SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[x]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008

[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                          to                        

Commission file number 0-28161

WELLSTONE FILTERS, INC.

(Exact name of registrant in its charter)

                         Delaware                                                                                  33-0619264

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

300 Market Street, Suite 130-13, Chapel Hill, North Carolina                     27516

           (Address of principal executive offices)                                         (Zip Code)

Registrant's telephone number, including area code:             (919) 370-4408

Securities registered pursuant to Section 12(b) of the Act:              None             

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $.001

Check 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      

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a small reporting company. See definition of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer [ ]   Accelerated filer [ ] Non-accelerated filer [ ] Small reporting company [ X ]

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

Yes  [   ]    No  [  X ]

State issuer's revenues for its most recent fiscal year: None

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 15, 2009 was $ 89,716 based on a closing bid price of $ 1.25  per share as of March 15, 2009

The number of shares outstanding of the issuer's classes of Common Stock as of March 15, 2009

Common Stock, $.001 Par Value – 105,989  Shares

PART I

Item 1.

DESCRIPTION OF BUSINESS

When used in this Form 10-KSB, the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties, including those set forth below under "Risks and Uncertainties," that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. Wellstone expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. This discussion should be read together with the financial statements and other financial information included in this Form 10-KSB. Readers should carefully review the risk factors described  in  other  documents  the Company files from time  to  time  with  the  Securities  and Exchange Commission,  including  the Quarterly Reports on Form 10-QSB to be filed  by the Company subsequent to this Annual Report on Form 10-KSB and any Current Reports  on  Form 8-K filed by the Company.

GENERAL

Wellstone Filters, LLC ("Wellstone LLC") was founded in February, 1998 by Dr. Carla Cerami Hand at Cerami Consulting Company.  Cerami Consulting Corp was investigating the negative health impact of cigarette smoking.  As an outgrowth of  this  work,  Cerami  Consulting decided to investigate the  possibility  of developing a filter technology  that would remove carcinogens without impacting flavor.  As a result of their research,  Cerami  Consulting  filed for U.S. and international patents on the technology and licensed it and related  patents to Wellstone  LLC  for  potential  commercialization.  Two U.S. patents have  been issued (1) U.S. Patent 6,119,701:  filed  -  Feb  13, 1998: issued- September 19, 2000:  valid  until 2018 and (2) U.S. patent 6,615,842:  filed-June  26,  2000: issued-September  9,  2003:  valid  until  2020).   International  patents  are pending.   The  patents  are held by Cerami Consulting, however the Company has the perpetual, exclusive worldwide  rights  to the use and commercialization of the patents and the technology related to the patents.  The Company  sublicensed the technology outside the United States in January 2007.

On May 25, 2001, Wellstone LLC was acquired  by  Farallon Corporation, a publicly registered reporting corporation formed with the  intention  of making subsequent  acquisitions.  Farallon Corporation acquired all of the outstanding membership interests  of  Wellstone  LLC  in exchange for 8,400,000 shares of common  stock of Farallon Corporation.  In addition,  in  connection  with  the transaction,  Farallon  Corporation  issued 238,728 shares of common stock in cancellation  of  debt.  As a result of  the  merger,  the  former  members  of Wellstone LLC acquired  a  majority  of  the  outstanding  shares  of Farallon. Accordingly, the combination has been accounted for as a reverse acquisition, under which, for accounting purposes, Wellstone LLC is the accounting acquiror, and  Farallon Corporation  is  accordingly  the  accounting  acquiree.   As is customary in a reverse acquisition, only the historical financial statements of Wellstone LLC, the accounting acquiror, are presented for periods prior to the acquisition.  Farallon Corporation, incorporated in 1994, subsequently changed its name to Wellstone Filters, Inc and Wellstone LLC  became a wholly-owned subsidiary  of Wellstone Filters, Inc.  References to Wellstone refer to the combined entity. On January 5, 2005, Wellstone created a wholly-owned subsidiary operating company, Wellstone Tobacco, Inc., a North Carolina corporation. All of the tobacco sales operations have been conducted through Wellstone Tobacco, Inc.

Wellstone tested  the  filter technology in small manufacturing batches. Wellstone held discussions with several major manufacturers for licensing or supply contracts, but no contracts have been entered into nor are any currently under negotiation.  All testing performed on the filter technology prior to and through December 31, 2005 has been for developmental  purposes  only and in the third  quarter of 2005 Wellstone shipped product to Central and South America for promotional and consumer trial purposes only.

Wellstone's original plan was to license its proprietary cigarette filter technology to existing cigarette  manufacturers.   We believe that our filter compound removes certain carcinogens and the incorporation of our compound into currently marketed brands would be the quickest way to bring Wellstone Filters to  the smoking public. After a review of the tobacco marketplace,  Management determined  to manufacture and produce its own brand, hoping to be a part of an increasing number of small manufacturers who have gained market share in recent years (estimated by some to be 12 billion units of the total 2005 US market) in this multi-billion dollar market.  Wellstone's objective is to offer an ultra premium product at a value price.  Sales of the Wellstone brand began in the first quarter of calendar 2006. On April 5, 2006, the  Company announced  that  a  major  supplier  to  convenience stores in the Southeastern United States agreed to carry all styles of the Wellstone brand and secure orders using  its sales organization.

Wellstone has developed packaging materials and tobacco blends for a full line of cigarettes (regular, smooth blue, and menthol) that is consistent with its ultra premium brand positioning.  In addition to selling our own brand of Wellstone cigarettes, we will continue to pursue incorporation of our filter into existing cigarette brands.   We purchase various ingredients necessary for our filter from suppliers, but do not enter into written agreements with such suppliers; rather we submit purchase orders on an as-needed basis.

The Wellstone brand of cigarettes are lower in toxins, yet, we believe, do not compromise the pleasurable effects of smoking. Wellstone's strategic plan as well as its philosophy is based on two assumptions:  first, quitting smoking can be difficult and second, smokers do not appear to focus on cigarette tar levels.   In 2002, according to industry reports, 64% of all cigarettes sold in the United States were high in tar. Wellstone believes that part of the reason smokers prefer high tar cigarettes is because of taste. Wellstone's goal is to reduce tar and certain associated carcinogens without affecting the cigarettes' taste. We believe smokers will try Wellstone for its lower price, and come back for its taste.

In the quarter ended September 30, 2006, the Company continued to suffer from a negative gross margin on its cigarettes, which was part of the Company's strategy to obtain market share and entry into the competitive cigarette marketplace.  Management reviewed the liquidity position of the Company during the quarter ended September 30, 2006 and sought unsuccessfully for additional debt or equity funding. Although the Company did enter into negotiations for a private placement, the funding group required that the Company carry out a 1-for- 25 reverse split of the common stock as a precondition to such placement. After Wellstone carried out the reverse split, the funding source did not complete funding.  Faced with inadequate cash resources to fund the market introduction of  its  products,  management determined  to suspend further marketing activity.  As a result, sales in the quarter ended September 30, 2006 fell to only $6,475, and Wellstone had no significant sales for the remainder of the year ended December 31, 2006.  All employees and officers have been dismissed or have resigned, except for the Company Chief Executive Officer. The Company has negotiated with it suppliers for time to obtain financing and continue its business, but there is not a high probability that financing can be obtained that is not unduly dilutive to the Company shareholders. Currently the Company has no sales and is seeking financing in order to re-enter the market.

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THE TOBACCO AND CIGARETTE INDUSTRY

Published  industry  sources  estimate  that  the  annual  U.S  sales  of cigarettes  in  2005  were  381  billion.  Approximately 44.5 million adult Americans smoke; worldwide, the figure is estimated to be 1.5 billion people. The market share of five major U.S. cigarette manufacturers in 2005 was estimated as follows:

FILTERS

Almost all cigarettes sold are filtered.   Worldwide, 93% of the 5.5 trillion cigarettes sold in 2005 were filtered.  Four types  of  material  are used in filters:  cellulose  acetate  (68%),  polypropylene  (21%  primarily in China)  pure  cellulose (less than 1%), and granular additive filters  such  as activated charcoal (1%).  Activated charcoal filters are efficient, having been proven to reduce carcinogenicity.   However,  activated  carbon  filters  also remove  much  of  the  taste  and  nicotine,  and have probably not become more popular  due  to  this  reason.  In management's opinion, the development of "safe" or "safer" cigarettes has been slow due to three factors.  First, the manufacturers had no interest in developing  "safer"  cigarettes since to do so would  be  an  admission  that smoking was prejudicial to health,  which  would adversely impact sales and  lead  to  liability.   We think this is no longer a factor due to overwhelming consensus that smoking is unhealthy, and the 1998 settlement between the state governments and the tobacco companies.

Second, an effective filter (such as activated charcoal) also is likely to remove that substance in tobacco smoke which makes smoking a pleasurable or addictive habit - nicotine.

Third, until Wellstone was introduced, any perceived safer cigarette, or PREP (perceived reduced exposure product) did not lead to a pleasant smoking experience.  We believe that the Wellstone filter provides a unique smoothness and rich flavor not found in any other PREP.

Cigarette manufacturers produce their own filters, or purchase from outside manufacturers, principally Filtrona Richmond, Inc.

Another device used to enhance filter performance is to make perforations around the base of the filter for ventilation.  The introduction of air dilutes the smoke, but this device can be circumvented by the smoker by covering the perforations with the fingers.

HARMFUL COMPONENTS OF TOBACCO SMOKE

Tobacco smoke is comprised of atmospheric and other gases, particulate matter, and hundreds of chemical compounds.   Tar is condensed tobacco smoke. Nicotine is the addictive substance in tobacco smoke.   In the doses found in cigarette smoke carbon monoxide reduces the blood's ability to carry oxygen. Known carcinogens include   benzene, 2-napthylamine, 4-amino and byphenyl and radioactive polonium-210.  Potential carcinogens include N-nitrosodiethylamine, N-nitrosopyrrolidine, benzoapyrene, N-nitrosodieth aholomine and cadmium.

OUR FILTER REMOVES CERTAIN CARCINOGENS

Our filter material works  by  trapping  nucleophiles in tobacco which is produced  during  combustion  and  is  the subject of  U.S.  Patent  6,119,701, "Methods, agents and devices for removing  nucleophilic toxins from tobacco and tobacco smoke", issued September 19, 2000, to  Anthony Cerami, Dr. Carla Cerami Hand M.D./Ph.D. and Dr. Peter Ulrich Ph.D, all shareholders  of  Wellstone  and licensed  to  Wellstone  on  September  14,  1999, and of U.S. Patent 6,615,842 "Methods for removing nucleophilic toxins from  tobacco smoke" issued September 9,  2003  to  Dr.  Cerami,  and Drs. Cerami Hand and Ulrich   and  licensed  to Wellstone on September 14, 1999.  Compounds  in  the  filter  material  include periodate-oxidated  (dialdeyhde)  devivaties  of  the polysaccarides cellulose, starch and agarose.

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We intend to sell and market our own cigarette  brand and to sell filters directly to manufacturers to be integrated into their own cigarette brands.  We also intend to develop our own "make your own" as well as  enter  into  the  small cigar market.

