UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 x
    QUARTERLY  REPORT  UNDER SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
quarterly period ended December 31, 2008
 
 
 o
     TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT
 
 For the
transition period from _______ to ________
 
 Commission
File
number               000-30262
  
 VISUALANT, INCORPORATED
 (Exact
name of registrant as specified in charter)
 
  Nevada
                    91-1948357(State
      or other jurisdiction of incorporation or
    organization)
                    (I.R.S.
      Employer Identification No.)500 Union Street, Suite
      406, Seattle, Washington
      USA
                    98101(Address
      of principal executive offices)
                    (Zip
      Code)
   206-903-1351(Registrant's
      telephone number, including area code)N/A(Former
      name, address, and fiscal year, if changed since last
    report)
   Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
  Yes x  No o
 
  Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer (See the definitions of “large accelerated
filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act).
  Large
accelerated filer   ̈            Accelerated
filer   ̈            Non-accelerated
filer   ̈            Smaller
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 o  No x
 
  The
number of shares of common stock, $.001 par value, issued and outstanding as
of  February 23, 2009:  27,742,901 shares
 
  Transitional
Small Business Disclosure Format (check one):
  Yes o No x
  1
    TABLE
      OF CONTENTSPage NumberPART
      1
                            FINANCIAL
      INFORMATION
                            3ITEM
      1
                            Financial
      Statements (unaudited)
                            3Balance
      Sheets as of December 31, 2008 and September 30, 2008
                            4Statements
      of OperationsFor
      the three months ended December 31, 2008 and 2007, and the period from
      October 8, 1998 (Date of Inception) to December 31, 2008
                            5Statements
      of Cash FlowsFor
      the three months ended December 31, 2008 and 2007 and for the period from
      October 8, 1998 (Date of Inception) to December 31, 2008
                            6Notes
      to the Financial Statements.
                            7ITEM
      2
                            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                            11ITEM
      4
                            Controls
      and Procedures
                            12PART
      II
                            OTHER
      INFORMATION
                            13ITEM
      2
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            13ITEM
      6
                            Exhibits
      and Reports on Form 8-K
                            13SIGNATURES
                            14
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  2
  
 PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              FINANCIAL
      STATEMENTS
 
 The
accompanying balance sheets of Visualant, Incorporated (development stage
company) at December 31, 2008 and September 30, 2008, the statements of
operations for the three months ended December 31, 2008 and 2007, the statements
of cash flows for the three months ended December 31, 2008 and 2007 and for the
period from October 8, 1998 (date of incorporation) to December 31, 2008, have
been prepared by the Company's management, in conformity with principles
generally accepted in the United States of America.  In the opinion of
management, all adjustments considered necessary for a fair presentation of the
results of operations and financial position have been included and all such
adjustments are of a normal recurring nature.
 
 Operating
results for the three month period ended December 31, 2008 are not necessarily
indicative of the results that can be expected for the year ending September 30,
2009.
 
 
 
 
 
 
 
 
 
 
 
    3
   VISUALANT,
INCORPORATED
 (Development
Stage Company)
  BALANCE
SHEETS
 December
31, 2008 and September 30, 2008
 
 December
      31, 2008
                                      
                                      
                                      September
      30, 2008ASSETSCURRENT
      ASSETSCash
                                      
                                      $
                                      803
                                      
                                      
                                      $
                                      255Prepaid
      Expenses
                                      
                                      
                                      1,026
                                      
                                      
                                      
                                      1,766Total
      Current Assets
                                      
                                      
                                      1,829
                                      
                                      
                                      
                                      2,021Deferred
      Financing Costs, net
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -TOTAL
      ASSETS
                                      
                                      $
                                      1,829
                                      
                                      
                                      $
                                      2,021LIABILITIES AND
      STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESNote
      payable to a related party
                                      
                                      $
                                      50,750
                                      
                                      
                                      $
                                      50,750Accrued
      expenses and other liabilities
                                      
                                      
                                      65,632
                                      
                                      
                                      
                                      110,562Accrued
      expenses and other liabilities due to related parties
                                      
                                      
                                      571,555
                                      
                                      
                                      
                                      504,662Accounts
      payable
                                      
                                      
                                      331,115
                                      
                                      
                                      
                                      780,912Accounts
      payable due to related parties
                                      
                                      
                                      253,151
                                      
                                      
                                      
                                      264,429Total
      Current Liabilities
                                      
                                      
                                      1,272,203
                                      
                                      
                                      
                                      1,711,315Long-term
      Notes Payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      425,340Commitments
      and Contingencies
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -STOCKHOLDERS'
      DEFICITPreferred
      stock - $0. 001 par value, 50, 000,000 shares authorized, no shares issued
      and outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      stock - $0.001 par value, 200,000,000 shares authorized, 27,742,901 and
      18,353,891 shares issued and outstanding, respectively
                                      
