Infusion Brands International (INBI) 10-Q 2008 Q3 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 September 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission file number 000-51599

OmniReliant Holdings, Inc.

(Exact name of small business issuer as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization) 54-2153837 (I.R.S. Employer Identification No.)

14375 Myerlake Circle

Clearwater, FL 33760

(Address of principal executive offices)

(727) 230-1031

(Issuer's telephone number)

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 x  No o

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 x
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the registrant's Common Stock, $0.00001 par value per share, outstanding as of November 14, 2008 was 14,509,225.

Table of Contents

		Page
Part I –	Financial Information	3
	Item 1. Financial Statements	3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	53
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	57
	Item 4T. Controls and Procedures	57
Part II –	Other Information	58
	Item 1. Legal Proceedings	58
	Item 1A. Risk Factors	58
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
	Item 3. Defaults upon Senior Securities	58
	Item 4. Submission of Matters to a Vote of Security Holders	58
	Item 5. Other Information	58
	Item 6. Exhibits	58
Signatures		59
Exhibit Index
Rule 13a-14(a) Certification executed by Paul Morrison
Section 1350 Certification

2

PART I - FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains “forward-looking statements” relating to OmniReliant Holdings, Inc. (referred to as the “Company” or “we”, “us” or “our” in this Form 10-Q), which represent the Company’s current expectations or beliefs including, but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”, or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and competition, certain of which are beyond the Company’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

3

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED BALANCE SHEET

	September 30,			June 30,
ASSETS	2008			2008
	(Unaudited)
Current assets:
Cash and cash equivalents	$	1,146,450		$	4,435,814
Accounts receivable		22,301			48,231
Inventory		256,193			232,425
Notes receivable		104,966			2,051,714
Allowance for doubtful note		--			(2,051,714	)
Prepaid expenses		135,076			69,200
Total current assets		1,664,986			4,785,670
Property, plant, and equipment, net of $40,420 accumulated depreciation:		2,710,564			--
Other assets:
Intangible assets, net of accumulated amortization of $692,196 and $623,804		1,310,120			1,278,512
Investments, available for sale		655,200			426,558
Investment, cost		100,000			--
Deferred financing costs, net of accumulated amortization of $86,747 and $30,287		1,021,777			1,078,237
Loan costs		61,838			--
Security deposits		11,285			--
Total other assets		3,160,220			2,783,307
Total assets	$	7,535,770		$	7,568,977
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	208,186		$	96,381
Accrued expenses		122,458			14,000
Derivative liabilities		3,888,599			6,361,100
Total current liabilities		4,219,243			6,471,481
Long term liabilities:
Security deposits on leases		11,734			--
Total long term liabilities		11,734			--
Total Liabilities		4,230,977			6,471,481
Preferred stock (mezzanine)		35,969,634			35,969,634
Minority interest		300,009			--
Stockholders' equity (deficit):
Common stock, $0.00001 par value; 500,000,000 shares authorized; 14,509,225 shares issued and outstanding		145			145
Additional paid-in capital		32,376,137			32,332,804
Deficit accumulated during development stage		(65,341,132	)		(67,205,087	)
Total shareholders' equity (deficit)		(32,964,850	)		(34,872,138	)
Total liabilities and shareholders' equity (deficit)	$	7,535,770		$	7,568,977

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

4

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three month period ended September 30, 2008			Three month period ended September 30, 2007
Product sales and licensing revenue:
License revenue	$	—		$	—
Product sales		103,634			158,823
Cost of goods sold		44,036			98,426
Gross profit margin		59,598			60,397
Real estate:
Rental revenue		47,696			—
Other real estate income		13,740			—
Total real estate revenue		61,436			—
Operating expenses:
Sales, general & administrative		496,084			303,527
Amortization		74,887			184,723
Real estate expenses, excluding depreciation		71,216			—
Depreciation		40,420			—
Total operating expenses		682,607			488,250
Operating loss		(561,573	)		(427,853	)
Other income (expense)
Derivative fair value adjustments		2,472,501			3,678,669
Interest income		20,947			—
Registration payments		—			(309,137	)
Interest expense		(56,460	)		(215,865	)
Total other income (expense)		2,436,988			3,153,667
Income (loss) before provision for income taxes and minority interest		1,875,415			2,725,814
Minority interest		19,990			—
Provision for income taxes		—			—
Net income (loss)		1,895,405			2,725,814
Reconciliation of net loss to loss applicable to common shareholders:
Net income (loss)	$	1,895,405		$	2,725,814
Accretion of preferred stock to redemption value		—			—
Preferred stock dividends, in arrears		—			—
Income (loss) applicable to common shareholders	$	1,895,405		$	2,725,814
Net income (loss) per common share (basic)	$	0.13		$	0.19
Net income (loss) per common share (diluted)	$	0.02		$	0.13
Weighted average common shares outstanding Basic	$	14,485,782		$	14,000,000
Diluted	$	77,277,235		$	20,225,427

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

5

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Period August 21, 2006 (inception) to September 30, 2008
Revenue	$	1,135,440
Cost of goods sold		332,394
Gross profit margin		803,046
Operating expenses:
Sales, general & administrative		7,966,184
Amortization		1,168,468
Real estate expenses, excluding depreciation		71,216
Depreciation		40,420
Total operating expenses		9,246,288
Operating loss		(8,443,242	)
Other income (expense)
Derivative fair value adjustments		4,010,658
Interest income		54,128
Extinguishment of other liabilities		(271,109	)
Interest expense		(476,709	)
Registration payments		(542,080	)
Impairment in investment in ResponzeTV		(5,776,917	)
Extinguishment of redeemable preferred		(26,247,007	)
Total other income (expense)		(29,249,036	)
Income (loss) before provision for income taxes and minority interest
Minority interest		19,990
Provision for income taxes		—
Net income (loss)	$	(37,672,288	)
Reconciliation of net loss to loss applicable to common shareholders:
Net income (loss)	$	(37,672,288	)
Accretion of preferred stock to redemption value		(25,913,272	)
Preferred stock dividends, in arrears		(194,468	)
Income (loss) applicable to common shareholders	$	(63,780,028	)

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

6

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three month period ended September 30, 2008			Three month period ended September 30, 2007
Cash flows from operating activities:
Net income	$	1,895,405		$	2,725,814
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of intangible assets & loan costs		74,887			184,723
Amortization of deferred finance costs		56,460			215,865
Depreciation		40,420			—
Minority interest		(19,990	)		—
Derivative fair value adjustments		(2,472,501	)		(3,678,669	)
Changes in operating assets and liabilities:
Accounts receivable		25,930			(160,661	)
Inventory		(23,768	)		(92,304	)
Prepaid expenses		(65,877	)		(394	)
Accounts payable		111,805			193,650
Accrued expenses		108,460			—
Accrued registration payments		—			309,137
Accrued interest on loans		(10,093	)		—
Net cash used for operating activities		(278,862	)		(302,839	)
Cash flows from investing activities:
Payments for patents		—			(3,335	)
Security deposits		(11,285	)		—
Payments for licenses		(100,000	)		—
Loan receivable		(104,966	)		—
Investment in securities		(375,000	)		—
Investment in building and equipment		(2,750,984	)		—
Net cash flow from investing activities		(3,342,235	)		(3,335	)
Cash flows from financing activities:
Minority interest		320,000			—
Security deposits on leases		11,734			—
Net cash flow from financing activities		331,734			—
Net decrease in cash and cash equivalents		(3,289,363	)		(306,174	)
Cash and cash equivalents at beginning of year		4,435,814			711,484
Cash and cash equivalents at end of year	$	1,146,451		$	405,310
Supplemental cash flow information:
Common stock issued for loan, at fair value	$	43,333		$	—

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

7

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Period August 21, 2006 (inception) to September 30, 2008
Cash flows from operating activities:
Net income (loss)	$	(37,672,288	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Loss on exchange of preferred stock		26,247,007
Impairment on investment in ResponzeTV		5,776,917
Share-based payments		3,650,606
Allowance on Note Receivable-ResponzeTV		2,051,714
Amortization of intangible assets & loan costs		1,387,223
Amortization of deferred finance costs		476,709
Extinguishment of liabilities		271,109
Depreciation		40,420
Minority interest		(19,990	)
Derivative fair value adjustments		(4,010,658	)
Changes in operating assets and liabilities:
Accounts receivable		(22,301	)
Inventory		(386,193	)
Prepaid expenses		(135,077	)
Accrued interest on loans		(69,501	)
Accounts payable		208,186
Accrued expenses		122,460
Accrued registration payments		542,080
Deferred revenue		(546,917	)
Net cash used for operating activities		(2,088,494	)
Cash flows from investing activities:
Security deposits		(11,285	)
Payments for patents		(56,811	)
Investment in securities		(825,000	)
Payments for licenses		(1,106,100	)
Loan receivable		(2,104,966	)
Investment in building and equipment		(2,750,984	)
Investment in ResponzeTV		(5,100,000	)
Net cash flow from investing activities		(11,955,146	)
Cash flows from financing activities:
Proceeds from sale of preferred stock, net		15,334,078
Minority interest		320,000
Security deposits on leases		11,734
Purchase and retirement of common stock		(475,722	)
Net cash flow from financing activities		15,190,090

8

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Net increase in cash and cash equivalents		1,146,450
Cash and cash equivalents at beginning of year		—
Cash and cash equivalents at end of year	$	1,146,450
Supplemental cash flow information:
Series C Preferred and warrants issued in exchange	$	33,404,543
Investment in ResponzeTV	$	(330,744	)
Transfer of inventory as part of investment in securities	$	130,000
Transfer of sublicense as part of investment in securities	$	198,914
Dividends paid in the form of Series C Preferred	$	309,564
Common stock issued for patent, at fair value	$	1,140,000
Common stock issued for license, at fair value	$	352,500
Series D Preferred and warrants issued in exchange	$	14,047,580
Common stock issued for loan, at fair value	$	43,333

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

9

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT)

Period from August 21, 2006 (inception) to September 30, 2008

								Other
	Common Stock				Paid-in			Comprehensive		Accumulated
	Shares		Amount		Capital			Income (Loss)		Deficit			Total
Balance, November 22, 2006 (unaudited)		6,485,000	$	65	$	254,264		$	—	$	(254,329	)	$	—
Recapitalization		7,300,000		73		(400,215	)		—		254,329			(145,813	)
Beneficial conversion on Series A Preferred offering (1)		—		—		1,173,510			—		—			1,173,510
Allocation of deferred finance costs (2), (1)		—		—		(911,135	)		—		(157,303	)		(1,068,438	)
Placement agent warrants (1)		—		—		2,492,312			—		—			2,492,312
Accretion to redemption value (1)		—		—		—			—		(3,000,000	)		(3,000,000	)
Accrual of dividends on Series A Preferred		—		—		—			—		(34,167	)		(34,167	)
Net loss for the three months ended December 31, 2006		—		—		—			—		(17,857,636	)		(17,857,636	)
Balance, December 31, 2006		13,785,000	$	138	$	2,608,736		$	—	$	(21,049,106	)	$	(18,440,232	)
Issuance related to license agreement		15,000		-		52,500			—		—			52,500
Accrual of Series A Preferred dividends		—		-		—			—		(41,687	)		(41,687	)
Net income for the three months ended March 31, 2007		—		-		—			—		1,884,327			1,884,327
Balance, March 31, 2007		13,800,000	$	138	$	2,661,236		$	—	$	(19,206,466	)	$	(16,545,092	)
Reclassification of amount out additional paid in capital		—		—		(49,999	)		—		—			(49,999	)
Reclassification of Series A to a liability (3), (1)		—		—		(1,600,270	)		—		—			(1,600,270	)
Reclassification of warrants to liability-Series A (4)		—		—		(4,202,366	)		—		(909,504	)		(5,111,870	)
Accrual of Series A Preferred dividends		—		—		—			—		(112,781	)		(112,781	)
Accrual of Series B Preferred dividends		—		—		—			—		(5,833	)		(5,833	)
Issuance of 1,000,000 warrants to consultant		—		—		2,471,401			—		—			2,471,401
Issuance related to patent agreement		200,000		2		719,998			—		—			720,000
Net loss for the three months ended June 30, 2007		—		—		—			—		(8,190,594	)		(8,190,594	)
Balance, June 30, 2007		14,000,000	$	140	$	—		$	—	$	(28,425,178	)	$	(28,425,038	)
Net income for the three month period ended September 30, 2007		—		—		—			—		2,725,814			2,725,814
Balance, September 30, 2007		14,000,000	$	140	$	—		$	—	$	(25,699,364	)	$	(25,699,224	)

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

10

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) (continued)

Period from August 21, 2006 (inception) to September 30, 2008

Beneficial conversion on Series C Preferred-Stock Financing (5)	—		—		2,766,833			—			—			2,766,833
Allocation of deferred finance costs associated with Series C Preferred-Stock Financing (6), (5)	—		—		(5,231,442	)		—			—			(5,231,442	)
Placement agent warrants on Series C Preferred-Stock Financing (5)	—		—		5,198,797			—			—			5,198,797
Investor warrants on Series C Preferred-Stock Financing (5)	—		—		3,633,167			—			—			3,633,167
Accretion to redemption value on Series C Preferred-Stock Exchange	—		—		—			—			(6,400,000	)		(6,400,000	)
Investor warrants-Stock Exchange	—		—		17,796,834			—			—			17,796,834
Registration payments net of dividends rolled into financing	—		—		—			—			—			—
Reclassification of warrants to equity (7)	—		—		4,008,912			—			—			4,008,912
Employee stock compensation	—		—		450,000			—			—			450,000
Employee stock option compensation	—		—		607,705			—			—			607,705
Employee exercise of stock options	27,778		—		—			—			—			—
Stock issued for legal work associated with Preferred C and SB-2	35,334		—		77,000			—			—			77,000
Net loss for the three month period ended December 31, 2007	—		—		—			—			(38,392,805	)		(38,392,805	)
Balance, December 31, 2007	14,063,112	$	140	$	29,307,806		$	—		$	(70,492,169	)	$	(41,184,223	)
Cashless exercise of warrants	38,400		—		—			—			—			—
Stock issued for patent	200,000		2		419,998			—			—			420,000
Net loss for the three month period ended March 31, 2008	—		—		—			—			11,802,971			11,802,971
Balance, March 31, 2008	14,301,512	$	142	$	29,727,804		$	—		$	(58,689,198	)	$	(28,961,252	)
Preferred Series D issuance	—		—		2,553,378			—			(316,615	)		2,236,763
Accretion of Series C Preferred	—		—		—			—			(9,513,273	)		(9,513,273	)
Accretion of Series D Preferred	—		—		—			—			(7,000,000	)		(7,000,000	)
Cashless exercise of warrants	131,880		2		(2	)		—			—			—
Stock issued as compensation for services	42,500		1		51,624			—			—			51,625
Fair value adjustment on available for sale securities	—		—		—		$	(31,135	)		—			(31,135	)
Net income for the three month period ended June 30, 2008	—		—		—			—			8,345,134			8,345,134
Balance, June 30, 2008	14,475,892	$	145	$	32,332,804		$	(31,135	)	$	(67,173,952	)	$	(34,872,138	)
Stock issued as compensation for services	33,333		—		43,333			—			—			43,333
Fair value adjustment on available for sale securities	—		—		—			(31,450	)		—			(31,450	)
Net income for the three month period ended September 30, 2008	—		—		—			—			1,895,405			1,895,405
Balance, September 30, 2008 (Unaudited)	14,509,225	$	145	$	32,376,137		$	(62,585	)	$	(65,278,547	)	$	(32,964,850	)

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

11

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) (continued)

Period from August 21, 2006 (inception) to September 30, 2008

Explanatory Notes:

(1) The initial classification of the Series A Preferred Stock was in the mezzanine section of the balance sheet, outside of stockholders’ equity. These amounts reflect the effects of the financing on stockholders’ equity. See Note 10 for details of the allocation.