RESULTS OF IN-HOUSE TESTING

The patent developers have tested our filter technology in  a biopharmaceuticals  laboratory, using standard cigarette filter material (cellulose acetate) containing the compound.  We have also tested our filter in an FTC testing facility.  These tests indicate that our technology removes a measurable level of harmful substances. Variables such as the mix of tobacco used and manufacturing additives may cause variations in the actual percentage of harmful materials removed.

The Ames test is a standard test used to measure mutagenicity by exposing the smoke (filtered and unfiltered)  to  a  strain of Salmonella bacteria.  The Ames test demonstrated that our filter removed  a majority of mutagens compared to the control cigarette.

The Greiss test measures nitrosamines, which  are  contained in cigarette smoke  and  believed  to  be  carcinogenic.   With  a  250 milligram  level  of concentration  in  the  Wellstone filter, a majority of the  nitrosamines  were removed.

MARKETING

The U.S. cigarette  market  is  a mature market in which overall consumer demand is expected to continue to decline  over  time.   On  average,  domestic consumption  has  fallen approximately 2 percent per year over the past decade. Numerous  factors  have   contributed   to   this   decline,  including  health considerations,   diminishing   social   acceptance  of  smoking,   legislative limitations on smoking in public places, and  rapidly accelerating costs in the form of increased state tax on cigarettes and settlement cost.

Even though our filter technology has proven  to  be  effective,  tobacco companies  are  now  prohibited from making any claims around the safety of  an ingredient, filter or  process  utilized  in cigarette manufacturing.  However, because our test marketing indicates that our  package design and product taste is acceptable, management feels that the brand will  be  successful  if  we get consumer trial and are able to maintain adequate distribution channels. We believe that our sales in the first half of 2006 justified management’s assessment of the potential success of the brand. Wellstone did not conduct any formal taste tests, but feedback from smokers indicated that Wellstone cigarettes had high taste acceptance. Unfortunately, Wellstone had to suspend marketing in the third quarter of 2006 due to lack of finances. We do not know when, if ever, we will be able to continue marketing and resume sales.

INTERNATIONAL MARKETS; GLYCANEX LICENSE; ACQUISITIONS

Wellstone investigated the  international potential of its proprietary compound, especially in Europe, Africa, and Asia where smoking levels are  much higher  than  in  the  United States and Canada. On January 17, 2007, Wellstone entered into a Patent License Agreement with  Glycanex BV, the supplier of the patented filter compound used  in Wellstone cigarettes. Under the Patent License  Agreement, Wellstone granted to Glycanex an exclusive right to the patent rights  for  all  countries excepting the  United  States  of  America and its territories and possessions.  Glycanex agreed to pay Wellstone a  3%  royalty  on  net  sales which exceed the minimum threshold of Euro 500,000.  The consideration for  the  granting of the license to Glycanex was the cancellation of $120,000 owed to Glycanex  for purchases of the filter compound.

Two  principal factors led to the decision to license Wellstone's  key technology to Glycanex.  First,  Wellstone  lacks  cash  at  this  time  to pay Glycanex  for the $ 120,000  which is owed and likewise lacks cash to defend any collection  lawsuit.  Wellstone  also  lacks  at  this  time  cash  to fund marketing  of its Wellstone cigarettes in the United States, but believes  that with sufficient  funding  it  can resume marketing. Secondly Wellstone believes that the technology is viable and  that  the  licenses  to  Glycanex  provide a possibility  for  Wellstone to receive royalty income from the exploitation  of the technology outside  the  United States. Management believes that the Patent License Agreement validates the value of the technology.

We are also considering one or more acquisitions if such  can be synergistic with our current business, but no agreements have been reached for any acquisitions.

COMPETITION

Our  technology faces competition,  but  we  think  that  our  technology competes favorably  because  it reduces carcinogens while retaining taste and a significant level of nicotine.   We  believe  that  we  potentially  have  five competitors, however additional competitors or new technologies could arise  at any  time.  None of them has any significant level of sales and there has never existed any market for special purpose filters.

Philip  Morris  test-marketed  a  new  cigarette  brand  during 2005, Marlboro Ultra Smooth, which contained a new carbon filter that  was presumably designed to help filter out certain toxins in cigarette smoke and  to therefore reduce  exposure  to  these  toxins.  However,  Philip Morris did not make  any reduced risk or reduced exposure health claims.   The  brand  was  removed from test market due to a lack of consumer acceptance.

RJ  Reynolds introduced its Eclipse cigarette in 1998.  Eclipse  purports to be safer  because  it  primarily  heats  rather  than burns tobacco, greatly reducing  second  hand  smoke,  and  leaves  no  ashes, stains  or  odor.   RJR advertised  that smoking Eclipse cigarette might reduce  the  risk  of  cancer, chronic bronchitis,  and emphysema.  The American Lung Association and American Heart Association disagree  with  those  claims.   Eclipse  is  being  marketed through the internet and limited retail sales.

INTELLECTUAL PROPERTY

The  technology  fundamental  to Wellstone is protected under U.S. Patent number  6,119,701,  entitled  "Methods,   agents   and   devices  for  removing nucleophilic  toxins  from tobacco and tobacco smoke," by Cerami  et  al.,  and issued to the Cerami Consulting Corporation.  This patent was filed on February 13, 1998, and approved  on  September 19, 2000.  Based on a licensing agreement with Cerami Consulting Corporation,  Wellstone  has  exclusive  rights  to  the technology  on  which  the  patent  is  based.   The  patent is protected until February 13, 2018, according to current U.S. Patent law.   A second U.S. patent was  issued to Cerami Consulting Corporation and licensed to  Wellstone:   U.S.  Patent   U.S.   Patent   number   6,615,842,  entitled  "Methods  for  removing nucleophilic toxins from tobacco smoke"  by Cerami et al., and issued to Cerami  Consulting Corporation.  This patent was filed  on  June 26, 2000 and issued on September  9,  2003.   Based  on a licensing agreement with  Cerami  Consulting Corporation, Wellstone has exclusive  rights  to  the  technology  on which the patent is based.  Therefore, Wellstone has controlling rights to the technology on which it is based until June 26, 2020, according to current U.S. Patent law.  

The international rights to our technology have been licensed to Glycanex, NL, as set forth under the caption “Marketing.”

EMPLOYEES

As  of  December  31,  2008, we had only one employee, our Chief Executive Officer, and a part-time controller.  Pending resumption of marketing, we do not intend to add additional employees at this time.

GOVERNMENTAL REGULATION

The manufacture and  sale of cigarettes and other tobacco products and of pharmaceutical products are subject to extensive federal and state governmental regulation in the United States  and  by comparable authorities in many foreign countries. These national agencies and  other federal, state and local entities regulate,  among  other things, research and  development  activities  and  the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of tobacco products.

There are multiple bills pending before the Congress and in several state legislatures which,  if  enacted,  would significantly change the United States tobacco industry. Some of these federal  bills  contain  provisions which would provide substantial federal government funds for smoking cessation programs and products, as well as incentives to tobacco companies and others to produce less harmful  or  reduced-risk  tobacco  products.   We are unable to  predict  what effect, if any, these provisions, if enacted, would have on our technology.

The FDA has promulgated regulations governing the sale and advertising of tobacco products designed primarily to discourage  the sale to, and consumption by,  adolescents  and  children. The authority of the FDA  to  promulgate  such regulations was challenged  in  the  federal  courts.  A federal District Court upheld  the  FDA's  authority  to promulgate such regulations  but  ruled  that certain of the regulations restricting advertising were invalid as violative of the constitutional right of free  speech. On appeal, the United States Court of Appeals for the Fourth Circuit affirmed  portions of the District Court opinion that held the FDA could not regulate tobacco  advertising  and  ruled  that the executive  branch of the United States government, in particular the FDA,  does not have any  authority  to  regulate  tobacco  products generally. The federal government appealed the Appeals Court's ruling and  the matter was heard by the United States Supreme Court in late 1999. On March 21,  2000, the Supreme Court in a five to four decision held that Congress has not given  the  FDA authority to regulate tobacco products as customarily marketed. Given the decision by the Supreme  Court  it  is  unclear  whether  the  Congress will act to grant  such authority to the FDA, although legislation that would create such authority has already been introduced in Congress.

The requirements for health warnings on cigarettes  are  governed  by the Federal  Cigarette  Labeling and Advertising Act ("Labeling Act"). The Labeling Act  imposes  labeling  and  advertising  requirements  on  the  manufacturers, packagers and importers  of cigarettes and requires any company wishing to sell cigarettes within the United  States  to  submit  a  plan  to the Federal Trade Commission  explaining  how  it  will  comply  with  the warning label  display requirements.

The sale of tobacco products is subject to taxation  in all fifty states. In  addition, some states permit municipalities to impose an  additional  sales tax,  and  many  municipalities  do so. The state and municipal sales taxes are imposed upon wholesalers and/or retailers but not manufacturers or suppliers of components such as filters and therefore  we  have no liability for such taxes. In addition, cigarettes are subject to substantial and increasing excise taxes. The   federal   excise   tax  on  cigarettes  has  been  steadily   increasing. Additionally, state excise  taxes range from $.07 per pack in South Carolina to $2.46 per pack in Rhode Island.   These  taxes could adversely affect cigarette sales in the future and our potential revenues.

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Tobacco  production  in  the  United  States  is  subject  to  government controls, including the tobacco-price support  and  production control programs administered by the United States Department of Agriculture  (the  "USDA").  In October  2004,  the Fair and Equitable Tobacco Reform Act of 2004 ("FETRA") was signed into law.  FETRA  provides  for  the  elimination of the federal tobacco quota and price support program through an industry  funded  buy-out of tobacco growers   and   quota-holders.   The  cost  of  the  buy-out  is  approximately $9.6 billion and will be paid over  10 years  by manufacturers and importers of all tobacco products. The cost will be allocated  based  on the relative market shares  of  manufacturers and importers of all tobacco products.  Manufacturers and importers of tobacco products are also obligated to cover any losses (up to $500 million)  that  the  government may incur on the disposition of pool stock tobacco  accumulated  under  the   previous   tobacco  price  support  program. Wellstone's share of tobacco pool stock losses will be minimal.

PRODUCT LIABILITY

In  the  United  States,  there  have been numerous  and  well-publicized lawsuits against the largest manufacturers  of  cigarettes  and  other  tobacco products  initiated  by  state  and  municipal  governmental units, health care providers  and  insurers, individuals (for themselves  and  on  a  class-action basis) and by others.  The  legal theories underlying such lawsuits are varied, but are generally based upon  one  or  more  of the following: (1) manufacturer defendants  have  deceived  consumers about the health  risks  associated  with tobacco product consumption;  (2)  such  defendants  knew  or should have known about  various harmful ingredients of their products and failed  to  adequately warn consumers  about  the  potential harmful effects of those ingredients; and (3) such defendants knew of the  addictive  attributes  of  nicotine  and  have purposefully  manipulated  their  product  ingredients  so  as  to  enhance the delivery of nicotine.