                                      
                                      27,743
                                      
                                      
                                      
                                      18,354Additional
      paid in capital
                                      
                                      
                                      5,905,777
                                      
                                      
                                      
                                      4,521,760Deficit
      accumulated during the development stage
                                      
                                      
                                      (7,203,894
                                      )
                                      
                                      
                                      (6,674,748
                                      )Total
      Stockholders' Equity (Deficiency)
                                      
                                      
                                      (1,270,374
                                      )
                                      
                                      
                                      (2,134,634
                                      )TOTAL
      LIABILITIES & EQUITY
                                      
                                      $
                                      1,829
                                      
                                      
                                      $
                                      2,021
 
 The
accompanying notes are an integral part of these financial
statements
  
   4
  VISUALANT,
INCORPORATED
 (Development
Stage Company)
  STATEMENTS
OF OPERATIONS
 For
the Three Months Ended December 31, 2008 and 2007 and the Period
from
 October
8, 1998 (Date of Inception) to December 31, 2008
 
 Three
      Months Ended December 31, 2008
                                      
                                      
                                      Three
      Months Ended December 31, 2007
                                      
                                      
                                      Period
      of Inception from October 8, 1998 to December 31, 2008Revenues
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -ExpensesResearch
      and development
                                      
                                      
                                      214,105
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,451,522Administrative
                                      
                                      
                                      300,335
                                      
                                      
                                      
                                      282,914
                                      
                                      
                                      
                                      4,289,624Total
      Operating Expense
                                      
                                      
                                      514,440
                                      
                                      
                                      
                                      282,914
                                      
                                      
                                      
                                      5,741,146Loss
      from Operations
                                      
                                      
                                      (514,440
                                      )
                                      
                                      
                                      (282,914
                                      )
                                      
                                      
                                      (5,741,146
                                      )Other
      Income (Expense)Settlement
      of debt
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      43,400Interest
      expense
                                      
                                      
                                      (14,706
                                      )
                                      
                                      
                                      (24,646
                                      
                                      
                                      
                                      (351,821
                                      )Loss
      of deposit
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,154,327
                                      )Net
      Loss
                                      
                                      $
                                      (529,146
                                      )
                                      
                                      $
                                      (307,560
                                      )
                                      
                                      $
                                      (7,203,894
                                      )Net
      Loss Applicable to Common Stockholders Basic and diluted
                                      
                                      $
                                      (0.02
                                      )
                                      
                                      $
                                      (0.02
                                      )Weighted
      Average Shares used in computing basic and diluted net loss per
      share
                                      
                                      
                                      26,439,503
                                      
                                      
                                      
                                      17,183,239
 
 The
accompanying notes are an integral part of these financial
statements
   
   5
  VISUALANT,
INCORPORATED
 (Development
Stage Company)
  STATEMENTS
OF CASH FLOWS
 For
the Three Months Ended December 31, 2008 and 2007 and the Period
from
 October
8, 1998 (Date of Inception) to December 31, 2008
 
 Three
      Months Ended
                                                        
                                                        
                                                        Three
      Months Ended
                                                        
                                                        
                                                        October
      8, 1998December
      31,
                                                        
                                                        
                                                        December
      31,
                                                        
                                                        
                                                        to
      December 31,2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                                        
                                                        $
                                                        (529,146
                                                        )
                                                        
                                                        $
                                                        (307,560
                                                        )
                                                        
                                                        $
                                                        (7,203,894
                                                        )Reconciliation
      of net loss to net cash used in operating activities:Depreciation,
      amortization and tangible and intangible asset impairments
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        19,808Issuance
      of capital stock for expenses
                                                        
                                                        
                                                        876,007
                                                        
                                                        
                                                        
                                                        118,000
                                                        
                                                        
                                                        
                                                        1,174,463Stock
      based compensation
                                                        
                                                        
                                                        35,304
                                                        
                                                        
                                                        
                                                        38,120
                                                        
                                                        
                                                        
                                                        477,457Stock
      Options Issued in exchange for services
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        236,988Amortization
      of Deferred Financing
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        8,000
                                                        
                                                        
                                                        
                                                        96,000Loss
      of deposit
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,154,327Capital
      contributions - expenses
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        10,950Increase
      (decrease) in cash resulting from changes in assets
      and liabilities:Prepaid
      expenses
                                                        
                                                        
                                                        740
                                                        
                                                        
                                                        
                                                        (18,602
                                                        )
                                                        