(2) Aggregate financing costs were allocated to deferred financing costs and paid-in capital based upon the relative fair values of the financial instruments issued in the financing. Since, as discussed in Note 10, no amount was initially allocated to the mezzanine classification, the amount associated with that financial instrument was recorded as a deemed dividend.

(3) As discussed in Note 10, the Series A Preferred fell within the scope of Statement 150 on May 22, 2007 and was re-classed to liabilities accordingly.

(4) Also, as discussed in Note 10, share settlement of share-indexed financial instruments was no longer within the Company’s control as a result of the variable-conversion rate in the Series A Preferred triggered on May 22, 2007. Warrants previously classified in stockholders’ equity required reclassification to derivative liabilities on that date, based upon their fair value. Amounts in excess of paid-in capital were classified as charges to accumulated deficit.

(5) The classification of the Series C Preferred Stock is in the Mezzanine section of the balance sheet outside of stockholders’ equity.

(6) Aggregate financing costs were allocated to deferred financing costs, paid in capital and Series C Preferred (Mezzanine) based upon the relative fair values of the financial instruments issued in the financing.

(7) Upon the exchange of the Series A and B Preferred Stock for Series C Preferred stock, there was no longer a variable conversion rate associated with the Preferred stock financings. Accordingly, share settlement was once again determined to be within the Company’s control and the warrants were reclassified from liabilities to stockholders’ equity.

The Accountant’s Report and accompanying notes are an integral part of these Consolidated Financial Statements.

12

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS:

Organization

Willowtree Advisor, Inc. ("the Company" or “OmniReliant Holdings, Inc”) was incorporated on June 16, 2004 under the laws of the State of Nevada to offer landscape advisory services. On November 22, 2006, Willowtree Advisor, Inc. entered into a Securities Purchase Agreement with OmniReliant Corporation (“OmniReliant”) and Cynthia Allison, pursuant to which OmniReliant purchased 5,000,000 shares of the Company's common stock from Ms. Allison for $475,813. Pursuant to the Common Stock Purchase Agreement, OmniReliant transferred the 5,000,000 shares to the Company for cancellation. The transaction with Ms. Allison was accounted for as a reduction of additional paid in capital.

Also on November 22, 2006, Willowtree entered into an exchange agreement pursuant to which the Company acquired one hundred percent (100%) of the equity of OmniReliant from, the stockholders of OmniReliant. Contemporaneously, the Company entered into to a securities purchase agreement with an accredited investor for the sale of convertible preferred stock and warrants for an aggregate purchase price of $3,000,000. As a result of the Exchange Agreement, OmniReliant became a wholly-owned subsidiary of the Company and the Company succeeded to the business of OmniReliant as its sole business.

The Exchange Transaction is deemed to be a reverse acquisition. In accordance with the Accounting and Financial Reporting Interpretations and Guidance provided by the staff of the U.S. Securities and Exchange Commission, WillowTree (the legal acquirer) is considered the accounting acquiree and OmniReliant (the legal acquiree) is considered the accounting acquirer. A reverse merger is accounted for as the issuance of shares of the accounting acquirer for the net-monetary assets or liabilities of the accounting acquiree, accompanied by a recapitalization of stockholders’ equity. The consolidated financial statements of the combined entity will, in substance, be those of the accounting acquiree, OmniReliant, which, as discussed below, was organized on August 21, 2006.

Effective December 29, 2006, the Registrant’s name changed from Willowtree Advisor, Inc. to OmniReliant Holdings, Inc. ("the Company").

Nature of Business

OmniReliant Corporation was incorporated on August 21, 2006 under the laws of the State of Florida. The Company is in the development stage and has realized only minor revenues from its planned operations. OmniReliant Corporation (“OmniReliant”) engages in the creation, design, distribution, and sale of affordable luxury products. OmniReliant plans to make these products available to U.S. and international consumers through direct response infomercials, live shopping networks, ecommerce, direct mail and traditional retail channels. OmniReliant will first focus on bringing the Kathy Hilton “Private Beauty Spa” product line to market, after which OmniReliant plans to develop other personalities and designer licenses. Ms. Hilton, who is the wife of Rick Hilton, the grandson of the Hilton Hotel founder, has agreed to appear in television segments and infomercials.

Until the Company’s products are successfully marketed on a live shopping network or via infomercials, we will not generate significant revenues and may not be successful. If we cannot generate sufficient revenues to continue operations, we will be forced to suspend or cease operations.

13

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS (CONTINUED):

Going Concern

The Company is in its development stage and has incurred losses and has used cash in its operating activities while devoting substantially all of its efforts to raising capital and identifying and pursuing businesses opportunities. The Company's total liabilities exceed its total assets and the Company's liquidity is substantially dependent on raising capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuing operations, realization of assets and liquidation of liabilities in the ordinary course of business. The Company's ability to continue as a going concern is dependent upon its ability to raise sufficient capital to implement a successful business plan and to generate profits sufficient to become financially viable. The consolidated financial statements do not include adjustments relating to the recoverability of recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 2 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements for the three month period ended September 30, 2008, the three month period ended September 30, 2007, and the period from August 21, 2006 (inception) to September 30, 2008 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The unaudited financial information included in this report includes all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim periods. The operations for the three month period ended September 30, 2008, the three month period ended September 30, 2007, and the period from August 21, 2006 (inception) to September 30, 2008 are not necessarily indicative of the results of the full fiscal year.

The condensed consolidated financial statements included in this report should be read in conjunction with the financial statements and notes thereto included in the Registrant's June 30, 2008 Annual Report on Form 10-KSB and subsequent filings on Form 8-K.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Revenue Recognition - Revenue is recognized when the product is shipped to a customer, or in the limited circumstances, at destination, when terms provide that title passes at destination. Estimated amounts for sales returns and allowances are recorded at the time of sale. License revenue is recorded over the term of the license arrangement, as it is earned.

Principles of Consolidation - The Consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts, profits and transactions have been eliminated in consolidation. Entities where the Company does not have voting control but has significant influence over its operations are accounted for under the equity method.

14

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Use of Estimates - The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

Investments in Debt Securities-The Company accounts for its investment in debt securities in accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and accordingly, classifies them as held-to-maturity, available-for-sale, or trading. Currently, the Company holds available-for-sale debt securities which are recorded at fair value.  Interest income is recognized when earned. Changes in Fair Value of an available-for-sale security are recorded as unrealized gains and losses as a component of stockholders equity.

Merchandise Inventories -Merchandise inventories are recorded at the lower of average cost or market. In-bound freight-related costs from our vendors are included as part of the net cost of merchandise inventories. Other costs associated with acquiring, storing and transporting merchandise inventories are expensed as incurred and included in cost of goods sold.

Intangible assets- Trademarks and licenses are recorded at cost and those with finite lives are amortized over the estimated periods of benefit. Amortization expense for the three month period ended September 30, 2008, the three month period ended September 30, 2007, and the period from August 21, 2006 (inception) to September 30 2008 was $74,887, $184,723, and $1,168,468, respectively.

Stock Based Compensation - In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment". SFAS 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) were required to apply SFAS 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. For public entities that file as small business issuers, SFAS 123(R) was applicable as of the beginning of the first interim or annual reporting period that begins after December 15, 2005.

15

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

2007 Long Term Incentive Plan

On November 21, 2007 the Company established a Long Term Incentive Plan (the “2007 Incentive Plan”) for the purposes of advancing the interests of the Company and our shareholders by providing incentives to certain of our employees and other key individuals who perform services for us, including those who contribute significantly to the strategic and long-term performance objectives and growth of the Company. The 2007 Incentive Plan is administered by a committee (the “Committee”) appointed by the Board of Directors. Currently, the Committee is comprised of all members of the Board of Directors acting as a group. The Committee has the power to interpret the 2007 Incentive Plan and to prescribe rules, regulations and procedures in connection with the operations of the 2007 Incentive Plan. The Committee may delegate administrative responsibilities under the 2007 Incentive Plan to any one or more of its members or other persons, except as may otherwise be required under applicable law or listing standards for an exchange on which the Company’s common stock may be listed. The 2007 Incentive Plan provides for the granting of several types of awards, including stock options, performance grants and other awards deemed by the Committee to be consistent with the purposes of the 2007 Incentive Plan. Awards may be granted alone, or in conjunction with one or more other awards, as determined by the Committee.

The 2007 Incentive Plan was effective as of November 21, 2007, and was approved by the Company’s board of directors. The Company’s shareholders have not voted on approval of the 2007 Incentive Plan. A maximum of two million shares (2,000,000) of common stock has been authorized to be issued under the 2007 Incentive Plan in connection with the grant of awards, subject to adjustment for corporate transactions, including, without limitation, any stock dividend, forward stock split, reverse stock split, merger or recapitalization. Of this amount, no more than two million (2,000,000) shares of common stock may be issued as incentive stock options. Common stock issued under the 2007 Incentive Plan may be either newly issued shares, treasury shares, reacquired shares or any combination thereof. If common stock issued as restricted stock, restricted stock units or otherwise subject to repurchase or forfeiture rights is reacquired by us pursuant to such rights, or if any award is cancelled, terminates, or expires unexercised, the common stock which would otherwise have been issuable pursuant to such awards will be available for issuance under new awards. All awards under the 2007 Incentive Plan shall be granted within 10 years of the date the plan was adopted.

The Committee has exclusive discretion to select to whom awards will be granted; to determine the type, size, terms and conditions of each award; to modify or waive, within certain limits, the terms and conditions of any award; to determine the time when awards will be granted; to establish performance objectives; to prescribe the form of documents representing awards under the 2007 Incentive Plan; and to make all other determinations which it deems necessary, advisable or desirable in the interpretation and administration of the 2007 Incentive Plan. At the discretion of the Committee, awards may be made under the 2007 Incentive Plan in assumption of, or in substitution for, outstanding awards previously granted by the Company, any predecessor or a company acquired by the Company or with which it combines. The Committee has the authority to administer and interpret the 2007 Incentive Plan, and its decisions are final, conclusive and binding. We anticipate that all of our employees and directors will be eligible to participate in the 2007 Incentive Plan.

On December 7, 2007 pursuant to the 2007 Incentive Plan the Company awarded certain employees 350,000 stock options with an exercise price of $1.00 and a term of 5 years. All of the options issued were fully vested on the grant date. The Company has recognized $-0- and $450,000 of expense related to issuances in the Consolidated Statement of Operations for the three month period ended September 30, 2008 and for the period from inception to September 30, 2008, respectively.

16

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Determining Fair-Value

The Company uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of share-based payment awards on the date of grant using an option-valuation model is affected by the Company’s stock price as well as assumptions regarding a number of complex variables. These variables include the Company’s expected stock price volatility over the term of the awards, projected employee stock option exercise behavior, expected risk-free interest rate and expected dividends.

The Company estimates the expected term and volatility of options granted based on values derived from its industry peer group. Our decision to use these measures of expected term and volatility was based upon the lack of availability of actively traded options in the Company’s own common stock and the Company’s assessment that the peer group measure of volatility is more representative of future stock price trends than the Company’s historical volatility. The Company bases the risk-free interest rate for option valuation on Constant Maturity Rates provided by the U.S. Treasury with remaining terms similar to the expected term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. In addition, SFAS No. 123(R) requires forfeitures of share-based awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. As this is the Company’s initial issuance and no historical data exists to estimate pre-vesting option forfeitures the Company has recorded stock-based compensation expense for the all the awards vested. The Company uses the straight-line attribution as its expensing method of the value of share-based compensation for options and awards.

Under SFAS No. 123(R) the Company uses the Black-Scholes option valuation model to estimate the fair value of the Company’s option awards. There were no grants during the three months ended September 30, 2008. The key assumptions used in the model during the period from inception through September 30, 2008 included a risk free interest rate of 5.00%, an expected volatility of 122.95% and an expected option life of 2 years.

Financial Instruments – Financial instruments, as defined in Financial Accounting Standard No. 107 Disclosures about Fair Value of Financial Instruments (Statement 107), consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments, and redeemable preferred stock that we have concluded is more akin to equity than debt.

17

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

We carry cash and cash equivalents, accounts payable and accrued liabilities at historical costs; their respective estimated fair values approximate carrying values due to their current nature. We carry derivative financial instruments at fair value in accordance with Financial Accounting Standard No. 133 Accounting for Derivative Financial Instruments and Hedging Activities (Statement 133). We carry redeemable preferred stock at either its basis derived from the cash received or fair value depending upon the classification afforded the preferred stock, or embedded components thereof, in accordance with Statement 133 and Financial Accounting Standard No. 150 Financial Instruments with Characteristics of both Equity and Liabilities (Statement 150).

Derivative Financial Instruments– Derivative financial instruments, as defined in Statement 133 consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as redeemable preferred stock arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by Statement 133, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.

Redeemable Preferred Stock– Redeemable preferred stock (and, if ever, any other redeemable financial instrument we may enter into) is initially evaluated for possible classification as liabilities under Statement 150. Redeemable preferred stock classified as liabilities is recorded and carried at fair value. Redeemable preferred stock that does not, in its entirety, require liability classification is evaluated for embedded features that may require bifurcation and separate classification as derivative liabilities under Statement 133. In all instances, the classification of the redeemable preferred stock host contract that does not require liability classification is evaluated for equity classification or mezzanine classification based upon the nature of the redemption features. Generally, any feature that could require cash redemption for matters not within our control, irrespective of probability of the event occurring, requires classification outside of stockholders’ equity. See Note 10 for further disclosures about our redeemable preferred stock.