We intend to sell cigarettes and to supply filters which we believe could make  cigarettes  less  prejudicial  to  health, Wellstone could be liable  for personal injury to consumers.  Even if we  believe  such  lawsuits  are without merit, the cost of defense or settlement of lawsuits could be substantial.

AVAILABLE INFORMATION

We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the "SEC").  The public may read and copy any materials we file with the SEC at the SEC's Public Reference  Room  at  450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The  SEC  also  maintains  an  Internet  site  that contains  reports,  proxy  and  information  statements,  and other information regarding issuers that file electronically with the SEC. The  address  of  that site is http://www.sec.gov.

Item 1A. RISK FACTORS.

We may be sued and may not be covered by insurance.

There are currently several pending legal actions affecting the tobacco industry, including proceedings  and claims arising out of the sale, distribution, manufacture, development, advertising, marketing and claimed health effects of cigarettes.  We may be named as a defendant in the future as there has been a noteworthy increase in the number of these cases pending. Punitive damages, often in amounts ranging into the hundreds of millions, or even billions of dollars, are specifically pleaded in a number of these cases in addition to compensatory and other damages. We do not yet have any product liability insurance, and if such insurance can be obtained it probably would be very limited in scope of coverage to any claims that tobacco products manufactured by or for us.  Such insurance probably would not cover health-related claims such as those that have been made against the major manufacturers of tobacco products.  We do not believe that such insurance currently can be obtained. Accordingly, our inclusion in any of these actions or any future actions would have a material and adverse effect on our financial condition.

We have generated only limited revenues and our marketing operations have been suspended.

Sales and marketing of the Wellstone brand began in the first quarter of calendar 2006. Our sales were limited and were carried out with a negative gross margin in order to obtain market share. Marketing efforts were suspended in the third quarter of 2006. Wellstone may not be able to find an adequate market for its products, achieve a significant level of sales or attain profitability.  As a result  of  the  significant operating expenses related to start up operations, Wellstone had a loss of $2,772,581 for the year ended December 31, 2006. We had a loss of $71,193 from operations and a net loss of $77,054 in 2007.  Wellstone had a net loss of $131,905 for the year ended December 31, 2008.  We do not have financing at this time to resume marketing operations, and we had to write off stale and obsolete inventory during the last quarter of 2006. Wellstone may not be able to resume marketing, or attain profitability.  Wellstone may not  be  able to implement its business plan in accordance with its internal forecasts or at a level  that meets the expectations of investors.

The report of our independent registered public accounting firm included in this Annual Report on Form 10-KSB contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

As a result of our losses to date and our current lack of revenue, our independent registered public accounting firm has concluded that there is substantial doubt as to our ability to continue as a going concern, and accordingly, our independent registered public accounting firm has included in their report on our December  31,  2007 consolidated  financial  statements included herein an explanatory paragraph describing the events that have given rise to this uncertainty. The Company will seek additional sources of capital through the issuance of debt or equity financing, but there can be no assurance the Company will be successful in accomplishing its objectives.  The ability of the Company to continue as a going concern is dependent on additional sources of capital.

We are dependent on the domestic tobacco business, which is contracting.

Substantially all of our revenues are initially expected to be derived from sales in the United States. The U.S. cigarette market is a mature market and on average, domestic consumption has decreased approximately 2% per year over the past decade.  Numerous factors have contributed to this decline, including health considerations,  diminishing  social  acceptance  of smoking, legislative  limitations  on  smoking in public places and rapidly accelerating costs in the form of increased state tax on cigarettes and settlement cost.  If the U.S. cigarette market continues to contract, it could adversely affect our potential future sales, operating income and cash flows.

Weaknesses in the Company's internal controls and procedures could have a material adverse effect on the Company.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Management determined that material weaknesses in our internal control over financial reporting existed as of December 31, 2005.  A material weakness is a control deficiency, or combination of control deficiencies that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

                                                                                            9

If we are unable to substantially improve our internal controls, our ability to report our financial results on a timely and accurate basis will continue to be adversely affected, which could have a material adverse effect on our ability to operate our business.   Please see Item 8A - Controls and Procedures for more information regarding the measures implemented in 2005, as well as those that we  implemented in 2006.  Each remedy is designed to remediate the deficiencies in our internal controls.  In addition, even after  the remedial measures discussed in  Item 8A - Controls and Procedures are fully implemented, our internal controls may not prevent all potential errors or fraud,  because any control system, no matter how well designed, can only provide reasonable and not absolute assurance that the objectives of the control system will be achieved.

We do not have any production facilities unless we acquire them or contract out production.

Problems in purchasing equipment, establishing manufacturing facilities and meeting demand can be expected.  Problems in contracting out production can also be expected.  If we cannot produce filter material or outsource production we may not be able to meet market demands of our own brand nor can the filter be used in existing brands unless we license the filer to such existing brands.

Competition could prevent us from meeting our objectives.

The cigarette industry is highly competitive.  Our competitors include developers of low-carcinogen tobacco and developers of other filter technology, and these competitors may have a substantially greater financial, manufacturing, marketing and other resources at their disposal.  Another company could develop filter technology similar to ours.  Competition will affect our ability to market our product and obtain financing.  Wellstone brands will be subject to increased competition and this has resulted in additional pressure due to price discounting.

Our cigarettes and the cigarettes using our filter may not be accepted by smokers.

Our filter and the Wellstone brand utilizing it may not be accepted by smokers.  Smokers may decide  not  to purchase our brand or any tobacco product made with our filters due to taste or other preferences, and sales of filters with our technology would be adversely affected.

The cigarette industry is subject to substantial and increasing regulation and taxation and this can only have a negative impact on us.

Various federal, state and local laws limit the advertising, sale and use of cigarettes, and these laws have proliferated in recent  years.   If, as expected, this trend continues, it may have material and adverse effects on potential sales, operating income and cash flows.  In addition, cigarettes are subject to substantial and increasing excise taxes.  Increased excise taxes may result in declines in overall sales volume. This result could adversely affect the market for our product.

The U.S. Food and Drug Administration ("FDA") has promulgated regulations governing the sale and advertising of tobacco products. These regulations are designed primarily to discourage the sale to, and consumption by, adolescents and children. The authority of the FDA to promulgate such regulations was challenged in the federal courts. On March 21, 2000, the United States Supreme Court in a five to four decision held that Congress had not given the FDA authority to regulate tobacco products as customarily marketed.  Given the decision by the Supreme Court it is unclear whether Congress in the future will act to grant such authority to the FDA, although legislation that would create such authority has already been introduced in Congress.  See "Government Regulation."

The cigarette industry is a mature market in which overall consumer demand may continue to decline over time and this may have a negative impact on us.

On average, domestic consumption has fallen approximately 2 percent per year over the past decade.  Numerous factors have contributed to this decline, including health considerations, diminishing social acceptance of smoking, legislative limitations on smoking in public places, and rapidly accelerating costs in the form of increased state tax on cigarettes and settlement costs. If this decline in industry-wide consumption  continues and Wellstone is unable to capture market share from its competitors, or  if the industry as a whole is unable to offset the decline, Wellstone's sales volume,  operating  income  and cash  flows  could  be  materially  adversely  affected,  which  in  turn could negatively affect the value of our common stock.

If we are successful, we might not be able to hire employees and manage a bigger enterprise.

If we are successful in obtaining market acceptance for our products, we will be required to manage increasing, possibly substantial, volume from the resulting customers.   To accommodate any such growth and compete effectively, we will be required to attract, integrate, motivate and retain additional highly skilled sales, technical and other employees. We face competition for these people.  Our ability to successfully manage such volume also will be dependent on our ability to find a suitable manufacturer for our brand and filters.   We or any person contracted with to produce our products in commercial quantities might not be able to overcome the challenge of setting up any production operations, and our personnel, systems, procedures and controls might prove inadequate to support our future operations.   Any failure to implement and improve our operational, financial and management systems or to attract, integrate, motivate and retain additional employees required by future growth,  if  any,  could have a material and adverse effect on our business and prospects, financial condition and results of operations.

We may not be able to protect our patents against infringement.

Our success in commercially exploiting our proprietary technology depends in large part on our ability to defend the patents that were licensed to us, to obtain further patent protection for the technology in the United States and other jurisdictions and to operate without infringing upon the patents and proprietary rights of others.  Additionally, we must be able to obtain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur, either in the United States or in foreign countries.  The primary patents licensed to us were only issued in the United States and not in foreign jurisdictions.   If international patents are not issued, it would diversely affect our competitive advantage, with respect to sales outside the United States.

Patent positions, including our patent positions (owned or licensed) are uncertain and involve complex legal and factual questions for which important legal principles are unresolved. Any conflicts  resulting  from  third  party patent applications  and patents could significantly reduce the coverage of our patents and limit our  ability  to  obtain  meaningful  patent  protection.  If patents are issued to other companies that contain competitive or conflicting claims, we may be required to obtain licenses to these patents or to develop or obtain alternative technology.  Such licensing agreements, if required, may be unavailable on acceptable terms or at all. If such licenses are not obtained, we  could  be  delayed  in  or  prevented  from  pursuing  the  development  or commercialization of our products.  It is possible that there exists an issued or pending patent which conflict with or potentially infringe on our patent.

Litigation which could result in substantial cost  may  also be necessary to  enforce  any  patents to which we have rights, or to determine  the  scope, validity and unenforceability  of  other  parties' proprietary rights which may affect our rights. U.S. patents carry a presumption of validity and generally can be invalidated only through clear and convincing evidence. We may also have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of an invention, which could result in substantial costs. Our licensed patents might not be held valid by a court or administrative  body or  that  an  alleged  infringer  would  be  found  to  be infringing.  The mere uncertainty resulting from the institution and continuation of any technology-related litigation or interference proceeding could have a material and adverse effect on our business and prospects.

We may also rely on unpatented trade secrets and know-how to maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and others. These agreements might be breached or terminated, or we might not have adequate remedies for any breach, and our trade secrets might otherwise become known or be independently discovered by competitors.

If we lose our management it would damage our business.

We depend upon the continued services of our senior management for our continued success.  The loss of the Company's Chief Executive Officer, Learned Jeremiah Hand, could have a serious negative impact upon our business and operating results.  We do not have an employment agreement with Mr. Hand, and we have not obtained "key-man" life insurance with respect to his life.

No cash dividends have been paid and we do not anticipate that we will pay any dividends in the future.

Wellstone has not paid any cash dividends on its capital stock. Wellstone anticipates that its future earnings, if any, will be retained for use in the business, or for other corporate purposes, and it is not anticipated that any cash dividends on its common stock will be paid in the foreseeable future.  Investors should not expect to receive any dividends or other periodic income on their investment.

Penny Stock rules could make it hard to resell your shares.

The Penny Stock rules apply to the trading of our stock.   Wellstone's common stock does not meet the listing requirements for any trading market other than the OTC Bulletin Board.   Consequently, the liquidity of Wellstone's securities could be impaired, not only  in the number of securities which could be bought and sold, but also through delays in the timing of transactions, reduction in security analysts' and the news media's coverage of Wellstone, and lower prices for Wellstone's securities than might otherwise be attained.