                                                        
                                                        (1,026
                                                        )Accounts
      payable and accrued expenses
                                                        
                                                        
                                                        (382,357
                                                        )
                                                        
                                                        
                                                        162,179
                                                        
                                                        
                                                        
                                                        2,703,383Net
      Cash Used in Operating Activities
                                                        
                                                        
                                                        548
                                                        
                                                        
                                                        
                                                        137
                                                        
                                                        
                                                        
                                                        (1,331,544
                                                        )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (12,308
                                                        )Purchase
      of investment - deposit
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,154,327
                                                        )Net
      Cash Used in Investing Activities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,166,635
                                                        )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,022,892Proceeds
      from issuance of convertible debt
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        425,340Proceeds
      from issuance of notes payable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        300,951Repayment
      of notes payable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (250,201
                                                        )Net
      Cash Provided by Financing Activities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,498,982Net
      Change in Cash
                                                        
                                                        
                                                        548
                                                        
                                                        
                                                        
                                                        137
                                                        
                                                        
                                                        
                                                        803Cash
      at Beginning of Period
                                                        
                                                        
                                                        255
                                                        
                                                        
                                                        
                                                        91
                                                        
                                                        
                                                        
                                                        -Cash
      at End of Period
                                                        
                                                        $
                                                        803
                                                        
                                                        
                                                        $
                                                        228
                                                        
                                                        
                                                        $
                                                        803Supplemental
      disclosure of cash flow informationCash
      paid during the period for interest
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        35,139
                                                        
                                                        
                                                        
                                                        141,413Issuance
      of common stock to retire debt
                                                        
                                                        
                                                        482,095
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
 The
accompanying notes are an integral part of these financial
statements
 
    6
 VISUALANT,
INCORPORATED
 (Development
Stage Company)
  NOTES
TO FINANCIAL STATEMENTS
 December
31, 2008
   1.
              ORGANIZATION
 
 Visualant,
Inc. was incorporated under the laws of the State of Nevada on October 8, 1998
under the name of “Cigar King Corporation” with authorized common stock of
200,000,000 shares at $0.001 par value. On September 13, 2002 the name was
changed to “Starberrys Corporation” as part of a change in the authorized
capital stock whereby 50,000,000 shares of preferred stock with a par value of
$0.001 were authorized.  On August 18, 2004 the name of the Company
was changed to “Visualant, Incorporated”. There are no preferred shares issued
and the terms have not been determined.
 
 The
Company is in the development stage and has not commenced
operations.
   2.
              GOING
      CONCERN
 
 The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. We have incurred net losses of approximately
$529,000 and $308,000 for the three months ended December 31, 2008 and 2007,
respectively. Our current liabilities exceeded our current assets by
approximately $1.3 million as of December 31, 2008.  Our net cash used
in operating activities approximated $548 for the three months ended December
31, 2008.
 
 As of
December 31, 2008, the Company had minimal cash.  The Company is
considered illiquid as this cash is not considered sufficient to fund the
recurring operating and associated financing costs. The Company needs to raise
additional funding to continue its operations.  However, there can be
no assurance that financing or additional funding will be available to the
Company on favorable terms or at all. If the Company raises additional capital
through the sale of equity or convertible debt securities, the issuance of such
securities may result in dilution to existing stockholders.
  We
anticipate that we will generate significant losses from operations for the
foreseeable future. As of December 31, 2008, our accumulated deficit was $7.2
million.  We have limited capital resources, and operations to date
have been funded with the proceeds from private equity and debt financings.
These conditions raise substantial doubt about our ability to continue as a
going concern. The audit report prepared by our independent registered public
accounting firm relating to our consolidated financial statements for the year
ended September 30, 2008 includes an explanatory paragraph expressing the
substantial doubt about our ability to continue as a going concern.
 
 Continuation
of the company as a going concern is dependant upon obtaining additional working
capital.  The financial statements do not include any adjustments that
might be necessary if we are unable to continue as a going concern.
 
