I lost my job in NC, and then I lost my home. I had to leave the state and move to IL to live with family. I had to use my 401K for moving expenses, but I had exhausted all my funds trying to stay in my home. Wll I be penalized for doing that? Can I deduct my moving expenses on my federal taxes for 2007>

You will owe income tax and the 10% early withdrawal penalty for the amount you withdrew from the 401(k). You can deduct moving expenses if you meet the criteria set buy the IRS, which is basically that you changed residences because of your job and moved at least 50 miles. See:

Moving Expenses Related to a New Job May Be Tax Deductible