In  addition, the  "penny  stock" rules limit trading of securities not traded on NASDAQ or a recognized stock exchange,  or securities which do not trade at a  price of $5.00 or higher, in that brokers making trades in  those securities must  make a special suitability determination for purchasers of the security, and obtain the purchaser's consent prior to sale.  The application of these rules may make it difficult for shareholders to resell their shares.

As the holders of a significant amount of common stock of Wellstone, management and its affiliates have, and will have, substantial influence over Wellstone, and such affiliates may have interests which differ from other holders.

Members of management, and their affiliates, own 71,773 shares of common stock, on a fully diluted basis, or 65.7% of the common stock.  As such, such individuals have substantial influence and control over matters voted upon by  stockholders  (such  as  the election of the  directors  to  the  Board  of Directors of Wellstone, mergers  and  sale  of  assets  involving Wellstone and other matters upon which stockholders of Wellstone vote).  This power, in turn, gives them substantial control over the business and operations of Wellstone.

We could change the strategy we outline in this report.

Although we have no current plan to do so, we may change our strategy for the development and marketing of our technology in the future.   Our business plan might not be implemented as set forth herein.

Item 1B.  UNRESOLVED STAFF COMMENTS

            We have no unresolved staff comments.

Item 2.

DESCRIPTION OF PROPERTY

Until September 3, 2003, we rented a minimal amount of office and a lab room of 1,200 square feet space of an affiliate, Kenneth Warren Institute.  From October 1, 2003 through November 30, 2004, we used a minimal amount of office space provided by our chief executive officer at no cost.  The agreed upon value of the facilities at the Warren Institute was $1,400 per month which was accrued from January 2002 to September 30, 2003. No rent was paid to the Warren Institute; however, Wellstone recorded rent expense for the use of the facilities and a contribution to capital by principal shareholder of $1,400 per month. We also use lab space provided from time to time under agreement with our director of research as part of his compensation. On November 30, 2004, we relocated from New York to North Carolina to avail ourselves of the talent pool and infrastructure already in place in North Carolina. Wellstone leased space in a state-of-the-art cigarette manufacturing facility. In addition to office and plant space, Wellstone also leased, on a non-exclusive basis as needed, certain production assets to produce cigarette samples. Wellstone vacated this space in September, 2006 and now rents a minimal amount of space in Chapel Hill, North Carolina on a month to month basis.

Item 3.

LEGAL PROCEEDINGS

Not Applicable.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2008.

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCK­HOLDER MATTERS

(a)  Market Information

The Company's Common Stock has traded on the OTC Bulletin Board under the symbol WLSF.OB from May, 2003 to June 29, 2006, when the symbol was changed to WFLT.OB in connection with a 1-for-25 reverse stock split, and under the symbol WFLR.PK on the Pink Sheets LLC from June 7, 2007, when a 1-for-100 reverse stock split was effected.   The high and low sales prices for the common stock were as follows:

All share information is adjusted for stock splits and stock dividends. The above information was supplied by the OTC Bulletin Board or Pink Sheets, LLC and these prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

(b)  Holders

As of December 31, 2008, there were approximately 140 record holders of Company common stock.

(c) Dividends

The Company has not paid any dividends on its common stock.  The Company currently intends to retain any earnings for use in its business, and therefore does not anticipate paying cash dividends in the foreseeable future.

(d)

Equity Compensation Plans

Equity Compensation Plans

Equity Compensation Plan Information as of December 31, 2008

                                                                                                                                Number of Securities

                                                                                                                                remaining available

                                                                (a)                                           (b)           for future issuance

                                                Number of Securities           Weighted Average              under equity

                                                To be issued upon               exercise price of                    compensation plans                                                                              exercise of existing               outstanding options,           (excluding Securities

                                                Options, warrants                                warrants and                         reflected in           

Plan Category                       and rights                              rights                                      column (a)

Equity compensation             7,200                                    $250                                     9,600

approved by

Security holders

Equity compensation                                          -                                -                                              -              

Plans not approved

By Security holders                      

Total                                       7,200                                                                                       9,600

(e)

Sales of Unregistered Securities during the year ended December 31, 2008

None.

(f) Company repurchases of common stock during the years ended December 31, 2008 and 2007.

None

 Item 6.   SELECTED FINANCIAL DATA

                                As a smaller reporting company we are not required to respond to this item.

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

SUSPENSION OF MARKETING PROGRAM

In the quarter ended September 30, 2006,  the Company continued to suffer from a negative  gross  margin  on its cigarettes; which  was  part  of  the  Company's strategy to obtain market  share  and  entry  into  the  competitive  cigarette marketplace.  Management reviewed the liquidity position of the Company  during the  quarter  ended September 30, 2006 and sought unsuccessfully for additional debt or equity  funding. Although the Company did enter into negotiations for a private placement,  the  funding group required that the Company carry out a 1-for- 25 reverse split of the  common stock as a precondition to such placement. After Wellstone carried out the  reverse  split,  the  funding  source  did not complete  funding.  Faced  with  inadequate  cash  resources to fund the market introduction  of  its  products,  management  determined   to  suspend  further marketing activity.  As a result, sales in the quarter ended September 30, 2006 fell to only $6,475, and Wellstone had no significant  sales for the fourth  quarter, and does not expect to be able to have any further sales until such time as Wellstone obtains financing. All full time employees and officers have  been dismissed or have resigned except for the Company Chief Executive Officer. The  Company  is in negotiations with its suppliers for time to  obtain  financing and continue its  business,  but  there  is  not  a  high probability that  financing  can be obtained that is not unduly dilutive to the Company shareholders.

WELLSTONE'S STRATEGIC DIRECTION

Following a review of the tobacco  market  and  cigarette  industry, Wellstone determined to manufacture  and  produce  its  own  brand  of  cigarettes.  In connection with such plan, Wellstone has developed packaging materials and tobacco blends for a full line of cigarettes, including regular, smooth blue and menthol. Our strategy and objective is to offer an ultra-premium product at a value price.

Wellstone has received approval from the Federal Trade Commission (FTC) and the National  Association  of Attorneys Generals (NAAG) and has been added  to  the list of approved brands  in  thirty  one states. We have initiated the process for approval in the remaining states but are not actively prosecuting approval due to lack of funds and uncertainty about the Company’s future marketing. Wellstone has signed a multi-year manufacturing contract with US Flue-Cured  Tobacco  for production. With the exception of filters, US Flue- Cured will procure all materials,  manufacture, package, and ship to order. The Company believes US Flue-Cured's annual manufacturing capacity is sufficient to meet its short and long-term needs.  Filters  will  be sourced from the largest domestic filter manufacturer, as well as several European alternatives. Tobacco leaves  and  filter compound material is readily available  through  a  variety of sources.

Subject to regulatory  approval,  we  intend  to offer what we consider to be a "Potentially Reduced Exposure Product" or "PREP"  or  products within the price value  segment  of  the  market.  The Company launched its Wellstone  brand  of cigarettes in the United States during  the  first  quarter  of  2006  and  has shipped  all  brand  styles to Arizona, Louisiana, North Carolina, Virginia and California. Wellstone  is  investigating  the  international  potential  of its proprietary  compound,  especially  in  Europe,  Africa, and Asia where smoking levels  are  much  higher  than in the United States and  Canada.  The  Company continues to consider one  or  more  acquisitions if such can be synergistic with  our  current  business,  but no agreements  have  been  reached  for  any acquisitions.

We  believe  that our brand of cigarettes  are  lower  in  toxins  and  do  not compromise the  pleasurable  effects  of smoking. Wellstone's strategic plan as well as its philosophy is based on two assumptions: first, quitting smoking can be  difficult and second, many smokers do  not  concentrate  on  cigarette  tar levels.  In  2002, according to industry reports, 64% of all cigarettes sold in the United States  were  high (more than 10 mg) in tar. Wellstone believes that part of the reason smokers  prefer  high  tar  cigarettes  is because of taste. Wellstone's goal is to reduce toxins and certain associated carcinogens without affecting the cigarettes' taste. We believe smokers will try  Wellstone for its lower price, and come back for its taste.

We believe that Wellstone is the only small (less than $50 million in sales) US cigarette manufacturer that is publicly traded. We believe that  the  remainder of  the  small  manufacturers  in  the  industry are privately held or foreign. Management believes Wellstone's access to  the  US  capital markets will assist Wellstone  in its goal to become the largest company in  the  growing  discount cigarette market. However, there can be no assurance that Wellstone's access to US capital markets  will  provide the necessary financing to build and grow the business.

We intend to sell and market  our  own  cigarette  brand  and  to  sell filters directly  to  manufacturers  to be integrated into their own cigarette  brands. Management has determined that  manufacturing and distributing a Wellstone line of cigarettes will be in the best  interests  of its stockholders, particularly if Wellstone is able to successfully market its brand. The successful launch of a  Wellstone  brand  should  add  significant  value   to   the  Company.  More importantly, the success of a Wellstone brand will, it is anticipated, lead the way for other manufacturers to utilize the filter in their own cigarettes under a Wellstone license. We also intend to develop our own "make  your own" as well as enter into the small cigar market.

OVERVIEW

Wellstone has relocated from New York to North Carolina to avail  itself of the talent  pool  and infrastructure already in place in North Carolina.  Wellstone has leased space  in  a  state-of-the-art  cigarette manufacturing facility. In addition to office and plant space, Wellstone  also  leases, on a non-exclusive basis as needed, certain production assets to produce  cigarette  samples.  The office  space and plant are located at 250 Crown Boulevard in Timberlake, North Carolina,  approximately  20 miles from Durham. This space was vacated in September, 2006, and now rents a minimal amount of space in Chapel Hill, North Carolina on a month to month basis.  In furtherance of its  marketing plans, the Company:

- Designed packaging to reflect the benefits of the Wellstone filter.

-  Retained  Signal  Design, Inc.  of  Durham,  North  Carolina  to  assist  in developing a comprehensive brand strategy and marketing campaign.

- Has received results  from  an  independent FTC testing facility that confirm the Company's expectations for their patented filter technology.

- Hired independent sales consultants and are negotiating with several more.

-  Entered  into an agreement with U.S.  Flue-Cured Tobacco Growers,  Inc. to manufacture Wellstone's product line.

- Received FTC advertising approval and rotation warning approval

- Wellstone brand  approved  by  Settling  States  under  the Master Settlement Agreement

- Has formulated distribution plans and begun shipping cigarettes.

RESULTS OF OPERATIONS

On January 5, 2006, the Company announced that it launched  its Wellstone brand in the United States with shipments to several states resulting  in  revenue of $258,194 for the year ended December 31, 2006, of which $215,741 represented sales for the six months ended June 30, 2006 before marketing efforts were suspended in the third quarter. On April 5, 2006, the  Company announced  that  a  major  supplier  to  convenience stores in the Southeastern United States had agreed to carry all styles  of the Wellstone brand and secure orders  using  its  sales  organization. Wellstone  had  been  able  to  secure additional suppliers to carry all styles of the Wellstone brand family and anticipated that it would ship to additional states  during  the third quarter of 2006 with sales to most states by the end of the year. However, due to cessation of marketing, there was only limited sales after June 30, 2006.  Wellstone shipped product to Central and South America during the third quarter of 2005  for  promotional  and  consumer trial  purposes  only. Prior to January 2006 Wellstone had received no revenue. Our operations primarily  consisted  of developing and refining our proprietary filter  formulation,  obtaining  a  US  and   international   patent   on  that formulation,  and  on seeking to market the filter technology and the Wellstone brand of cigarettes.