  
 7
 VISUALANT,
INCORPORATED
 (Development
Stage Company)
  NOTES
TO FINANCIAL STATEMENTS (Continued)
 December
31, 2008
  3.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
  Recent
Accounting Pronouncements
  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations — a
Replacement of FASB Statement No. 141 (“SFAS No. 141(R)”). The
statement is to be applied prospectively for fiscal years beginning on or after
December 15, 2008. The statement also applies to the treatment of taxes
from prior business combinations. The statement requires more assets acquired
and liabilities assumed in future business combinations to be measured at fair
value as of the acquisition date. In addition, expenses incurred for all
acquisition-related costs are to be expensed and liabilities related to
contingent consideration are to be re-measured to fair value each subsequent
reporting period. We will adopt SFAS No. 141(R) at the beginning of our
2010 fiscal year, or October 1, 2009. We do not expect this statement will
have a significant impact on our consolidated financial position or results of
operations when adopted.
  In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51
(“SFAS No. 160”). The statement changes how non-controlling interests in
subsidiaries are measured to initially be measured at fair value and classified
as a separate component of equity. SFAS No. 160 establishes a single method
of accounting for changes in a parent’s ownership interest in a subsidiary that
do not result in deconsolidation. No gains or losses will be recognized on
partial disposals of a subsidiary where control is retained. In addition, in
partial acquisitions, where control is obtained, the acquiring company will
recognize and measure at fair value all of the assets and liabilities, including
goodwill, as if the entire target company had been acquired. The statement is to
be applied prospectively for fiscal years beginning on or after
December 15, 2008. We will adopt this statement on October 1, 2009,
which is the beginning of our 2010 fiscal year. Currently we do not have any
subsidiaries, and therefore we do not anticipate any significant impact on our
financial position or results of operations when adopted.
   4.
              ADOPTION
      OF ACCOUNTING STANDARDS
  Adoption
of SFAS No. 157, Fair Value Measurements
  We
adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements(“SFAS No. 157”), on October 1, 2008 for financial assets and
liabilities. We elected to defer adoption of SFAS No. 157 for our
non-financial assets and liabilities until October 1, 2009 as permitted by
FASB Staff Position No. 157-2, Effective Date of FASB Statement
No. 157.
  As of December 31, 2008, there are no
financial assets or liabilities requiring additional fair value
disclosure.
  SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value and enhances disclosures about fair value measurements. Fair value is
defined as the exchange price that would be received for an asset or paid to
transfer a liability (or exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair
value must maximize the use of observable inputs and minimize the use of
unobservable inputs. SFAS No. 157 establishes a fair value hierarchy based
on three levels of inputs that may be used to measure fair value. The input
levels are:
  Level 1:
                
                Quoted
      (observable) market prices in active markets for identical assets or
      liabilities.
 
 Level 2:
                
                Inputs
      other than Level 1 that are observable, such as quoted prices for similar
      assets or liabilities; quoted prices in markets that are not active; or
      other inputs that are observable or can be corroborated by observable
      market data for substantially the full term of the asset or
      liability.Level 3:
                
                Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the asset or
  liability.
   5.
              DEVELOPMENT
      OF TECHNOLOGIES OWNED BY THE
COMPANY
 
 The
Company is in the business of researching, developing, acquiring, and
commercializing products and services related to illumination and detection of
electromagnetic energy, typically in the visible and near-visible portions of
the electromagnetic spectrum, using specialized illumination and sensing systems
and spatial analysis software modeling which allow for pattern
recognition.  This technology involves specialized and proprietary
information and trade secrets, which the Company considers to be among its most
sensitive, confidential, and proprietary information.
 8
 VISUALANT,
INCORPORATED
 (Development
Stage Company)
  NOTES
TO FINANCIAL STATEMENTS (Continued)
 December
31, 2008
  6.
              NOTES
      PAYABLE
 
 In
October 2008, the Long Term Note Payable and accrued interest outstanding with
Coventry Capital LLC was converted into 3,213,967 shares of common stock at
$0.15 per share.  The amount converted of $482,095 was comprised of
the entire principal balance of $425,340 and accrued interest of
$56,755.
  .In
February 2007, the Company entered into a demand note with CEO and President,
Bradley E. Sparks totaling $50,000 plus loan fees of $750.  As of
December 31, 2008, the outstanding note payable totaled $50,750 consisting of
the note payable to Sparks.  Interest expense accrues on the note at a
rate of 18% per annum.  Accrued interest on the notes payable is
recorded in the balance sheet in accrued expenses and other
liabilities.
  Any
delays in repayment of the principal and accrued interest on the note payable
upon demand result in a penalty interest rate of 30% per annum.  The
interest due to Sparks became in arrears on February 16, 2008 and has not been
paid as of the date of this filing.  Sparks has not demanded repayment
of the note as of the date of this filing.
 
  7.
              LINE
      OF CREDIT
 
 In
October 2008, the Convertible Line of Credit Agreement with Coventry Capital LLC
was terminated and the total $482,095 outstanding  Long Term Note
Payable with Coventry was converted into 3,213,967 shares of common stock at
$0.15 per share.  The amount converted was comprised of the principal
balance of $425,340 and accrued interest of $56,755.
   8.
              COMMON
      CAPITAL STOCK
 
 During
the quarter ended December 31, 2008, the company issued 6,039,010 shares of
common stock in satisfaction of $906,823 of outstanding indebtedness, including
the debt due to Coventry Capital, 950,000 shares of common stock as grants to
directors, 550,000 shares of common stock as grants to consultants, and
1,850,000 shares in resolution of certain outstanding matters with the RatLab
LLC.
 
 
 9.
              STOCK
      OPTIONS
  Description of Stock Option
Plan
  In 2005,
our Board of Directors adopted a combined incentive and nonqualified stock
option plan for our employees and consultants (“2005 Stock Option
Plan”).   On October 9, 2006 the Board of Directors authorized an
increase in shares available for grant from 2 million to 4 million, subject to
stockholder approval.
  Determining Fair Value Under
SFAS No. 123R
  Effective
October 1, 2006, we began recording compensation expense associated with stock
options and other equity-based compensation in accordance with SFAS No. 123
(revised 2004), “Share-Based Payment”. We adopted FAS 123(R) using the modified
prospective method.  Share-based compensation recognized in fiscal
2007 as a result of the adoption of SFAS No. 123R use the
Black-Scholes-Merton option valuation model for estimating fair value of stock
options granted under our plan. We amortize the fair value of stock options on a
ratable basis over the requisite service periods, which are generally the
vesting periods. The expected life of awards granted represents the period of
time that they are expected to be outstanding.  We estimate the
volatility of our common stock based on the historical volatility of our own
common stock over the most recent period corresponding with the estimated
expected life of the award. We base the risk-free interest rate used in the
Black-Scholes-Merton option valuation model on the implied yield currently
available on U.S. Treasury zero-coupon issues with an equivalent remaining term
equal to the expected life of the award. We have not paid any cash dividends on
our common stock and do not anticipate paying any cash dividends in the
foreseeable future. Consequently, we use an expected dividend yield of zero in
the Black-Scholes-Merton option valuation model.  In accordance with
SFAS No. 123R, we adjust share-based compensation for changes to the
estimate of expected equity award forfeitures based on actual forfeiture
experience. The effect of adjusting the forfeiture rate for all expense
amortization after October 1, 2006 is recognized in the period the
forfeiture estimate is changed.
  9
 VISUALANT,
INCORPORATED
 (Development
Stage Company)
  NOTES
TO FINANCIAL STATEMENTS (Continued)
 December
31, 2008
  9.
              STOCK OPTIONS -
      continued
  Stock Option
Activity
  A summary
of activity relating to our stock option plan is as follows:
  Options
                                
                                Weighted-
                                  Average
                                  Exercise Price
                                
                                
                                Weighted-
                                  Average
                                  Remaining
                                  Contractual TermOutstanding
      as of September 30, 2008
                                1,485,000Granted
                                -Exercised
                                -Expired
                                -Forfeited
                                -Outstanding
      as of December  31, 2008
                                1,485,000
                                
                                $
                                0.55
                                
                                
                                
                                3.02
 
 No
options have been granted during the three months ended December 31,
2008.
   10.
              SIGNIFICANT
      TRANSACTIONS WITH RELATED PARTIES
 
 See
Note 6 for discussion of notes payable issued to the Company’s CEO and
President during the quarter ended March 31, 2007.   Other than the
note payable, related interest and payroll related accruals, all amounts are
recorded in the related parties accounts payable balance.  As of the
filing date, the directors and officers of the Company beneficially own an
aggregate 4,581,875 shares of common stock or 16.5% of the Company.
 
 Mr.
Sparks is owed $513,333 of accrued salary plus $41,178 which has been accrued to
pay applicable payroll taxes, FUTA, etc.  Additionally, interest
of $17,044 is owed Mr. Sparks for the note payable described in Note 6
to these Notes to Financial Statements.  Mr. Sparks is also owed
$38,793 for cash amounts advanced by him to Visualant to fund operating expenses
since his employment.
 
 Mr.
Erickson is owed $121,177 for cash amounts advanced by him to Visualant to fund
operating expenses.  During the first quarter ending December 31,
2008, Mr. Erickson advanced $17,357 to the Company.  Additionally, the
Company owes Juliz I Limited Partnership (a limited partnership of which Mr.
Erickson exercises control)  $12,000 for cash amounts advanced to fund
operating expenses during the first quarter ending December 31,
2008.
 
 Dr.
Kawahata is owed $90,000 by the Visualant Japanese operations for services
rendered to the Company.
 