Registration Payment Arrangements– Certain financial instruments, including convertible preferred stock and the related freestanding warrants issued in connection with those convertible instruments, are subject to registration rights agreements, which impose penalties for our failure to register the underlying common stock by a defined date. These potential cash penalties, which are referred to as registration payment arrangements, are recorded when payments are both probable and reasonably estimable, in accordance with FAS No. 5, Accounting for Contingencies. These liquidated damages were included in the liabilities that were exchanged for the Series C Preferred Stock. Accordingly, we no longer have an obligation to pay registration payments. See Note 10 for additional information related to the exchange.

18

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Recent Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements the impact of tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of

FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to beginning retained earnings. The adoption of this statement did not have a material impact on the Company's consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is encouraged. The adoption of this accounting pronouncement is being evaluated by management.

In September 2006, the Securities and Exchange Commission issued SAB No. 108 "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements", which 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. The guidance is applicable beginning fiscal 2008. The adoption of this statement did not have a material impact on the Company's consolidated financial position or results of operations.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - An amendment of ARB No. 51”.SFAS 160 requires companies with noncontrolling interests to disclose such interests clearly as a portion of equity but separate from the parent’s equity. The noncontrolling interest’s portion of net income must also be clearly presented on the Income Statement. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of this statement may have a material effect on the Company's future financial position or results of operations.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, (revised 2007), “Business Combinations”. SFAS 141 (R) applies the acquisition method of accounting for business combinations established in SFAS 141 to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. Consistent with SFAS 141, SFAS 141 (R) requires the acquirer to fair value the assets and liabilities of the acquiree and record goodwill on bargain purchases, with main difference the application to all acquisitions where control is achieved. SFAS 141 (R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of this statement may have a material effect on the Company's future financial position or results of operations.

19

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. 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. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement did not have a material effect on the Company's future financial position or results of operations.

In March 2008, the FASB issued FASB Statement No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities". SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is currently being evaluated by management.

NOTE 4 - ACCOUNTING FOR STOCK BASED COMPENSATION:

Prior to January 1, 2006, the Company accounted for Stock Options and Stock Based Compensation under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation”. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 are based on (a) the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006 are based on the grant-date fair value estimated in accordance with the provisions of SFAS No.123(R). Results for prior periods have not been restated.

As a result of adopting SFAS No.123(R) on January 1, 2006, the Company has recognized $607,705 of expense related to issuances in the Consolidated Statement of Operations for the period from inception to September 30, 2008. There were no grants issued during the three month period ended September 30, 2008.

20

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - ACCOUNTING FOR STOCK BASED COMPENSATION (CONTINUED):

Stock Options and Warrants:

The following table summarizes the activity related to all Company stock options and warrants for the period from August 21, 2006 (inception) through September 30, 2008:

												Weighted Average
							Exercise Price					Exercise Price
				Stock			Per Share					Per Share
	Warrants			Options			Warrants		Options			Warrants		Options
Balances at August 21, 2006 (inception)		—			—					—					—
Outstanding at June 30, 2006		—			—		$	—	$	—		$	—	$	—
Granted		9,004,000			—			1.00-3.75		—			2.13		—
Exercised		—			—			—		—			—		—
Cancelled or expired		—			—			—		—			—		—
Outstanding at June 30, 2007		9,004,000			—		$	1.00-3.75	$	—		$	2.13	$	—
Exercisable at June 30, 2007		9,004,000			—		$	1.00-3.75	$	—		$	2.13	$	—
Granted		—			—			—		—			—		—
Exercised		—			—			—		—			—		—
Expired		—			—			—		—			—		—
Outstanding at September 30, 2007		9,004,000			—		$	1.00-3.75	$	—		$	2.13	$	—
Granted		23,092,171			350,000		$	0.75-2.00	$	1.00		$	1.72	$	1.00
Exercised		—			(50,000	)		—		(1.00	)		—		(1.00	)
Outstanding at December 31, 2007		32,096,171			300,000		$	0.75-3.75	$	1.00		$	1.70	$	1.00
Granted		—			—		$	—	$	—		$	—	$	—
Exercised		(38,400	)		—			—		—			—		—
Outstanding at March 31, 2008		32,057,771			—		$	—	$	—		$	—	$	—
Granted		—			—					—					—
Exercised		—			—					—					—
Cancelled or expired		—			—					—					—
Outstanding at June 30, 2008		—			—					—					—
Exercisable at June 30, 2008		32,057,771			—		$	—	$	—		$	—	$	—
Granted		—			—					—					—
Exercised		—			—					—					—
Cancelled or expired		—			—					—					—
Outstanding at September 30, 2008		—			—					—					—
Exercisable at September 30, 2008 (unaudited)		32,057,771			—		$	—	$	—		$	—	$	—

The warrants expire at various dates ranging from April 2010 through October 2017.

21

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – INCOME (LOSS) PER SHARE:

Components of loss per common share for the period for the following periods are as follows:

	Three Months Ended  September 30, 2008		Three Months Ended   September 30, 2007
Income (loss) applicable to common shareholders	$	1,895,405	$	2,725,814
Weighted average shares outstanding:
Basic		14,485,782		14,000,000
Diluted		77,277,235		20,225,427
Income (loss) per share—basic	$	0.13	$	0.19
Income (loss) per share—diluted	$	0.02	$	0.13

Diluted weighted average per share outstanding for all periods presented, other than the three months ended September 30, 2007 do not include the effect of dilutive Series A and B Preferred Stock and Series A-1, A-2, B-1, B-2, C-1, C-2, BD-1, BD-2, BD-3, BD-7, BD-8 and BD-9 and consultant warrants because to do so would have been anti-dilutive (see list of anti-dilutive shares below). Accordingly, basic and diluted net loss per share for these periods is the same.

22

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - LOSS PER SHARE (CONTINUED):

Below is a detailed list of the Company’s common stock equivalents at September 30, 2008: 

	Common
	Equivalents
Securities
Series C Preferred		20,619,128
Series D Preferred		14,000,000
Warrants:
Class A-1 Warrants		3,000,000
Class A-2 Warrants		3,000,000
Class B-1 Warrants		480,000
Class B-2 Warrants		480,000
Class BD-1 Warrants		300,000
Class BD-2 Warrants		300,000
Class BD-3 Warrants		300,000
Class BD-4 Warrants		1,600
Class BD-5 Warrants		1,600
Class BD-6 Warrants		1,600
Class BD-7 Warrants		821,333
Class BD-8 Warrants		821,333
Class BD-9 Warrants		821,333
Class BD-10 Warrants		700,000
Class BD-11 Warrants		1,400,000
Warrant issued to consultants		1,000,000
Paul Morrison Options		300,000
Class C-1 Warrants		10,266,086
Class C-2 Warrants		10,266,086
Class D-1 Warrants		28,000,000
Total common stock equivalent shares (unaudited)		96,880,099

(1) Warrants were repriced to $0.75 in connection with the Series C Convertible Preferred and Warrant Financing Transaction on October 19, 2007 (see Note 10). The repricing gave rise to an approximate $3.2 million derivative expense.

23

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – INVESTMENT IN DEBT SECURITIES:

On February 12, 2008, we purchased a face-value $150,000, 6.0% per annum, Convertible Promissory Note from an early-stage, Member-Managed Limited Liability Company in the Media Sector. Principal and interest are payable on February 12, 2010. The Convertible Promissory Note is convertible at our option into Member Units representing an aggregate of 2.0% of the investee’s aggregate member units.

Investments in these debt securities are carried as available-for-sale securities under Statement’s on Financial Accounting Standards No. 115. Debt securities classified as available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity.

Fair value is based upon the present value of the forward cash-flows, discounted at a credit-risk adjusted rate for similar instruments. The conversion option is considered a fair-value enhancement when such amount is readily convertible into cash, which, as a private, closely held company, it is not currently. Changes in the fair value of available-for-sale debt securities arise from changes in market interest rates for similar instruments and the period remaining to maturity.

On April 3, 2008, we amended the Convertible Promissory Note to add full-ratchet anti-dilution protection and a “Most Favored Nation” provision which would allow us to exchange the promissory note for any securities issued by the Investee in a subsequent financing on a dollar by dollar basis.

On April 4, 2008, we invested an additional $300,000 and received a Convertible Promissory Note which accrues interest at 6% per year and is due and payable on February 12, 2010. We have the option to convert the note anytime prior to maturity and we would receive Membership Interests equal to the principle balance on the note divided by $10,000,000. This note contains full ratchet anti-dilution protection and a “Most Favored Nation” provision.

24

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – INTANGIBLE ASSETS:

Our intangible assets consist of the following at September 30, 2008:

	Carrying		Accumulated
Intangible Assets:	Amount		Amortization
License agreement	$	148,690	$	(604,315	)
Patent costs		1,161,430		(88,421	)
Total	$	1,310,120	$	(692,736	)
Aggregate Amortization Expense
Quarter ended September 30, 2008	$	74,887
Estimated Amortization Expense
Period from September 30, 2008 through June 30, 2009:	$	50,842
Year ending June 30:
2010		75,729
2011		95,021
2012		107,817
2013		88,078
2014		88,078
Thereafter		804,555
		1,310,120

On October 12, 2007 we sold a portion of our licenses to ResponzeTV. The carrying value of the licenses sold was $653,005 and the related accumulated accumulation was $286,521. The difference of $366,484 was recorded as an addition to our investment in ResponzeTV.

Licensing Agreement - On October 13, 2006, the Company entered into an agreement with a related party. This agreement was subsequently amended on November 20, 2006. Under the terms of the Licensing Agreement the Company has obtained the exclusive right and license to certain licensed products through December 31, 2011 with an option to renew for an additional five year period provided all the minimum royalty payments have been paid during the initial term. In consideration of the license granted and the services to be performed, the Company will compensate the other party an annual guaranteed minimum (payable semi-annually) royalty as follows:

Annual			Minimum
Period	Dates		Royalty
1		Effective Date to 12/31/07	$	1,000,000
2		1/1/08 to 12/31/08	$	400,000
3		1/1/09 to 12/31/09	$	400,000
4		1/1/10 to 12/31/10	$	400,000
5		1/1/11 to 12/31/11	$	400,000
6		1/1/12 to 12/31/15	$	400,000

25

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – INTANGIBLE ASSETS (CONTINUED):

In addition to the minimum royalty payment the Company will also compensate the other party a sales royalty of eight percent (8%) on each annual period's net sales made in all venues other than infomercials; a minimum of three percent (3%) on each annual period's net sales made through infomercials and four percent (4%) should the revenues exceed media expenditures by a three to one media ratio. The sales royalty is payable on a quarterly basis within forty-five (45) days after the close of the prior quarter's sales. The payment of sales royalties are credited against the guaranteed minimum royalty payment for any annual period.

In addition to the sales royalties and guaranteed minimum royalties being paid the Company also delivered three million (3,000,000) shares of the Company's common stock, which represented 25% of the issued and outstanding common stock on that date.

On November 20, 2006 the Licensing Agreement was amended to change the date of the first annual Guaranteed Minimum Royalty payment from thirty (30) days following the effective date to January 3, 2007. In addition, the amendment revised subsequent payments to occur on January 1^st and July 1^st of each annual period. On November 22, 2006 the Company made a payment of $850,000 pursuant to this agreement. On January 10, 2007 the Company made a payment of $150,000 pursuant to the licensing agreement. The payment was the final payment of the $1,000,000 initial installment due under the agreement.

For the three months ended September 30, 2008 and 2007 the Company recognized $162,021 and $385,715 of expenses related to this agreement.

Straightening Irons Agreement - On February 12, 2007, the Company entered into an agreement with a manufacturer of straightening irons. Pursuant to the terms of the contract the Company  agrees to pay Licensor a Royalty payment of one percent (1.0%) of the Adjusted Gross Collected Revenues (“AGCR”), defined below, on all revenues generated from the sale of the Product and up-sells of like category sold in connection with the Product and through the inbound call. The Royalties shall be paid quarterly, along with sufficient reports justifying the calculation of the Royalty payments. Should the Infomercial’s performance exceed a two point two five (2.25) times the media ratio, meaning the revenues generated by the Infomercial, less returns and charge backs exceed two and one quarter times the expenditures on the media ratio (the “Media Ratio”), the Royalty shall increase to two and one half percent (2.5%) of the AGCR. Should the Media Ratio exceeds three (3) times the Media Ratio, the Royalty shall be bumped to three and one half percent (3.5%), if the Media Ratio exceeds three and one half (3.5) times the Media Ratio, the Royalty shall be four percent (4%), and in the event the Media Ratio exceeds four (4) times the Media Ratio, the Royalty shall be boosted to five percent (5%). The Royalty on sales in all other channels of distribution except Live Shopping shall be five percent (5%) of the wholesale revenues. Licensor shall receive six percent (6%) royalty for Live Shopping on wholesale revenues less returns. Upon the execution of this Agreement, ORH shall issue Licensor 15,000 common shares of OmniReliant Holdings, Inc. (ORHI) which shall be restricted stock and subject to the SEC 144 Rules.

Adjusted Gross Collected Revenues.“AGCR” shall mean ORH’s Gross Revenue from sales of the Products, less all of the following:

· Shipping & Handling, credit card fees, refunds, credits or other allowances on business, as actually incurred and as reserved for (“Returns”); not

· Sales, excise, use, value added or any like taxes;

· Cost of goods for purposes of liquidation or closeout (“Liquidation Sales”). Licensor shall have the first right of refusal to purchase the liquidation inventory at a penny above ORH’s best offer.

26

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – INTANGIBLE ASSETS (CONTINUED):

The reserve for Returns and un-collectibles shall initially be ten percent (10%) of Adjusted Gross Revenues, and shall be adjusted periodically based upon actual experience.

The Company shall have the right to sell and distribute the Products at such prices and on such terms and conditions (including shipping and handling charges) as ORH may establish. In the event that ORH fails, during the one-year period commencing upon Rollout and continuing thereafter, to generate $2,000,000 in Product sales per year (“Minimum Quantities”), Licensor may provide 30 days prior written notice to ORH and make ORH’s rights hereunder non-exclusive. For the life of the Product, ORH or a designated third party, such as the manufacturer, on behalf of ORH will maintain and keep in force product liability insurance with an insurer approved by Licensor in the amounts not less than $2,000,000 per occurrence and $5,000,000 in the aggregate covering all Products licensed by ORH from Licensor. ORH, Licensor and, upon ORH’s request, any of ORH’s subsidiaries, affiliates or sub-licensees who are involved with the marketing and distribution of the Products shall be named as additional insured on all such insurance policies, each of which shall be endorsed so as to provide at least 30 days notice to ORH of its cancellation, termination or non-renewal.