Wellstone had a loss from operations of $6,044 in the year ended December 31, 2008. These expenses reflect sales of $0, and operating expenses associated with the inactivity of the company. Interest expenses of $125,861 related to the outstanding debt to debenture holders and management. The Company had a loss of $ 77,054 for the year ended December 31, 2007 that included a gain of $120,000 from the forgiveness of debt associated with the international license of the technology to a supplier for the year ended December 31, 2007.  The loss is primarily the result of interest  expense  of $125,861

Substantially all of our losses for the year ended December 31, 2005  were the   result   of  general  operating  expense,  legal  fees,  and  stock-based compensation expense  for  the issuance of stock and stock options.  Options to purchase 180,000 shares with  exercise  prices of $.08325 per share were issued to two officer employees resulting in an expense  of  approximately $1,920,000. Because  these  stock  options  were  issued  to  employees,  the  expense  was calculated  in  accordance  with  Accounting  Principles  Board (APB)  No.  25, Accounting  for  Stock Issued to Employees.  Under APB No. 25,  the  difference between the fair value  of the Company's common stock on the grant date and the exercise  price of the stock  option,  multiplied  by  the  number  of  options granted, is  recorded  as compensation expense. In addition, the Company issued 160,000 shares of stock  to  an  unrelated individual as certain compensation for consulting services that he provided  to  the Company and 20,000 shares of common stock to the brother of the Company's Chief  Executive Officer for legal services that he provided to the Company.  These shares  were  valued  at $25.50 per share based on the closing price of the Company's common stock on the  date of  issuance  and  resulted  in  a non-cash expense of $4,590,000.  The Company issued 65,000 shares of common  stock  upon the exercise of stock options at an exercise price of $.25 and 24,000 shares  of common stock upon the exercise of stock options at an exercise price of $.08325.

LIQUIDITY AND CAPITAL RESOURCES

We began shipping  cigarettes  in  the US during January 2006 with shipments to several states resulting in revenue  of  $258,194  for  the  year  ended December 31,  2006. We currently have no sales and no cash to fund operations. An officer and director is advancing funds to Wellstone for its cash requirements.

Wellstone  Filters,  Inc. received  $250,000  from  the Carlson  Group,  Ltd., pursuant to a promissory note, dated May 17, 2006. This  Note is not associated with  the prior promissory notes which had been issued in 2006  and  2004.  The Company  borrowed  the  principal amount of $250,000, at an interest rate of 8% per annum, due in full on December 31, 2007. In addition to the stated interest rate, the Company shall also pay to the Lender an amount equal to the lesser of (a) $25,000 or (b) 3% of  the net profits after taxes as of September 30, 2007, to be payable simultaneously  with  the  principal and interest due on December 31, 2007. If a portion of the principal or  interest  is paid prior to December 31, 2007, the calculation of the additional amount shall  be adjusted pro-rata. In  the  event of a default under the note when due, then the  Lender,  at  its election,  may  declare the entire unpaid principal, and all accrued but unpaid interest, immediately  due  and payable. The maximum additional amount that the Company shall pay is $25,000,  and  such  amount  is due on the maturity of the Note. This note has not been paid as of December 31, 2008, and the Company lacks funds to pay the note. Wellstone is in discussions with Carlson Group, Ltd. regarding repayment options.

On January 25, 2006, Wellstone Filters, Inc. received $500,000 from the Carlson Group, Ltd., pursuant to a promissory note, dated January  25,  2006. This Note is not associated with the prior promissory note which had been issued in 2004. The Company borrowed the principal amount of $500,000, at an interest  rate  of 8%  per  annum,  due  in  full  on December 31, 2007. In addition to the stated  interest rate, the Company shall  also pay to the Lender an amount equal to the lesser of (a) $25,000 or (b) 3% of  the net profits after taxes as of September 30, 2007, to be payable simultaneously  with  the principal and interest due on December 31, 2007. If a portion of the principal  or  interest is paid prior to December 31, 2007, the calculation of the additional amount  shall  be adjusted pro-rata.  In the event of a default under the note when due, then the  Lender, at its election,  may  declare the entire unpaid principal, and all accrued but unpaid interest, immediately  due  and  payable.  The maximum additional amount that the Company shall pay is $25,000, and such amount  is  due on the maturity of the Note. This note has not been paid as of December 31, 2008, and the Company lacks funds to pay the note. Wellstone is in discussions with Carlson Group, Ltd. regarding repayment options.

During  2004,  the  Company  received  $1,500,000  in  exchange  for  a $1,500,000 convertible promissory note, due December 31, 2006, that it issued to the Carlson  Group,  Ltd.  The note bears interest  at  a  rate  of  4%  per  annum (effective interest rate  of 38%), which accrues and is payable on maturity. This note has not been paid as of December 31, 2008, and the Company lacks funds to pay the note. Wellstone is in discussions with Carlson Group, Ltd. regarding repayment options.

Wellstone  has  sourced  suppliers  to manufacture its patented formulation  in commercial quantities. These sources  of  supply  will enable Wellstone to meet all foreseeable market demand for the Wellstone line as well as to supply other manufacturers who may choose to license the product. Because the formulation is unique to Wellstone's product, Wellstone has been required  to specially source manufacturing  to  ensure  that  strict  specifications can be met.  Wellstone intends to use multiple suppliers to ensure a reliable supply.

Our activities to date have been limited to seeking capital; seeking sources of supply and development of a business plan. We do not believe  that conventional financing,  such  as bank loans, is available to us due to these  factors.  The Company will be required  to  engage  in debt or equity transactions to satisfy cash needs over the next twelve months, and Management believes that it will be able  to  raise  the required funds for operations  from  one  or  more  future offerings and to affect  our business plan. However, there can be no assurances to that effect because our  ability  to  raise significant amounts of financing will be dependent on favorable capital markets  and  obtaining a market for our products,  and  other  risks inherent in the business as  discussed  under  the caption "Risk Factors" may affect the outcome of Management's plans.

Item 8. FINANCIAL STATEMENTS

Wellstone's financial statements are appended to the end of this reportreport and include the following:

Report of  Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31,  2008 and 2007

Consolidated Statement of Income for the years ended December 31, 2008 and 2007 and the period inception (February 17, 1998)) to December 31, 2008

Consolidated Statement of Cash Flows  for the years ended December 31, 2008 and 2007 and the period inception (February 17, 1998) to December 31, 2008

Consolidated Statement of Stockholders’ Deficit for the  period inception (February 17, 1998)) to December 31, 2008

Notes to Consolidated Financial Statements.

.

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT­ING AND FINANCIAL DISCLOSURE

On January 12, 2008, Wellstone Filters, Inc. (the “Company”) terminated its relationship with  De Joya Griffith & Company, LLC (“De Joya Griffith”), the principal accountant previously engaged to audit the Company’s financial statements.  The Company’s board of directors approved the dismissal of  De Joya Griffith. The audit reports of De Joya Griffith on  the Company’s financial statements for the fiscal years ending December 31, 2006 and 2005 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles, except such report was modified to include an explanatory paragraph for a going concern uncertainty. In connection with the audits of the fiscal year ending  December 31, 2007 and 2006 including the subsequent interim periods since engagement through January 12, 2008,  the date of termination, the Company had no disagreements with De Joya Griffith with respect to accounting or auditing issues of the type discussed in Item 304(a)(iv) of Regulation S-B.  Had there been any disagreements that were not resolved to their satisfaction, such disagreements would have caused De Joya Griffith to make reference in connection with their opinion to the subject matter of the disagreement. In addition, during that time there were no reportable events (as defined in Item 304(a)(1)(iv) of Regulation S-B).

                                                                                                 19

During the fiscal year ending December 31, 2006, including the subsequent interim periods since engagement through January 12, 2008, the date of De Joya Griffith’s termination, the Company (or anyone on its behalf) did not consult with any other accounting firm regarding any of the accounting or auditing concerns stated in Item 304(a)(2) of Regulation S-B. Since there were no disagreements or reportable events (as defined in Item 304(a)(2) of Regulation S-B), the Company did not consult any other firm in respect to these matters during the time periods detailed herein.

The Company provided De Joya Griffith with a copy of the Form 8-K reporting this change. The Company requested that De Joya Griffith furnish the Company with a letter to the Securities and Exchange Commission stating whether De Joya Griffith agreed with the above statements. A copy of that letter dated January 12, 2008 is filed as an Exhibit to the Form 8-K.  

On January 12, 2008 the Registrant engaged Black Wing Group,,LLC as its new independent.  Prior to the engagement of Black Wing Group. LLC, the Registrant did not consult with Black Wing Group, LLC on the application of accounting principles to any specific transaction nor the type of audit opinion that might be rendered on the Registrant's financial statements.

Item 9T.  CONTROLS AND PROCEDURES

We  maintain  disclosure controls and procedures designed to ensure  that information required  to be disclosed in our reports filed under the Securities Exchange Act of 1934, as  amended  (the  Exchange Act), is recorded, processed, summarized, and reported accurately, in accordance with U.S. Generally Accepted Accounting  Principles and within the required  time  periods,  and  that  such information is  accumulated  and  communicated to our management, including our Chief Executive Officer and Chief Financial  Officer,  as appropriate, to allow for timely decisions regarding disclosure.

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

Item 9B.       OTHER INFORMATION

               Not applicable

Item 10.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The members of the Board of Directors of Wellstone serve until the next annual meeting of stockholders, or until their successors have been elected.  The officers serve at the pleasure of the Board of Directors.  The following are the directors, executive officers and key employees of Wellstone.

Learned Jeremiah Han

Learned Jeremiah Hand, Chief Executive Officer

Mr. Hand, age 50,  joined Wellstone in March, 2000. He has been Chief Executive Officer and a director since March 2000 and Acting Chief Financial Officer since September, 2006.  From March 2000 to December 2003 he was employed by Warren Pharmaceuticals, Inc. as its Vice President - Chief Operating Officer.  From January 2000 to December 2003 he was Executive Director of the Kenneth S. Warren Institute, a non-profit medical research facility.  In 1999 he founded HFC, a private seed venture capital corporation, which has made many internet and biotechnology related investments and is a founder of Medibuy.com.  In March 2000, Mr. Hand began to devote a significant portion of his time to Wellstone.  He now dedicates 30% of his time to Wellstone.  From 1994 to 1999, he served as Vice President at Morgan Stanley Dean Witter.  He has a BA cum laude from Amherst College.

Code of Ethics

Wellstone  has not adopted a code of ethics which applies to the chief executive officer, or principal financial and accounting officer, because of our level of operations at this time. Wellstone intends to adopt a code of ethics during calendar 2008.

