher than the fair market value, the options have no value and no benefits have been recorded since inception of the 2000 plan.

20

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

The stock options have not been included in the calculation of the diluted earnings per share as their inclusion would be anti-dilutive.

The following table summarizes the stock option activity during the periods ended June 30:

	2008				2007
	Shares		Weighted- Average Excise Price		Shares		Weighted- Average Excise Price
Outstanding, beginning of period		1,456,246	$	1.88		1,456,246	$	1.88
Granted		-		-		-		-
Exercised		-		-		-		-
Cancelled		-		-		-		-
Outstanding, end of period		1,456,246	$	1.88		1,456,246	$	1.88
Weighted average remaining contractual life of common stock options		2 years				3 years

Note 14 - Income Taxes

The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes". This Standard prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The effects of future changes in tax laws or rates are not anticipated. Corporate income tax rates applicable to the Company in 2008 and 2007 were 16.5% of the first 100 million Korean Won ($84,000) of taxable income and 29.7% on the excess. For the United States operation, the corporate tax rate is approximately 34%. Tax losses from the Korean subsidiary can be carried forward for five years. The U.S. tax losses can be carried forward for fifteen to twenty years. The company has accumulated approximately $24,686,000 of taxable losses which can be used to offset future taxable income. The utilization of the losses expires in years 2008 through 2027.

Under SFAS No. 109 income taxes are recognized for the following: a) amount of tax payable for the current year, and b) deferred tax liabilities and assets for future tax consequences of events that have been recognized differently in the financial statements than for tax purposes.

The Company has deferred income tax assets as follows at:

	June 30, 2008			Dec. 31, 2007
Deferred income tax assets:
Research and development expenses amortized over 5 years for tax purposes	$	-		$	150,722
Net operating loss carryforwards		4,073,190			4,002,900
		4,073,190			4,153,622
Valuation allowance for deferred income tax assets		(4,073,190	)		(4,153,622	)
	$	-		$	-

The Company provided a valuation allowance equal to the deferred income tax assets because it is presently considered that they will not be realized.

21

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Note 15 – Business Segment Information

Sales and cost of goods sold of the Company’s segments for the six months ended June 30, 2008 and 2007 were as follows:

	2008		2007
Sales:
Manufacturing	$	327,657	$	212,221
Merchandise		-		97,354
	$	327,657	$	309,575
Cost of Sales:
Manufacturing	$	129,621	$	94,565
Merchandise		-		66,306
	$	129,621	$	160,871

Note 16 - Major Customers

Sales to two major customers accounted for all of the Company’s total revenue for the period ended June 30, 2008.

Note 17 - Related Party Transactions

Significant transactions with companies related or affiliates by common control for the periods ended and as of June 30, 2008 and 2007 are summarized as follows:

	Sales		Net rental/ Interest income		Purchases		Accounts Receivable		Accounts Payable		Rental Deposit
Company related by common control
2008	$	-	$	-	$	-	$	-	$	-	$	-
2007	$	97,354	$	-	$	66,306	$	-	$	247,417	$	65,033
Companies affiliated by common control
2008	$	-	$	-	$	-	$	-	$	-	$	-
2007	$	201	$	1,582	$	-	$	4,542	$	73,179	$	-

These transactions were in the normal course of business and recorded at an exchange value established and agreed upon by the above mentioned parties, which approximates fair market value.

22

EUGENE SCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

(UNAUDITED)

Note 18 - Restatement of the 2007 Comparative Consolidated Financial Statements

On further consideration, the Company decided to revise, add or expand certain notes to the financial statements to provide more accurate and complete disclosures pertaining to the account balances and transactions presented in the accompanying consolidated financial statements for the interim periods ended June 30, 2007. These changes were made to the notes to the financial statements and there was no effect to the Company’s net income, earning (loss) per share or net equity on the consolidated financial statements as of and for the interim periods ended June 30, 2007.

23

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Management’s Discussion and Analysis or Plan of Operation” and in other sections of this Quarterly Report on Form 10-Q. Words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable as of the date of this Quarterly Report on Form 10-Q, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Quarterly Report on Form 10-Q. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. Readers are urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including, without limitation, the audited financial statements and the notes thereto and disclosures made under the captions “Management’s Discussion and Analysis or Plan of Operation,” “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.