As of December 31, 2007, this agreement was fully amortized; therefore the Company had no expense related to this agreement for the three months ended September 30, 2008.

Patent Application Agreement - On June 18, 2007, OmniReliant Holdings, Inc. (“the Company”) entered into an Agreement for Acquisition of a Patent Application with Product & Technology Partners LLC. Pursuant to the Agreement, the Company acquired from Seller the rights to a patent-pending self-warming topical pharmaceutical product capable of delivering salicylic acid in a foam suitable for consumer use. In consideration for the rights to the product, the Company agreed to pay Seller in the following manner:

a) Upon execution of the Agreement, the Company paid Seller (i) an aggregate of Twenty Five Thousand dollars ($25,000) and (ii) issued to the Seller Two Hundred Thousand (200,000) shares of the Company’s common stock.

b) Following the completion of due diligence (which shall be six months from the date of the Agreement), if the Company is satisfied with the Product and intends to offer Product for sale, the Company shall pay to Seller Twenty Five Thousand dollars ($25,000).

c) The Company shall also pay Seller installment payments of up to a maximum of Four Hundred Thousand Dollars ($400,000), payable over a period of 4 years beginning six months from the date of the Agreement. If no revenues are generated from the sale of the Product, no installment payments shall be due.

On January 22, 2008 the Company paid the additional $25,000 pursuant to the terms listed above.

The Company has received a written opinion issued by the USPTO as International Search Authority and a response was filed as entering Chapter ii of the PCT designating the USPTO as International Examining Authority. The Company has consulted with the scientist regarding the application and we believe the technology has many future uses. Once approved, the Company plans to market and sell products using the technology acquired.

The Company estimates the patent pending application will take up to 3 years to go through the approval process. At such time the Company will begin amortizing the cost over 20 years, the useful life of the asset.

In the event additional assistance is required with the patent pending application or development of a product the members of Product & Technology Partners, LLC have agreed to work with the Company on a consulting basis.

27

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – INTANGIBLE ASSETS (CONTINUED):

For the three months ended September 30, 2008 and for the period from inception through September 30, 2008 the Company did not recognize any expense related to this agreement.

The Company entered into a patent agreement on January 24, 2008. Amortization expense related to the agreement for the three months ended September 30, 2008 and for the period from inception through September 30, 2008 was 12,353 and 32,941, respectively. In addition, 200,000 shares were issued in connection with this agreement.

NOTE 8 - COMMITMENTS & CONTINGENCIES:

Consulting Agreement - On October 1, 2006 the Company entered into a six (6) month consulting agreement with Harrington Business Development, LLC (“HBD”) to provide services related to the creation, production, and editing of infomercials and also to consult the Company on marketing and distribution of its products. In consideration for the services performed the Company will compensate HBD $15,000 per month. On April 1, 2007 the Company verbally extended the term of the Harrington Business Development, LLC consulting agreement for an additional three months. The agreement was not renewed subsequent to June 30, 2007. The shareholders of HBD are also shareholders of the Company.

On July 14, 2008 the Company entered into a one (1) year consulting agreement with HBD to provide services related to, but not be limited to, the media production related to The Franklin Mint, Inc., media purchase and management, supervision of editing and dubbing of productions, shipping of tapes or DVDs to television or radio networks and stations, assistance in website development, assistance in establishing call centers and scripting for inbound calls, tracking of media results, and any other assistance that is needed from the Company. In consideration for the services performed the Company will compensate HBD $50,000 per month net of $5,000 for office rent. The Company has right to extend the term of the Harrington Business Development, LLC consulting agreement for an additional year. For the three months ended September 30, 2008 and 2007 the Company recognized expenses amounting to $-0- and $135,000, related to this agreement.

Employment Agreement - On October 31, 2006 the Company entered into an employment agreement with Paul Morrison to act as its Chief Operating Officer and President. Under the terms of the agreement Mr. Morrison's contract will be for a term of two (2) years with automatic successive two (2) year term renewals subject to a notice of non-renewal. In consideration for the services he is to receive a base salary of $120,000 per year with annual pay increases of ten percent (10%); incentive bonus of one and half percent (1.5%) of pretax profits on the sales of certain products payable the day after the Company's 10-KSB annual report is filed with the SEC; the issuance of 300,000 shares the Company's restricted common stock payable as follows: 150,000 shares upon execution of the agreement and 150,000 shares on the first anniversary of employment with the Company. On October 31, 2006, prior to the recapitalization, OmniReliant Corporation issued Mr. Morrison 150,000 shares and recorded $15,000 of stock compensation expense related to this agreement.

Assignment of Contract - On November 10, 2006 the Company entered into an agreement with Reliant International Media, LLC (“RIM”) to assume a marketing and distribution agreement RIM had with a third party manufacturer of spa related products. The original agreement was entered into on September 25, 2006 for a term of twelve (12) months. The agreement gives the Company exclusive rights to market and distribute the product in the United States and Canada. The Company also received the non-exclusive right to all other countries. The shareholders of RIM are also shareholders of the Company.

28

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - COMMITMENTS & CONTINGENCIES (CONTINUED):

International Distribution Agreement - On March 19, 2007, the Company entered into an International Distribution Agreement with Reliant International Media LLC. Pursuant to the Agreement, the Company has granted Reliant the exclusive right to represent the Company with respect to sales of certain products through retail distribution channels in the United Kingdom, Japan and Korea. The products covered by the agreement include any and all products marketed by the Company under the Kathy Hilton name, likeness or brand, excluding all perfume and perfume related products. In consideration for Reliant’s marketing services, the Company has agreed to pay to Reliant a royalty equal to ten percent of the Company’s gross revenues. The shareholders of Reliant International Media are also shareholders of the Company.

Public Relations Agreement - On April 27, 2007 the Company entered into a three year consulting agreement with a public relations firm. Pursuant to the terms of the agreement the Company will pay the following as compensation for services: $7,500 payable each month; 1,000,000 warrants with a term of 3 years, issued at the onset, entitling the holder to purchase shares of the Company’s common stock at an exercise price of $1.00 per share; exclusive rights to all future public relation contracts awarded to the Company for Kathy Hilton licenses; and compensation at the rate of 3% of projected gross wholesale sales per year on all future Kathy Hilton licenses awarded to the Company. For the year ended June 30, 2007 the Company recognized $2,490,151 of expense related to this agreement, of which $2,471,401 was associated with the 1,000,000 warrants which were issued. The value of the warrants was determined by using the Black-Scholes option pricing model. The Company used a volatility percentage of 23.6%, a risk free interest rate of 5.00%, and an expected life of 1 ½ years in calculating the fair value.

NOTE 9 – STOCKHOLDERS’ EQUITY:

Common Stock Purchase Agreement

On November 22, 2006 the Company and OmniReliant entered into a securities purchase agreement with the Company's then principal stockholder, Cynthia Allison, pursuant to which OmniReliant purchased 5,000,000 shares of the Company's common stock from Ms. Allison for a purchase price of $475,813. Pursuant to the Common Stock Purchase Agreement, OmniReliant transferred the 5,000,000 shares to the Company for cancellation. The transaction with Ms. Allison was accounted for as a reduction of additional paid in capital.

Exchange Agreement

Pursuant to the Exchange Agreement, dated November 22, 2006, the Company issued 12,300,000 shares of common stock to the OmniReliant stockholders. The common stock was issued to the following stockholders pursuant to the Exchange Agreement:

	Number of
Name	Shares
Apogee Financial Investments, Inc.		3,000,000
ZTZ Trust Inc.		3,000,000
Kevin Harrington		1,500,000
Tim Harrington		1,500,000
KRH Licensing Company, LLC		3,000,000
Paul Morrison		300,000
Total		12,300,000

29

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – STOCKHOLDERS’ EQUITY (CONTINUED):

Public Relations Agreement - On April 27, 2007 the Company entered into a three year consulting agreement with a public relations firm. Pursuant to the terms of the agreement the Company will pay the following as compensation for services: $7,500 payable each month; 1,000,000 warrants with a term of 3 years, issued at the onset, entitling the holder to purchase shares of the Company’s common stock at an exercise price of $1.00 per share; exclusive rights to all future public relation contracts awarded to the Company for Kathy Hilton licenses; and compensation at the rate of 3% of projected gross wholesale sales per year on all future Kathy Hilton licenses awarded to the Company. For the three months ended September 30, 2008 and for the period from inception through September 30, 2008 the Company has recognized $90,000 and $2,490,151 of expenses related to this agreement. No warrants were issued for the three months ended September 30, 2008. For the period from inception through September 30, 2008 the Company recognized expenses of $2,471,401 associated with the 1,000,000 warrants that were originally issued in connection with this agreement.

As more fully discussed in Note 10, these warrants were reclassified to liabilities on May 22, 2007, and were carried at their fair values, with adjustments to income until October 18, 2008, at which time they will be reclassed to equity.

Patent Application Agreement - On June 18, 2007, the Company entered into an Agreement for Acquisition of a Patent Application. The Company upon execution of the Agreement issued to the Seller Two Hundred Thousand (200,000) shares of the Company’s common stock. For the quarter ended September 30, 2008 the Company did not recognize any expense related to this agreement. See “Patent Application Agreement” above for additional details.

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS:

This footnote includes (i) the details of our redeemable preferred stock, (ii) our accounting for the Series A, Series B, Series C, and Series D Financing Transactions both on the inception dates and thereafter, (iii) our consideration related to and accounting for warrants issued in these transactions and (iv) registration payment arrangements extended to the investors.

Series A, Series B, Series C, and Series D Convertible Preferred Stock:

The Company is authorized to sell or issue 100,000,000 shares of preferred stock.

On November 22, 2006, we designated 3,000 shares of our preferred stock as Series A 10% Convertible Preferred Stock (“Series A Preferred”). On May 25, 2007, we designated 1,000 shares of our preferred stock as Series B 10% Convertible Preferred Stock (“Series B Preferred”). On October 18, 2007, we designated 10,620,000 shares of our preferred stock as Series C Convertible Preferred Stock (“Series C Preferred”). On April 30, 2008, we designated 7,000,000 shares of our preferred stock as Series D Convertible Preferred Stock (“Series D Preferred”).The Series A has a par value of $0.0001, a stated value of $1,000 and a liquidation preference of $1,000, plus accrued dividends, if any. The Series B has a par value of $0.0001, a stated value of $1,000 and a liquidation preference of $1,000. The Series C has a par value of $0.0001, a stated value of $1.00 and a liquidation preference of $1.00. The Series D has a par value of $0.0001, a stated value of $1.00 and a liquidation preference of $1,000. The Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred were convertible into our common stock at stated conversion prices of $1.00, $1.25, $0.75, and $0.50 respectively, based upon the stated value. The conversion prices are subject to anti-dilution protection for (i) traditional capital restructurings, such as splits, stock dividends and reorganizations and (ii) sales or issuances of common shares or contracts to which common shares are indexed at less than the stated conversion prices.

30

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

Holders of the Company’s Series C and D Preferred are not entitled to dividends. Holders of the Company’s Series A Preferred and the Series B Preferred (collectively the “Series A and B Preferred”) were entitled to cumulative dividends at the rate per share of 10% per annum, payable quarterly on January 1, April 1, July 1 and October 1. Dividends were payable in cash or common stock, as follows: (a) if funds were legally available and certain equity conditions, described below, have not been met during the preceding five consecutive trading days payment must be in cash; (b) if funds were available and the equity conditions have been met during the five preceding trading days the payment may be made, at the sole election of the Company, in either cash or common shares (at a 10% discount to the trading market price, as defined in the Certificate of Designation).

The Certificate of Designation provided that dividends were cumulative and unconditionally payable, even in the absence of a Board declaration. Accordingly, we accrued dividends as they were earned. As of October 18, 2007, (the date the Series A and B Preferred were exchanged for Series C Preferred), we had accrued $285,355 and $24,209 in dividends related to the Series A and B Preferred shares, respectively. Preferred stock dividends are recorded as a reduction of stockholders’ equity. However, we also reflect preferred stock dividends as a reduction of our net loss for purposes of calculating income (loss) applicable to common stockholders and our net loss per common share.

As discussed in more detail in this footnote, the Series A and B Preferred Stock were exchanged for Series C Preferred Stock and Warrants.

The Series C and Series D Preferred are redeemable for cash in an amount representing the stated value. The following events give rise to a redemption triggering event:

· The Corporation shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder;

· Unless specifically addressed elsewhere in this Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in the Certificate of Designation, and such failure or breach shall not, if subject to the possibility of a cure by the Corporation, have been cured within 20 calendar days after the date on which written notice of such failure or breach shall have been delivered;

· The Corporation shall be party to a Change of Control Transaction;

· There shall have occurred a Bankruptcy Event;

· Any monetary judgment, writ or similar final process shall be entered or filed against the Corporation, any Subsidiary or any of their respective property or other assets for greater than $100,000.

If the Company fails to pay the Triggering Redemption amount on the date it is due, interest will accrue at a rate equal to the lesser of 18% per year, or the maximum rate permitted by applicable law, accruing daily from the date of the Triggering event until it is paid in full.

31

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

Sales of Series A and Series B Preferred Stock and Warrants:

On November 22, 2006 and May 25, 2007, we sold 3,000 Series A Preferred shares and 600 Series B Preferred shares, respectively, plus two tranches of warrants with each financing. We also issued warrants to placement agents. The following table illustrates details of the sales of these financial instruments:

	Series A			Series B			Total
Gross proceeds	$	3,000,000		$	600,000		$	3,600,000
Financing costs paid in cash		(475,000	)		(95,000	)		(570,000	)
Net proceeds	$	2,525,000		$	505,000		$	3,030,000
Common shares indexed to financial instruments:
Series A and B Preferred		3,000,000			480,000			3,480,000
Investor warrants:
Tranche A/B-1		3,000,000			480,000			3,480,000
Tranche A/B-2		3,000,000			480,000			3,480,000
Placement agent warrants		900,000			144,000			1,044,000
		9,900,000			1,584,000			11,484,000

Apogee Financial Investments, Inc., a company owned by certain of our stockholders, received cash fees of $125,000 for consulting and due diligence services rendered in connection with the transactions, which amount is included in the financing costs paid in cash in the table above.