Audit Committee Financial Expert

Wellstone  does not have either an Audit Committee or a financial expert on the Board of Directors.   The Board of Directors believes that obtaining the services of an audit committee financial expert is not economically rational at this time in light of the costs  associated  with  identifying and retaining an individual  who  would  qualify  as  an audit committee financial  expert,  the limited scope of our operations and the  relative  simplicity  of our financial statements and accounting procedures .

Section 16(a)  Beneficial Ownership Reporting Compliance

Section   16(a)  of  the  Exchange  Act  requires  Wellstone's  officers, directors and persons  who  own  more than ten percent of a registered class of our equity securities to file reports  of  ownership  and  changes in ownership with the SEC.  Officers, directors and ten percent stockholders are required by regulation  to  furnish Wellstone with copies of all Section 16(a)  forms  they file.  During the year ended December 31, 2007, Wellstone believes that Learned Jeremiah  Hand  and  Samuel M. Veasey failed to file the reports required by Section 16(a) of the Exchange  Act,  including  Forms  3,  4 and 5. Based  on  representations submitted by such people.  Wellstone does not believe that such individuals purchased or sold any Wellstone Common Stock during 2008.

Item 11. EXECUTIVE COMPENSATION

No compensation or benefits have been paid to the sole executive officer and director for the years ended December 31, 2008 and 2007.

In September 2004 Mr. Hand was granted options to purchase 7,200 shares at $250.00 per share. The above options were granted under Wellstone's 1994 Stock Option Plan, as such plan was amended and restated in 2004.  There were no options granted or exercised in the years ended December 31, 2008 and 2007. The options held by Mr. Hand are not in the money and have no value.

Wellstone has no long term incentive plans other than the plans described above.

Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information relating to the beneficial ownership of Company common stock as of the date of this report by (i) each person known by Wellstone to be the beneficial owner of more than 5% of the outstanding shares of common stock (ii) each of Wellstone's directors and executive officers, and (iii) all officers and directors as a group.  Unless otherwise noted below, Wellstone believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.  For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities.  Each beneficial owner's percentage ownership is determined by assuming that any warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised.

Name and Address                        Common Stock                                    Percentage

Learned Jeremiah Hand⁽¹⁾⁽²⁾                                                71,773                                                     66.3%

Chief Executive Officer

Carla Cerami Hand, MD,PhD⁽¹⁾⁽²⁾                                   71,773                                                     66.3%

 Anthony Cerami, PhD⁽¹⁾⁽³⁾                                                  11,574                                                     11.5%

All officers and directors

  as a group (1 person)                                        71,773                                                     66.3%

* less than 1%                             

(1)The business address of each of these persons is300 Market Street, Suite 130-13, Chapel Hill, North Carolina 27516

(2)Ms. Cerami Hand and Mr. Learned Jeremiah Hand are wife and husband.  The 71,773 shares listed as beneficially owned by Mr. Learned Jeremiah Hand include 55333 shares which are controlled by Carla Cerami Hand, as stated below; 7,200 shares issuable upon exercise of stock options, and 9,240 shares held through a family limited partnership controlled by him.  Mr. Hand disclaims beneficial ownership of such 55,333  shares.  Ms. Cerami is the sole limited partner of a partnership which holds 46,093 shares and also controls 9,240 shares held via a trust, and may be deemed to beneficially own the 16,440 shares controlled by Learned Jeremiah Hand.  She disclaims beneficial ownership of the 16,440 shares controlled by Learned Jeremiah Hand.

(3)Dr. Anthony Cerami is the father of Carla Cerami Hand. Shares are held in a trust.

Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Mr. Learned Hand, an officer and director, advanced $28,940  to Wellstone for expenses which had not been reimbursed as of December 31, 2008.  Mr. Learned Hand advanced an additional $15,000 to Wellstone for operating expenses in September 2006 that has not been reimbursed as of December 31, 2008.   A law firm controlled  by a brother of Learned Hand advanced funds on behalf of  Wellstone from time to  time  prior to calendar  2006,  and as of December 31, 2007 and 2008 the amount unreimbursed to the law firm was $16,286.  The  highest amount owing to the law firm during 2007 or 2008  was $16,286.

Mr. Learned J. Hand has advanced the Company additional funds during  2007 in the amount of $61,144.  Mr. Hand is under no commitment to continue to advance funds to the Company.

Carla  Cerami  Hand  or  Cerami  Consulting  Corporation  and  an  entity controlled  by  Learned  Hand loaned various amounts to Wellstone for its capital requirements prior to the year ended December 31, 2006.   The  loans are due on demand, bear interest at 8% per annum and are represented by promissory  notes.   As  of December 31, 2008,  $34,671 had accrued as interest on these notes, none of which  had  been paid.  These  related  party  notes  payable totaled $59,200 as of December 31, 2008.

The Company has a licensing agreement with Cerami Consulting Corporation, an entity owned and controlled by the spouse of the Company's Chief Executive Officer.  The licensing agreement grants the Company the exclusive worldwide exploitation rights to practice and utilize the inventions, technology, know- how, and patent,  including the rights to manufacture and market the filters which are the subject of the licensing  agreement, that  are  held by Cerami Consulting Corporation.  In exchange for the license rights, the Company agreed to pay all future costs for development, manufacture, and commercialization of the technology, including all other future fees and costs in connection with the patents.

Item 14 Principal Accountant Fees and Services.

Audit Fees

Item 14 Principal Accountant Fees and Services.

      During the period covering the fiscal years ended December  31,  2007   our  principal  accounting  firm  Blackwing Group was paid audit fees of $2,000 for audit services performed in 2008. In fiscal 2007 we paid DeJoya Griffith & Co. $9,000 for reviews of our Quarterly Reports on Form 10-QSB. We paid DeJoya Griffith $24,000 in audit fees and $1,345 for EDGAR filing fees for $2006.

Audit Committees pre-approval policies and procedures

We do not have an audit committee.  Our engagement of Blackwing Group LLC, as our independent registered public accounting firm, was approved by the Board of Directors.  No services described in Item 9(e)(2) through 9(e)(4) of Schedule 14A were performed by our auditors.

PART IV

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.  The following exhibits of the Company are included herein.No schedules are required.

2. Plan of acquisition, reorganization, arrange­ment, li­quidation or succession.

2.1. Agreement and Plan of Reorganization, dated February, May 25, 2001, be­tween the Reg­istrant and Wellstone LLC.⁽²⁾

3. Certificate of Incorporation and Bylaws

3.1. Articles of Incorporation⁽¹⁾

3.2 Articles of Amendment⁽²⁾

3.3 Bylaws⁽¹⁾

3.4 Articles of Amendment increasing authorized common stock to 300,000,000 shares (5)

3.5 Articles of Amendment for reverse stock split. (10)

10. Material Contracts

10.1 Stock Option Plan⁽¹⁾

102 Amended and Restated Stock Option Plan(5)

10.3 Funding Agreement with Arrakis Select Fund,(5)

10.4 Schedule of Details, options granted as of December 31, 2004 under Stock Option Plan(5)

10.5 $1,500,000 Promissory Note (4)

10.6 Warrants, exercisable for 3,240,000 shares of common stock (4)

10.7 Lease Agreement, with U.S. Flue-Cured Tobacco Growers Inc., dated as of September 1, 2004. (5)

10.8 Marketing Agreement, with H&S Marketing, dated as of December 28, 2004 (5)

10.9 License Agreement, by and between Cerami Consulting Corporation and Wellstone Filters, LLC, dated as of  September 14, 1999 (5)

10.10 Lease Extension Agreement with U.S. Flue-Cured Tobacco Growers Inc., dated May 2, 2005 (5)

10.11 $500,000 Promissory Note between Wellstone Filters, Inc. and Carlson Group, Ltd., dated January 25, 2006 (6)

10.12 Summary of Employment Agreement with Learned Jeremiah Hand (7)

10.13 Summary of Employment Agreement with Samuel M. Veasey (7)

10.14. Patent License Agreement dated January 17, 2007 between Wellstone and Glycanex BV.(8)

21.1 Wellstone Tobacco Company is incorporated in North Carolina. Trade names used include Wellstone and Silverton.  Wellstone Filters LLC is incorporated in Delaware.

31.1 Certification of Chief Executive and Financial Officer Pursuant to Exchange Act Rule 13a-14(a)(10).

32.1 Certification of Chief Executive and Financial Officer pursuant to 18 U.S.C. Section 1350(10).

(1) Incorporated by reference to the Company's Registration Statement on Form 10-SB, file no. 0-28161.

(2) Incorporated  by  reference to  the Company's Current Report on Form 8-K, dated May 25, 2001.

(3) Incorporated  by  reference  to the  Company's Current Report on Form 8-K dated August 6, 2001.

(4) Incorporated by reference to the Company's  Current Report  on  Form 8-K, dated December 3, 2004.

(5) Incorporated by reference to the Company's amended Annual Report  on Form 10-KSB/A, dated December 31, 2004.

(6) Incorporated by reference  to the Company's  Current  Report on Form 8-K, dated December 25, 2005.

(7) Incorporated by reference to the Company's Annual Report  on Form 10-KSB, dated December 31, 2004.

 (8) Incorporated by reference to the Company's Current Report on Form 8-K, dated January 22, 2007.

(9) (7) Incorporated by reference to the Company's Annual Report  on Form 10-KSB, dated December 31, 2006.

(10) Filed herewith.

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 on March 18, 2009.

WELLSTONE FILTERS, INC.

By:/s/ Learned Jeremiah Hand

Learned Jeremiah Hand

CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on March 18, 2009.

By:/s/Learned Jeremiah Hand                                                            CEO and Director

Learned Jeremiah Hand                                                                       (principal executive officer and acting        

                                                                                                      accounting and financial officer)

                                                                                                                    26

THE BLACKWING GROUP, LLC

18921G E VALLEY VIEW PARKWAY #325

INDEPENDENCE, MO 64055

816-813-0098

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Wellstone Filters, inc. (A Development Stage Company)

3887 Pacific Street

Las Vegas, NV 89121

We have audited the accompanying balance sheets of Wellstone filters, inc. (A Development Stage Company) as of December 31, 2007 and 2008, and the related statements of income and changes in member’s equity, and cash flows for the periods then ended and the period from February 17, 1998 to December 31, 2008.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, based on our audit and the report of the prior auditor, these financial statements referred to above present fairly, in all material respects, the financial position of Wellstone filters, inc. (A Development Stage Company) as of December 31, 2007 and 2008, and the results of its operations and its cash flows for the periods then ended and the period from February 17, 1998 to December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note C to the financial statements, the Company faces competition from existing companies with considerably more financial resources and business connections. In the event that Company fails to meet the anticipated levels of performance there is significant doubt that the Company will be able to meet the debt obligations related to the non public offering. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note C. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.          

The Blackwing Group, LLC

Issuing Office: Independence, MO

March 17, 2009

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

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

The accompanying notes are an integral part of this financial statement.

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

 WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies of Wellstone Filters, Inc. (A Development Stage Company) (the Company) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity. The Company has not realized revenues from its planned principal business purpose and is considered to be in its development state in accordance with SFAS 7, “Accounting and Reporting by Development State Enterprises.”