Overview

We were incorporated on August 26, 1998 as Orcas Ltd. under the laws of the State of Delaware. As Orcas Ltd., we were in the business of building and promoting arcade video games and vending machines. We underwent a reverse merger and abandoned this enterprise to develop a loyalty reward program based in Taipei, Taiwan, at which time we changed our name to Ezcomm, Inc. to reflect this change in our business model. We were unable to raise enough capital to finance the research and development of our proposed consumer incentive and loyalty program in Asia and, therefore, we abandoned all efforts to develop such business in January 2001. We remained inactive until July 2004, at which time we changed our name to Ezcomm Enterprises, Inc. and began to consider and investigate potential business opportunities, including an acquisition or merger. On September 30, 2005, we acquired Eugene Science, Inc. pursuant to the terms of an exchange agreement. The exchange transaction was accounted for as a reverse merger (recapitalization) with Eugene Science deemed to be the acquirer for accounting purposes. Accordingly, the historical financial information presented in our financial statements is that of Eugene Science as adjusted to give effect to any difference between the par value of our capital stock and Eugene Science capital stock with an offset to capital in excess of par value. The basis of the assets, liabilities and retained earnings of Eugene Science, the accounting acquirer, were carried over in the recapitalization. Upon the closing of the exchange transaction, we became a global biotechnology company that develops, manufactures and markets nutraceuticals, functional foods that offer health-promoting advantages beyond that of nutrition. Our primary products are our plant sterol products, including our CZ ^TM - Series of food additives, and our CholZero^TM - branded beverages and capsules. On January 13, 2006, we changed our name from Ezcomm Enterprises to Eugene Science.

Going Concern

Our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern, in its report for the fiscal year ended December 31, 2007, based on significant operating losses that we incurred and the fact that we do not have adequate working capital to finance our day-to-day operations. Our continued existence depends upon the success of our efforts to raise additional capital necessary to meet our obligations as they become due and to obtain sufficient capital to execute our business plan. We intend to obtain capital primarily through issuances of debt or equity. There can be no degree of assurance that we will be successful in completing additional financing transactions.

If we cannot obtain adequate funding or achieve revenues from the sale of our products, we may be required to significantly curtail or even shut down our operations.

24

Results of Operations

Revenue

Comparison of the Three Months Ended June 30, 2008 and 2007

Our total revenue increased 32%, or $49,429, to $204,237 for the three months ended June 30, 2008 as compared to $154,808 for the three months ended June 30, 2007. The increase in total revenue for the three months ended June 30, 2008 was primarily attributable to sales of raw material to Korea Tobacco & Ginseng Corporation.

Cost of Goods Sold

Comparison of the Three Months Ended June 30, 2008 and 2007

Cost of goods sold decreased 61%, or $74,837, to $48.294 for the three months ended June 30, 2008 as compared to $123,131 for the three months ended June 30, 2007. The decrease in cost of sales for the three months ended June 30, 2008 was primarily attributable to decreases in the cost of raw materials for the products which we produce for Korea Tobacco & Ginseng Corporation.

Operating Expenses

Comparison of the Three Months Ended June 30, 2008 and 2007

Our operating expenses increased 9%, or $30,299, to $360,473 for the three months ended June 30, 2008 as compared to $408,754 for the three months ended June 30, 2007. Our operating expenses increased for the three months ended June 30, 2008 due primarily to an increase in travel expenses incurred by our principal executive officers.

Other Income (Expense)

Comparison of the Three Months Ended June 30, 2008 and 2007

Other expense primarily represents interest on indebtedness and loss of equipment sales. Other expense decreased 34%, or $250,582, to $491,157 for the three months ended June 30, 2008 as compared to $741,739 for the three months ended June 30, 2007. The decrease in other expense for the three months ended June 30, 2008 was primarily attributable to a decrease in net interest expenses resulting from our debt restructuring arrangements. All of our bank loans were in default as of June 30, 2008. The interest rate on such loans ranges from 15% to 18%.

Liquidity and Capital Resources

At June 30, 2008, we had cash and cash equivalents of $7,319 and negative working capital of approximately $(15,152,854). At June 30, 2007, we had cash and cash equivalents of $32,342 and negative working capital of approximately $(15,753,267). The decrease in our cash and cash equivalents at June 30, 2008 was primarily attributable to an increase in the cost of our business operations. The increase in our working capital at June 30, 2008 was primarily attributable to the payment of accrued wages to retirees.

We currently satisfy our working capital requirements primarily through cash flows generated from operations, bank loans and sales of equity and debt securities. For the three months ended June 30, 2008, we had a net decrease in cash and cash equivalents of approximately $360,000 as compared with a net decrease in cash and cash equivalents of approximately $562,000 for the three months ended June 30, 2007.