The following table illustrates the terms of the warrants issued in connection with the Series A and B Preferred Financings:

Warrant terms:	Strike Price	Term
Tranche A-1	$1.50	5 years
Tranche A-2	$1.00	10 years
Tranche B-1	$1.87	3 years
Tranche B-2	$3.75	5 years
Placement agents:
Series A Financing	$1.00—$3.00	10 years
Series B Financing	$1.25—$3.75	10 years

32

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

The following tables illustrate (i) how the net proceeds arising from each of the Series A Preferred and Series B Preferred financing was allocated on the financing inception dates and (ii) how the aggregate financing costs (both cash and warrant consideration) were allocated on the inception dates:

Classification	Series A			Series B			Total
Redeemable preferred stock (mezzanine)	$	—		$	—		$	—
Redeemable preferred stock (liability)		—			(780,000	)		(780,000	)
Derivative warrants (investor warrants)		(16,342,550	)		(1,655,567	)		(17,998,117	)
Beneficial conversion feature		(1,173,510	)		—			(1,173,510	)
Derivative put liability		(834,826	)		—			(834,826	)
Day-one derivative loss		15,350,886			1,835,567			17,186,453
Gross proceeds	$	3,000,000		$	600,000		$	3,600,000

The accounting and reporting for complex financing transactions that embody multiple financial instruments, some of which are features embedded within financial instruments, can best be described as a step-by-step process where the terms and features of the financial instruments are compared to multiple standards in a hierarchy of decision making. The following summarizes this process and conclusions during the process.

As an initial consideration, we are required to consider whether the Series A and B Preferred Stock are, by their terms, financial instruments that require liability classification under Statements on Financial Accounting Standards No. 150 Accounting for Certain Financial Instruments with Characteristics of both Equity and Liability. Statement 150 generally provides that financial instruments that are issued in the form of shares that are mandatorily redeemable on a fixed or determinable date or upon an event certain to occur be classified as liabilities. Neither the Series A Preferred nor the Series B Preferred provide for their redemption on fixed or determinable date. In addition, events that could give rise to cash redemption are conditional and not certain to occur.

· Series A Preferred—November 22, 2006—The Series A Preferred did not require liability classification on the inception date because the contract did not provide for a fixed or determinable redemption (an unconditional payment requirement) and events that could give rise to cash redemption were conditional and not certain to occur on the inception date. However, other standards exist that provide for classification of redeemable securities outside of stockholders’ equity when, irrespective of probability, contingent redemption events are outside of the issuer’s control. As a result, the Series A Preferred required classification outside of stockholders’ equity on the inception date.

· Series B Preferred—May 25, 2007—The Series B Preferred has terms and features consistent with those embodied in the Series A Preferred. However, as more fully discussed below, on the issuance date the Company’s ability to share settle any of its share-indexed financial instruments was not within its control, due to the triggering of the variable-share-indexed conversion feature in the Series A Preferred. Because share settlement was not within the Company’s control, net cash settlement was assumed and the Series B Preferred was initially classified in liabilities, at fair value.

33

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

The terms and conditions of the Series A Preferred were also subject to evaluation under Statement 133. Derivative financial instruments, as defined in Statement 133 consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

In considering the application of Statement 133, we identified those specific terms and features embedded in the contracts that possess the characteristics of derivative financial instruments. Those features included the conversion option, redemption features and other equity-indexed terms and conditions. In evaluating the respective classification of these embedded derivatives, we are required to determine whether the host contract (the Series A and B Preferred) is more akin to a debt or equity instrument in regards to the risks. This determination is subjective. However, in complying with the guidance provided in EITF D-109 Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under Statement No. 133 we concluded, based upon the preponderance and weight of all terms, conditions and features of the host contracts, that the Series A Preferred was more akin to an equity instrument for purposes of considering the clear and close relation of the embedded feature to the host contract. Based upon this conclusion, we further concluded that (i) the equity indexed and settled embedded features did require derivative liability classification and (ii) certain redemption features (that is, features that afford the investor the right to put the instruments for cash) required bifurcation and classification as compound embedded derivative liabilities, at fair value on the inception date. These amounts are reflected in the table above as derivative put liabilities and are valued using multiple, probability-weighted cash flow outcomes and market discount rates that are commensurate with our estimated credit risk.

Although, as described above, the embedded conversion feature did not require liability classification under Statement 133, we were required to consider if the hybrid preferred contracts embodied beneficial conversion features (“BCF”). A BCF is present when the “effective” conversion price ascribed to the conversion feature has intrinsic value. Further, a BCF is accounted for as a component of paid-in capital on the inception date. As reflected in the tables above, the Series A Preferred was found to have a BCF. The aggregate BCF at its intrinsic value amounted to $9,326,490. This amount gives effect to the (i) the trading market price on the contract dates and (ii) the effective conversion price of each preferred issuance after allocation of proceeds to all financial instruments sold based upon their relative fair values. Notwithstanding, BCF was limited to the value ascribed to the remaining hybrid contract (using the relative fair value approach). Accordingly, the BCF allocated to paid-in capital amounted to $1,173,510.

In determining how the basis of the hybrid instruments would be allocated to the host contracts, detachable warrants, and the embedded conversion features, we utilized the guidance of Statement 133 Implementation Issue No. B-6 (“DIG Issue B6”) provided by the Derivatives Implementation Group. DIG Issue B6 provides that the initial carrying values of the host contract component and the embedded derivative components of a hybrid instrument should be determined by recording the embedded derivative at fair value and determining the initial carrying value assigned to the host contract as the difference between the basis of the hybrid instrument and the fair value of the embedded derivatives (a “with and without” method based on the fair value of the embedded derivative). Since there were warrants issued concurrently with the host instrument and a BCF calculated upon inception, these components also needed to be considered when calculating the value to be assigned to the host instrument. When we evaluated the warrants, we concluded that equity classification was not appropriate for the investor warrants under EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Accordingly the proceeds from the issuance of the debt and the detachable warrants was first allocated to the debt and the warrants based on their relative fair values as described in APB 14. The embedded derivatives in the debt instrument that required bifurcation (put liability) were then bifurcated at their fair values from the proceeds allocated to the debt under APB 14 and then the BCF was calculated. After the allocation process, any residual proceeds would be allocated to the debt host, however, the aggregate fair values of the warrants, put and BCF exceeded the gross proceeds so we recognized a day-one derivative loss as indicated.

34

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

As discussed above, the initial allocation of the basis in the Series A Preferred Financing transaction resulted in no basis ascribed to the redeemable preferred stock. According to EITF D-98 Classification and Measurement of Redeemable Securities, if the security is not currently redeemable and it is not probable that the security will be become redeemable, accretion to face value is not necessary. The Series A Preferred is convertible upon inception and there was no persuasive evidence that the Preferred Stock would not be redeemed. Based on this information, redemption could not be considered “not probable” of occurring and accretion was necessary. Redeemable preferred stock is required to be accreted to its redemption values through periodic charges to retained earnings or, if no term of redemption is embodied in the contract, as is the case of the Series A Preferred, on the date of issuance. As a result, a day-one deemed dividend of $3,000,000 was recorded to accrete the Series A Preferred to its redemption value.

The allocation of the basis of the Series A and Series B Financing transactions required the allocation to certain financial instruments at their respective fair values, and these fair values in each instance exceeded the cash proceeds obtained from the transactions. As a result, we were required to record day-one derivative losses in connection with these transactions because fair value was the required standard.

Subsequent and Ongoing Classification Considerations:

The evaluation of the classification of the Series A and B Preferred was required at each reporting date. Statement 150 requires reclassification of financial instruments otherwise classified in stockholders’ equity or redeemable preferred stock to liabilities when the conditional redemption becomes certain of occurrence. On May 21, 2007 and thereafter we were in default under the terms and conditions of the Series A Preferred due to non-registration of the underlying common shares (also see registration rights, below). On that date, the Series A Preferred Stock became redeemable for cash at 130% of the stated value, or $3,900,000, or, at the holder’s option, in the number of common shares equal to the cash redemption price divided by the 75% of the trading market price. The operation of the feature related to the holder’s rights to redeem in common shares has rendered the number of shares necessary to share-settle the contract (and our other share-indexed financial instruments) indeterminate. Therefore, share settlement of the Series A Preferred, and all other of our share-indexed financial instruments was presumed to no longer to be within our control. The triggering of the redemption and the share-settlement feature of the Series A Preferred had the following financial effects:

· The Series A Preferred required reclassification from its mezzanine classification to liabilities, at fair value, because the redemption is no longer conditional. This reclassification was accomplished by transferring the fair value from the mezzanine classification and joining the put derivative (that was fair valued on the date of the redemption triggering event with a charge to income).

· The Series B Preferred Stock, although possessing terms and conditions similar to those of the Series A Preferred was not afforded equity classification because share-settlement is presumed not to be within the Company’s control. In addition, investor and placement agent warrants issued with the Series B Preferred did not achieve equity classification for this same reason.

35

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

· Other share-indexed financial instruments, such as warrants, required reclassification to liabilities because our ability to share-settle those instruments was no longer within our control. This reclassification was accomplished by transferring the fair value of these instruments from stockholders’ equity to liabilities at their fair values. They require ongoing fair value measurement. See “Warrant Considerations,” below.

The following table illustrates the activity with respect to each of the Series A and Series B Preferred from their respective inception dates to September 30, 2008:

	Series A			Series B			Total
Mezzanine
Initial allocation of Series A Preferred in the mezzanine	$	—		$	—		$	—
Accretion to redemption value		3,000,000			—			3,000,000
Reclassification to liabilities		(3,000,000	)		—			(3,000,000	)
Redeemable preferred stock	$	—		$	—		$	—
Liabilities
Reclassification from mezzanine	$	3,000,000		$	—		$	3,000,000
Reclassification from paid-in capital		1,600,270			—			1,600,270
Reclassification from derivative		599,730			—			599,730
Initial allocation of Series B Preferred in liabilities		—			780,000			780,000
Redeemable preferred stock (liabilities)		5,200,000			780,000			5,980,000
Exchanged for Series C Preferred		(5,200,000	)		(780,000	)		(5,980,000	)
	$	—		$	—		$	—

When the redeemable preferred stock was reflected in liabilities, the value was based upon the redemption values calculated as follows:

· Series A—This amount represents the common stock equivalent value associated with the holders’ redemption alternative to require the Company to settle the debt in common stock, in the number of shares equal to the cash redemption amount (130% of the stated value) divided by 75.0% of the trading market value.

· Series B—This amount represents only the cash redemption value because, unlike the Series A Preferred holders, the Series B Preferred holders did not have the right to require redemption in common stock.

· The shares underlying the investor warrants were subject to firm registration rights. That is, we were required to deliver registered shares, and the Registration Rights Agreement did not specify how the warrant contract would be settled in the event that we are unable to deliver registered shares. As a result, net-cash settlement was assumed under the standard. That ultimate assumption required us to classify the warrants as derivative liabilities at their fair values and account for the warrants at fair value with changes recognized in income.

36

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

· The shares underlying the placement agent warrants are not subject to the registration rights. Accordingly, the placement agent warrants issued with the Series A Preferred Financing were afforded equity classification. On May 21, 2007, however, our ability to share-settle our share-indexed financial instruments was placed out of our control because the number of shares necessary to share-settle the Series A Preferred became indeterminate and we potentially could have insufficient authorized shares to settle all of our share-indexed financial instruments. On that date, the warrants issued with the Series A Preferred required reclassification to liabilities. Subsequently, on May 25, 2007, the placement agent warrants issued with the Series B Preferred Financing did not achieve equity classification for this reason. The Series A and Series B Preferred Stock were exchanged for Series C Preferred Stock and warrants on October 18, 2007, as discussed in the following section. Upon the exchange of the Series A and B Preferred Stock for Series C Preferred Stock, there was no longer a variable conversion rate associated with the Preferred Stock Financings. Accordingly, share settlement was again determined to be within the Company’s control and the placement agent warrants from the Series A and B Financings were reclassed to equity.

Note: In accordance with SFAS 150, the carrying amount of the Series A and B Preferred Stock were measured at fair value when the instruments were classified as liabilities. Certain provisions in the Preferred Stock were considered when determining the fair value of the instrument. There was no right to participate in earnings, the liquidation preference of the Preferred Stock was the same as the stated rate, there were no voting rights and the Preferred Stock was not redeemable by the Company, so no value was ascribed to these provisions. There was also no value ascribed to the cumulative dividend feature since the Company was unable to pay its dividend from earnings. Accordingly, the fair value approximates the redemption value of the Preferred Stock which is calculated as a common stock equivalent value based upon observable market prices.

37

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

Sale and Exchange of Series C Preferred Stock:

On October 18, 2007, we sold 6,400,000 Series C Preferred shares plus two tranches of warrants. We also issued warrants to placement agents. On October 18, 2007, we also exchanged all outstanding Series A Preferred, and Series B Preferred, for 3,909,564 shares of Series C Preferred and two tranches of warrants. The following table illustrates details of the sales of these financial instruments:

	Series C Financing			Series C Exchange		Total
Gross proceeds	$	6,400,000		$	—	$	6,400,000
Financing costs paid in cash		(340,000	)		—		(340,000	)
Net proceeds	$	6,060,000		$	—	$	6,060,000
Common shares indexed to financial instruments:
Series C Preferred		8,533,333			5,212,752		13,746,085
Investor warrants:
Tranche C-1		8,533,334			5,212,752		13,746,086
Tranche C-2		8,533,334			5,212,752		13,746,086
Placement agent warrants		2,559,999			—		2,559,999
		28,160,000			15,638,256		43,798,256

Apogee Financial Investments, Inc., a company owned by certain of our stockholders, and Midtown Partners & Company LLC, a related company, received cash fees of $340,000 for consulting and due diligence services rendered in connection with the transactions, which amount is included in the financing costs paid in cash in the table above.

The following table illustrates the terms of the warrants issued in connection with the Series C Preferred Financing:

Warrant terms:	Strike Price		Term
Tranche C-1	$	1.50		5 years
Tranche C-2	$	2.00		10 years
Placement agents	$	0.75-$2.00		10 years

38

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

The following tables illustrate how the net proceeds arising from each of the Series C Preferred Financing and Exchange was allocated on the inception dates:

	Series C Financing			Series C Exchange			Total
Redeemable preferred stock (mezzanine)	$	—		$	(13,553,155	)	$	(13,553,155	)
Beneficial conversion feature (paid-in capital)		(2,766,833	)		—			(2,766,833	)
Derivative put liability		(399,150	)		—			(399,150	)
Sub-total redeemable preferred		(3,165,983	)		(13,553,155	)		(16,719,138	)
Paid-in capital (investor warrants)		(3,633,167	)		(17,796,834	)		(21,430,001	)
Loss on extinguishment of redeemable preferred stock		—			26,247,006			26,247,006
Day-one derivative loss		399,150			—			399,150
Loss on extinguishment of other liabilities		—			271,109			271,109
Gross proceeds (financing) basis (exchange)	$	(6,400,000	)	$	(4,831,874	)	$	(11,231,874	)

The Exchange of Series A and B Preferred for Series C Preferred and related warrants, was accounted for as the settlement of the former financial instruments resulting in (i) an extinguishment loss, to the extent that the fair value of the Series C Preferred and related warrants exceeded the carrying values of the Series A and B Preferred (included in liabilities). The following table illustrates the calculations related to the Exchange.