  11.
              CANCELLATION
      OF AGREEMENT TO PURCHASE SHARES OF
SCI
 
 On April
9, 2003 the Company signed a Purchase Agreement with Malaremastastarnas
Riksforening, the owner of all the shares of Skandinaviska Farginstituter AB
(the Scandinavian Colour Institute or "SCI") which owns the color notation
system Natural Color Systems ("NCS"), containing the terms of an acquisition by
the Company or its assigns for a price of SEK 35,000,000 of all shares of
SCI.  Pursuant to the terms of the agreements the Company made
payments of $1,154,327 into an escrow account as part payment toward the
purchase price.  The Company subsequently failed to make further
payments on the contracts and by mutual agreement the contracts were cancelled
and the moneys paid were expensed.
   12.
              SUBSEQUENT
      EVENTS
 
 None
     10
  ITEM
      2.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 The
Company is a development stage company engaged in the business of
commercializing products and services based upon our spectral signature
technology as reflected in our recently filed patent
applications.  These patent applications pertain to the use of
controlled illumination with specific bands of electromagnetic radiation,
detection of returned electromagnetic radiation and data management in an
innovative manner enabling our devices to establish a unique spectral
signature for both individual and classes of items.  The unique
spectral signature data can potentially be used in a variety of applications in
areas such as brand protection, forgery detection, homeland security, medical
diagnostics, quality control, fluids monitoring, metal stress analysis, and many
others.  As of December 31, 2008, the Company has six
utility patent applications with the U.S. Patent Office.
 
 The
Company purchases its research and development services from outside third party
sources.  On March 15, 2006, the Company entered into a research and
development contract with RATLab LLC, a privately-owned research laboratory in
Seattle, Washington.  Under the contract, RATLab performs research and
development using the Company’s existing intellectual property, as well as newly
developed research and technologies in order to assist the Company with the
commercialization of its core spectral signature technologies.  During
the three and twelve-month periods ended September 30, 2008, the Company made no
payments for research and development fees to RATLab LLC.  RATLab LLC
is a research laboratory formed primarily by Dr. Thomas Furness, founder and
former director of the Human Interface Technology Lab (HIT Lab) at the
University of Washington, and one of the leading researchers in the world in the
area of human interface technology.  RATLab LLC also employs other
leading scientists and research associates in the areas of computer science,
imaging technology, and light sensing technology, who are part of the team
conducting research on behalf of the Company.
 
 The
Company’s research and development activities under its Research and Development
Contract with RATLab LLC, however, were suspended on July 12, 2007 due to lack
of funds.  During the three month period ended December 31, 2008, the
Company made no payments for research and development fees to RATLab LLC.
Developmental activities, however, will resume with the RATLab under the terms
of the new licensing agreement with the RatLab, which are set forth
below.
 
 On August
20, 2008, the Company entered into a letter of intent with the RatLab
LLC.  The purpose of the agreement contemplated by the letter of the
intent was to achieve resolution of the relationship between the RatLab LLC and
the Company and provide a means for a mutually beneficial on-going
relationship.  On October 23, 2008, the Company and the RatLab LLC
entered into definitive agreements which provide for a non-commercial
non-exclusive license of the Company’s technology to the RatLab LLC for the
purpose of continuing research and development with a license back to the
Company for enhancements that are developed.  Further, an exclusive
license was entered into between the Company and the RatLab LLC for four fields
of use:  medical, agricultural, environmental and
jewelry.  This exclusive license provides for certain performance
milestones, a market-rate royalty to the Company and an equity participation in
an entity to be formed by the RatLab LLC to commercialize the Company’s
technology in the enumerated fields of use.
 
 The
Company intends to position its technology as both a revolutionary as well as a
practical solution for security and fraud prevention applications and
markets.  The Company’s current focus is to secure customers for its
spectral signature technology and to capitalize upon the potential business
opportunities in the areas of national security, document forgery/fraud, brand
protection, label fraud and product tampering.  However, the
broad scope of the applications covered by the Company’s patent applications may
result in new opportunities surfacing from customers desiring prototypes
designed to satisfy their specific technology needs.  As of December
31, 2008, the Company had no customers.
 
 The
Company has developed prototypes which capture the spectral signatures of items
and manage the data gathered.  These prototypes are being shown to
potential customers and funding sources to demonstrate the potential and
capabilities of our devices.  It is envisioned that once the Company
has secured a customer or customers, it will collaborate with the customer to
develop devices and specific applications of the Company’s technology that are
designed to address the customer’s unique concerns.  The Company will
then hire new personnel sufficient to fulfill its development obligations under
any contract entered into.  In lieu of such hiring, the Company may
contract with certain research organizations to perform development activities
on behalf of the Company.
 
 Through
the formation and development of its Japanese division, the Company plans to
facilitate the development of business relationships with Japanese license
partners and to help build strong relationships between Visualant and the
Japanese marketplace.  The Company sees the expansion of Visualant
into the Japanese market place as a key strategic move which will allow it to
closely align with manufacturers and systems suppliers who can integrate the
Visualant technology into their product offerings.
 
 On April
17, 2008 the Company announced the formation of a majority owned Japanese
subsidiary, Visualant Kabushiki Kaisha (“KK”) headquartered in Tokyo,
Japan.  The Chairman of Visualant KK is Dr. Masahiro Kawahata, who
also serves as a member of the Board of Directors for Visualant,
Inc.  For 100,000 shares of its common stock, Visualant, Inc. plans to
purchase 66% of an existing entity of which Dr. Kawahata and Ron Erickson
previously owned, and of which they will continue to own, 17% each.  As of
December 31, 2008, the purchase of the existing entity shares has not closed and
the 100,000 Visualant shares have been issued, but still remain in the custody
of the Company.  They are not counted in the total Company shareholders
count.  The closing is expected to occur within the first half of
calendar year 2009.
  11
  ITEM
      2.
              MANAGEMENT'S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
  This
Report on Form 10-Q contains certain forward-looking statements that are based
on current expectations.  When used in this discussion, the words
"believe", "anticipates", "expects" and similar expressions are intended to
identify forward-looking statements.  Such statements
are  subject  to  certain risks and uncertainties,
which could cause actual results to differ materially from those projected, and
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.  The
Company may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop and
market its products; the market may not accept the Company’s future products;
the Company may not be able to retain existing key management personnel; and
there may be other material adverse changes in the Company’s operations or
business.  Assumptions relating to budgeting, marketing, and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing
or other budgets, which may in turn affect the Company’s financial position and
results of operations.  Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.  The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.  Readers
are also urged to carefully review and consider the other risk factors relating
to the Company and the various disclosures made by the Company that
attempt to advise interested parties of factors which affect the Company's
business, in the Company’s Annual Report on Form 10-KSB for the year ended
September 30, 2008 as well as in the Company's periodic reports on Forms 10-Q
and 8-K filed with the Securities and Exchange Commission
(the  "SEC").  The Company's financial statements are stated
in United States Dollars and are prepared in accordance with United States
Generally Accepted Accounting Principles.
   Liquidity
and Capital Resources
  The
Company has no revenue to date from its operations, and its ability to implement
its plans for the future will depend on the future availability of
financing.  Such financing will be required to enable the Company to
further develop its spectral signature technology and continue its
operations.  The Company intends to raise further funds through
private placements of the Company's common stock and through short term
borrowing.  The financing activities of the Company are current and
ongoing, and it will expand and accelerate its development program as the timing
and amount of financing allow.  However, there can be no assurance
that the Company will be successful in obtaining additional capital for such
technology development from the sale of its capital stock, or in otherwise
raising substantial capital.
 
 The
Company’s cost to continue operations as they are now conducted is approximately
$42,000 per month, and the Company does not have sufficient funds to cover
existing operations.   The Company needs to raise additional
funds in order to continue its existing operations, to resume its research and
development activities, and to finance its plans to expand its operations for
the next year.  The Company intends to raise the required funds by
obtaining share capital from outside sources.  During the quarter,
operating funds were advanced to the Company by its Chairman, Ronald P. Erickson
and salaries were deferred.  If the Company is successful in raising
additional funds, the Company’s research and development efforts will continue
and expand, and overdue accounts payable will be satisfied.
  During
the first quarter 2009, the Company converted $482,095 of its outstanding
indebtedness and accrued interest owed to
Coventry Capital  into  3,213,967 shares of the
Company’s common stock. Also occurring in the first quarter of 2009, in
satisfaction of outstanding matters with the RatLab LLC, a total of 1,850,000
shares of the Company’s common stock was issued, subject to certain
restrictions, to current and former RatLab LLC employees and consultants, in
settlement of outstanding matters with the RatLab LLC.
  During
first quarter of 2009 and excluding the conversion of amounts owed to Coventry
Capital, the Company converted $424,727.68 of its outstanding indebtedness
into 2,825,043 shares of the Company’s common stock.
 
 On
October 8, 2008 the board of directors granted Ron Erickson 500,000 shares of
common stock, Lynn Felsinger 300,000 shares of common stock, Dr. Masahiro
Kawahata 300,000 shares of common stock, and Jon Pepper, Marco Hegyi, and
Yoshitami Arai 50,000 shares of common stock.  The shares of common
stock were issued for past services performed and board
grants.
  
 Off-Balance
Sheet Arrangements
 
 The
Company currently has no off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on the Company’s financial
condition, revenues or expenses, results of operations, liquidity or capital
resources.
  
 ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 (a)           
Evaluation of
Disclosure Controls and Procedures
  The
Company’s Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of the Company’s controls and procedures (as defined in the
Securities Act of 1934 Rule 13a-15(e) or Rule 15d-15(e)) as of the end of the
period covered by this report, have concluded that the Company’s disclosure
controls and procedures are effective to give reasonable assurance that the
information required to be disclosed in reports that the Company files under the
Exchange Act is recorded, processed, summarized and reported as and when
required.
 
 (b)           
Changes in Internal
Control Over Financial Reporting
  There
were no significant changes in the Company’s internal control over financial
reporting that occurred during the Company’s last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company’s disclosure controls and procedures subsequent to the Evaluation Date,
nor any significant deficiencies or material weaknesses in such disclosure
controls and procedures requiring corrective actions.
  12
 
 PART
II.     OTHER INFORMATION
  ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  During
the first quarter 2009, the Company converted $482,095 of its outstanding
indebtedness and accrued interest owed to
Coventry Capital  into  3,213,967 shares of the
Company’s common stock. Also occurring in the first quarter of 2009, in
satisfaction of outstanding matters with the RatLab LLC, a total of 1,850,000
shares of the Company’s common stock was issued, subject to certain
restrictions, to current and former RatLab LLC employees and consultants, in
settlement of outstanding matters with the RatLab LLC.  Dr. Thomas
Furness and Dr. Brian Schowengerdt were awarded an additional 500,000 shares
each which vest upon their completion of performance metrics as outlined in the
license dated October 23, 2008.
  During
first quarter of 2009 and excluding the conversion of amounts owed to Coventry
Capital, the Company converted $424,727.68 of its outstanding indebtedness
into 2,825,043 shares of the Company’s common stock.
 
 On
October 8, 2008 the board of directors granted Ron Erickson 500,000 shares of
common stock, Lynn Felsinger 300,000 shares of common stock, Dr. Masahiro
Kawahata 300,000 shares of common stock, and Jon Pepper, Marco Hegyi, and
Yoshitami Arai 50,000 shares each of common stock.  The shares of
common stock were issued for past services performed and board
grants.   The board of directors also granted 250,000 shares
valued at $33,750 to Thelon Capital to provide future financial advisory
services to the Company designed to help raise working capital.
   The public market stock price on October 8, 2008 was $0.135
per share.
 
 The
9,389,010 shares issued during the first quarter of 2009 were unregistered and
fall under the purview of Rule 144 of the Securities Exchange Act of 1934, as
amended.
 
  ITEM
      6.
              EXHIBITS
      AND REPORTS ON FORM 8-K
 
 The
exhibits required to be filed  herewith by Item 601 of Regulation S-K,
as described in the following index of exhibits, are attached hereto unless
otherwise indicated as being incorporated by reference,
as  follows:
 
 (a)        Exhibits
 
 3.1
              Amended
      and Restated Articles of Incorporation, filed aa an exhibit to the
      Company’s annual report on Form 10-KSB filed on February 9, 2006, and
      incorporated herein by reference.
 
 3.2
              Bylaws
      incorporated herein by reference to the Company’s Registration Statement
      on Form 10-SB filed on March 11,
1999.
 
 4.1
              2005
      Combined Incentive and Non-Qualified Stock Option Plan of the Company,
      filed as an exhibit to the Company’s Registration Statement on Form SB-2
      filed on August 1, 2005, File no. 333-127100, and incorporated herein by
      reference.
 
 10.1
              Intellectual
      Property Agreement dated June 16, 2004 between the Company and Kenneth
      Turpin, filed as an exhibit to the Company’s Registration Statement on
      Form SB-2 filed on August 1, 2005, File No. 333-127100, and incorporated
      herein by reference.
 
 10.2
              Letter
      Agreement dated November 10, 2006 between the Company and Bradley E.
      Sparks, Chief Executive Officer, President and a member of the Board of
      Directors.
 
 10.3
              Letter
      Agreement dated October 23, 2008 between the Company and RATLAB, LLC, and
      affiliates.
 
 31.1
              Certification
      of the Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
  31.2
              Certification
      of the Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 32.1
              Certificate
      Pursuant to 18 U.S.C. Section 1350 signed by the Chief
      Executive Officer
 
 32.2
              Certificate Pursuant to 18 U.S.C. Section 1350 signed by the
      Chief Financial Officer
   13
 
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 
 
 VISUALANT,
INCORPORATED
 (Registrant)
 
 Date:
      February 23, 2009
                By:
                /s/ Bradley
      E. SparksBradley
      E. SparksChief
      Executive Officer, President, and Director
  Date:
      February 23, 2009
                By:
                /s/ Bradley
      E. SparksBradley
      E. SparksChief
      Financial Officer, and Secretary Treasurer
    14