Cash Used In Operating Activities

Cash used in operating activities increased 118%, or $596,975, to $1,102,334 for the three months ended June 30, 2008 as compared to cash used in operating activities of $505,359 for the three months ended June 30, 2007. The increase in cash used in operating activities for the three months ended June 30, 2008 was primarily attributable to a decrease in our net losses.

25

Cash Provided By Investing Activities

Cash provided by investing activities decreased 205%, or $316,473, to $162,429 for the three months ended June 30, 2008 as compared to cash provided by investing activities of $154,044 for the three months ended June 30, 2007. The decrease in cash provided by investing activities for the three months ended June 30, 2008 was primarily attributable to the acquisition of equipment and decrease in actual investment.

Cash Provided By Financing Activities

Cash provided by financing activities decreased 198%, or $1,302,086, to $644,017 for the three months ended June 30, 2008 as compared to cash provided by financing activities of $658,069 for the three months ended June 30, 2007. The decrease in cash provided by financing activities for the three months ended June 30, 2008 was primarily attributable to the increase in amounts owed for indebtedness.

Bank Loans

Since 1999, we have borrowed an aggregate principal amount of $3,889,259 from the Industrial Bank of Korea, or IBK. These loans bear interest at rates of 4.5% to 18% per annum and are due and payable on demand. A portion of these loans was secured by our real property located in Bucheon, Korea. Loans in the aggregate principal amount of $1,301,919 were guaranteed by the Korea Technology Credit Guarantee Fund, or KOTEC, a fund operated by the Korean government. During the first half of the 2006 fiscal year, we used the proceeds from the sale of our real property in Bucheon, Korea to repay all of the outstanding principal and a portion of the accrued and unpaid interest owed under the loans from IBK. At June 30, 2008, the accrued and unpaid interest owed by us to IBK under these loans was approximately $1,290,507.

In December 2004, we obtained a short-term loan from the National Agricultural Cooperative Federation, or the NACF, in the principal amount of $1,946,105. This loan bears interest at a rate of 4.6% per annum and was due on December 22, 2005. This loan is guaranteed by KOTEC. At June 30, 2008, the loan had not been repaid to NACF and the aggregate outstanding principal balance and accrued and unpaid interest on such loan was approximately $1,451,788.

In September 2002, we obtained a short-term loan from ChoHeung Bank in the principal amount of $278,805. This loan has an interest rate of 9.5%, was due on August 1, 2004 and is personally guaranteed by Mr. Noh, our president, chief executive officer, chairman of the board and principal stockholder. At December 31, 2007, the aggregate principal balance and accrued and unpaid interest on such loan was approximately $304,148. In each of July 2001 and December 2002, we entered into loan arrangements with Kookmin Bank. Each loan has a principal amount of $1,000,000, is unsecured and bears interest at the rate of 6.22% or 11.22% per annum, respectively. Both loans were due and payable on November 15, 2004. At June 30, 2008, the aggregate principal balance and accrued and unpaid interest on such loans was approximately $2,494,286.

On July 12, 2007, we entered into a debt restructuring agreement with KOTEC pursuant to which we paid approximately $82,000, or 75,000,000 Korean Won, in principal on debt of approximately $3,300,000 in exchange for which KOTEC agreed to extinguish $1,200,000 in debt. The remaining $2,110,000 will be paid, interest free, and following a three-year grace period, over a ten-year period beginning in 2010.

Additionally, we held advanced discussions and reached preliminary restructuring or workout agreements with creditors holding approximately $12,000,000 in debt which we intend to implement in the third quarter of 2008 in order to further strengthen our balance sheet.

26

Notes

On October 9, 2004, we issued KOTEC a note in connection with its payout as guarantor of a convertible debenture issued by us. The note bears interest at a rate of 21% per annum, is guaranteed by Mr. Noh, our president, chief executive officer, chairman of the board and principal stockholder, and is due and payable on demand. To date, KOTEC has made no demands for payment of this note. At June 30, 2008, the outstanding balance of this note was $2,191,949.

In October 2003, we issued a note in the principal amount of $47,772, bearing interest at a rate of 9% per annum, to Jae Ho Lee, the president of UcoleBio Corp., an entity in which Eugene Science Korea, our subsidiary, has a 73% ownership interest. The note is due and payable on demand and, to date, Mr. Lee has made no demands to us for payment of this note. At June 30, 2008, the outstanding balance of this note was $57,064.

In February 2002, we issued a note in the principal amount of $100,000, bearing interest at a rate of 8% per annum, to Kyungioils Co., Ltd. The note is due and payable on demand and, to date, no demands have been made to us for payment of this note. At June 30, 2008, the outstanding balance of this note was $24,741.

In July and August 2007, we issued $2,250,000 in secured convertible notes to several accredited investors along with warrants to purchase 3,200,000 shares of our common stock at an exercise price of $0.25 per share. The notes bear interest at 10% per annum, and, at the option of the investors, were convertible into shares of our common stock during the first six months following the issue date of the notes at a conversion price of $0.65. None of the investors converted the notes into shares of our common stock during such six-month period.

On November 27, 2007, we issued a senior secured promissory note in the aggregate principal amount of $600,000 to an accredited investor and warrants to purchase 1,560,000 shares of our common stock at an exercise price of $0.25 per share. The note bears interest at a rate of 10% per annum and, at the option of the investor, is convertible into shares of the Company’s common stock during the first six months following the issue date of the note at a conversion price of $0.65. The investor did not convert the note into shares of our common stock during such six-month period.

Government Loans

On March 2, 2003, we received a non-interest bearing, unsecured loan from the Korean government in the principal amount of $61,779. Pursuant to its terms, the loan was to be repaid in three annual installments of $20,593, beginning February 26, 2004. The loan matured in its entirety in February 2006. At June 30, 2008, we were $67,702 in arrears under this loan.

We received a $316,181 loan from the Korean government in connection with certain of our research and development projects over the period from 1999 to 2002. These research and development projects were not successful and, as a result, we are obligated to repay the principal amount of the loan to the Korean government. We repaid $21,034 of the amount due under this loan in our 2004 fiscal year. At June 30, 2008, we were $45,134 in arrears under this loan arrangement.

Critical Accounting Policies

Our financial position, results of operations and cash flows are impacted by the accounting policies we have adopted. In order to get a full understanding of our financial statements, one must have a clear understanding of the accounting policies employed. A summary of our critical accounting policies follows:

BASIS OF PRESENTATION. These financial statements have been prepared with the assumption that we will be able to realize our assets and discharge our liabilities in the normal course of business.

BASIS OF CONSOLIDATION. The reverse-takeover transaction between us and Eugene Science Korea, our Korean subsidiary, has been recorded as our recapitalization, with our net assets brought forward at their historical basis. The intention of Eugene Science Korea’s management was to acquire us as a shell company listed on a stock market. As such, accounting for the reverse-takeover as our recapitalization is deemed appropriate. The consolidated financial statements included the accounts of us (formerly, Ezcomm Enterprises) in the United States, Eugene Science Korea, our Korean subsidiary, in Korea, and Ucolebio, Inc., a subsidiary of Eugene Science Korea, in Korea. Significant inter company transactions, if any, have been eliminated in consolidation. Minority interests are recorded to the extent of their equity. Losses in excess of minority interest equity capital are charged against the majority interest and will be reversed when the losses reverse.

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UNIT OF ESTIMATES. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes to financial statements. These estimates are based on our management’s best knowledge of current events and actions that we may undertake in the future. Actual results may ultimately differ from estimates, although our management does not believe such changes will materially affect the financial statements in any individual year.

REVENUE RECOGNITION. We generate revenue from sales of manufactured goods and merchandise, as well as the rental of our buildings. Revenue from our product sales are recognized in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” when delivery has occurred, provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collection of the related receivable is probable. For manufactured finished goods, we recognize revenue when there is a definitive sales agreement, and upon shipment of products, when title is passed and the amount collectible can reasonably be determined. For merchandise sales, we recognize revenue upon shipment of products, when title is passed and the amount collectible can reasonably be determined. For rental income, we retain substantially all of the benefits and risks of ownership of our income properties and therefore recognize revenue upon receipt of monthly rent.

GOVERNMENT GRANTS. Government grants are recognized as income over the periods necessary to match them with the related costs that they are intended to compensate.

CURRENCY TRANSLATION. Our functional currency is the Korean Won. Adjustments to translate those statements into United States dollars at the balance sheet date are recorded in other comprehensive income. Foreign currency transactions of our Korean operation have been translated to Korean Won at the rate prevailing at the time of the transaction. Realized foreign exchange gains and losses were charged to income in the year.

CASH AND EQUIVALENTS. Highly liquid investments with maturities of three months or less when purchased are considered cash equivalents and recorded at cost, which approximates fair value.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. An allowance for doubtful accounts is computed based on our historical experience and our management’s analysis of possible bad debts. Accounts receivable are shown net of allowance for doubtful accounts of $0 and $0 as of June 30, 2008 and 2007, respectively.