Fair value of Series C Preferred	$	13,553,155
Fair value of Series C investor warrants		17,796,834
		31,349,989
Carrying values of financial instruments exchanged:
Series A Preferred		(5,200,000	)
Series B Preferred		(780,000	)
Accrued dividends		(309,564	)
Accrued damages		(542,080	)
Unamortized finance costs		1,999,771
Total carrying values		(4,831,873	)
Excess of fair values over carrying values	$	26,518,116
Allocation of excess:
Extinguishment of redeemable preferred	$	26,247,007
Extinguishment of other liabilities		271,109
Excess of fair values over carrying values	$	26,518,116

39

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

The investor warrants were valued using BSM. Significant assumptions underlying the BSM calculations are as follows:

Financing Inception Dates:	A-1			A-2			B-1			B-2
Trading market price	$	3.50		$	3.50		$	3.50		$	3.50
Strike or exercise price	$	1.50		$	1.00		$	1.87		$	3.75
Expected term in years		5yrs			10yrs			3yrs			5yrs
Volatility		43.91	%		51.15	%		39.86	%		42.19	%
Risk-free rate		4.57	%		4.57	%		4.81	%		4.80	%
Expected dividend rate	$	0.00		$	0.00		$	0.00		$	0.00

October 18, 2007:	A-1			A-2			B-1			B-2
Trading market price	$	2.60		$	2.60		$	2.60		$	2.60
Strike or exercise price:
Contract price	$	1.50		$	1.00		$	1.87		$	3.75
Repriced	$	0.75		$	0.75		$	0.75		$	0.75
Expected term in years		4.10yrs			9.10yrs			2.60yrs			4.60yrs
Volatility		39.73	%		50.03	%		34.98	%		40.08	%
Risk-free rate		4.17	%		4.52	%		3.98	%		4.17	%
Expected dividend rate	$	0.00		$	0.00		$	0.00		$	0.00

On October 18, 2007, certain warrants were repriced from their original exercise price to $0.75 in connection with the Series C Preferred financing. On April 30, 2008 certain warrants were repriced to $0.50 in connection with the Series D Preferred Financing. We recorded an expense of approximately $3.2 million resulting from repricing of warrants.

The fair value of the warrants issued to placement agents in connection with the Series A Preferred and Series B Preferred financing transactions amounted to $2,492,312 and $384,034, respectively; $2,876,346 in the aggregate. The fair values were calculated using the Black-Scholes-Merton (“BSM”) valuation technique.

Notes to BSM: We did not have a historical trading history sufficient to develop an internal volatility rate for use in BSM. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily. We do not have a history to develop the expected term for our warrants. Accordingly, we have used the contractual remaining term in our calculations. Finally, for purposes of our risk-free rate, we have used the publicly-available yields on zero-coupon Treasury securities with remaining terms to maturity consistent with the remaining contractual term of the warrants. These assumptions are estimates of future trends. Actual results during the periods that the warrants are outstanding will most likely be different.

40

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

Sales of Series D Preferred Stock and Warrants:

On April 30, 2008, we entered into securities purchase agreement (the “Purchase Agreement”) with Vicis Capital Master Fund (“Vicis”) pursuant to which Vicis purchased 7,000,000 shares of our Series D Convertible Preferred Stock (“Series D Preferred Stock”), respectively for an aggregate purchase price of $7,000,000. The Series D Preferred Stock has a conversion price of $0.50 and is convertible into an aggregate amount of 14,000,000 shares of common stock. The Series D Preferred Stock does not pay annual dividends but each holder of Series D Preferred Stock has the right to such number of votes equal to the number of shares of common stock that the Series D Preferred Stock may be converted into, subject to the beneficial ownership limitation described below.

In connection with the Agreement, Vicis received a Series D warrant to purchase 28,000,000 shares of common stock of the Company (“Series D Warrants”). The Series D Warrants are exercisable for a period of seven years from the date of issuance at an initial exercise price of $0.75. Vicis may exercise the Series D Warrants on a cashless basis if the shares of common stock underlying the Series D Warrants are not then registered pursuant to an effective registration statement. In the event Vicis exercises the Series D Warrants on a cashless basis, then we will not receive any proceeds.

The conversion price of the Series D Preferred Stock and the exercise price of the Series D Warrants are subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustment provisions for stock splits, stock dividends, and recapitalizations.

In addition, the Company, Vicis and Dynamic Decisions Strategic Opportunities (“Dynamic Decisions”) have entered into Amendment No. 1 to its amended and restated registration rights agreement (“Amended Registration Rights Agreement”) pursuant to which if at any time after the date of the Amended Registration Rights Agreement we shall decide to prepare and file with the Commission a registration statement relating to an offering for our own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the stock option or other employee benefit plans, then we will send to each holder a written notice of such determination and, if within fifteen days after the date of such notice, any such holder shall so request in writing, we will include in the registration statement, all or any part of such Registrable Securities (as defined in Amended Registration Rights Agreement) such holders request to be registered.

Vicis has contractually agreed to restrict their ability to convert the Series D Preferred Stock and exercise the Series D Warrants and receive shares of our common stock such that the number of shares of the Company common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of our issued and outstanding shares of common stock.

At any time before the one year anniversary of the date we initially issued the shares of Series D Preferred Stock, we may, upon written notice, redeem the outstanding shares of Series D Preferred Stock in cash at a price equal to 110% of Stated Value (as such term is defined in the Certificate of Designations).

41

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

The following table illustrates (i) how the net proceeds arising from the Series D Preferred financing were allocated on the financing inception date and (ii) how the aggregate financing costs (both cash and warrant consideration) were allocated on the inception date:

Classification	Series D
Redeemable Preferred Stock (Mezzanine)	$	-
Derivative warrants (investor warrants)		(18,174,800	)
Derivative warrants (agent warrants)		(1,131,620	)
Beneficial conversion feature		(2,839,864	)
Derivative put liability		(1,024,605	)
Deferred financing costs		1,077,268
Retained earnings (financing fees)		316,615
Paid in capital (financing fees)		286,487
Day-one derivative loss		14,965,519
Net proceeds	$	6,525,000

The accounting and reporting for complex financing transactions that embody multiple financial instruments, some of which are features embedded within financial instruments, can best be described as a step-by-step process where the terms and features of the financial instruments are compared to multiple standards in a hierarchy of decision making. The following summarizes this process and conclusions during the process.

As an initial consideration, we are required to consider whether the Series D Preferred Stock is, by its terms, financial instruments that require liability classification under Statements on Financial Accounting Standards No. 150 Accounting for Certain Financial Instruments with Characteristics of both Equity and Liability. Statement 150 generally provides that financial instruments that are issued in the form of shares that are mandatorily redeemable on a fixed or determinable date or upon an event certain to occur be classified as liabilities.

· The Series D Preferred did not require liability classification on the inception date because the contract did not provide for a fixed or determinable redemption (an unconditional payment requirement) and events that could give rise to cash redemption were conditional and not certain to occur on the inception date. However, other standards exist that provide for classification of redeemable securities outside of stockholders’ equity when, irrespective of probability, contingent redemption events are outside of the issuer’s control. As a result, the Series D Preferred required classification outside of stockholders’ equity on the inception date.

The terms and conditions of the Series D Preferred were also subject to evaluation under Statement 133. Derivative financial instruments, as defined in Statement 133 consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

42

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

In considering the application of Statement 133, we identified those specific terms and features embedded in the contracts that possess the characteristics of derivative financial instruments. Those features included the conversion option, redemption features and other equity-indexed terms and conditions. In evaluating the respective classification of these embedded derivatives, we are required to determine whether the host contract (the Series D Preferred) is more akin to a debt or equity instrument in regards to the risks. This determination is subjective. However, in complying with the guidance provided in EITF D-109 Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under Statement No. 133 we concluded, based upon the preponderance and weight of all terms, conditions and features of the host contracts, that the Series D Preferred was more akin to an equity instrument for purposes of considering the clear and close relation of the embedded feature to the host contract. Based upon this conclusion, we further concluded that (i) the equity indexed and settled embedded features did not require derivative liability classification and (ii) certain redemption features (that is, features that afford the investor the right to put the instruments for cash) required bifurcation and classification as compound embedded derivative liabilities, at fair value on the inception date. These amounts are reflected in the table above as derivative put liabilities and are valued using multiple, probability-weighted cash flow outcomes and market discount rates that are commensurate with our estimated credit risk.

Although, as described above, the embedded conversion feature did not require liability classification under Statement 133, we were required to consider if the hybrid preferred contracts embodied beneficial conversion features (“BCF”). A BCF is present when the “effective” conversion price ascribed to the conversion feature has intrinsic value. Further, a BCF is accounted for as a component of paid-in capital on the inception date. As reflected in the tables above, the Series D Preferred was found to have a BCF. The aggregate BCF at its intrinsic value amounted to $38,460,136. This amount gives effect to the (i) the trading market price on the contract dates and (ii) the effective conversion price of each preferred issuance after allocation of proceeds to all financial instruments sold based upon their relative fair values. Notwithstanding, BCF was limited to the value ascribed to the remaining hybrid contract (using the relative fair value approach). Accordingly, the BCF allocated to paid-in capital amounted to $2,839,864.

As discussed above, the initial allocation of the basis in the Series D Preferred Financing transaction resulted in no basis ascribed to the redeemable preferred stock. According to EITF D-98 Classification and Measurement of Redeemable Securities, if the security is not currently redeemable and it is not probable that the security will be become redeemable, accretion to face value is not necessary. The Series D Preferred is convertible upon inception and there was no persuasive evidence that the Preferred Stock would not be redeemed. Based on this information, redemption could not be considered “not probable” of occurring and accretion was necessary. Redeemable preferred stock is required to be accreted to its redemption values through periodic charges to retained earnings or, if no term of redemption is embodied in the contract, as is the case of the Series D Preferred, on the date of issuance. As a result, a day-one deemed dividend of $7,000,000 was recorded to accrete the Series D Preferred to its redemption value.

The allocation of the basis of the Series D Financing transaction required the allocation to certain financial instruments at their respective fair values, and these fair values in each instance exceeded the cash proceeds obtained from the transactions. As a result, we were required to record a day-one derivative loss in connection with this transaction because fair value was the required standard.

43

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

Subsequent and Ongoing Classification Considerations:

The evaluation of the classification of the Series D Preferred is required at each reporting date. Statement 150 requires reclassification of financial instruments otherwise classified in stockholders’ equity or redeemable preferred stock to liabilities when the conditional redemption becomes certain of occurrence. As of September 30, 2008, the conditional redemption was not considered certain to occur and the Series D Preferred continued to be recorded in the mezzanine section.

Midtown Partners & Co., LLC, (“Midtown”), which served as the Company’s placement agent in connection with the Purchase Agreement, received aggregate placement agent fees of approximately $350,000, as well as the following common stock purchase warrants: (a) a Series BD-10 warrant entitling Midtown to purchase 700,000 shares of the Company's common stock at an exercise price of fifty cents ($0.50) per share, and (b) a Series BD-11 warrant entitling Midtown to purchase 1,400,000 shares of our common stock at an exercise price of seventy-five cents ($0.75) per share. The Series BD-10 and BD-11 warrants have a term of five years from the date of issuance. Midtown is a FINRA registered broker-dealer. Pursuant to the terms of the Registration Rights Agreement by and between the Company and Midtown, if at any time after the date of the Registration Rights Agreement the Company decides to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the stock option or other employee benefit plans, then the Company shall send to each holder a written notice of such determination and, if within fifteen days after the date of notice, the holder requests in writing, the Company will include in such registration statement, all or any part of such Registrable Securities (as defined in Registration Rights Agreement) the holders request to be registered.

The Series D Preferred Stock is convertible into shares of common stock at a conversion price of $0.50.  Any previously issued and outstanding financial instruments afforded full ratchet protection with a conversion price greater than $0.50 automatically had their conversion price ratcheted down to the lower conversion price. These financial instruments included the Series C Preferred Financing and the investor and placement agent warrants related to the Series A, Series B, and Series C Financings.

The investor warrants were valued using BSM. Significant assumptions underlying the BSM calculations are as follows:

April 30, 2008 (inception):	Series D
Trading market price	$	2.95
Strike or exercise price:	$	0.75
Expected term in years		7yrs
Volatility		43.82	%
Risk-free rate		3.34	%
Expected dividend rate	$	0.00

44

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

Warrant Considerations

The overall accounting for the Series A, B, C, and D Preferred Financings required consideration regarding the classification of the investor and placement agent warrants. Warrants are derivative financial instruments that are indexed to the Company’s own stock and, accordingly, equity classification of the warrants is dependent upon meeting eight specific conditions for equity classification provided in EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. In evaluating the warrants under EITF 00-19, we noted that there were no explicit conditions that required net cash settlement. However, equity classification is permissible only in instances where the contract permits us to settle in unregistered shares.

· The shares underlying the Series A and B investor warrants were subject to firm registration rights. That is, we were required to deliver registered shares, and the Registration Rights Agreement did not specify how the warrant contract would be settled in the event that we are unable to deliver registered shares. As a result, net-cash settlement was assumed under the standard. That ultimate assumption requires us to classify the warrants as derivative liabilities at their fair values and account for the warrants at fair value each reporting period with changes recognized in income. The series c investor warrants are not subject to firm registration rights and they meet the criteria in EITF 00-19 paragraphs 12-32 for equity classification. The Series D warrants are redeemable for cash upon certain events not considered within our control, as such, they require liability classification under SFAS 150, and must by classified as liabilities and adjusted to fair value each reporting period with changes in fair value recognized in income.

· The shares underlying the placement agent warrants are not subject to the registration rights. Accordingly, the placement agent warrants issued with the Series A Preferred Financing were afforded equity classification. On May 21, 2007, however, our ability to share-settle our share-indexed financial instruments was placed out of our control because the number of shares necessary to share-settle the Series A Preferred became indeterminate and we potentially could had insufficient authorized shares to settle all of our share-indexed financial instruments. On that date, the warrants issued with the Series A Preferred required reclassification to liabilities. Subsequently, on May 25, 2007, the placement agent warrants issued with the Series B Preferred Financing did not achieve equity classification for this reason. Upon the exchange of the Series A and B Preferred Stock for Series C Preferred Stock, there was no longer a variable conversion rate associated with the Preferred Stock Financings. Accordingly, share settlement was again determined to be within the Company’s control and the placement agent warrants from the Series A and B Preferred Financings were reclassed to equity. The placement agent warrants issued with the Series C Preferred were afforded equity classification. The placement agent warrants issued with the Series D Preferred were redeemable for cash upon the occurrence of certain events not considered within our control, as such, they require liability classification under SFAS 150, and must be classified as liabilities and adjusted to fair value each reporting period with changes in fair value recognized in income.

The warrants were valued using BSM. Significant assumptions underlying the BSM calculations are as follows at September 30, 2008:

	A-1			A-2			B-1			B-2			D
Trading market price	$	1.18		$	1.18		$	1.18		$	1.18		$	1.18
Strike or exercise price	$	0.50		$	0.50		$	0.50		$	0.50		$	0.75
Expected term in years		3.14yrs			8.14yrs			1.65yrs			3.65yrs			6.58yrs
Volatility		40.32	%		45.31	%		43.21	%		39.78	%		42.90	%
Risk-free rate		2.28	%		3.38	%		2.00	%		2.28	%		3.38	%
Expected dividend rate	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00

45

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

The warrants were valued using BSM. Significant assumptions underlying the BSM calculations are as follows for year ended September 30, 2007:

	A-1			A-2			B-1			B-2			BD-1
Trading market price	$	3.25		$	3.25		$	3.25		$	3.25		$	3.25
Strike or exercise price	$	1.50		$	1.00		$	1.87		$	3.75		$	1.00
Expected term in years		4.15yrs			9.15yrs			2.65yrs			4.65yrs			9.15yrs
Volatility		39.60	%		52.07	%		34.97	%		40.03	%		52.07	%
Risk-free rate		4.23	%		4.59	%		4.03	%		4.23	%		4.59	%
Expected dividend rate	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00

	BD-2			BD-3			BD-4			BD-5			BD-6
Trading market price	$	3.25		$	3.25		$	3.25		$	3.25		$	3.25
Strike or exercise price	$	1.50		$	3.00		$	1.87		$	3.75		$	1.25
Expected term in years		9.15yrs			9.15yrs			9.65yrs			9.65yrs			9.65yrs
Volatility		52.07	%		52.07	%		51.33	%		51.33	%		51.33	%
Risk-free rate		4.59	%		4.59	%		4.59	%		4.59	%		4.59	%
Expected dividend rate	$	0.00		$	0.00		$	0.00		$	0.00		$	0.00

Direct Financing Costs:

Aggregate financing costs arising from the Series A, Series B, Series C, and Series D Preferred financings amounted to $2,967,313, $479,034, $5,538,797, and $1,680,370 respectively. As noted in the tables below, these financing costs were allocated among deferred financing costs, paid-in capital and retained earnings based upon the relative fair values of the components of the financing. That is, liability classified financial instruments (i.e. derivatives), mezzanine financial instruments and equity classified financial instruments (i.e. BCF). Since, as previously discussed, no basis was ascribed to the redeemable preferred stock, the amount of financing costs allocated to this category were reflected as a charge to retained earnings.

The following table illustrates the allocation of financing costs associated with the Series A, Series B, and Series D Financing Transactions:

Classification	Series A		Series B		Series C		Series D		Total
Deferred financing costs (asset)	$	1,898,875	$	479,034	$	43,079	$	1,077,268	$	3,498,256
Paid-in capital		911,135		—		4,998,925		286,487		6,196,547
Series C preferred mezzanine		—		—		496,793		—		496,793
Accumulated deficit (deemed dividend)		157,303		—		—		316,615		473,918
Aggregate finance costs	$	2,967,313	$	479,034	$	5,538,797	$	1,680,370	$	10,665,514
Common shares indexed to warrants recorded as derivative liabilities								37,060,000

46

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

  

NOTE 10 - REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

Derivative Financial Instruments

The following table summarizes the components of derivative liabilities as of September 30, 2008:

Financing Transaction:
Series A Convertible Preferred Financing- Investor warrants	$	(568,200	)
Series B Convertible Preferred Financing- Investor warrants		(16,944	)
Series C Convertible Preferred Financing- Put liability		(722,475	)
Series D Convertible Preferred Financing- Investor warrants		(1,509,200	)
Series D Convertible Preferred Financing- Placement agent warrants		(68,780	)
Series D Convertible Preferred Financing- Put liability		(1,003,000	)
	$	(3,888,599	)

The following table summarizes the components of derivative income (expense) arising from fair value adjustments during the three month period ending September 30, 2008:

Financing Transactions:	Embedded Derivatives		Warrant Derivatives		Total
Series A Financing	$	--	$	525,300	$	525,300
Series B Financing		--		25,440		25,440
Series C Financing		10,668		--		10,668
Series D Financing		11,363		1,899,730		1,911,093
Other warrants, reclassified		--		--		--
Day-one derivative losses		--		--		--
Total derivative income (expense)	$	22,031	$	2,450,470	$	2,472,501

The following table summarizes the components of derivative income (expense) arising from fair value adjustments during the three month period ending September 30, 2007:

Financing Transactions:	Embedded Derivatives		Warrants Derivatives		Total
Series A Financing	$	--	$	2,884,659	$	2,884,659
Series B Financing		--		414,110		414,110
Other warrants, reclassified		--		379,900		379,900
Day-one derivative losses		--		--		--
Total derivative income (expense)		--	$	3,678,669	$	3,678,669

47

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high estimated historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Registration Rights Agreements

In connection with the Series A and B Preferred financings, the Company and the Investors entered into a registration rights agreement pursuant to which the Company agreed to file, within 90 days after the closing (the Filing Date), a registration statement covering the common stock issuable upon conversion of the Preferred Stock and exercise of the Warrants. If (i) a Registration Statement is not filed on or prior to its Filing Date (if the Company files a Registration Statement without affording the Holders the opportunity to review and comment on the same as required or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be “reviewed,” or not subject to further review, or (iii) prior to its Effectiveness Date, the Company fails to file a pre-effective amendment and otherwise respond inwriting to comments made by the Commission in respect of such Registration Statement within 10 calendar days after the receipt of comments by or notice from the Commission that such amendment is required in order for a Registration Statement to be declared effective, or (iv) a Registration Statement filed or required to be filed hereunder is not declared effective by the Commission by its “Effectiveness Date” (the 150th calendar day following the date the agreement was entered into or the 180th calendar day in the event of a “full review” of the initial Registration Statement by the Commission), or (v) after the Effectiveness Date, a Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities, for which it is required to be effective, or the Holders are otherwise not permitted to utilize the Prospectus therein to resell such Registrable Securities for more than 10 consecutive calendar days or more than an aggregate of 15 calendar days during any 12-month period (which need not be consecutive calendar days) then, in addition to any other rights the Holders may have hereunder or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash or shares of Common Stock, or combination thereof, as partial liquidated damages and not as a penalty, equal to 1.5% of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement for any Registrable Securities then held by such Holder (calculated as if all convertible securities had been fully converted.)

48

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – REDEEMABLE PREFERRED STOCK, DERIVATIVE FINANCIAL INSTRUMENTS AND REGISTRATION PAYMENT ARRANGEMENTS (CONTINUED):

The parties agree that (1) the Company will not be liable for liquidated damages under this Agreement with respect to any Warrants or Warrant Shares, (2) in no event will the Company be liable for liquidated damages under this Agreement in excess of 1.5% of the aggregate Subscription Amount of the Holders in any 30-day period and (3) the maximum aggregate liquidated damages payable to a Holder under this Agreement shall be 9% of the aggregate Subscription Amount paid by such Holder pursuant to the Purchase Agreement. The price at which shares of Common Stock issuable in lieu of cash hereunder shall be equal to the lesser of (x) [90% of the average of the 5 consecutive VWAPs immediately prior to the applicable Event Date, (y) [90% of the average of the 5 consecutive VWAPs immediately prior to the date such damages are due or (z) the then applicable Conversion Price. Notwithstanding anything herein to the contrary, payment in shares of Common Stock may only occur if during the period from the applicable Event Date until such issuance is made in full all of the Equity Conditions (as defined above-“Convertible Preferred Stock Rights and Preferences”) have been met and the Company shall have given the Holder written irrevocable notice within 2 Trading Days of the Event Date. Subject to the terms and conditions described above, the decision whether to pay partial liquidated damages in shares of Common Stock or cash shall be at the discretion of the Company. Subject to the aforementioned conditions, failure to timely provide such written notice shall be deemed an election by the Company to pay the partial liquidated damages on such Event Date in cash. Except as otherwise provided, if at any time the Company pays partial liquidated damages partially in cash and partially in shares of Common Stock, then such payment shall be distributed ratably among the Holders based upon the subscription amount paid by each Holder. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata basis for any portion of a month prior to the cure of an Event.

On October 18, 2007, when the Series A and B Preferred were exchanged for the Series C Preferred, the Registration Rights Agreement was amended. The Amended Registration Rights Agreement calls for piggy-back registration rights only and the Company’s best efforts at obtaining and maintaining effectiveness. There are no stipulations or damages if the registration does not occur.

NOTE 11 – RELATED PARTY TRANSACTIONS:

Consulting Agreement - On October 1, 2006 the Company entered into a six (6) month consulting agreement with Harrington Business Development, LLC (“HBD”). The shareholders of HBD are also shareholders of the Company. This agreement was not renewed subsequent to June 30, 2007 and therefore The Company did not recognize any expense related to this agreement for the quarter ended September 30, 2008. On July 14, 2008 the Company entered into a one (1) year consulting agreement with HBD. For the three months ended September 30, 2008 and 2007 the Company recognized expenses amounting to $-0- and $135,000, related to this agreement. Refer to the “Consulting Agreement” above for further details.

Licensing Agreement - On October 13, 2006, the Company entered into a licensing agreement with a shareholder of the Company. On November 22, 2006 the Company made a payment of $850,000 pursuant to the agreement. On January 10, 2007, pursuant to the agreement, the Company paid the remaining balance due of $150,000. The Company has recognized expense related to this agreement in the amount of $56,964 for the quarter ended September 30, 2008. See “Licensing agreement” above for further details.

Assignment of Contract - On November 10, 2006 the Company entered into an agreement with Reliant International Media, LLC (“RIM”). The members of RIM are also shareholders of the Company. See “Assignment of Contract” above for further details.

49

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – RELATED PARTY TRANSACTIONS (CONTINUED):

Preferred Stock Purchase Agreement - Midtown Partner & Co. LLC, served as the Company's placement agent in connection with the Series A, B and C Preferred Stock Purchase Agreements. Midtown Partners & Co. LLC received an aggregate placement agent fee related to Series A Preferred Stock Purchase agreement of approximately $300,000, as well as the following common stock purchase warrants: (a) series BD-1 common stock purchase warrants entitling Midtown Partners to purchase 300,000 shares of the Company's common stock at an exercise price of one dollar ($1.00) per share, (b) series BD-2 common stock purchase warrants entitling Midtown Partners to purchase 300,000 shares of the Company's common stock at an exercise price of one dollar and fifty cents ($1.50) per share, and (c) series BD-3 common stock purchase warrants entitling Midtown Partners to purchase 300,000 shares of the Company's common stock at an exercise price of three dollars ($3.00) per share. The Series BD warrants have a term of ten years.

In addition, Midtown Partner & Co. LLC received an aggregate placement agent fee related to the Series B Preferred Stock Purchase agreement of approximately $60,000, as well as the following common stock purchase warrants: (a) series BD-4 common stock purchase warrants entitling Midtown Partners to purchase 48,000 shares of the Company's common stock at an exercise price of one dollar and eighty-seven cents ($1.87) per share, and (b) series BD-5 common stock purchase warrants entitling Midtown Partners to purchase 48,000 shares of the Company's common stock at an exercise price of three dollars and seventy-five cents ($3.75) per share and (c) series BD-6 common stock purchase warrants entitling Midtown Partners to purchase 48,000 shares of the Company's common stock at an exercise price of one dollar and twenty five cents ($1.25) per share. The Series BD warrants have a term of ten years. The member’s of Midtown Partners & Co. LLC are also shareholders of the Company. See “Preferred Stock Purchase Agreement” above for further details.

Midtown Partner & Co. LLC received an aggregate placement agent fee related to the Series C Preferred Stock Purchase agreement of approximately $340,000, as well as the following common stock purchase warrants: (a) series BD-7 common stock purchase warrants entitling Midtown Partners to purchase 853,333 shares of the Company's common stock at an exercise price of seventy five cents ($0.75) per share, and (b) series BD-8 common stock purchase warrants entitling Midtown Partners to purchase 853,333 shares of the Company's common stock at an exercise price of one dollar and fifty cents ($1.50) per share and (c) series BD-8 common stock purchase warrants entitling Midtown Partners to purchase 853,333 shares of the Company's common stock at an exercise price of two dollars ($2.00) per share. The Series BD warrants have a term of ten years. The member’s of Midtown Partners & Co. LLC are also shareholders of the Company. See “Preferred Stock Purchase Agreement” above for further details.

Preferred Stock Purchase Agreement - Pursuant to a verbal agreement, Apogee Financial Investments, Inc., a merchant bank, received a cash fee of $125,000 for consulting and due diligence services rendered in connection with the Preferred Stock Purchase Agreement, Exchange Agreement and the Common Stock Purchase Agreement. Apogee Financial Investments, Inc. is owned by shareholders of the Company. See “Preferred Stock Purchase Agreement” above for further details.

Consulting Agreement - On December 8, 2006 the Company entered into a verbal agreement with TotalCFO, LLC. TotalCFO, LLC is owned by a shareholder of the Company. The Company has recognized $18,000 of expense related to this agreement for the quarter ended September 30, 2008.

International Distribution Agreement - On March 19, 2007, the Company entered into an International Distribution Agreement with Reliant International Media LLC. The shareholders of Reliant International Media, LLC are also shareholders of the Company. See “International Distribution Agreement” above for further details.

50

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12– TRANSACTIONS WITH RESPONZETV:

Sublicense Agreement:

On October 19, 2007, we entered into a sublicense arrangement with ResponzeTV PLC providing for restricted rights to use the Kathy Hilton Trademark, as provided in our Principal License Agreement with KHL Holdings, Inc., without territorial restriction. The only restriction is as to fragrance related products. The structure of this arrangement was accomplished, as follows:

· We created a wholly-owned subsidiary named KHL Holdings, Inc. with minimal capitalization on October 12, 2007. This subsidiary had no operations; nor were any operations transferred to the subsidiary.