Organization, Nature of Business and Trade Name

Wellstone Filters, LLC (Wellstone) was organized as a Delaware limited liability company on February 17, 1998 (date of inception). On May 25, 2001, Wellstone Filters, Inc. (formerly Farallon Corporation) (the "Registrant") acquired Wellstone pursuant to an Agreement and Plan of Reorganization (the Agreement), dated as of May 25, 2001. The Registrant acquired all of the outstanding membership interest of Wellstone, in exchange for 8,400,000 shares of the Registrant's Common Stock. In addition, the Company issued 238,728 shares of common stock for cancellation of debt.

The stockholders of Wellstone, after the acquisition, owned the majority of the combined company.  Accordingly, the combination has been accounted for as a reverse acquisition whereby, for accounting purposes, Wellstone is the accounting acquirer and Registrant is the accounting acquiree. Registrant and Wellstone are collectively referred to as (the Company).  The Company has adopted a December 31 yearend. The financial statements from inception through May 25, 2001, are those of Wellstone, LLC, and the accounting acquirer.  Subsequent to May 25, 2001, the financial statements reflect the consolidated position and operations of Registrant and Wellstone. All share amounts are after giving effect to a 5-for-1 forward stock split effected in July 2003, a .40 for one stock dividend effected in October 2003 and a 3-for-1 forward stock split effected in September 2004, a 1-for-25 reverse split effective June 2006 and a 1-for-100 reverse stock split effective June of 2007.

The Company is engaged in the development and marketing of a proprietary cigarette filter technology and the Wellstone brand of cigarettes utilizing its patented reduced risk filter. On January 5, 2006, Wellstone announced that it had launched its brand in the United States with shipments to Phoenix, Arizona. The Company subsequently announced that it had shipped the Wellstone brand to Chapel Hill, NC and Richmond, Virginia and has partnered with a major supplier of convenience stores in the Southeastern United States to carry the Wellstone brand family. The Company is not currently generating any revenues from planned principal operations and is considered a development stage company as defined in Statement of Financial Accounting Standards No. 7.  

These Consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany transactions and accounts have been eliminated in consolidation.

                                                                                                                        33

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

Organization, Nature of Business and Trade Name (continued)

Basis of Presentation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that (1) recorded transactions are valid; (2) all valid transactions are recorded and (3) transactions are recorded in the period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the company for the respective periods being presented.

Property and Equipment

Property and equipment are carried at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged against operations. Renewals and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period.

Depreciation is computed for financial statement purposes on a straight-line basis over estimated useful lives of the related assets of 3 to 5 years.

For federal income tax purposes, depreciation is computed under the modified accelerated cost recovery system. For audit purposes, depreciation is computed under the straight-line method.

Income Taxes

Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to difference between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with maturity of three months or less to be cash equivalents.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock based Compensation

On January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Accounting for Stock-Based Compensation, to account for compensation costs under our stock option plans. We previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as amended).

We use the fair value method for equity instruments granted to employees and non-employees and use the Black Scholes model for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting period.

For the twelve months ended December 31, 2008, the Company did not have any stock based compensation expenses.

Revenue and Cost Recognition

The Company provides custom solutions for business management needs. The Company reports income and expenses on the accrual basis of accounting, whereby income is recorded when it is earned and expenses recorded when they are incurred. In this specific industry revenue from jobs is recognized as stipulated in each contract for services. The Company currently has not met any contract terms for recognition of revenue.

Cost of Goods Sold

Job costs include all direct materials, and labor costs and those indirect costs related to contracted services. Selling, general and administrative costs are charged to expense as incurred.

Advertising

Advertising expenses related to specific jobs are allocated and classified as costs of goods sold. Advertising expenses not related to specific jobs are recorded as general and administrative expenses.

Use of Estimates

The preparation of financial statements in accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  

A change in managements’ estimates or assumptions could have a material impact on Wellstone Filters, Inc.’s financial condition and results of operations during the period in which such changes occurred. Actual results could differ from those estimates. Wellstone Filters, Inc.’s financial statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Research and Development

The Company expenses research and development costs as incurred.

Concentration of Credit Risk

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

Principles of Consolidation

The consolidated financial statements include the accounts of the Registrant and its wholly owned subsidiaries, Wellstone Filters, LLC and Wellstone Tobacco, Inc. All significant inter-company transactions have been eliminated in consolidation.

Recently Issued Accounting Pronouncements

Recently Enacted Accounting Standards – In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (FAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of FAS 157 became effective as of the beginning of our 2008 fiscal year. The adoption of FAS 157 did not have a significant impact on our financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), which addresses how to quantify the effect of financial statement errors. The provisions of SAB 108 became effective as of the end of our 2007 fiscal year. The adoption of SAB 108 did not have a significant impact on our financial statements.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (FAS 159). FAS 159 permits companies 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 and establishes presentation and disclosure requirements designed to facilitate comparison between companies that choose different measurement attributes for similar types of assets and liabilities. The provisions of FAS 159 become effective as of the beginning of our 2009 fiscal year. We are currently evaluating the impact that FAS 159 will have on our financial statements.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” which applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Issued Accounting Pronouncements (continued)

noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. The statement is effective for annual periods beginning after December 15, 2008.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133,” (SFAS “161”) as amended and interpreted, which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format provides a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early adoption is permitted. We are currently evaluating the impact that FAS 161 will have on our financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60.”  SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation.  This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements.  SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.

None of the above new pronouncements has current application to the Company, but may be applicable to the Company’s future financial reporting.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE B – STOCK SPLITS AND STOCK DIVIDENDS

The Company has declared and affected the following stock splits and dividends:

- A five for one stock split in July 2003

- A four-tenths for one stock dividend in September 2003

- A three for one stock split in September 2004

- A one for 25 reverse stock split in June 2006

- A one for 100 reverse stock split in January 2007

All  share amounts in the consolidated financial statements have been retroactively restated to reflect these stock splits and dividend.

NOTE C – GOING CONCERN

Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading, or seeking protection from creditors pursuant to laws or regulations.

Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.

The Company incurred a net loss of $31,715 and $32,788 for the three months ended December 31, 2008 and 2007 and $131,905 and $77,054 for the twelve months ended December 31, 2008 and 2007.  The Company's liabilities exceed its assets by  $4,340,096 as of December 31, 2008.  The Company's sole operations have been discontinued with no other source of operating revenues. These factors create substantial doubt about the Company's ability to continue as a going concern.  The Company's management plans to continue as a going concern revolves around its ability to develop and/or acquire new business operations, as well as raise necessary capital to pay ongoing general and administrative expenses of the Company.

The ability of the Company to continue as a going concern is dependent on securing additional sources of capital and the success of the Company's plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE D – INCOME TAXES

The Company accounts for income taxes using the liability method; under which deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE D – INCOME TAXES – Continued

As of December 31, 2008, the Company had net operating loss carryforwards of approximately $32,604,542, which expire in varying amounts between 2016 and 2026.   Realization of this potential future tax benefit is dependent on generating   sufficient   taxable income prior to expiration of the loss carryforward. The deferred tax asset related to this potential future tax benefit has been offset by a valuation allowance in the same amount. The amount of the deferred tax asset ultimately realizable could be increased in the near term if estimates of future taxable income during the carryforward period are revised.

Deferred income tax assets of $6,045,049 and $5,987,407 at December 31, 2008 and 2007, respectively were offset in full by a valuation allowance.

The components of the Company's net deferred tax assets, including a valuation allowance, are as follows:

A reconciliation between the amounts of income tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:

Due to the inherent uncertainty in forecasts and future events and operating results, the Company has provided for a valuation allowance in an amount equal to gross deferred tax assets resulting in the above figures for the periods audited.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE E – NET LOSS PER COMMON SHARE

Net loss per share is calculated in accordance with SFAS No. 128, “Earnings Per Share” using the weighted average number of common shares outstanding during the year.

The computation of diluted loss per common share is based on the weighted average number of shares outstanding during the year, plus common stock equivalents calculated under the treasury stock method. The Company has issued equity instruments convertible into common stock such as stock options and warrants issued to employees, consultants and creditors that can be exercised for approximately 1,462,600 shares of common stock at December 31, 2006 with conversion process of $2.50 per share as of December 31, 2006. Common stock equivalents have not been included in the diluted loss per share calculation for the year December 31, 2008 or 2007  because the effect would be antidilutive.

NOTE F – PROPERTY AND EQUIPMENT

The carrying values of fixed assets as of December 31, 2008 and 2007, were as follows:

Depreciation for the periods ended December 31, 2008 and 2007 is $1,294 and $6,178.

NOTE G – ACCRUED EXPENSES

The Company has accrued expenses for years ended 2008 and 2007 of $1,356,224 and $1,230,363 , respectively. The amounts for 2008 and 2007 were primarily the result of deferred salaries of Company executives and interest on notes payable.

NOTE H – LONG-TERM DEBT

Long-Term debt consist of the following at December 31, 2007 and 2008:

40

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE I – RELATED PARTY TRANSACTIONS

Mr. Learned Hand, an officer and director, advanced $28,942 to the Company for expenses, which had not been reimbursed as of December 31, 2008.  Mr. Learned Hand advanced an additional $15,000 to Wellstone for operating expenses in September 2006.  The unreimbursed amount as of December 31, 2006 was $43,942.   A law firm controlled by a brother of Learned Hand advanced funds on behalf of the Company from time to time in calendar 2004, and as of December 31, 2006 the amount unreimbursed to the law firm was $16,286.

Pacific Coast Distributors, a distributor owned and operated by Adam Hand, a brother of the Company's CEO, accounted for $ 39,311, or 15% of the Company's sales in 2006. The sales terms to this distributor were the same as any other distributor. As of December 31, 2006, this distributor owed the Company $39,311, which was 15% of the Company's accounts receivable as of that date. However, in connection with its cessation of sales, the Company has written off all of its accounts receivables as uncollectible.

Pursuant to an Agreement and Plan of Reorganization dated May 25, 2001, Wellstone Filters, Inc., a Delaware corporation formerly known as Farallon Corporation  ("Wellstone") acquired all of the outstanding membership interests of Wellstone LLC in exchange for 210,000,000 shares of Wellstone's Common Stock.  In addition, Wellstone issued 5,968,200 shares of common stock to a stockholder of Farallon in cancellation of debt of $2,842. The terms of the acquisition were determined between the parties, who are related in that Learned Jeremiah Hand, the CEO of Wellstone, LLC, is the brother of Jehu Hand, the founder and president of Farallon. Prior to the acquisition, Wellstone LLC

and Farallon had no affiliation or relationship.

Carla Cerami Hand or Cerami Consulting Corporation and an entity controlled by Learned Hand have loaned various amounts to the Company for its capital requirements, as follows. The loans are due on demand; bear interest at 8% per annum and are represented by promissory notes. As of December 31, 2008, $34,671 had accrued as interest on these notes, none of which had been paid. These related party notes payable totaled $59,200 as of December 31, 2005.

During 2005 Wellstone issued 20,000 shares of common stock, valued at $510,000, to the brother of the Company's Chief Executive Officer for legal services that he provided to the Company.