PROPERTIES AND EQUIPMENT. Properties and equipment are stated at cost. Major renewals and betterments are capitalized and expenditures for repairs and maintenance are charges to expense as incurred. Depreciation is computed using the straight line method over the following periods:

Building	20-40 years
Machinery	10 years
Vehicles	5 years
Furniture and equipment	3-5 years

INTANGIBLE ASSETS. Intangible assets such as cost of obtaining industrial rights and patents are stated at cost, net of depreciation computed using the straight-line method over five to ten years.

INVENTORIES. Inventories are stated at the lower of cost or net realizable value. Net realizable value is determined by deducting selling expenses from selling price. The cost of inventories is determined on the first-in first-out method, except for materials-in-transit for which the specific identification method is used.

INVESTMENTS. Investments in available-for-sale securities are being recorded in accordance with FAS-115, “Accounting for Certain Investments in Debt and Equity Securities.” Equity securities that are not held principally for the purpose of selling in the near term are reported at fair market value with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders’ equity.

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FINANCIAL INSTRUMENTS. Fair values of cash equivalents, short-term and long-term investments and short-term debt approximate their costs. The estimated fair values of other financial instruments, including debt, equity and risk management instruments, have been determined using market information and valuation methodologies, primarily discounted cash flow analysis. These estimates require considerable judgment in interpreting market data, and changes in assumptions or estimation methods could significantly affect the fair value estimates.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standard Board, or the FASB, issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in our financial statements in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of FIN 48 are effective for the fiscal years beginning after December 15, 2006. We do not expect that the adoption of FIN 48 will have a significant effect on our financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” or SAB No 108. SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. Under SAB No. 108, we should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstatement that is material when all relevant quantitative and qualitative factors are considered. The adoption of SAB 108 did not have any impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," or SFAS No. 159, which permits entities to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions. The decision is irrevocable and it is applied only to entire instruments and not to portions of instruments. SFAS No. 159 requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year provided the entity also elects to apply the provisions of SFAS No. 157, "Fair Value Measurements.” Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Since the provisions of SFAS No. 159 are applied prospectively, any potential impact will depend on the instruments selected for fair value measurement at the time of implementation. We are currently evaluating the impact, if any, that the adoption of SFAS No. 159 will have on our financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We do not currently have any exposure to market risk with respect to our currency, cash and cash equivalents or investment securities.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were not effective for the reasons disclosed below.

The Company has limited revenue and only six employees. One employee, the internal controller, is responsible for daily financial bookkeeping responsibilities. The internal controller reports directly to the Company’s chief financial officer. The chief financial officer prepares a monthly report for the chief executive officer and the board of directors of the Company to review. The board of directors consists of three members and holds a minimum of one meeting per month. The financial state of the company is discussed in depth by the board of directors, which includes review of the monthly report. After each quarter, the board of directors reviews a combined quarterly report and signs off based on its evaluation that the financial statements are accurate. The CFO will then provide the approved quarterly financial report to the Company’s auditors for their review.

The Company has previously identified certain internal control deficiencies that we consider to be material weaknesses, including: (1) the Company’s operations are primarily located in South Korea and the initial bookkeeping is prepared according to Korean GAAP and then converted to U.S. GAAP which often leads to discrepancies; (2) due to having minimal employees, there are only two levels of control from the internal controller to the chief financial officer and thus, minimal levels of checks and balances; and (3) the staff of the Company is somewhat inexperienced with the regulatory requirements of a public company in the United States.

The internal controller and the chief financial officer are working together to keep each other appraised of items which may require disclosure and to see that proper level of disclosure is made.

Changes In Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the second quarter ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 4T. Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control of over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of December 31, 2007, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control - Integrated Framework as a basis for our assessment.

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Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified a material weakness in our internal control over financial reporting. This material weakness consisted of inadequate staffing and supervision within the accounting operations of our company. The relatively small number of employees who have bookkeeping and accounting functions prevents us from segregating duties within our internal control system. The inadequate separation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. However, we have determined that the addition of personnel to our bookkeeping and accounting operations is not an efficient use of our resources at this time.

Because of the above condition, the Company’s internal controls over financial reporting were not effective as of June 30, 2008.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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PART II—OTHER INFORMATION

Item 6. Exhibits

The exhibits set forth below are filed as part of this Quarterly Report on Form 10-Q:

Exhibit Number	Description
31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EUGENE SCIENCE, INC.
Date: August 18, 2008	By:	/s/ Christopher Craney
		Christopher Craney
		Chief Executive Officer
		(Principal Executive Officer)

Date: August 18, 2008	By:	/s/ Byung Ho Hoang
		Byung Ho Hoang
		Chief Financial Officer
		(Principal Financial Officer)

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Exhibit Index

Exhibit Number	Description
31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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