· Also on October 12, 2007, we executed a formal sublicense agreement with the newly formed for the use of the licensed trademark, which agreement required and received the formal acknowledgement of Kathy Hilton.

· On October 19, 2007 all outstanding common stock KHL Holdings, Inc. was sold to ResponzeTV for 10,000,000 shares of their common stock, which had a value of $6,538,240 based upon ResponzeTV’s trading market price.

· Also on October 19, 2007, we executed a formal assignment agreement providing for the assignment of KHL Holdings, Inc. rights in the sublicense agreement to ResponzeTV.

The sublicense agreement provides for Minimum Annual Guaranteed Payments that coincide with the Principal License Agreement (although in lower amounts in recognition of the restriction as to product types) and royalty payments in amounts consistent with the Principal License Agreement.

The substance of the above series of transactions is that of a sublicense arrangement between us and ResponzeTV; that is, a revenue arrangement. Our accounting for the activity arising from this arrangement, which will commence in the second fiscal quarter of our year ending June 30, 2008, provides for recognition of deferred revenue to the extent of the consideration received for the sublicense, which amounts will be recognized in our earnings when amounts are earned. As of September 30, 2008 we had recognized $546,917 of earnings.

Investment in ResponzeTV:

On October 19, 2007, we purchased 8,500,000 shares of ResponzeTV common stock (valued at $5,557,504 based upon the trading market price of $0.653824, as translated to US$) and warrants to purchase ResponzeTV common stock at prices between $0.75 and $2.04 for $5,100,000. The common shares purchased are freely trading in the United Kingdom; the warrants are not traded. We issued 500,000 of the purchased shares to brokers.

Upon the completion of the aforementioned sublicense agreement, the purchase and the issuance of shares to the brokers, we owned 16.78% of ResponzeTV’s outstanding common stock. Our voting control coupled with our representation on ResponzeTV’s board of directors indicates that we have substantial influence with respect to ResponzeTV. As a result, the Company is accounting for the investment under the equity method of accounting in accordance with Accounting Principles Board Opinion No.18, “The Equity Method for Accounting for Investments in Common Stock” (APB 18).

51

OMNIRELIANT HOLDINGS, INC. & SUBSIDIARY

(A Development Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - SUBSEQUENT EVENTS:

On July 24, 2008, the Company entered into a commercial real estate mortgage loan agreement (the “Mortgage Agreement”) with Omnicomm Studios, LLC (“Omnicomm”), a sixty percent owned subsidiary of the Company, pursuant to which Omnicomm obtained a $2,000,000 loan for purchase of property located in Pinellas County, Florida. The Mortgage Agreement contains a ballooning interest rate, where for the first three years it will bear a minimum per annum rate of 6.50% to a maximum per annum rate of 7.75% and for the last three years of the Mortgage Agreement it will bear a minimum per annum rate of 6.75% to a maximum per annum rate of 8.75%. The Mortgage Agreement matures on July 24, 2014, seventy-two months from the date of issuance (the “Maturity Date”). On November 7, 2008, the Company assigned its interest in the Mortgage Agreement to the bank providing a $2,000,000 mortgage/loan.

52

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

Special Note on Forward-Looking Statements

Some of the statements contained in this Form 10-Q that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:

1. Our ability to attract and retain management, and to integrate and maintain technical information and management information systems;

2. Our ability to generate customer demand for our services;

3. The intensity of competition; and

4. General economic conditions.

All written and oral forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Overview

The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of OmniReliant Holdings, Inc.  MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements ("Notes").

Reverse Acquisition

OmniReliant Corporation was incorporated on August 21, 2006 under the laws of the State of Florida. On November 22, 2006, Willowtree Advisor, Inc., an entity which was incorporated on June 16, 2004 under the laws of the State of Nevada, entered into an exchange agreement with the stockholders of OmniReliant Corporation (the “Exchange Transaction”).

As a result of the Exchange Transaction, OmniReliant Corporation became a wholly-owned subsidiary of Willowtree Advisor, Inc. and succeeded to the business of OmniReliant Corporation as its sole business. The Exchange Transaction is deemed to be a reverse acquisition for accounting purposes. As a result, in accordance with the Accounting and Financial Reporting Interpretations and Guidance provided by the staff of the U.S. Securities and Exchange Commission, Willowtree Advisor, Inc. (the legal acquirer) is considered the accounting acquiree and OmniReliant Corporation (the legal acquiree) is considered the accounting acquirer. The discussions below, and the consolidated financial statements attached hereto, will in substance be those of OmniReliant Corporation, with the assets and liabilities, and revenues and expenses, of Willowtree Advisor, Inc. being included effective from the date of consummation of the Exchange Transaction.

53

Plan of Operation - Development Stage Company

The Company is a development stage company with limited revenues and limited historical information upon which to base an evaluation of its performance.

The Company engages in the creation, design, distribution, and sale of affordable luxury products. The Company plans to make these products available to U.S. and international consumers through direct response infomercials, live shopping networks, ecommerce, direct mail and traditional retail channels. The Company will first focus on bringing the Kathy Hilton fragrance product line to market, after which OmniReliant plans to develop other personalities and designer licenses. Ms. Hilton, who is the wife of Rick Hilton, the grandson of the Hilton Hotel founder, has agreed to appear in television segments and infomercials. We have entered into a license agreement with KRH Licensing Company, LLC, an affiliate of Rick and Kathy Hilton.

It is the Company’s intention to design, manufacture, market and distribute prestige fragrances and related products. In addition, the Company has an agreement to market and distribute hair straightening irons. The Company plans to engage contract packagers and professionals in the field. In the United States, our plan is to enter into agreements to distribute our products through a targeted group of department and specialty stores, such as Macy's, Foley's, Marshall Fields, Famous Barr, Belks, Elder Beerman, Carson Pirie Scott, and Filenes. In international markets, we plan to distribute our products through established prestige distribution channels. We hope to sell products under private label that have already reached its market entry point.

As a development stage company, we may not be successful in implementing our plan to manufacture, market and distribute prestige fragrances and related products. Until our products are successfully manufactured and marketed on a live shopping network or via infomercials, we will not generate significant revenues and may not be successful. If we cannot generate sufficient revenues to continue operations, we will be forced to suspend or cease operations, and may forfeit our rights under license agreements.

We do not expect to make any significant purchases of equipment nor do we expect a significant change in the number of our employees.

Our officers and directors will handle our administrative duties with the help of a consultant, TotalCFO, LLC.

We cannot guarantee that we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise.

Results of Operations

The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.

Quarter Ended September 30, 2008 compared to Quarter Ended September 30, 2007 (all references are to the Quarter Ended September 30)

Revenues. Our revenues from product sales for the three months ended September 30, 2008 were $103,634 compared to the three months ended September 30, 2007 which was $158,823. This increase is primarily the result of launching our products. If we are unable to implement our plan to manufacture, market and distribute our products, our revenues will not significantly increase during the upcoming fiscal year.

Cost of Product Sales. Costs of Products Sold for the three months ended September 30, 2008 was $44,036_compared to the three months ended September 30, 2007 which was $98,426 This increase of profit was the result of selling directly to distributors versus selling to shopping channels that tend to have lower margins.

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Amortization – Amortization expense related to our intangible assets for the three months ended September 30, 2008 was $74,887 compared to the three months ended September 30, 2007 which amounted to $184,723 We amortize our intangible assets using the straight-line method over periods of future benefit. We also consider our intangible assets for impairment when circumstances, if any, arise that indicates that we may not recover these assets through future revenue streams. During the period from August 21, 2006 (inception) through September 30, 2008, and through the date of this report, we concluded that our intangible assets were recoverable and that our estimated useful lives continued to be appropriate. However, given the developmental nature of our operations, we will continue to evaluate these assets as of each future reporting period. Our operations will continued to reflect amortization of these intangible assets over the remaining estimated useful lives.

General and Administrative – Our general and administrative expenses for the three months ended September 30, 2008 were $496,084compared to the three months ended September 30, 2007 which amounted to $303,527. We may incur higher levels of general and administrative expenses when our operations become established and increase.

Derivative Fair Value Adjustments – Our derivative fair value adjustments for the three months ended September 30, 2008 were $2,472,501 compared to the three month period ended September 30, 2007 which amounted to $3,678,669. The increase in the derivative fair value adjustment is primarily related to the additional preferred shares issued in connection with Series A and D financing agreements.Derivative financial instruments, as defined in Financial Accounting Standard No. 133 consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as redeemable preferred stock arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by Statement 133, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.

We note that all share-indexed financial instruments previously and subsequently issued required derivative liability classification, unless otherwise exempted under Statement 133, so long as the Series A Preferred Stock embodied its current variable share-indexed redemption because, under these circumstances, share-settlement was presumed not to be within our control and net-cash settlement was assumed. Upon the exchange of the Series A and B Preferred Stock for Series C Preferred Stock, there was no longer a variable conversion rate associated with the Preferred Stock financings. Accordingly, share settlement was once again determined to be within our control and the share-indexed instruments were reclassified from liabilities to stockholders’ equity.

Finance Costs – Finance costs, which represent amortization of asset-classified finance costs arising from our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Warrant financing transactions for the three months ended September 30, 2008 was $56,460 compared to the three months ended September 30, 2007 which was $215,865. The decrease in finance costs is primarily related to the exchange on October 18, 2007 of the Series A and B Preferred Stock for Series C Preferred Stock. As a result of the exchange, the amount of the deferred finance costs allocated to the Series C Preferred decreased. The allocation of the finance costs is based upon the relative fair values of the components of the financing. We will continue to amortize deferred financing costs over the terms of the liability classified financial instruments.

Net Income (Loss) – Our net income (loss) for the three months ended September 30, 2008 was $1,895,405 compared to the three months ended September 30, 2007 which was $2,725,814. This gives effect to the components of our operational income and costs and expenses and our other income and expense categories as discussed above.

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Income (loss) Applicable to Common Shareholders – Income (loss) applicable to common stockholders represents our net loss as adjusted for cumulative dividends and accretions of discounts on our Series A, B and C Preferred Stock. Our income (loss) applicable to common shareholders and our income (loss) per common share (basic and diluted) for the three months ended September 30, 2008 was $1,895,405 compared to the three months ended September 30, 2007 which was $2,725,814.All of the accumulated dividends in arrears associated with the Series A and Series B Preferred Stock were eliminated as part of the exchange agreement associated with the Series C Preferred Stock. There are no preferred dividends related to the Series C Preferred Stock, so it is not necessary to adjust net income for accrued preferred dividends in arrears in future periods unless a new agreement or amendment to the existing agreement warrants such treatment.

Liquidity and Capital Resources

Liquidityand Going Concern– Cash and cash equivalents amounted to $1,146,450 as of September 30, 2008. The Company has a working capital deficiency of $2,554,257. Included in the working capital deficiency is $3,888,599 of derivative financial instruments because net cash settlement is assumed with respect to certain share-indexed financial instruments, principally warrants.

The Company has suffered recurring losses while devoting substantially all of its efforts to raising capital, identifying and pursuing businesses opportunities. Moreover, the Company's total liabilities exceed its total assets and the Company's liquidity is substantially dependent on raising capital.

Currently the Company does not generate revenues from its operations, and the Company will require additional cash to develop its business plan and to pay ongoing operating expenses, including licensing fees.

These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuing operations, realization of assets and liquidation of liabilities in the ordinary course of business. The Company's ability to continue as a going concern is dependent upon its ability to raise sufficient capital to implement a successful business plan and to generate profits sufficient to become financially viable.

To the extent that it becomes necessary to raise additional cash in the future as our current cash and working capital resources are depleted, we will seek to raise it through the public or private sale of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or a combination of the foregoing. We also may seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities.

We have no assurance that future financings will be available to us on acceptable terms. If financing is not available to us on acceptable terms, we may be unable to continue our operations.

Cash Flow from Operating Activities – We used cash of ($278,862) and ($302,839) in our operating activities during the nine months ended September 30, 2008 and 2007, respectively. Our cash flow gives effect to our net loss, as adjusted for non-cash charges and credits to income, including fair value adjustments to derivatives, share-based payments and amortization.

Cash Flow from Investing Activities– We used cash of ($3,342,235) and ($3,335) in our investing activities during the nine months ended September 30, 2008 and 2007, respectively. We purchased a building for $2,750,984 and made additional investments of $375,000 during the quarter.

Cash Flow from Financing Activities – We received $331,734 in cash from our financing activities for the nine month period ended September 30, 2008 that principally relate to the minority interest investment in OmniComm Studio’s LLC.

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. For a description of those estimates, see Note 3, Summary of Significant Accounting Policies, contained in the explanatory notes to our audited financial statements for the three months ended September 30, 2008 attached to this Form 10-Q. On an on-going basis, we evaluate our estimates, including those related to reserves, deferred tax assets and valuation allowance, impairment of long-lived assets, fair value of equity instruments issued to consultants for services and estimates of costs to complete contracts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.

Effect of Recently Issued Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements the impact of tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to beginning retained earnings. The adoption of this statement does not have a material impact on the Company's consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Earlier application is encouraged. The adoption of this accounting pronouncement is being evaluated by management.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 will be effective at the beginning of fiscal year 2008. We are presently evaluating the impact of the adoption of SFAS No. 159 on our results of operations and financial position.

In September 2006, the Securities and Exchange Commission issued SAB No. 108 "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements", which 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. The guidance is applicable beginning fiscal 2008. The implementation of SAB No. 108 does not have a material impact on the consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

N/A

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending September 30, 2008 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

Changes in Internal Controls over Financial Reporting

During the quarter ended September 30, 2008, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of the Effectiveness of Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
 

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material pending legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, management is not aware of any known litigation or liabilities involving the operators of our properties that could affect our operations. Should any liabilities be incurred in the future, they will be accrued based on management’s best estimate of the potential loss. As such, there is no adverse effect on our consolidated financial position, results of operations or cash flow at this time. Furthermore, Management of the Company does not believe that there are any proceedings to which any director, officer, or affiliate of the Company, any owner of record of the beneficially owned more than five percent of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.

Item 1A. Risk Factors.

There have been no material changes in our risk factors from those disclosed in our Form10-KSB filed with the SEC for the period ended June 30, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuance of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4.Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1	Certification of Periodic Financial Reports by Paul Morrison in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Periodic Financial Reports by Paul Morrison in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Periodic Financial Reports by Paul Morrison in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350
32.2	Certification of Periodic Financial Reports by Paul Morrison in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	OmniReliant Holdings, Inc.
Date: November 19, 2008	By:	/s/ Paul Morrison
		Paul Morrison
		Chief Executive Officer and Chief Financial Officer (Principal Accounting Officer)

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