In 2004, we issued to Jehu Hand, a brother of our Chief Executive Officer, 600,000 shares of common stock as compensation   for   legal services, which he provided to the Company. The Company's issuance of shares of its common stock to Mr. Hand resulted in an expense of approximately $6,270,000.  On January 2, 2004, Arrakis Select, Inc., a company controlled by Jehu Hand, a brother of our Chief Executive Officer, entered into a Funding Agreement whereby Arrakis provided $195,000 to Wellstone between January and October 2004 in exchange for 22,992 shares of common stock. The Company issued common stock   to Arrakis monthly at a price per share equal to the closing bid price of common stock as of the 15th day of the month in which Arrakis invested the money.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE I – RELATED PARTY TRANSACTIONS (continued)

The Company has a licensing agreement with Cerami Consulting Corporation, an entity owned and controlled by the spouse of the Company's Chief Executive Officer.  The licensing agreement grants the Company the exclusive worldwide exploitation rights to practice and utilize the inventions, technology, know how, and patent, including the rights to manufacture and market the filters which are the subject of the licensing agreement, that are held by Cerami Consulting Corporation. In exchange for the license rights, the Company agreed to pay all future costs for development, manufacture, and commercialization of the technology, including all other future fees and costs in connection with the patents.

In the fiscal years ended December 31, 2003 and 2002, Ms. Cerami Hand and/or Mr. Learned Hand advanced $8,899 and $16,072, respectively, on behalf of the Company for its corporate expenses. The Warren Institute, affiliated with the above officers, provided from time to time office space and occasional use of a 1,200 square foot lab to the Company at a cost of $1,400 per month from January 2002 to September 30, 2003, all of which has been accounted for as a contribution to capital by the controlling stockholders. Such amounts are not represented by any promissory note and bear no interest.

The notes payable - related party consist of loans from officers of the Company. The amounts are unsecured, bearing interest rates between 5% to 8% and are due on demand.  Accrued interest on the notes was $37,109 and $31,248 as of December 31, 2008 and December 31, 2007, respectively.

Accounts payable – related party includes amounts due to an officer of the Company and the brother of an officer of the Company.

NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION

No cash amounts were paid for interest or income taxes during the period from February 17, 1998, (date of inception) to December 31, 2008.

During the year ended December 31, 2004, the Company issued warrants with debt.  The warrants were valued at $1,020,000, which amount was recorded as a discount on long-term debt.  During 2005 and 2004,  $510,000 and $42,500, respectively, of the debt discount was accreted as interest expense.

During the years ended December 31, 2003 and 2002, the Company recorded a contribution of capital of $12,600 and  $16,800, respectively, for the use of office space provided by an officer and board member of the Company.  The arrangement for the use of office space was mutually terminated on September 30, 2003.

During   the   year   ended December 31, 2003, the Company purchased furniture and equipment through an increase in the related party accounts payable totaling $67,705.

During the year ended December 31, 2002, the Company acquired furniture and equipment in exchange for an increase in related party accounts payable of $11,167.

During the year ended December 31, 2001 the Company issued 238,728 shares of common stock in settlement of $2,842 of debt.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE K – CAPITAL STOCK

Preferred Stock

The Company has authorized 1,000,000 shares of preferred stock, $.001 par value, with such rights, preferences and designation and to be issued in such series as determined by the Board of Directors. No shares of preferred stock are issued and outstanding at December 31, 2008.

Common Stock

The Company has authorized common stock. A three for one stock split was approved on September 27, 2004 and subsequently effected on October 6, 2004. The stock split resulted in the issuance of an additional 157,978,800 shares of common stock. On September 15, 2003 a four tenths for one stock dividend was declared and subsequently issued on September 30, 2003. The stock dividend resulted in the issuance of an additional 45,136,800 shares of common stock.

On December 1, 2006 a one for one-hundred reverse stock split was approved and effected on January 31, 2007.  The reverse stock split resulted in a reclassification of common stock from 10,433,720 to 105,989

, including 1,652 shares issued to shareholders in rounding off the reverse stock split. .

On May 17, 2006 a one for twenty-five reverse stock split was approved and effected on June 19, 2006. The reverse stock split resulted in a reclassification of common stock from 280,842,991 to 10,433,720.

There was only one issuance of common stock in 2006. On March 6, 2006, an employee exercised stock options to purchase 24,000 shares of common stock for $2,000.

During 2005, the Company issued to Jehu Hand, a brother of our Chief Executive Officer, 600,000 shares of common stock as compensation for legal services, which he provided to the company. The Company’s issuance of shares of its common stock to Mr. Hand resulted in an expense of approximately $6,270,000.

During 2004, Arrakis Select, Inc., a company controlled by Jehu Hand, a brother of our Chief Executive Officer, entered into a Funding Agreement whereby Arrakis provided $195,000 to Wellstone between January and October 2004 in exchange for 22,992 shares of common stock.  The Company issued common stock to Arrakis monthly at a price per share equal to the closing bid price of common stock as of the 15th day of the month in which Arrakis invested the money.

Issuance of Stock Options Resulting in Expense

During 2005, the Company granted stock options to purchase 180,000 shares of common stock to employees with exercise prices below the market price on the measurement date.  Because the options vested immediately, they resulted in compensation expense of $1,920,000 in 2005. No options were granted in 2006 or 2007.

During 2004, options to purchase 26,500,000 shares with exercise prices ranging from $.003 to $.01 per share were issued to three officers of the Company, resulting in an expense of approximately $13,555,000.   Also, during the year, options were issued to a scientific advisor to purchase 4,800,000 shares at an exercise price of  $.0007 per share resulting in expense of approximately $655,000.  The expense for the issuance of these stock options to the advisor was calculated based on the Black-Scholes option-pricing model.

                                                                                                                        43

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2008

NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash, accounts payable, and notes payable. The carrying amount of cash and accounts payable approximates fair-value because of the short-term nature of these items. The carrying amount of notes payable approximates fair value as the individual borrowings bear interest at market interest rates.

NOTE M – PATENT LICENSE AGREEMENT

On January 17, 2007, Wellstone entered into a Patent License Agreement with Glycanex, BV, the supplier of the patented filter compound used in Wellstone cigarettes. Under the Patent License Agreement, Wellstone granted to Glycanex an exclusive right to the patent rights for all countries excepting the United States of America and its territories and possessions. Glycanex agreed to pay Wellstone a 3% royalty on net sales which exceed the minimum threshold of Euro 500,000. The consideration for the granting of the license to Glycanex was the cancellation of $120,000 owed to Glycanex for purchase of the filter compound.  There was no activity with respect to this agreement in 2008.

NOTE N - LIQUIDITY

The Company launched its Wellstone brand of cigarettes in the United States during the first quarter of 2006 and has shipped all brand styles to Arizona, Louisiana, North Carolina, Virginia and California.  Additionally, the Company has partnered with several suppliers of convenience stores in the Southeastern and the West Coast to carry the Wellstone brand family. Even though the Company’s net revenue increased 241% for the second quarter over the first quarter it continued to have a deficit in working capital and stockholders' deficit, and continued to incur losses. Although sales were increasing, the Company continued to suffer from a negative gross margin on its cigarettes; which was part of the Company’s strategy to obtain market share and entry into the competitive cigarette marketplace. Management reviewed the liquidity position of the Company during the quarter ended September 30, 2006 and sought unsuccessfully for additional debt or equity funding. Although the Company did enter into negotiations for a private placement, the funding group required that the Company carry out a 1-for- 25 reverse split of the common stock as a precondition to such placement. After Wellstone carried out the reverse split, the funding source did not complete funding. Faced with inadequate cash resources to fund the market introduction of its products; management determined to suspend further marketing activity.  

NOTE O - NOTE PAYABLE

Wellstone Filters, Inc. received $250,000 from the Carlson Group, Ltd., pursuant to a promissory note, dated May 17, 2006. This Note is not associated with the prior promissory notes which had been issued in 2006 and 2004. The Company borrowed the principal amount of $250,000, at an interest rate of 8% per annum, due in full on December 31, 2007. In addition to the stated interest rate, the Company shall also pay to the Lender an amount equal to the lesser of (a) $25,000 or (b) 3% of the net profits after taxes as of September 30, 2007, to be payable simultaneously with the principal and interest due on December 31, 2007. If a portion of the principal or interest is paid prior to December 31, 2007, the calculation of the additional amount shall be adjusted pro-rata. In the event of a default under the note when due, then the Lender, at its election, may declare the entire unpaid principal and all accrued but unpaid interest, immediately due and payable. The maximum additional amount that the Company shall pay is $25,000, and such mount is due on the maturity of the Note.  No further arrangements have been made with respect to these agreements in 2008.

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2007

NOTE O - NOTE PAYABLE (continued)

On January 25, 2006, Wellstone Filters, Inc. received $500,000 from the Carlson Group, Ltd., pursuant to a promissory note, dated January 25, 2006. This Note is not associated with the prior promissory note which had been issued in 2004. The Company borrowed the principal amount of $500,000, at an interest rate of 8% per annum, due in full on December 31, 2007. In addition to the stated interest rate, the Company shall also pay to the Lender an amount equal to the lesser of (a) $25,000 or (b) 3% of the net profits after taxes as of September 30, 2007, to be payable simultaneously with the principal and interest due on December 31, 2007. If a portion of the principal or interest is paid prior to December 31, 2007, the calculation of the additional amount shall be adjusted pro-rata.

In the event of a default under the note when due, then the Lender, at its election, may declare the entire unpaid principal and all accrued but unpaid interest, immediately due and payable. The maximum additional amount that the Company shall pay is $25,000, and such amount is due on the maturity of the Note. In October 2004 the Company entered into an agreement with another fund under which it received $1.5 million in debt financing plus warrants.  The Company has dismissed or accepted the resignation of all employees and officers except for its Chief Executive Officer, has vacated its corporate offices and otherwise drastically reduced its general and administrative costs pending a resolution of its liquidity problems.  The Company is funding its cash needs from funds lent by its officer and director.

NOTE P – STOCK OPTION PLAN

On April 1, 1994, the Company adopted the 1994 Stock Option Plan. The plan provides for the granting of awards of up to 1,680,000 shares of common stock to officers, directors, employees, advisors, and employees of other companies that do business with the Company as non-qualified stock options. The Stock Option Committee for the Board of Directors determines the option price, which cannot be less that the fair market value at the date of the grant or 110% of the fair market value if the recipient of the grant holds 10% or more of the Company’s common stock. The exercise price per share of shares subject to a NON-Qualified option cannot be less than 85% of the fair market value. Options granted under the plan will typically expire ten years from the date of the grant (five years if the recipient of the grant holds 10% or more of the Company’s common stock on the date of the grant) or three months after termination of employment. The plan was amended and restated in 2003 for technical updates to confirm with law.

On December 31, 2008, the Company had 960,000 shares available for grant under the Option Plan.

During 2004, the Company issued warrants to purchase 129,600 shares of common stock with an exercise price of $12.50 per share in connection with a note payable. See Note H.

45

WELLSTONE FILTERS, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDING DECEMBER 31, 2007

NOTE P – STOCK OPTION PLAN (continued)

A schedule of the options is as follows: