UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K


(Mark
One)




ý
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
Fiscal Year Ended December 31,
2008




 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      1934




For the
transition period from __________________ to __________________




Commission
file number: 333-152940




DAIS ANALYTIC
CORPORATION


(Exact
name of registrant as specified in its charter)





New
      York
            
            14-1760865(State
      or Other Jurisdiction of Incorporation or Organization)
            
            (I.R.S.
      Employer Identification No.)11552
      Prosperous Drive
              Odessa,
      Florida
            
            33556(Address
      of Principal Executive Offices)
            
            (Zip
      Code)





Registrant’s
      telephone number, including area code: (727)
  375-8484




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 $0.001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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. o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
accelerated filer   o      
               
     Accelerated filer  o




Non-accelerated
filer o (Do not
check if a smaller reporting company)     Smaller reporting company
x




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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $1,591,244 as of the last
business day of the registrant’s most recently completed second fiscal quarter,
based upon the closing sale price on the Pink Sheets reported for such date.
Shares of common stock held by each officer and director and by each person who
owns 10% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.




As of
March 31, 2009, the Registrant had 16,482,731 outstanding shares of its common
stock, $0.01 par value.









DAIS
ANALYTIC CORPORATION


FORM
10-K





TABLE
OF CONTENTS




PART
      I
                
                3FORWARD-LOOKING
      STATEMENTS
                
                3ITEM
      1.
                DESCRIPTION
      OF BUSINESS
                
                4ITEM
      2.
                DESCRIPTION
      OF PROPERTY
                
                24ITEM
      3.
                LEGAL
      PROCEEDINGS
                
                25ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                
                25PART
      II
                
                
                26ITEM
      5.
                MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
      EQUITY SECURITIES
                
                26ITEM
      6.
                SELECTED
      FINANCIAL DATA
                
                30ITEM
      7
                MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                
                30ITEM
      8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                
                38ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE
                
                38ITEM
      9A(T).
                CONTROLS
      AND PROCEDURES
                
                38ITEM
      9B.
                OTHER
      INFORMATION
                
                38PART
      III
                
                
                39ITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A)
      OF THE EXCHANGE ACT
                
                39ITEM
      11.
                EXECUTIVE
      COMPENSATION
                
                41ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                
                46ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                
                48ITEM
      14.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                
                49ITEM
      15.
                EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                
                50SIGNATURES
                
                52FINANCIAL
      STATEMENTS
                
                F-1




2




PART
I




INTRODUCTORY
NOTE




FORWARD-LOOKING
STATEMENTS





Information
included or incorporated by reference in this Annual Report may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.




This Form
10-K Annual Report contains forward-looking statements, including statements
regarding, among other things:


·
                our
      ability to continue as a going
concern;


·
              our
      ability to achieve and maintain
profitability;
  ·
              the
      price volatility of the common
stock;
  ·
              the
      historically low trading volume of the common
  stock;
  ·
              our
      ability to manage and fund our
growth;
  ·
              the
      short period of time we have employed certain of our executive
      officers;
  ·
              our
      ability to attract and retain qualified
  personnel;
  ·
              litigation;
  ·
              our
      ability to compete with current and future
  competitors;
  ·
              our
      short operating history;
  ·
              our
      ability to obtain additional
financing;
  ·
              general
      economic and business conditions;
  ·
              other
      risks and uncertainties included in the section of this document titled
      “Risk Factors”; and
  ·
              other
      factors discussed in our other filings made with the
      Commission.




These
statements may be found under "Management's Discussion and Analysis" and
"Description of Business," as well as in other sections of this Annual Report
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this Annual Report generally. In light of these risks and uncertainties, there
can be no assurance that the forward-looking statements contained in this Annual
Report will in fact occur. We have no obligation to publicly update or revise
these forward-looking statements to reflect new information, future events, or
otherwise, except as required by applicable Federal securities laws, and we
caution you not to place undue reliance on these forward-looking
statements.




3




ITEM
      1.
            BUSINESS





Dais
Analytic Corporation is a nano-structure polymer technology materials company
which has developed and is selling ConsERVTM, a energy recovery ventilator, a
Heating, Ventilation and Air Conditioning (“HVAC”) energy conservation
product.  We intend to develop other nano-structure polymer technology
products including (i) “NanoAir”, a water based HVAC system and (ii)
“NanoClear”, a water clean-up process useful to create potable water from sea,
brackish or waste water.  We further believe that our nano-structure
polymer technology may be useful in developing a Ultra-capacitor, a device
capable of greater energy density and power per pound than traditional
capacitors or batteries.





History





We were
incorporated as a New York corporation on April 8, 1993 as “Dais Corporation”.
We subsequently changed our name to Dais Analytic Corporation on December 13,
1999.  We were formed to develop new, cost-effective polymer materials
for various applications, including providing a lower cost membrane material for
Polymer Electrolyte Membrane (“PEM”) fuel cells.  We believe our
research on materials science has yielded technological advances in the field of
selective ion transport polymer materials.





In
December 1999, we purchased the assets of Analytic Power Corporation, which was
founded in 1984 to provide fuel cell and fuel processor design and consulting
services, systems integration and analysis services to develop integrated fuel
cell power systems, and we were re-named Dais Analytic Corporation. Analytic
Power Corporation developed a portfolio of fuel cell and related fuel cell
component technologies, including fuel cell stack designs, a membrane electrode
assembly process, and natural gas, propane, diesel and ammonia fuel
processors for use in creating integrated fuel cell systems.




In March
2002, we sold substantially all of our fuel cell assets to a large U.S. oil
company for a combination of cash and the assumption by such company of certain
of our obligations. After we sold a substantial portion of our fuel cell assets,
we focused on expanding our nano-structured polymer platform, having already
identified the Energy Recovery Ventilator (“ERV”) application as our first
commercial product.





Financing





From
December 2007 to January 2008, we issued (i) 9% secured convertible promissory
notes in an aggregate principal amount of $2,950,000 the principal amount of
which may be converted into 14,750,000 shares of common stock, par value $.01
per share and (ii) warrants to purchase up to 14,750,000 shares of common stock
at an exercise price of $.25 per share (the “Financing”).  Aggregate
proceeds to the Company from this Financing were $2,950,000. The notes issued in
the Financing mature 12 months from the date of issuance and may be converted
into common stock at the option of the holder any time prior to the maturity
date at a conversion price of $0.20 per share. The notes include standard
default provisions and price protection with regards to issuance by the Company
of common stock and common stock equivalents.  The warrants issued in
the Financing have a five-year term, cashless exercise provisions and
anti-dilution protection. Pursuant to the terms of the Financing and the
Security Agreement entered into in connection with the Financing, we granted
investors a first priority security interest in our patents and certain patent
applications.  There are no other liens currently in effect against
such patents or patent applications.  The Company was obligated to
register the shares of common stock underlying the convertible principal amount
of the convertible notes and warrants issued in this Financing pursuant to a
registration rights agreement entered into with investors in this
Financing.  On August 11, 2008, we filed a registration statement on
Form S-1 covering the resale of up to 18,110,782 shares of common
stock.  Such registration statement was declared effective November
12, 2008.





Technology





We use
proprietary nano-technology to reformulate thermoplastic materials called
polymers.  Nano-technology involves studying and working with matter on an
ultra-small scale. One nanometer is one-millionth of a millimeter and a single
human hair is around 80,000 nanometers in width.  Polymers are
chemical, plastic-like compounds used in diverse products such as Dacron,
Teflon, and polyurethane. A thermoplastic is a material that is plastic or
deformable, melts to a liquid when heated and to a brittle, glassy state when
cooled sufficiently.





These
reformulated polymers have properties that allow them to be used in unique
ways.  We transform polymers from a hard, water impermeable substance
into a material which water and similar liquids can, under certain conditions,
diffuse (although there are no openings in the material) as molecules as opposed
to liquid water. Water and similar liquids penetrate the thermoplastic material
at the molecular level without oxygen and other atmospheric gases penetrating
the material. It is believed this selectivity is dependant on the size and type
of a particular molecule.




4




Products





ConsERVTM





We
currently sell one product, our ConsERVTM product, a HVAC energy conservation
product which, according to various tests, saves an average of up to 30% on HVAC
operating costs and allows HVAC equipment to be up to 30% smaller, reducing peak
energy usage by up to 20% while simultaneously improving indoor air
quality.  This product makes HVAC systems operate more efficiently and
results, in many cases, in energy and cost savings.  ConsERVTM attaches onto
existing HVAC systems, typically in commercial buildings, to provide ventilation
within the structure.  It pre-conditions the incoming air by passing
through our nano-technology polymer which has been formed into a filter of
sorts. The nano-technology ‘filter’ uses the stale building air that must be
simultaneously exhausted to transfer heat and moisture into or out of
the incoming air.  For summer air conditioning, the “core”
removes some of the heat and humidity from the incoming air, transferring it to
the exhaust air stream thereby, under certain conditions, saving
energy.  For winter heating, the “core” transfers a portion of the heat and
humidity into the incoming air from the exhaust air stream thereby often
saving energy.





Our
ConsERVTM product is the primary focus of our resources and commercialization
efforts.   When compared to similar competitive products, we believe
based on test results conducted by the Air-Conditioning, Heating and
Refrigeration Institute (“AHRI”), a leading industry association,  
ConsERVTM is twice as effective in managing latent and sensible heat. We expect
ConsERVTM to continue to be our focused commercial product through
2009.




How
It Works





Most
building codes mandate commercial structures provide certain levels of
ventilation determined by use and occupancy.   ERVs are systems used
by HVAC manufacturers to increase energy efficiencies in HVAC units by
transferring heat and humidity between air flows.  They do this by
capturing a portion of the energy already used to heat or cool air that is being
released to the outside and use such released air to condition the incoming air
stream.  In an air conditioning application, heat and humidity that
are part of the incoming air stream are transferred to the cool, dry exhaust
air, thereby “pre-conditioning” the incoming air before it reaches the
building’s air conditioning system.  By pre-conditioning the incoming
air, ERVs should increase the operating efficiency of the HVAC unit, thereby
lowering the overall costs associated with heating and cooling buildings and
potentially reducing the size and initial capital cost of the overall HVAC
unit.




ConsERVTM
has a “core” component made using our nano-structured material and may be
described as a high-performance ERV.  It is used in conjunction with a
building’s HVAC equipment. The ConsERVTM energy recovery ventilator, employs
nano-technology based materials to create an exchange of sensible (temperature)
and latent (humidity) energy between the two air streams using HVAC equipment to
provide building ventilation.  The first air stream typically exits a
building at the temperature and relative humidity level set by the buildings air
conditioning and heating equipment.  The second air stream comes from
the outside environment at a different temperature and relative humidity level
and is used to bring outdoor air to the occupants of the
building.  The ConsERVTM  product uses the energy found in
the first air stream (air already cooler or heated) to condition the second air
stream (the outdoor air coming in) before the second air stream (outside air)
enters the HVAC equipment.   The ConsERVTM product may save
energy, in that it reduces the required energy and size of the HVAC equipment
and thereby may lower the cost of providing ventilation. In addition, it may
lower carbon dioxideemissions because the HVAC
equipment may not need to be used as frequently and often times can be reduced
in size to provide the same levels of comfort indoors. The process is shown in
the picture below.




5









Given
third-party test data, our ConsERVTM product, with its nano-structured materials,
offers better total performance than other ERV products of which we are aware,
with no moving parts and little or no cross-air stream contamination.1  Our ConsERVTM core
product has received UL 900 recognition and Air-Conditioning,
Heating and Refrigeration Institute (“AHRI”) standard 1060
certification.  Our ConsERVTM product is compatible with most
commercial HVAC units and requires only a small amount of additional HVAC
technical expertise to install.  We believe the purchase and
installation costs of our ConsERVTM product are comparable to the costs of
competing energy recovery products and our ConsERVTM product is more efficient in
transferring moisture with lower life cycle maintenance costs.




Studies
have shown recent increases in the levels and overall volatility of energy
prices in the United States (averaging in excess of 11% during 2007) have
prompted renewed interest by corporate and political leaders, as well as the
public at large, in energy conservation initiatives.2




Achieving
sales revenue growth from our ConsERVTM product is predicated on the success in
five key areas:




·
              Achieving
      continued technological improvements in key materials to lower our ‘per
      unit’ cost structure.


·
              Completing
      outsourced manufacturing and assembly relationships which lower our ‘per
      unit’ cost structure.


·
              Securing
      HVAC equipment manufacturers, as well as ERV Original Equipment
      Manufacturers (“OEM”) (or Licensees), with presence in existing and
      evolving sales channels as our customers or partners to sell
      worldwide in-country/region.


·
              Recruiting
      and retaining the necessary people and infrastructure to support sales
      growth of ConsERVTM and other products as they are introduced into
      their respective sales
channels.


·
              Obtaining
      capital in a timely manner for the necessary steps outlined above to
      continue without
interruption.





Our
Other Nano-Structured Products




We are
devoting varying amounts of time to other uses of our nano-structured products
in ways which are not disruptive to the key ConsERVTM effort. To date,
insignificant revenues have been generated from these non-ConsERVTM related
applications.




These
product applications and activities include:




·
              Water
      Clean-up or “NanoClean”: We expect that this application would function to
      remove quantities of salt and other impurities from water to produce
      potable water using  an environmentally friendly design that
      would use less energy and be  less expensive than current methods. We
      have developed a functional table-top demonstration unit which highlights
      the basics of how this system works using the Company’s nano-structured
      materials to clean water.  This demonstration unit is being used
      as the basis for the product’s next planned inflexion point: a small pilot
      plant. The NanoClean product is currently in the middle to late stages of
      Alpha/Beta development.





·
              Water
      Based HVAC system or “NanoAir”: We expect this application would function
      to dehumidify and cool air in warm weather, or humidify and heat in cold
      weather.  This NanoAir application is designed to be capable of
      replacing a traditional refrigerant loop based heating/cooling system. The
      Company has a small prototype showing fundamental heating, cooling,
      humidification, and dehumidification operation of this evolving product.
      The NanoAir product is in the middle to late stages of
      Alpha/Beta development.







1
Air-Conditioning, Heating, and Refrigeration Institute (“AHRI”) – May
2008 test results.  This study is publicly available and was not
prepared for our benefit or funded by us.
 2 “Rising
demand for oil provokes new energy crisis,” New York Times, Nov. 9,
2007.




6




·
              Ultra-capacitor:
      Based on initial tests conducted by a third party, we believe that by
      applying a combination of our nano-materials we may be able to construct a
      device which stores energy similar to a battery with projected increases
      in energy density and lifetimes. The key application for such a
      device would be in
transportation.




As
previously mentioned, aside from our ConsERVTM product, the Company has three
additional products under development. The Company intends to sell polymer
membrane or polymer membrane incorporated into an application appropriate form,
or to license the application. We do not intend to build and market the entire
product.  The three product applications include:





Application
            Current
      Stage
            Estimated
      Funding Required to Commercialize
            Estimated Time to Market(post funding)Water
      Clean-up (NanoClean) - A process using a low temperature, low pressure
      approach to process brackish and salt water into potable
      water.
            3rd
      Stage Alpha/Beta
            $9
      Million
            24
      – 36 monthAdvanced
      Heating, Ventilating, and Air Conditioning  (NanoAir)- A process
      using the nano-technology materials to create an advanced heating,
      ventilating, and air-conditioning system.
            3rd
      Stage Alpha/Beta
            $9
      Million
            18 –
      24 monthUltracapacitor
      –if fully developed, may have a greater energy density and power per pound
      than traditional capacitors or the batteries on the market
      today.
            Base
      materials testing underway by third party to confirm the effectiveness of
      the Company’s materials in the application.
              
              Current
      activities are moving us closer to the optimization of materials. An
      alpha prototype would then will be required.
            $22
      Million
            36
      – 48 months





The
Company has identified other potential products for its materials and processes.
Some have basic data to support the needed functionality and market
differentiation of a product based on using our nano-technology based
inventions. Such applications include immersion coatings and performance
fabrics. These other products are based, in part, upon the known functionality
of the Company’s materials and processes.





Patents





We own
the rights to seven patents and to four pending U.S. patent applications. We
co-own two pending Patent Cooperation Treaty (“PCT”) applications with Aegis
Biosciences LLC, a biomaterials drug delivery technology company. These patents
relate to, or are applications of, our nano-structured polymer materials that
perform functions such as ion exchange and modification of surface properties.
The polymers are selectively permeable to polar materials, such as water, in
molecular form. Selective permeability allows these materials to function as a
nano-filter in various transfer applications.  These materials are
made from base polymer resins available from a number of commercial firms
worldwide and possess some unique and controllable properties, such
as:





·
              Selectivity: 
      Based on our research, we believe that when the polymer is made there are
      small channels created that are 5 to 30 nanometers in diameter. There are
      two types of these channels: hydrophilic (water permeable), and
      hydrophobic (water impermeable). The channels can be chemically tuned to
      be highly selective for the ions or molecules they transfer. The high
      selectivity of the polymer can be adjusted to efficiently transfer water
      molecules from one face to the other using these
  channels.




7




·
              High
      transfer rate: Based on in-house testing protocols and related results, we
      have found that the channels created when casting the materials into a
      nano-structured membrane have a transfer rate of water, or flux, greater
      than 90% of an equivalent area of an open tube. This feature is
      fundamental to the material’s ability to transfer moisture at the
      molecular level while substantially allowing or disallowing the transfer
      of other substances at a molecular
level.





·
              Unique
      surface characteristic: The materials offer a surface characteristic
      that we believe inhibits the growth of bacteria, fungus and algae and
      prevents adhesives from
attaching.





The
molecular selectivity, transfer rate and surface coating properties, coupled
with our ability to produce the nano-structured materials at what we believe is
an affordable price, distinguishes our technology and value-added
products.  By incorporating our nano-structured materials into
existing products, we strive to address current real-world market needs by
offering what we believe to be higher efficiencies and improved price
performance. For example, there are other energy recovery mechanisms available
for HVAC that use coated paper or desiccant technology instead of our highly
efficient nano-structured polymer materials.





Manufacturing





We do not
have long term contractual relationships with any of our manufacturers or
vendors. The only product or service which we could not have purchased elsewhere
and used in the on-going growth of the ConsERVTM business is the plastic based
sheet good.  All purchases to date of raw materials and related
services have been on a purchase order basis using non-disclosure agreements.
Our manufacturing process is described below.





Polymer
Membrane





Commercially
available styrene based polymer resin in flake form and industrial grade
solvents are mixed together using a proprietary process involving heat,
industrial mixers, and solvents.  The resin and the solvents are
commercially available from any number of chemical supply houses, or firms such
as Dow and Kraton (former Shell Oil).  Our process changes the
molecular properties of the starting styrene based polymer resins into a liquid
material which gives the attribute of being selective in what molecules it will
allow through the plastic, which includes water molecules. This process, called
‘sulfonation’, is done at facilities around the world known as Toll Houses.
These are firms which specialize in making small lot (by industry standards)
runs of specialty chemicals.





Plastic
Based Sheet Good





A thin
coating of the liquid polymer material is applied on one side of the sheet good
by a ‘tape casting’ firm of which there are many in the United States. The
coated sheet good is heated to rapidly dry the liquid material thus bonding the
polymer solution and rolled sheet good together. The resulting ‘modified sheet
good’ is then re-coiled into 10,000 foot rolls and shipped to us. Currently this
is provided to us by one vendor. Additional vendors for this component have not
been sought by the Company. However, we have identified other entities making
similar types of products and believe such entities and products may provide
alternatives should one be required.





The
“Core”





The
modified sheet good is cut into defined dimensions and glued to a PVC formed
spacer. This ‘spacer/glued modified sheet good’ is a single layer. Multiple
layers are stacked one on top the other until a certain height is
achieved.  Once the proper height is achieved, these layers are then
fitted with a galvanized sheet metal plate on the top and bottom of the stack
along with galvanized sheet metal ‘Y’ shaped bracket on each of the four corners
of the assembly.  This assembly is called a ‘core’. The galvanized
sheet metal is a world-wide commodity material formed to our specifications by
local and out-of-town sheet metal forming companies. We have no long term
contractual relationships with firms making the PVC spacers, supplying the glue,
supplying rivets to hold the structure together, and the sheet metal firms
making the top and bottom plate as well as the side rails.





Completion





For the
complete ConsERVTM system, one or more cores are placed inside of aluminum or
steel boxes built by us or a vendor. The box may or may not also be fitted with
an electric motor, fan, electric relay, and electrical disconnect. Inclusion or
exclusion of the electric motor and fan is dictated by the customers’ needs and
current HVAC system.  Once outfitted with cores, the product is
complete. We have no long term contractual relationships with firms providing
the aluminum or steel parts used to build the box, the motors, the fans, the
relays, or the electrical disconnects.





In the
start-up phase of the ConsERVTM business we brought on a limited number of
independent sales representatives. This was done for quality and infrastructure
reasons. As a result, the bulk of our revenues are concentrated in a small
number of customers that distribute our product to the consumers.




8




Licensing




While we
have earned licensing revenue under agreements licensing our technology in the
past, we may not receive any material revenue from these agreements in the
near or foreseeable future.





Research
and Development





The
Company has spent approximately $45,000 on research and development during the
last two fiscal years.




Key
Relationships




We have
strategic relationships with leaders in the energy industry who have entered
into sales, marketing, distribution and product development arrangements with us
and, in some cases, hold equity in our Company.  They
include:





Electric Power Research Institute
(“EPRI”)





We have
an on-going relationship with a number of utilities through EPRI. The EPRI
participants include Public Service Company of New Mexico, Kansas City Power
& Light, Reliant Energy Incorporated, Alliant Energy Company, Omaha Public
Power District, Wisconsin Public  Service Corporation, Southern California
Gas Company, EDF Electricite de France, Consolidated  Edison of New
York, Tokyo Gas Co., Ltd., CINERGY Corporation, Northern States Power Company,
American Electric Power Company, Inc., Sierra Pacific Power Company, Public
Service Electric & Gas  Company (“PSE&G”), and Tennessee
Valley Authority.  The EPRI users group has been helpful in creating
opportunities for us to define specifications and applications for our
nano-structured materials that address existing energy related challenges while
possibly opening new sources of revenue.





Comfort
Systems USA





In June
2006 we entered into a non-exclusive national sales arrangement with Comfort
Systems, a national HVAC and mechanical systems installation and service company
principally oriented to the mid-market commercial industrial and institutional
sectors. Pursuant to this arrangement, Comfort Systems and its 42 branches
agreed to sell our ConsERVTM product to new or retro-fit HVAC building
applications. Our marketing team has begun working with Comfort Systems
designers on new and retro-fit HVAC system applications.





ConsERVTM
- Sales and Marketing Strategies




We market
our ConsERVTM product principally through alliances with local independent
manufacturer representatives. We currently have 24 independent commercial sales
representatives in various locations throughout North America selling the
ConsERVTM product.  We intend to increase the number of commercial
independent sales representatives to approximately 40 to properly cover the
North American commercial sales territory.  We are also working to secure
ongoing relationships with leading industry HVAC manufacturers and other ERV
manufacturers. Other potential and targeted sales channels for the ConsERVTM
product are energy service companies and HVAC product distributorships. We
continue to leverage our relationship with EPRI and a group of 16 utility
companies (consisting of EPRI members and some of our minority shareholders)
into expected sources of future product sales through the introduction of demand
reduction incentives.




Future
Products – Sales and Marketing Strategies




Our
intended sales and marketing strategy will require us to create alliances with
companies having strong, existing channel presence in the target
industries. We believe working with industry leaders at the development level
allows us to better address the market’s needs and possibly accelerate the time
to market cycle.




Competition
and Barriers to Entry




We
believe the efficacy of our value-added products and technology has the ability
to decrease sales of competing products, thus taking business away from more
established firms using older technology. We believe that our ConsERVTM product
may become a functional component of newer, more efficient OEM products. Our key
challenge is to educate channel decision makers of the benefits of products made
using our materials and processes to overcome the strength of the current
product sales.




There are
a number of companies located in the United States, Canada, Europe and Asia that
have been developing and selling technologies and products in the energy
recovery industry, including but not limited to: Semco, Greenheck, Venmar,
Bry-Air, Renewaire and AirXchange.




We will
experience significant competition regarding our products because certain
competing companies possess greater financial and personal resources than
us.  Future product competitors include, but are not limited
to:




9




Products
            Current
      and Future CompetitorsConSERV
            AAON,
      TraneNanoClean
            Dow,
      Dupont, GENanoAir
            AAON,
      Trane,Ultracapacitor
            EEstor
      Maxwell




We
believe that the combination of our nano-material platform’s characteristics
(high selectivity, high flux rate, manufacturability, et al.), growing patent
position, and possible ‘first to market’ position, are competitive
advantages, which may allow us time to execute our business plan. Competitors
may experience barriers to entry in these markets primarily related to the lack
of similarly performing proprietary materials and processes.





Intellectual
Property




As stated
above, we have seven granted U.S. patents, including patents covering the
composition and structure of a family of ion conducting polymers and membranes
and applications of the polymer.  We believe some of these patents
make reference to applications relating to the materials we are
developing.  Please see the “Risk Factors” Section of this Annual
Report.  A list of our existing patents follows:





1.
              Patent
      No. 6,841,601- Cross-linked polymer electrolyte membranes for heat and
      moisture exchange devices.This
      patent was issued on January 11, 2005 and expires March 12,
      2022.




2.
            Patent
      No. 6,413,298 – Water and ion-conducting membranes and uses
      thereof. This patent was issued on July2,
      2002 and expires July 27, 2020.




3.
            Patent
      No. 6,383,391 – Water and ion-conducting membranes and uses
      thereof. This patent was issued on May7,
      2002 and expires on July 27, 2020.




4.
              Patent
      No. 6,110,616 - Ion-conducting membrane for fuel cell. This patent
      was issued on August 29, 2000 andexpires on January 29, 2018.




5.
              Patent
      No. 5,679,482 – Fuel Cell incorporating novel ion-conducting
      membrane. This patent was issued onOctober
      21, 1997 and expires on October 20,
2014.




6.
              Patent
      No. 5,468,574 – Fuel Cell incorporating novel ion-conducting membrane.
      This patent was issued onOctober
      21, 1995 and expires on May 22,
2014.




7.
              Patent
      No. 7,179,860 – Cross-linked polymer electrolyte membranes for heat, ion
      and moisture exchangedevices. This patent was issued on February 20, 2007 and expires on
      March 11, 2022.




We have
provisional and patent applications in the following areas: Advanced Polymer
Synthesis Processes, Reversible Liquid to Air Enthalpy Core Applications and
Construction, and Desalination.





The
following is a partial list of the patent applications publicly
visible:




1.
              WO20080316678
      – Nanoparticle Ultra
Capacitor


2.
              WO/2008/039779
      – Enhanced HVAC System and
Method


3.
              WO/2008/089484
      – Multiphase selective Transport Through a
  Membrane


4.
              WO2008.141179
      – Molecule Sulphonation Process
*


5.
              WO/2009/002984
      – Stable and Compatible Polymer
Blends*


6.
              WO2009/002984
      – Novel Coblock Polymers and Methods for Making
  Same





*Patent
applications jointly owned with Aegis Biosciences, LLC.





Patents
may or may not be granted on these applications. As noted above, two of these
applications are jointly owned with Aegis Biosciences, LLC. We also seek to
protect our proprietary intellectual property, including intellectual property
that may not be patented or patentable, in part by confidentiality agreements
with our current and prospective strategic partners and employees.





Government
Regulation




We do not
believe the sale, installation or use of our nano-structured products will be
subject to any government regulation, other than perhaps adherence to building
codes, military specifications, and water safety regulations governing products
used in HVAC, military clothing, immersion coatings, and water desalination. We
do not believe that the cost of complying with such codes and regulations, to
the extent applicable to our products, will be material.




10




We do not
know the extent to which any existing or new regulations may affect our ability
to distribute, install and service any of our products. Once our products reach
the commercialization stage and we begin distributing them to our target
markets, federal, state or local governmental entities may seek to impose
regulations.




We are
also subject to various international, federal, state and local laws and
regulations relating to, among other things, land use, safe working conditions,
and environmental regulations regarding handling and disposal of hazardous and
potentially hazardous substances and emissions of pollutants into the
atmosphere.  Our business may expose us to the risk of harmful
substances escaping into the environment, resulting in potential personal injury
or loss of life, damage to or destruction of property, and natural resource
damage.  Depending on the nature of the claim, our current insurance
policies may not adequately reimburse us for costs incurred in settling
environmental damage claims, and in some instances, we may not be reimbursed at
all.  To date, we are not aware of any claims or liabilities under
these existing laws and regulations that would materially affect our results of
operations or financial condition.





Employees




As of
March 5, 2009, we employed 14 full-time employees and one part time employee in
our Odessa, Florida facility. Of the 14 employees, 3 are technicians, 2 product
managers, 1 polymer chemist, 2 engineers, 1 development vice president, 1
administrative assistant, 1 administrator, 2 sales managers, 1 accountant and 1
president and chief executive officer.  None of the employees are
subject to a collective bargaining agreement.  We consider our
relations with our employees to be good.





Principal
Offices




Our
principal office is located at 11552 Prosperous Drive, Odessa,
FL 33556.




11




ITEM
      1A.
            RISK
      FACTORS




You
should carefully consider the risks described below.    Our
business, financial condition, results of operations or cash flows could be
materially adversely affected by any of these risks.  The valuation for the
Company could also decline due to any of these risks, and you may lose all or
part of your investment.  This document also contains forward-looking
statements that involve risks and uncertainties.  Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including the risks faced by us
described below and elsewhere in this Annual Report. In assessing these
risks, you should also refer to the other information contained in this Annual
Report, including our financial statements and related notes.





Risks
Related to Our Business




$2,950,000
of our 9% convertible secured promissory notes have matured, which may cause us
to go out of business if Judgments are obtained.





At
December 31, 2008, as a result of the Financing transaction, the Company had 23
note holders holding $2,950,000 in principal amount 9% convertible secured
promissory notes together with the interest thereon outstanding.  As of the
date hereof those holding notes constituting $675,000 of the aforementioned
aggregate principal amount agreed to convert and $325,000 agreed to extend and
all such remaining notes have matured and remain outstanding. Management has
requested each note holder either extend the term of its note by nine (9) months
or convert the full amount of all principal and interest due thereunder into
shares of Company’s common stock pursuant to the terms of the note. Those note
holders opting to convert under the foregoing request will receive a five (5)
year warrant subject to which holder may purchase shares of Company’s common
stock equal in number to one third the number of shares received by the note
holder due to conversion of the principal amount of the note at an exercise
price of twenty-five cents ($.25) per share. To date five of the 23 note holders
have agreed to extend the maturity date of their notes and two note holders have
agreed to convert their notes. If we are unable to reach an agreement with all
the note holders and the note holders elect to obtain a judgment against the
company, we may be forced out of business. The Company will find it difficult to
continue its business, including financing its operations, where a default
continues.





We
have a history of losses since our inception, we expect to sustain future losses
and we may never achieve or sustain profitability.




We have
incurred substantial losses since we were founded in 1993 and we anticipate we
will continue to incur substantial losses in the future.  As of
December 31, 2008, we had an accumulated deficit of approximately $28.8
million.  We have not achieved profitability in any year since
inception and we expect to continue to incur net losses and negative free cash
flow until we can produce sufficient revenues to cover our cost, which is not
expected for several years.  We have only one product fully developed
and marketed, ConsERVTM, and anticipate all other products will take at least 18
to 36 months to develop.  Furthermore, even if we achieve our
projection of selling a greater number of ConsERVTM units in 2009, we anticipate
that we will continue to incur losses until we can cost-effectively produce and
sell our products to a wider market.  Even if we do achieve
profitability, we may be unable to sustain or increase our profitability in the
future.





We
may lose all our patents and the majority of our patent applications if we are
unable to repay or convert the principal and interest on the outstanding 9%
secured convertible notes issued in the Financing transaction or obtain an
agreement for extension of the maturity dates.





Demands
for repayment have been received from four note holders and negotiations with
the note holders continue. The Company does not have adequate funds to repay the
notes and does not expect to attain adequate funds for repayment from
operations.  The notes are secured by all of the Company’s
patents and the majority of the Company’s patent applications. Our success
depends, to a significant extent, on the technology that is incorporated in our
product and the underlying patents and patent applications securing the notes.
The Company intends to continue to finance its operations, including the
repayment of the notes, primarily through private sales of debt and equity
securities.  The Company may not be able to secure additional financing to
repay the notes on acceptable terms, if at all.  There is no guarantee
that all note holders will accept the above offer. Further, some note holders
may request additional concessions from the Company in return for extending or
converting their note. Any such additional consideration would likely be offered
to all note holders. Any re-negotiated terms we may be able to secure may not be
favorable to the Company. Unfavorable terms, in either a financing transaction
or debt renegotiation, would adversely impact our business, financial condition
and/or results of operations.  In the event (i) we are unable to secure
additional financing sufficient to pay the notes, (ii) the notes are not
converted into shares of our common stock, or (iii) we are not able to negotiate
extensions to the maturity dates of the notes, note holders will have the option
to foreclose on all of our patents and those patent applications securing the
notes, which would likely result in the failure of our business.





If
we fail to raise additional capital we will be unable to continue our
business.




Our
commercialization and development efforts to date have consumed and will
continue to require substantial amounts of capital in connection with our
nano-technology material based products (including but not limited to ConsERVTM,
water desalination, immersion coatings, and performance fabrics). Our channel
penetration and product development programs require substantial capital outlays
in order to reach full product commercialization. As we enter into more advanced
product development we will need significant funding to complete product
development and to pursue product commercialization.




12




Additionally,
our auditors have expressed substantial doubt about our ability to continue as a
going concern. Our ability to continue our business and our research,
development and testing activities and commercialize our products in development
is highly dependent on our ability to obtain additional sources of financing,
including entering into and maintaining collaborative arrangements with third
parties who have the resources to fund such activities. Any future financing may
result in substantial dilution to existing shareholders, and future debt
financing, if available, may include restrictive covenants or may require us to
grant a lender security interest in our assets not already subject to an
existing security interest. To the extent that we attempt to raise additional
funds through third party collaborations and/or licensing arrangements, we may
be required to relinquish some rights to our technologies or products currently
in various stages of development, or grant licenses or other rights on terms
that are not favorable to us. Any failure by us to timely procure additional
financing or investment adequate to repay our 9% notes and to fund our ongoing
operations, including planned product development initiatives, clinical studies
and commercialization efforts, will have material adverse consequences on our
business operations, consolidated financial condition, results of operations and
cash flows.




We
have a history of operating losses, and we expect our operating losses to
continue for the foreseeable future and we may not continue as a going
concern.





Our
accumulated deficit was $28.8 million as of December 31, 2008. The reports from
Pender Newkirk & Company, LLC, our independent registered public accounting
firm, relating to our December 31, 2008 financial statements contains Pender’s
opinion that our net losses from operations, negative working capital,
accumulated deficit and stockholder’s deficit raised substantial doubt about our
ability to continue as a going concern. There has been no change in the
Company’s position relative to the foregoing statements. It is possible that we
will never generate sufficient revenue to achieve and sustain profitability.
Even if we achieve profitability, we may not be able to sustain or increase
profitability. We expect our operating losses to continue for the foreseeable
future as we continue to expend substantial resources to expand the ConsERVTM
business while working to bring additional products to the market including
research and development, design and testing, obtaining third party validations,
identifying and securing collaborative partnerships, and executing to enter into
strategic relationships.





The
Company financed its operations since inception primarily through private sales
of its common and preferred stock, issuance of convertible promissory notes,
cash received in connection with exercise of warrants, license agreements and
the sale of certain fuel cell assets in 2002. As of December 31, 2008, the
Company had $395,150 of current assets.




Even if
the Company is successful in raising additional equity capital to fund its
operations, the Company will still be required to raise an additional
substantial amount of capital in the future to fund its development initiatives
and to achieve profitability. The Company’s ability to fund its future operating
requirements will depend on many factors, including the following:





·
              ability
      to obtain funding from third
parties;
 
 ·
              progress
      on research and development
programs;
 
 ·
              time
      and costs required to gain third party
  approvals;
 
 ·
              costs
      of manufacturing, marketing and distributing its
  products;
 
 ·
              costs
      of filing, prosecuting and enforcing patents, patent applications, patent
      claims and trademarks;
 
 ·
              status
      of competing products; and
 
 ·
              market
      acceptance and third-party reimbursement of its products, if successfully
      developed.




13




Our
future indebtedness could adversely affect our financial health.




We have
and may continue to incur a significant amount of indebtedness to finance our
operations and growth. Any such indebtedness could result in negative
consequences to us, including:





·
              increasing
      our vulnerability to general adverse economic and industry
      conditions;


·
              requiring
      a portion of our cash flow from operations be used for the payment of
      interest on our debt, thereby reducing our ability to use our cash flow to
      fund working capital, capital expenditures and general corporate
      requirements;


·
              limiting
      our ability to obtain additional financing to fund future working capital,
      capital expenditures and general corporate
  requirements;


·
              limiting
      our flexibility in planning for, or reacting to, changes in our
      business;


·
              placing
      us at a competitive disadvantage to competitors who have less
      indebtedness; and


·
              as
      the majority of our assets are pledged to current debt holders, the
      failure to meet the terms and conditions of the debt instruments, or a
      failure to timely rearrange the current terms and conditions of the notes,
      if so required, will result in the Company having no access to certain
      portions of its own
technology.





The
recent economic downturn has affected, and is likely to continue to adversely
affect, our operations and financial condition potentially impacting our ability
to continue as a going concern.





The
recent economic downturn has resulted in a reduction in new construction and
less than favorable credit markets, both of which may adversely affect the
Company. Certain vendors from which we currently secure parts for our ConsERV
product have either reduced or eliminated payment terms. Hence, more capital is
required to secure parts necessary to produce our products. In addition, our
products are often incorporated in new construction which experienced a decided
down turn in project starts. Although the portion of new construction most
affected is home sales, which represents a minority of our sales, commercial
construction has also experienced a reduction in starts with some projects being
delayed and possibly eliminated. If the commercial construction market stagnates
or decreases in volume or project size, our operations and financial condition
could continue to be negatively impacted. Expenditures under the recently
enacted United States economic stimulus plan appear to have targeted energy
products. ConsERVTM may qualify under said program and the Company may
potentially benefit from such program. However, when and if we will experience
any increase in sales or investment due to this program is uncertain. In the
interim, we will need additional capital to address these external conditions.
An internal program to reduce personnel costs including the reduction of some
salaries and limited furloughs has been undertaken. Such a program may impact
our ability to retain personnel and produce our products; however, we do not
expect the impact of our internal program to be significant or long in duration.
As noted above, we intend to continue to finance operations, including the
repayment of the outstanding convertible notes, primarily through private sales
of debt and equity securities.  In light of the recent economic downturn
the Company may not be able to secure additional financing on acceptable terms,
if at all.  Unfavorable terms for a financing transaction would
adversely impact our business, financial condition and/or results of operations.
 In the event we are unable to secure additional financing our business may
fail.




If
we fail to successfully address the challenges, risks and uncertainties
associated with operating as a public company, our business, results of
operations and financial condition would be materially harmed.





We have
and will continue to incur a significant increase in costs as a result of
operating as a public company, and our management has and will be required to
devote substantial time to new compliance initiatives. Until November of 2008 we
had never operated as a public company. In preparation for and since reporting
as a public company, we have and expect to continue to incur significant legal,
accounting and other expenses that we did not incur as a non-reporting company.
In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as
well as new rules subsequently implemented by the Securities and Exchange
Commission (the “SEC”) and various stock exchanges, has imposed many new
requirements on public companies, including requiring changes in corporate
governance practices. Our management and other personnel have and will continue
to devote a substantial amount of time to these new compliance
procedures.




14




We
have and will continue to incur significant increased costs as a result of
operation as a public company, and our management has and will continue
to  be required to devote substantial time to new compliance
initiatives.





As a
public company, we are now subject to the reporting requirements of the
Securities and Exchange Act of 1934, as amended (the “Exchange Act”), the
Sarbanes-Oxley Act and the rules promulgated by the SEC and the NASDAQ Global
Market in response to the Sarbanes-Oxley Act.  The requirements of
these rules and regulations have and will continue to significantly increase our
legal and financial compliance costs, make some activities more difficult,
time-consuming or costly and may strain our systems and
resources.  The Exchange Act requires, among other things, that we
file annual, quarterly and current reports with respect to our business and
financial condition.  The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and procedures and
internal controls for financial reporting.  In particular, commencing
in 2009, we must perform system and process evaluation and testing of our
internal controls over financial reporting to allow management and our
independent registered public accounting firm to report on the effectiveness of
our internal controls over financial reporting, as required by Section 404 of
the Sarbanes-Oxley Act.  Our testing, or the subsequent testing by our
independent registered public accounting firm, may reveal deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses.  We expect to incur significant expense and devote
substantial management effort toward ensuring compliance with Section
404.  As a result, management’s attention may be diverted from other
business concerns, which could have a material adverse effect on our business,
financial condition and results of operations.





Furthermore,
we currently do not have an internal audit function, and we will need to hire
additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge.  If we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls that are deemed to be material weaknesses, the market price of
our stock could decline and we could be subject to sanctions or investigations
by SEC or other regulatory authorities, which would entail expenditure of
additional financial and management resources.





These
rules and regulations could also make it more difficult for us to attract and
retain qualified independent members of our Board of
Directors.  Additionally, we have found these rules and regulations
make it more difficult and more expensive for us to obtain director and officer
liability insurance.  We have, and may be required once again, to
accept reduced policy limits and/or coverage or incur substantially higher costs
to obtain the same or similar coverage.  NASDAQ rules also require
that a majority of our Board of Directors and all of the members of certain
committees of the Board of Directors consist of independent
directors.  We cannot assure you that we will be able to expand our
Board of Directors to include a majority of independent directors in a timely
fashion to comply with the requirements of these rules.





Our
ConsERVTM product is in small volume production, we have no long term experience
manufacturing our products on a commercial basis and may not be able to achieve
cost effective large volume production.




Our
ConsERVTM product is built in small volumes. Our ability to achieve commercial
production of that product is subject to significant uncertainties, including:
completion of necessary product automation, developing experience in
manufacturing and assembly on a large commercial scale; assuring the
availability of raw materials and key component parts from third party
suppliers; and developing effective means of marketing and selling our
product.





We are in
the process of assembling our ConsERVTM product at our facility in Odessa,
Florida. Initial production costs of this product line are high with no or a
lower than desired profit margin.  As a result, we believe we will
need to reduce unit production costs, including the nano-structured
materials themselves made to our specifications by third parties, over time in
order to offer our products at a profitable basis on a commercial scale. Our
ability to achieve cost reductions in all areas of nano-structured materials and
value added products depends on entering into suitable manufacturing
relationships with component suppliers, as well as increasing sales volumes so
that we can achieve economies of scale.  A failure to achieve a lower
cost structure through economies of scale and improvements in engineering and
manufacturing in a timely manner would have a material adverse effect on our
business and financial results.  There can be no assurance that we
will obtain higher production levels or that the anticipated sales prices of our
products will ever allow an adequate profit margin.




15




We
may not be able to meet our product development and commercialization
milestones.




We have
established internal product and commercialization milestones and dates for
achieving development goals related to technology and design improvements of our
products.  To achieve these milestones we must complete substantial
additional research, development and testing of our products and
technologies.  Except for our ConSERV product, we anticipate that it
will take at least 18 to 48 months to develop and ready for scaled production
our other products.  Product development and testing are subject to
unanticipated and significant delays, expenses and technical or other
problems.  We cannot guarantee that we will successfully achieve our
milestones. Our business strategy depends on acceptance by key market
participants and end-users of our products.




Our plans
and ability to achieve profitability depend on acceptance by key market
participants, such as vendors and marketing partners, and potential end-users of
our products.  We continue to educate designers and manufacturers of
HVAC equipment with respect to our ConsERVTM product.  More generally,
the commercialization of our products may also be adversely affected by many
factors that are out of our control, including:




·
              willingness
      of market participants to try a new product and the perceptions of these
      market participants of the safety,   reliability and
      functionality of our
products;


·
              emergence
      of newer, possibly more effective
technologies;


·
              future
      cost and availability of the raw materials and components needed to
      manufacture and use our
products;


·
              cost
      competitiveness of our products;
and


·
              adoption
      of new regulatory or industry standards which may adversely affect the use
      or cost of our products.




Accordingly,
we cannot predict with any certainty that there will be acceptance of our
products on a scale sufficient to support development of mass markets for those
products.




We
are dependent on third party suppliers and vendors for the supply of key
components for our products.




We are
dependent on third parties to manufacture the key components needed for our
nano-structured based materials and value added products made with these
materials. Accordingly, a supplier’s failure to supply components in a timely
manner, or to supply components that meet our quality, quantity and cost
requirements, technical specifications, or the inability to obtain alternative
sources of these components on a timely basis or on terms acceptable to us,
would create delays in production of our products or increase unit costs of
production.  Certain of the components contain proprietary products of
our suppliers, or the processes used by our suppliers to manufacture these
components are proprietary.  If we are required to replace any of our
suppliers, while we should be able to obtain comparable components from
alternative suppliers at comparable costs, this would create a delay in
production.




Our
applications require extensive commercial testing and will take long periods of
time to commercialize.




Our
nano-structured materials and associated applications need to undergo extensive
testing before becoming commercial products. Consequently, the commercialization
of our products could be delayed significantly or rendered
impractical.  Moreover, much of the commercial process testing will be
dependent on the efforts of others.  Any failure in a manufacturing
step or an assembly process may render a given application or our
nano-structured material(s) unsuitable or impractical for
commercialization.  Testing and required development of the
manufacturing process will take time and effort.




We
have not devoted any significant resources towards the marketing and sale of our
products, we expect to face intense competition in the markets in which we do
business, and expect to rely, to a significant extent, on the marketing and
sales efforts of third parties that we do not control.




To date,
we primarily focused on the sale of the ConsERVTM and, since we have only
sold limited quantities of our products, we have limited experience in the
marketing and sale of products on a commercial basis.  We expect that
the marketing and sale of the ConsERV product will continue to be conducted by a
combination of independent manufactures representatives, third-party strategic
partners, distributors, or OEMs.  Consequently, commercial success of
our products will be dependent largely on the efforts of others.  We
intend to enter into additional strategic marketing and distribution agreements
or other collaborative relationships to market and sell our nano-structured
materials and value added product.  However, we may not be able to
identify or establish appropriate relationships in the future.  Even
if we enter into these types of relationships, we cannot assure you that the
distributors or OEMs with which we form relationships will focus adequate
resources on selling our products or will be successful in selling
them.  In addition, our chosen third-party distributors or OEMs may
require us to provide volume price discounts and other allowances, customize our
products or provide other concessions which could reduce the potential
profitability of these relationships.  To the extent any strategic
relationships that we establish are exclusive, we may not be able to enter into
other arrangements at a time when the distributor with which we form a
relationship is not successful in selling our products or has reduced its
commitment to marketing our products.  Failure to develop
sufficient distribution and marketing relationships in our target markets will
adversely affect our commercialization schedule and, to the extent we enter into
such relationships, the failure of our distributors and other third parties in
assisting us with the marketing and distribution of our products may adversely
affect our financial condition and results of operations.




16




We will
face intense competition in the markets for our nano-structured materials and
valued added products made from these materials. We will compete directly with
currently available products, some of which may be less expensive. The companies
that make these other products may have established sales relationships and more
“name-brand” recognition in the market than we do.  In addition, some
of those companies may have significantly greater financial, marketing,
manufacturing and other resources.




Our
future results could be harmed by economic, political, regulatory and other
risks associated with international sales and operations.




We intend
to market, distribute and service our products on an international basis and
expect to derive a significant portion of our revenue in coming years from
international sales.  If we fail to successfully sell our products
internationally, our ability to increase our future revenue and grow our
business would be impaired.  We have limited experience developing,
and no experience manufacturing, our products to comply with the commercial,
regulatory and legal requirements of international markets.  Our
success in those markets will depend on our ability to secure relationships with
foreign resellers and our ability to manufacture products that meet foreign
regulatory and commercial requirements.  In addition, our planned
international operations could be harmed by a variety of factors, including but
not limited to:





·
              difficulties
      in collecting international accounts
receivable;


·
              increased
      costs associated with maintaining international marketing
      efforts;


·
              compliance
      with potential United States Department of Commerce export
      controls;


·
              increases
      in duty rates or other adverse changes in tax
  laws;


·
              trade
      protection measures and import or export licensing
      requirements;


·
              fluctuations
      in currency exchange rates;


·
              political
      and economic instability in foreign countries;
  and


·
              difficulties
      in securing and enforcing intellectual property rights, foreign (where
      filed and obtained) or domestic, and time and complexities of vetting and
      establishing relations with foreign resellers or licensees including but
      not limited to designing, validating and marketing a product geared
      specifically to a particular market
segment.




We
depend on our intellectual property and failure to protect it could enable
competitors to market products with similar features that may reduce demand for
our products.




We
currently have seven United States patents, four patent applications and co-own
two PCT applications, some of which apply to the composition and structure of a
family of ion conducting polymers and membranes.  These patents and
patent applications often make reference to applications for, and in some
instances, are application patents relating to materials we are
developing.  The PCT applications may be submitted as patent
applications in foreign countries.  Our patent applications may or may
not mature into issued patents.




17




Our
success depends, to a significant extent, on the technology that is incorporated
in our product. Although some of the inventions which we have obtained or
applied for patent protection are no longer suitable for use with our planned
products, we believe that some of the other inventions covered by the patents
and patent applications are important to the success of our products. If we are
unable to protect our intellectual property, competitors could use our
intellectual property to market products similar to our products, which could
reduce demand for our products. We may be unable to prevent unauthorized parties
from attempting to copy or otherwise obtain and use our products or technology.
Policing unauthorized use of our technology is difficult, and we may not be able
to prevent misappropriation of our technology, particularly in foreign countries
where the laws may not protect our intellectual property as fully as those in
the United States.  Others may circumvent trade secrets, trademarks
and copyrights that we own or may own.  Any such infringements, or any
alleged infringements, could have a material adverse effect on our business,
results of operations, and financial condition.




Any of
the United States patents or foreign patents owned by us or subsequently issued
to us may be invalidated, circumvented, challenged or rendered
unenforceable.We
may not be issued any patents as a result of our pending and future patent
applications and any patents we are issued may not have the claim coverage
sought by us or necessary to prevent others from introducing similar
products.  Any litigation surrounding our patent rights could force us
to divert significant financial and other important resources away from our
business operations.





Some of
our intellectual property is not covered by any patent or patent
application.  We seek to protect this proprietary intellectual
property, which includes intellectual property that may not be patented or
patentable, in part by confidentiality agreements with our distributors and
employees. These agreements afford only limited protection and may not provide
us with adequate remedies for any breach or prevent other persons or
institutions from asserting rights to intellectual property arising out of these
relationships.  In addition, we cannot assure you that these
agreements will not be breached, that we will have adequate remedies for any
such breach or that the parties to such agreements will not assert rights to
intellectual property arising out of these relationships.




The
members of our scientific advisory board are employed by entities other than us,
some of which may compete with us.  While we intend to enter into
non-competition agreements with our scientific advisors, if any of them were to
consult with or become employed by any of our competitors, our business could be
negatively affected.




We
have entered into agreements with various third parties that may affect our
intellectual property rights.





We have
entered into agreements with various third parties in connection with the
development of various applications for our technology.  Those
agreements generally provide for the third party to own any resulting
intellectual property rights and often provide for the grant of a license to us
relating to those rights.  We cannot assure you that the terms of
those licenses will not limit our ability to apply such rights to specific
applications in competition with the relevant third party, which may adversely
affect our business.




Our
products employ technology that may unknowingly infringe on the proprietary
rights of others, and, as a result, we could become liable for significant
damages and suffer other harm.




We cannot
assure you that our technologies and products do not or will not infringe on the
proprietary rights of third parties or that third parties will not assert
infringement claims against us in the future.  We are aware of some
patents in the nano-materials field held by potential competitors and other
third parties. We cannot assure you that a third party will not claim
infringement by us with respect to these patents, other patents or proprietary
rights, or that we would prevail in any such proceeding.  Any such
infringement claim, whether meritorious or not, could:





·
              be
      time-consuming;


·
              result
      in costly litigation or arbitration and the diversion of technical and
      management personnel, as well as the diversionof
      financial resources from business
operations;


·
              require
      us to develop non-infringing technology or seek to enter into royalty or
      licensing agreements; or


·
              require
      us to cease use of any infringing
technology.




18




We may
not be successful in developing non-infringing technologies.  Royalty
or licensing agreements, if required, may not be available on terms acceptable
to us, or at all, and could significantly harm our business and operating
results.  A successful claim of infringement arising from the
existence of a ‘submarine patent’ or another existing patent against us or our
failure or inability to license the infringed or similar technology could
require us to pay substantial damages and could harm our business.  In
addition, to the extent we agree to indemnify customers or other third parties
against infringement of the intellectual property rights of others, a claim of
infringement could disrupt or terminate their ability to use, market or sell our
products.





We
may not be able to control our warranty exposure, which could increase our
expenses.




We
currently offer and expect to continue to offer a warranty with respect to our
ConsERVTM product and we expect to offer a warranty with each of our future
products.  If the cost of warranty claims exceed any reserves we may
establish for such claims, our results of operations and financial condition
could be adversely affected.




We
may be exposed to lawsuits and other claims if our products malfunction, which
could increase our expenses, harm our reputation and prevent us from growing our
business.




Any
liability for damages resulting from malfunctions of our products could be
substantial, increase our expenses and prevent us from growing or continuing our
business.  Potential customers will rely on our products for critical
needs, such as backup power.  A malfunction of our products could
result in warranty claims or other product liability.  In addition, a
well-publicized actual or perceived problem could adversely affect the market's
perception of our products.  This could result in a decline in demand
for our products, which would reduce revenue and harm our business.





Our
key employees are critical to our success and the loss of any key employees
could impair our ability to execute our strategy and grow our
business.




Our
future success depends, to a significant extent, on the continued service of our
executive officers and other key technical, sales and senior management
personnel and their ability to execute our growth strategy, all of whom have
non-compete agreements with the Company which may not withstand court review if
litigation were to occur.  The loss of the services of any of our
senior level management or other key employees could harm our
business.  Our future performance will depend, in part, on our ability
to recruit and retain additional experienced management personnel and for our
executive officers to work together effectively.  Our executive
officers may not be successful in carrying out their duties or running our
Company.  Any dissent among executive officers could impair our
ability to make strategic decisions.





Effective
as of March 1, 2009, the Company reduced the salaries of its employees by
approximately thirty percent (30%).  These salary reductions may have
an adverse effect on our ability to retain key employees.




If
we fail to attract, retain and motivate qualified employees, we may be unable to
execute our business strategy.




Our
future success will depend in part on our ability to attract and retain highly
qualified individuals, including researchers, engineers, sales and marketing
personnel and management. Competition for these individuals may become intense,
and it may become increasingly difficult to attract, assimilate and retain these
highly qualified persons. Competitors and others may attempt to recruit our
employees. Should we experience attrition or need to augment our staff, the cost
of securing personnel may be significantly higher than currently experienced and
thus negatively impact our financial position.





Our
failure to manage our growth could harm our business.




We may
grow in the number of our employees, the size of our physical facilities and the
scope of our operations.  In addition, we intend to focus greater
resource on ConsERVTM margins, sales/marketing activities and channel expansion,
and marketplace education. Any expansion would likely place a significant strain
on our senior management team and other internal and external resources.
Furthermore, we may be required to hire additional senior management
personnel.  Our ability to manage growth will depend in part on our
ability to continue to enhance our operating, financial and management
information systems.  Our personnel, systems and controls may be
unable to support any growth we may experience and as a result, our financial
results would suffer.




19




Any
acquisitions we make could disrupt our business and harm our financial
condition.




As part
of our growth strategy we may review opportunities to acquire other businesses
or technologies that would complement our products, expand the breadth of our
target markets or enhance our technical capabilities.  Acquisitions
entail a number of risks that could materially and adversely affect our business
and operating results, including but not limited to:





·
              problems
      integrating the acquired operations, technologies or products with our
      existing businesses
and products;


·
              constraints
      arising from increased expenses and working capital
      requirements;


·
              constraints
      on our ability to incur debt;


·
              dilution
      of our stock if we issue additional
securities;


·
              disruption
      of our ongoing business, diversion of capital and distraction of our
      management;


·
              difficulties
      in retaining business relationships with suppliers and customers of
      acquired companies;


·
              difficulties
      in coordinating and integrating overall business strategies, sales,
      marketing, research and development
efforts;


·
              potential
      liabilities in businesses and facilities
  acquired;


·
              difficulties
      in maintaining corporate cultures, controls, procedures and
      policies;


·
              difficulties
      evaluating risks associated with entering markets in which we lack prior
      experience; and


·
              potential
      loss of key employees.





Our
revenue and operating results may fluctuate significantly as a result of factors
outside of our control, which could cause the value of our Company to
decline.





Unless
and until we establish a predictable sales record for our products, we expect
our revenue and operating results to vary significantly from quarter to
quarter.  As a result, quarterly comparisons of our financial results
are not necessarily meaningful and you should not rely on them as an indication,
in any manner, of our future performance.  In addition, due to our
stage of development, we cannot predict our future revenue or results of
operations accurately.  As a consequence, our operating results may
fall below the expectations of investors, which could cause the valuation of our
company to decline.




We expect
to make significant investments in all areas of our business, particularly in
research and product development and in expanding in-house or outsourced
manufacturing capability.  Because the investments associated with
these activities are relatively fixed in the short-term, we may be unable to
adjust our spending quickly enough to offset any unexpected shortfall in our
revenue growth.  In addition, because we are in the early stages of
commercializing the ConsERVTM application and anticipate that it will take at
least an additional 18 to 36 months to develop our other products for
commercial sale, we expect our order flow to be uneven from period to
period.




Risks
Related to Our Industry




If
our products fail to meet certain technical standards, we could be subject to
claims, fines or other penalties and we may be curtailed from conducting our
business operations.




Our
nano-structured membrane products are designed for specific applications with
specific technical objectives and standards.  If these membranes, or
the hardware device(s) used to make the membranes work, fail to meet those
technical objectives and/or standards, we could be liable for potential personal
injury, loss of life and damages (including consequential
damages).  Depending on the nature of the claim, our current insurance
policies may not adequately reimburse us for costs incurred by reason of said
claims, including, but not limited to, environmental damage claims, and in
certain instances, we may not be reimbursed at all.  Our business is
subject to numerous federal, state and local laws, regulations and policies that
govern environmental protection.  These laws and regulations have
changed frequently in the past and may continue to do so in the
future.  Our operations may not comply with such changes and we may be
required to make significant unanticipated capital and operating expenditures to
comply with such changes.  If we fail to comply with such applicable
environmental laws and regulations, governmental authorities may seek to impose
fines or other penalties on us or to revoke or deny the issuance or renewal of
certain permits issued to us.  Accordingly, we might be subject to damage
claims or penalties, and we may be curtailed from conducting our business
operations.




20




We
could be liable for environmental damages resulting from our research,
development and manufacturing operations.




Our
business may expose us to the potential risk of harmful substances escaping
into the environment, resulting in potential personal injury or loss of life,
damage to or destruction of property, and natural resource
damage.  Depending on the nature of the claim, our current insurance
policies may not adequately reimburse us for costs incurred in settling
environmental damage claims, and in certain instances, we may not be reimbursed
at all.  Our business may be or become subject to numerous federal,
state and local laws, regulations and policies that govern environmental
protection.  These laws and regulations have changed frequently in the
past and may continue to do so in the future.  Our operations may not
comply with such changes and we may be required to make significant
unanticipated capital and operating expenditures to comply with such
changes.  If we fail to comply with applicable environmental laws and
regulations, governmental authorities may seek to impose fines or other
penalties on us or to revoke or deny the issuance or renewal of certain permits
issued to us. Accordingly, we might be subject to damage claims or penalties,
and we may be curtailed from conducting our business operations.




Future
government regulation may impair our ability to market and sell our
products.




Our
current and planned products are potentially subject to federal, state, local
and foreign laws and regulations governing, among other things, emissions to air
as well as laws relating to occupational health and safety.  As these
products are introduced commercially, it is possible that governmental
authorities will adopt new regulations that will limit or curtail our ability to
market and sell such products.  We may also incur substantial costs or
liabilities in complying with such new governmental regulations.  Our
potential customers and distributors, some of which operate in highly regulated
industries, may also be required to comply with new laws and regulations
applicable to products such as ours, which could adversely affect their interest
in our products.




Alternatives
to our technology could render our systems obsolete prior to
commercialization.




Our
nano-structured materials and their identified uses are one of a number of
products being developed today as potential answers to perceived market needs
such as additional water sources, energy and emissions savings with regard to
HVAC operation, alternative energy storage and “clean” power sources.
Improvements are also being made to the existing products. Technological
advances in all fields and improvements in key targeted application areas with
existing or different new technology may render our nano-structured material
approach obsolete before or during commercialization.





Risks
Related to Investment in Our Securities





Future
issuances or the conversion or exercise, as applicable, of our outstanding
convertible securities and warrants could result in substantial dilution to the
interests of our shareholders and downward pressure on the price of our common
stock.




The
issuance of any shares of our common stock, either pursuant to the conversion or
exercise of our outstanding convertible securities and warrants or pursuant to
any other agreement entered into by us in the future, may result in substantial
dilution to the interests of holders of our common stock. The sale of our shares
of common stock in the market could cause the market price of our common stock
to decline as a result of the increased supply of shares, which could in turn
cause you to lose a portion of your investment. Such depression in the value of
our common stock could also reduce or eliminate amounts that would otherwise
have been available to pay dividends on our common stock or to make
distributions upon our liquidation.




21




Furthermore,
shares owned by our current shareholders, who are registered in a registration
statement, or which otherwise may be transferred without registration pursuant
to applicable exemptions under the Securities Act of 1933, as amended (the
“Securities Act”) may be sold. Because of the perception by the investing public
that a sale by such insiders may be reflective of their own lack of confidence
in our prospects, the market price of our common stock could decline as a result
of a sell-off following sales of substantial amounts of common stock by our
officers, directors and 5% or more beneficial owners into the public market, or
the mere perception that these sales could occur.




Our
stock price is likely to be volatile.




Our
common stock has been quoted on the Pink OTC Markets, Inc.’s Pink Sheets since
November 15, 2005 and the Over the Counter Bulletin Board since November 24,
2008. The market price of our common stock has been and will likely continue to
be subject to fluctuations. In addition, the stock market in general and the
market for technology companies in particular, have from time to time
experienced significant price and volume fluctuations that have been often
unrelated or disproportionate to the operating performance of such companies.
These broad market and industry factors may cause our common stock to materially
decline, regardless of our operating performance. In the past, following periods
of volatility in the stock market and the market price of a particular company’s
securities, securities class action litigation has often been instituted against
that company. Litigation of this type could result in substantial legal fees and
other costs, potential liabilities and a diversion of management’s attention and
resources.




We
have not and do not intend to pay dividends on our common stock.





The
payment of dividends upon our capital stock is solely within the discretion of
our board of directors and dependant upon our financial condition, results of
operations, capital requirements, restrictions contained in our future financing
instruments and any other factors our board of directors may deem relevant. We
have never declared or paid a dividend on our common stock and, because we have
very limited resources, we do not anticipate declaring or paying any dividends
on our common stock in the foreseeable future. Rather, we intend to retain any
future earnings for the continued operation and expansion of our business. It is
unlikely, therefore, that the holders of our common stock will have an
opportunity to profit from anything other than potential appreciation in the
value of our common shares held by them.





Our
executive officers and directors have significant shareholdings, which may lead
to conflicts with other shareholders over corporate governance
matters.





As of
January 31, 2009, our directors and officers, as a group, beneficially own
approximately 44% of our outstanding common stock, including shares of common
stock issuable upon exercise of warrants and options.  Acting
together, these shareholders would be able to significantly influence all
matters that our shareholders vote upon, including the election of directors,
mergers or other business combinations.





As
a company quoted on the OTC Bulletin Board, we are not subject to any minimum
listing criteria or other eligibility requirements.





Companies
that are listed on a national securities exchange, such as the NASDAQ Stock
Market, American Stock Exchange or New York Stock Exchange, must meet certain
qualitative and quantitative listing criteria, such as they must meet
requirements with respect to operating results, net asset thresholds, corporate
governance, trading price and minimums for their public
float.  Companies that are quoted on the OTC Bulletin Board, while not
subject to listing requirements per se, must be registered with the SEC under
Section 13 or 15(d) of the Exchange Act, and must remain current in their
reporting requirements in order to remain eligible for quotation. As we are
quoted on the OTC Bulletin Board, we do not need to meet minimum listing
criteria and the information available regarding us, our financial condition,
business or operations, may be more limited than those companies listed on a
national securities exchange. Therefore you may find it more difficult to obtain
accurate quotations as to the price of our securities or dispose of securities
which you own.




22




Our securities are characterized as
“microcap stock”, and
are subject to a number of unique risks.





The term
“microcap stock” applies to companies with low or “micro” capitalizations,
meaning the total value of the company’s stock.  Our securities are
characterized as “microcap stock”, and are subject to a number of unique risks.
Many microcap companies tend to be new and have no proven track record. Some of
these companies have limited or no assets or operations. Others have products
and services that are still in development or have yet to be tested in the
market. Another risk that pertains to microcap stocks involves the low volumes
of trades. Because microcap stocks trade in low volumes, any size of trade can
have a large percentage impact on the price of the stock. While all investments
involve risk, microcap stocks can be among the most risky.




Unless
an active trading market develops for our securities, shareholders may have
difficulty or be unable to sell their shares of common stock.





Our
common stock is currently quoted on the OTC:BB under they symbol “DLYT.”
However, currently there is not an active trading market for our common stock,
meaning that the number of persons interested in purchasing shares of our common
stock at or near ask prices at any given time may be relatively small or
non-existent, and there can be no assurance that an active trading market may
ever develop or, if developed, that it will be maintained. There are a number of
factors that contribute to this situation, including, without limitation, the
fact that we are a small development-stage company that is relatively unknown to
stock analysts, stock brokers, institutional investors and others in the
investment community that generate or influence sales volume, and even if we
came to the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven, development-stage company such as ours or
purchase or recommend the purchase of shares of our common stock until such time
we become more seasoned and viable.





As a
consequence, our stock may be characterized by a lack of liquidity, sporadic
trading, larger spreads between bid and ask quotations, and other conditions
that may affect shareholders’ ability to re-sell our
securities.  Moreover, there may be periods of several days or more
when trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. Unless an active trading market for our common stock is developed and
maintained, shareholders may be unable to sell their common stock and any
attempted sale of such shares may have the effect of lowering the market price
of our common stock and a shareholder’s investment could be a partial or
complete loss.





Since
our common stock is thinly traded, it is more susceptible to extreme rises or
declines in price and shareholders may not be able to sell their shares at or
above the price paid.





Since our
common stock is thinly traded, its trading price is likely to be highly volatile
and could be subject to extreme fluctuations in response to various factors,
many of which are beyond our control, including:





·
              the
      trading volume of our shares;


·
              the
      number of securities analysts, market-makers and brokers following our
      common stock;


·
              new
      products or services introduced or announced by us or our
      competitors;


·
              actual
      or anticipated variations in quarterly operating
  results;


·
              conditions
      or trends in our business
industries;


·
              announcements
      by us of significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital
commitments;


·
              additions
      or departures of key
personnel;


·
              sales
      of our common stock;


·
              general
      stock market price and volume fluctuations of publicly-quoted, and
      particularly microcap, companies;
and


·
              material
      legal action.





Shareholders, including
but not limited to those who hold shares as a result of the exercise
or conversion of our outstanding convertible securities and warrants, may have
difficulty reselling shares of our common stock, either at or above the price
paid, or even at fair market value. The stock markets often experience
significant price and volume changes that are not related to the operating
performance of individual companies, and because our common stock is thinly
traded it is particularly susceptible to such changes. These broad market
changes may cause the market price of our common stock to decline regardless of
how well we perform as a company. In addition, and as noted below, our shares
are subject to the penny stock regulations. Price fluctuations in such shares
are particularly volatile and subject to manipulation by market-makers,
short-sellers and option traders.




23




Our
common stock is subject to the “penny stock” regulations, which are likely to
make it more difficult to sell.





Our
common stock is considered a “penny stock,” which generally is a stock trading
under $5.00 and not registered on a national securities exchange. The SEC has
adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. These rules generally have the result of reducing
trading in such stocks, restricting the pool of potential investors for such
stocks, and making it more difficult for investors to sell their shares once
acquired. Prior to a transaction in a penny stock, a broker-dealer is required
to:





·
              deliver
      to a prospective investor a standardized risk disclosure document that
      provides information about penny stocks and the nature and level of risks
      in the penny stock market;


·
              provide
      the prospective investor with current bid and ask quotations for the penny
      stock;


·
              explain
      to the prospective investor the compensation of the broker-dealer and its
      salesperson in the
transaction;


·
              provide
      investors monthly account statements showing the market value of each
      penny stock held in their account;
and


·
              make
      a special written determination that the penny stock is a suitable
      investment for the purchaser and receive the purchaser’s written
      agreement  to the
transaction.





These
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that is subject to the penny stock rules. Since
our common stock is subject to the penny stock rules, investors in our common
stock may find it more difficult to sell their shares.




Our
listing has moved to the OTC Bulletin Board as of November 24, 2008, subjecting
us to additional regulatory requirements which may negatively affect our common
stock’s trading price.




On
November 24, 2008, the Company moved its listing to the OTC Bulletin Board where
the trading price of our common stock has been and is expected to remain below
$5.00 per share. As a result of this exchange relocation, trading in our common
stock is subject to the requirements of certain rules promulgated under the
Exchange Act. These rules require additional disclosure by broker-dealers in
connection with any trades generally involving any non-NASDAQ equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Such rules require the delivery, before any penny stock transaction,
of a disclosure schedule explaining the penny stock market and the risks
associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must determine the suitability of the penny
stock for the purchaser and receive the purchaser’s written consent to the
transaction before sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
our common stock. As a consequence, the market liquidity of our common stock
could be severely affected or limited by these regulatory
requirements.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS





None.





ITEM
      2.
            PROPERTIES





We
currently lease a 7,200 square feet of combined office and production space
located at 11552 Prosperous Drive, Odessa, FL 33556.  We lease
the site from Ethos Business Ventures, LLC, a limited liability company in
which our Chief Executive Officer, Timothy N. Tangredi, has a controlling
financial interest.




24




The lease
for our corporate headquarters began on March 18, 2005. The lease term will
terminate upon 30 days’ written notice from either party. The current monthly
rent is $3,800 per month. We also pay all taxes and utilities as well as most
repairs relating to our office.  Most of the Company functions are
performed at this site including corporate, marketing, administration, on-going
product and nano-structured polymer development, and product assembly and
shipping. Key polymer synthesis and casting is out-sourced and not done at this
facility.





We do not
anticipate investing in real estate or interests in real estate, real estate
mortgages, or securities of or interests in persons primarily engaged in real
estate activities. We currently have no formal investment policy and do not
intend to undertake investments in real estate as a part of our normal
operations.





ITEM 3.
            LEGAL
      PROCEEDINGS





None.





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





25




PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Our
common stock was traded from November 15, 2005 to November 23, 2008 on the
PinkSheets and from November 24, 2008 to present on the Over the Counter
Bulleting Board under the trading symbol “DLYT.”  The following table sets
forth the range of reported high and low bid prices of our common stock during
the periods indicated. Such quotations reflect prices between dealers in
securities and do not include any retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions. Trading in our common stock
should not be deemed to constitute an “established trading market.”





High
            
            
            LowFor
      the year ending December 31, 2008:First
      Quarter
            
            
            .51
            
            
            
            .15Second
      Quarter
            
            
            .51
            
            
            
            .24Third
      Quarter
            
            
            .45
            
            
            
            .16Fourth
      Quarter
            
            
            .20
            
            
            
            .07For
      the year ending December 31, 2007:First
      Quarter
            
            
            1.45
            
            
            
            .20Second
      Quarter
            
            
            .60
            
            
            
            .12Third
      Quarter
            
            
            .51
            
            
            
            .21Fourth
      Quarter
            
            
            .88
            
            
            
            .15




The above
prices represent inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.




Transfer
Agent





Our
transfer agent is Island Stock Transfer located at 100 Second Avenue South,
Suite 104N St. Petersburg, Florida 33701, telephone (727)
289-0010.





Holders





As
of March 24, 2009 there were approximately 146 shareholders of record of
our common stock.





Dividend
Policy





We have
not declared or paid any dividends and do not intend to pay any dividends in the
foreseeable future to the holders of our common stock. We intend to retain
future earnings, if any, for use in the operation and expansion of our business.
Any future decision to pay dividends on common stock will be at the discretion
of our board of directors and will depend on our financial condition, results of
operations, capital requirements and other factors our board of directors may
deem relevant.




Equity
Compensation Plan Information




The
following table sets forth information regarding our 2000 Incentive Compensation
Plan (the “2000 Plan”) under which our securities are authorized for issuance as
of December 31, 2008.




Plan
      Category
            
            Number of Securities to
              be Issued Upon
              Exercise
              of
      Outstanding Options,
              Warrants
      and Rights
            
            
            Weighted Average
              Exercise
      Price of
              Outstanding
              Options,
              Warrants
      and Rights
            
            
            Number of
              Securities
              Remaining
              Available
      for
              Future Issuance
              Under
      Equity
              Compensation
              PlansEquity
      compensation plans approved by security holders:
            
            
            8,606,557
            
            
            
            .263
            
            
            
            3,767,325Equity
      compensation plans not approved by security holders:
            
            
            0
            
            
            
            0
            
            
            
            0




26




In June
2000, our board of directors adopted, and our shareholders approved, the 2000
Plan, which provides for the grant of stock options, incentive stock options,
stock appreciation rights, restricted stock, restricted stock units and bonus
stock and other awards to eligible persons, as defined in said plan, including,
but not limited to, officers, directors and employees of the
Company.  Certain awards under the 2000 Plan may be subject to
performance conditions.





Number of Shares of Common Stock
Available Under the 2000 Plan.  As of December 31, 2007, our
board of directors approved and made available 6,093,882 shares of common stock
to be issued pursuant to the 2000 Plan. Subsequently, our board of directors
approved and made available an additional 5,000,000 shares of our common stock
for issuance under the 2000 Plan. The 2000 Plan permits grants of options to
purchase common shares authorized and approved by the Company’s Board of
Directors and shareholders for issuance prior to the enactment of the 2000
Plan.





Administration of the 2000
Plan.  The 2000 Plan is administered by a committee of two or
more directors designated by the board of directors to administer the 2000 Plan
(the “Committee”) or, in the absence of such Committee, by the board of
directors.  Currently, the 2000 Plan is administered by our board of
directors.  The board of directors has the authority to select the
participants to whom awards under the 2000 Plan will be granted, grant awards,
determine the type, number and other terms and conditions of, and all other
matters relating to, awards granted under the 2000 Plan and to prescribe the
rules and regulations for the administration of the 2000 Plan.  No
option or stock appreciation rights granted under the 2000 Plan shall be
exercisable, however, more than ten years after the date of the
grant.





Exercise Price.  The
2000 Plan requires the Committee to grant qualified options with an exercise
price per share not less than the fair market price of a share of common stock
on the date of grant of the option.





Transferability.Awards
granted under the 2000 Plan are generally not transferable by the optionee
otherwise than by will or the laws of descent and distribution and generally
exercisable during the lifetime of the optionee only by the
optionee.





Change in
Control.All awards granted under the 2000 Plan which were not
previously exercisable and vested shall become fully exercisable and vested upon
a change of control of the Company, which includes the consummation of a merger
or consolidation of the Company with or into any other entity, sale of all or
substantially all of our assets, replacement of a majority of our board of
directors, acquisition by any person of securities representing 20% or more of
the voting power of our then outstanding securities (other than securities
issued by us) or any other event which the board of directors determines would
materially alter our structure or ownership.





Options Granted to Non-Employee
Directors.  Non-employee directors of the Company are usually
granted options each year, which generally become exercisable upon the date of
grant, and generally expire on the earlier of ten years from the date of grant
or up to three years after the date that the optionee ceases to serve as a
director.





Stand-Alone
Grants





Our board
of directors may grant common share purchase options or warrants to selected
directors, officers, employees, consultants and advisors in payment of goods or
services provided by such persons on a stand-alone basis outside of any of our
2000 Plan. The terms of these grants may be individually
negotiated.




27




RECENT
SALES OF UNREGISTERED SECURITIES- USE OF PROCEEDS





During the past three years, we issued the
following securities without registration under the Securities Act of 1933, as
amended (the “Securities Act”), pursuant to exemption from registration under
Section 4(2) and Regulation D of the Securities Act:





In August
2008 we issued a five year warrant to purchase 250,000 shares of common stock to
Mr. Ehrenberg in recognition for Mr. Ehrenberg’s achievement of certain company
goals.  The fair value of the warrant issued is approximately $49,000.
The warrant vested upon issuance and has an exercise price of $.30 per
share.





In April
2008 we issued a five year warrant to purchase 3 million shares of common stock
to Mr. Tangredi in recognition for Mr. Tangredi’s achievement certain
company goals.  The fair value of the warrant issued is approximately
$687,000. The warranted vested upon issuance and has an exercise price of $.36
per share.





In
January 2008 we closed on an aggregate of $2,950,000 in gross proceeds from the
private sale to 23 accredited investors of 9% secured convertible notes and
warrants to purchase 14,750,000 shares of our common stock.  The
convertible notes provided that such notes may be converted into one share of
common stock for every $.20 in principal and interest on the convertible
notes.  The warrants have a five-year term, cashless exercise
provisions and anti-dilution protection. The anti-dilution protection includes
standard protection for stock dividends or splits, reclassification or capital
reorganization as well as protection with regards to additional issuances of
common stock or common stock equivalents.  The exercise price is $0.25
per share of common stock.  Pursuant to the terms of this financing we
granted the investors a security interest in certain of our
assets.  We entered into an agreement with placement agent, Legend
Merchant Group, Inc. on October 5, 2007 pursuant to which, Legend Merchant
Group, Inc. received a cash commission equal to 8% of the gross proceeds raised
by Legend Merchant (and its subagent), which totaled $2,800,000, plus a warrant
equal to 10% of the number of shares of common stock underlying the warrants
issued to convertible note holders, or 1,400,000. The issuance of these
securities was exempt from registration under Section 4(2) and Regulation D of
the Securities Act.  The Company made this determination based on the
representations of the investors, which included, in pertinent part, that such
investors were either (a) “accredited investors” within the meaning of Rule 501
of Regulation D promulgated under the Securities Act or (b) had a
pre-existing or personal relationship with the Company. Each investor further
represented that he or she was acquiring our common stock for investment
purposes not with a view to the resale or distribution thereof and understood
that the shares of our common stock may not be sold or otherwise disposed of
without registration under the Securities Act or an applicable exemption
therefrom.  A legend was included on all offering materials and
documents which stated that the shares have not been registered under the
Securities Act and may not be offered or sold unless the shares are registered
under the Securities Act, or an exemption from the registration requirements of
the Securities Act is available.





In
February 2008 we issued 140,000 shares of common stock and warrants to purchase
an additional 140,000 shares to Richardson & Patel LLP, our legal counsel,
in connection with performance of legal services pursuant to exemption from
registration under Section 4(2) of the Securities Act.  The fair value
of the equity instruments issued for these services is approximately
$59,000.  On August 7, 2008, we issued an additional 252,308 shares of
common stock and warrants to purchase an additional 252,308 shares to Richardson
& Patel LLP in connection with performance of legal services pursuant
to exemption from registration under Section 4(2) of the Securities
Act.  The fair value of the equity instruments issued for these
services is approximately $136,000.




From
October 2005 to February 2007 we sold an aggregate of $1,265,547 of secured
convertible promissory notes to 16 accredited investors (the “Additional
Financing”).  Pursuant to a subsequent conversion agreement between
the Company and the various note holders, the notes were converted into an
aggregate of 3,258,323 shares of common stock and warrants to purchase 428,677
shares of common. The issuance of these securities was exempt from
registration under Section 4(2) and Regulation D of the Securities
Act.  The Company made this determination based on the representations
of the investors, which included, in pertinent part, that such shareholders were
either (a) “accredited investors” within the meaning of Rule 501 of Regulation D
promulgated under the Securities Act or (c) had a pre-existing or personal
relationship with the Company. Pursuant to an agreement with the Company, note
holders opting to convert their notes received one share for every $.275 in
principal and one share for every $.25 in interest.  The warrants
issued in the Additional Financing have a five-year term and anti-dilution
protection for stock dividends or splits, mergers, consolidation,
reclassification, capital reorganization or a sale of substantially all of the
Company’s assets. The exercise price is $0.55 per share of common stock, do not
provide for cashless exercise and are exercisable as follows:  (a) one
third of the total number of warrant shares on or after the six month
anniversary of the issuance date, (b) an additional one third of the total
number of warrant shares on or after the one year anniversary of the issuance
date, and (c) in full commencing on or after the 18 month anniversary of the
issuance date.  If the per share market value of the Company’s common
stock is $1.50 per share or greater for ten consecutive trading days (subject to
adjustment to reflect stock splits, stock dividends, recapitalizations and the
like), the Company may require the holder to exercise the warrant and purchase
all warrant shares within ten business days of the Company issuing notice to the
holder or the warrant will automatically terminate. The warrants do not contain
any redemption features.  Investors in the Additional Financing have
no registration rights.




28




From
December 2006 to March 2007 we sold 818,181 shares of common stock and warrants
to purchase 112,499 shares of common stock to six trust and family members of
the Daily family pursuant to exemption from registration under Section 4(2) and
Regulation D of the Securities Act for aggregate gross proceeds of $450,000. The
warrants have a five-year term and anti-dilution protection for stock dividends
or splits, mergers, consolidation, reclassification, capital reorganization or a
sale of substantially all of the Company’s assets. The exercise price is $0.55
per share of common stock and vested upon the issuance of the
warrant.





In December
2006 we issued a warrant to purchase 84,555 shares of common stock to Matrix,
USA in connection with providing strategic financial advice to the Company
pursuant to exemption from registration under Section 4(2) and Regulation D of
the Securities Act.  The fair value of the equity instruments issued
for these services is approximately $52,028.61. The warrants have a five-year
term and anti-dilution protection for stock dividends or splits, mergers,
consolidation, reclassification, capital reorganization or a sale of
substantially all of the Company’s assets. The exercise price is $0.55 per share
of common stock and vested upon the issuance of the
warrant.




In
February 2007 we issued 180,000 shares of common stock to Consulting for
Strategic Growth, Inc. for consulting services pursuant to exemption from
registration under Section 4(2) of the Securities Act. The fair value of
the equity instruments issued for these services is approximately
$170,000.





In
February 2007 we issued 50,000 shares of common stock to Spartan Securities, St.
Petersburg, FL in connection with Spartan’s senior management team providing
strategic financial advice to the Company pursuant to exemption from
registration under Section 4(2) of the Securities Act.  The fair value
of the equity instruments issued for these services is approximately
$47,000.





In
February 2007 we issued 100,000 shares of common stock to Michael Williams. P.A,
in connection with legal services pursuant to exemption from registration
under Section 4(2) of the Securities Act.  The fair value of the
equity instruments issued for these services is approximately
$55,000.





In
January 2008, we issued 439,293 shares of common stock and warrants to purchase
50,000 additional to the Robb Charitable Trust pursuant to exemption from
registration under Section 4(2) and Regulation D of the Securities
Act.  The 439,293 shares of common stock were issued in connection
with an amendment to a prior note pursuant to which one half of the principal
and interest was payable in cash and one half of the principal and interest was
payable in common stock.  The aggregate value of principal and
interest relating to the conversion was $108,540. The warrant was issued
pursuant to the terms of the original note. The warrants have a five-year term
and anti-dilution protection for stock dividends or splits, mergers,
consolidation, reclassification, capital reorganization or a sale of
substantially all of the Company’s assets. The exercise price is $0.55 per share
of common stock and they do not provide for cashless exercise. These warrants
are exercisable as follows:  (a) one third of the total number of
warrant shares on or after the six month anniversary of the issuance date, (b)
an additional one third of the total number of warrant shares on or after the
one year anniversary of the issuance date, and (c) in full commencing on or
after the 18 month anniversary of the issuance date.  If the per share
market value of the Company’s common stock is $1.50 per share or greater for ten
consecutive trading days (subject to adjustment to reflect stock splits, stock
dividends, recapitalizations and the like), the Company may require the holder
to exercise the warrant and purchase all warrant shares within ten business days
of the Company issuing notice to the holder or the warrant will automatically
terminate.  The warrants do not contain any redemption
features.





In June
2008 we agreed to issue, and have since issued, 100,000 shares of common stock
to Gemini Strategies, LLC in connection with consulting services related to
establishing an environmental based carbon credit program pursuant to
exemption from registration under Section 4(2) of the Securities
Act.  The fair value of the equity instruments issued for these
services is approximately $51,000.




29




On
January 8, 2009, we issued 9,000 and 103,846 shares of the Company’s common
stock to Design Technica, Inc. and Ellenoff Grossman & Schole, LLP,
respectively, in connection with performance of services.  The common
stock was issued pursuant to exemption from registration under Section 4(2) of
the Securities Act. The fair value of the services for which the equity
instruments were issued is approximately $2,700 and $27,000,
respectively.




On March
9, 2009, the Company entered into a subscription agreement with Michael
Gostomski pursuant to which Mr. Gostomski purchased 576,923 shares of Company’s
common stock and a five year warrant to purchase an additional 288,462 shares of
common stock at an exercise price of $.26 per share. The aggregate gross
proceeds received by Company for this sale was $150,000. On the same date,
Harris Weston entered into a subscription agreement with Company and purchased
100,000 shares of Company’s common stock and a five year warrant to purchase an
additional 50,000 shares of common stock at a purchase price of $.26 per share.
The aggregate gross proceeds received by Company for this sale was $26,000. The
warrants issued to these purchasers are identical in their terms, immediately
exercisable and subject to adjustment for standard anti-dilutions events,
including but not limited to stock dividends, split-up, reclassification or
combination of Company’s share, exchange of stock for other Company stock, or
certain capital reorganizations or reclassification of the capital stock or
consolidation, merger or sale of substantially all Company’s assets. In
addition, subject to certain conditions, upon the per share market price of the
common stock (as defined in warrant) being $1.50 per share for ten consecutive
trading days the Company may require the holder of the warrant exercise the
warrant or it will automatically terminate. The issuance of these securities was
exempt from registration under Section 4(2) and Regulation D of the Securities
Act.




The
proceeds are expected to be used for general working capital
purposes.




From
October 2008 to March 2009, Company issued a total of 96,000 shares of common
stock to Sheppard Goldberg pursuant to a consulting agreement. Said agreement
required the Company to issue 16,000 shares per month for each month of the
agreement. The agreement is still in effect. The fair value of the common stock
issued for these services is approximately $12,640.





On
February 16, 2009, and March 12, 2009, Michael Gostomski and Platinum Montaur
Life Sciences, respectively, elected to convert their 9% secured
convertible notes and the related accrued interest in the amounts of $83,007.53
and $664,948 into 415,038 and 3,324,740 shares of common stock.  Such
investors also received an additional warrant to purchase up to 124,875 and
999,000 shares of common stock, respectively, at an exercise price of $.25 per
share in consideration for converting their 9% secured convertible
note.





Recent
Repurchases of Common Stock




There
were no repurchases of our common stock during the fourth quarter of the fiscal
year covered by this report.





ITEM
      6.
            SELECTED
      FINANCIAL DATA





Pursuant
to Item 301 (c) of Regulation S-K, we are not required to provide information
under this item.





ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.




The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those which are not within our
control.




30




OVERVIEW




We have
developed and patented a nano-structure polymer technology, which is being
commercialized in products based on the functionality of these materials. We
believe the applications of our technology have promise in a number of diverse
market segments and products.




The
initial product focus of the Company is ConsERV, an energy recovery
ventilator.  Our primary focus is to expand our marketing and sales of
our ConsERVTM product.




We also
have new product applications in various developmental stages.  We
believe that three of these product applications, including an advanced air
conditioning system which is projected to use less energy and emits fewer
emissions than current HVAC equipment, a sea-water desalination product and an
electrical energy storage device, can be brought to market in the foreseeable
future if we receive adequate capital funding.





REVENUES




We
generate our revenues primarily from the sale of our ConsERVTM products in
residential and commercial HVAC markets.  Sales channels for our
ConsERVTM products include OEMs, distributors, retailers, and
consumers.  We also occasionally license our technology to strategic
partners and sell various prototypes of other product applications that use our
polymer technology.





Our
revenue growth is dependent on continued sales from (i) more seasoned
independent sales representatives, (ii) a greater number of independent sales
representatives (iii) fulfilling the ventilation needs of the growing “energy
consultant” marketplace which work to lower  their client’s energy
costs and emissions, and (iv)  from the Company’s own ‘customer
direct’ sales activities, all of which focus on the sale of product primarily
into the commercial user marketplace with a growing emphasis on low rise
structures (small commercial buildings, multi-purpose structures, and
residences).  In addition, the Company and its independent sales
representative sales force will work to secure orders for ConServ “core only”
sales (i) from HVAC equipment manufacturers, (ii) from distribution
firms servicing the equipment needs of the HVAC installer community, and (iii)
creating license/supply relationships to HVAC or ERV OEMs preferably having a
dominant presence in existing direct related sales channels





COST
OF SALES




Our cost
of sales consists primarily of materials (including freight), direct labor, and
outsourced manufacturing expenses incurred to produce our ConsERVTM
products.





We are
dependent on third parties to manufacture the key components needed for our
nano-structured based materials and value added products made with these
materials. Accordingly, a supplier’s failure to supply components in a timely
manner, or to supply components that meet our quality, quantity and cost
requirements or our technical specifications, or the inability to obtain
alternative sources of these components on a timely basis or on terms acceptable
to us, would create delays in production of our products or increase our unit
costs of production. Certain of the components contain proprietary products of
our suppliers, or the processes used by our suppliers to manufacture these
components are proprietary.  If we are required to replace any of our
suppliers, while we should be able to obtain comparable components from
alternative suppliers at comparable costs, this would create a delay in
production.




31




Our cost
of sales may fluctuate due to a number of factors, including, but not
limited to:





·
              A
      change in key suppliers or the prices that they charge for the fundamental
      components of our ConsERVTM
products;


·
              An
      increase in the labor resources needed to expand the production of our
      ConsERVTM products;


·
              Commercialization
      of new product applications of our polymer
  technology;


·
              Continued
      technological improvements in key materials or configuration(s) to reduce
      our ‘per unit’ cost structure;
and


·
              Additional
      outsourcing of our manufacturing and assembly processes with strategic
      partners to reduce our ‘per unit’ cost
  structure.




SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES




Our
selling, general and administrative expenses consist primarily of payroll and
related benefits, share-based compensation, professional fees, marketing and
channel support costs, and other infrastructure costs such as insurance,
information technology and occupancy expenses.





Our
selling, general and administrative expenses may fluctuate due to a variety of
factors, including, but not limited to:





·
              Additional
      expenses as a result of becoming a reporting company including, but not
      limited to, director and officer insurance, director fees, SEC reporting
      and compliance, transfer agent fees, additional staffing, professional
      fees and similar expenses;


·
              Additional
      infrastructure needed to support the expanded commercialization of our
      ConsERVTM products and/or new product applications of our polymer
      technology for, among other things, administrative personnel, physical
      space, marketing and channel support and information technology;
      and


·
              The
      fair value of new share-based awards, which is based on various
      assumptions including, among other things, the volatility of our stock
      price




RESULTS
OF OPERATIONS





The
following table sets forth, for the periods indicated, certain data derived from
our Statements of Operations:





Year
      EndedDecember
      31,2008
            
            2007Revenues
            
            $
            1,035,091
            
            
            $
            870,160Percentage
      of revenues
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of goods sold
            
            $
            796,217
            
            
            $
            637,032Percentage
      of revenues
            
            
            76.9.
            %
            
            
            73.2
            %Selling,
      general and administrative expenses
            
            $
            2,935,552
            
            
            $
            1,871,030Percentage
      of revenues
            
            
            283.6
            %
            
            
            215.0
            %Interest
      Expense
            
            $
            3,282,768
            
            
            $
            596,083Percentage
      of revenues
            
            
            317.1
            %
            
            
            68.5
            %Net
      loss
            
            $
            (5,979,446)
            
            
            $
            (2,233,985)Percentage
      of revenues
            
            
            (577.7)
            %
            
            
            (256.7)
            %





32




DECEMBER 31,
      2008 COMPARED TO DECEMBER 31,
2007





REVENUES:Total revenues for
the year ended December 31, 2008 and 2007 were $1,035,091 and $870,160
respectively, an increase of $164,931, or 19.0%. The increase in revenues is
attributable to stronger sales of our ConsERV units during the fourth quarter of
2008 and interest income of $19,658 earned during 2008 on proceeds from the
private offering that closed from December 2007 to January
2008.  During the year ended December 31, 2008 and 2007, four and
three customers accounted for approximately 64% and 65% of revenues,
respectively.





COST OF GOODS SOLD:Cost of
goods soldwas
$796,217 and 637,032, or 78.4% and 73.2% of revenues excluding interest income,
for the years ended December 31, 2008 and 2007, respectively.  The
increase in 2008 of $159,185 is due to higher ConsERV sales and an increase in
material costs of approximately $114,000, offset by a decrease in direct labor
costs of approximately $29,000.





SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:Selling, general and administrative expenses were $2,935,552
for the year ended December 31, 2008, compared to $1,871,030 for the year ended
December 31, 2007, an increase of $1,064,522 or 56.9%.  This increase
is due to a variety of factors, including: compensation expense of approximately
$687,000 recognized during 2008 for a warrant granted to an executive as
discussed in Note 6 to the Financial Statements, an increase in compensation
expense of approximately $145,000 related to various option and warrant awards
granted during 2008, and an increase in payroll expense of approximately
$323,000 for new employees.  These increases are partially offset by a
decrease in other expenses of $106,000, which results from a change in the
estimated outcome of certain contingent liabilities discussed in Note 11 of the
Financial Statements.





INTEREST EXPENSE:Interest
expense was $3,282,768 for the year ended December 31, 2008 compared to $596,083
for the same period of 2007, an increase of $2,686,685 or 450.7%.  For
the year ended December 31, 2008, interest expense was comprised of amounts
related to convertible notes issued from December 2007 to January 2008,
including approximately $262,000 of interest payable to the note holders, loan
cost amortization of approximately $102,000, and approximately $2,849,000 for
the amortization of the note discount and embedded beneficial conversion feature
described in Note 5 to the Financial Statements.  During the year
ended December 31, 2008, the Company also recognized approximately $65,000 of
interest expense from the induced conversion of notes payable to the Robb
Charitable Trust.  During the year ended December 31, 2007, interest
expense was comprised of amounts related to convertible notes, including
approximately $47,000 of interest payable to the note holders, loan cost
amortization of approximately $24,000, and amortization of beneficial conversion
features of approximately $510,000





NET LOSS:Net loss for the
year ended December 31, 2008 increased by $3,745,461 to $5,979,446 from
$2,233,985 for the year ended December 31, 2007. The increase in net loss is
primarily due to the increases in cost of sales, stock-based compensation,
payroll expenses and interest expense discussed above.





LIQUIDITY
AND CAPITAL RESOURCES





The
Company finances its operations primarily through sales of its ConsERV products,
sales of its common and preferred stock, the issuance of convertible promissory
notes and license agreements.





From
November 2007 through January 2008, the Company consummated a private placement
offering and received funding of $2,950,000 from the issuance of 9% convertible
promissory notes, secured by patents, with maturity dates from December 2008
through January 2009.  Warrants to purchase 14,750,000 shares of
common stock at an exercise price of $0.25 per share accompanied the
notes.  These warrants vest immediately and expire December 2012
through January 2013.  At maturity, the lender has the option of
receiving payment of any principal and accrued interest due under the notes in
either cash or common stock of the Company.  If the lender opts for
payment in the form of common stock, it will be issued at the rate of one share
per $0.20 of outstanding principal and interest.





At
December 31, 2008, $2,950,000 of principal due on the notes plus the related
accrued interest was outstanding.  The notes matured and became due
and payable in full between December 2008 and January 2009.  The
Company has not repaid any of the amounts due.  Certain investors with
outstanding principal balances of approximately $450,000 at December 31, 2008,
have notified the Company that they are asserting their rights to receive
payment of the principal and interest pursuant to the terms of the
notes.  We do not have adequate funds to repay the notes, and do not
expect to attain adequate funds for repayment from operations. The notes are
secured by all of the Company’s patents and the majority of the Company’s patent
applications.  Management is currently attempting to renegotiate the
repayment terms of the notes.  From December 2008 through March
2009, five investors extended the maturity dates of the notes for nine months
and two investors converted the notes.  The total outstanding
principal due on the notes from these investors was $1,000,000 at
December 31, 2008.




33




There is
no guarantee that any re-negotiated terms we may be able to secure on the
remaining notes of $1,950,000 plus accrued interest would be favorable to the
Company. Unfavorable terms, in either a financing transaction or debt
renegotiation, would adversely affect our business, financial condition and
results of operations. In the event (i) we are unable to secure additional
financing sufficient to pay the notes, (ii) the notes are not converted into
shares of our common stock pursuant to their terms, or (iii) we are not able to
negotiate extensions to the maturity dates of the notes, the note holders will
have the option to obtain a judgment against us and to foreclose on all of our
assets, including our patents and those patent applications securing the notes,
which would likely result in the failure of our business.





The
Company issues stock options and warrants to certain employees and third party
consultants for payment of services in lieu of cash.  During the years
ended December 31, 2008 and 2007, the Company issued shares of common stock and
warrants in lieu of cash of approximately $229,000 and $217,000, respectively,
to third party consultants for services received.  During the year
ended December 31, 2008, the Company granted an executive a fully vested warrant
to purchase 3,000,000 shares of the Company’s common stock at an exercise price
of $.36 per share for services performed and granted other stock-based
compensation awards to employees of approximately $497,000.  During
the year ended December 31, 2007, the Company granted stock-based compensation
awards to employees of approximately $359,000.





At
December 31, 2008, we had cash and cash equivalents of $26,867.  Our
lack of sufficient cash in 2009 has restricted our ability to acquire component
parts to build our ConsERV products.  In response to our need for
liquidity, we reduced the salaries of our employees by approximately 30 percent
effective as of March 1, 2009.  We also temporarily released certain
hourly employees for the month of March 2009.  Some of these hourly
employees have since returned to work and others will rejoin our workforce in
April 2009.  Management and the Board of Directors will monitor salary
and staffing levels on a regular basis and determine when it is appropriate to
restore them to normal levels.





To date,
these salary reductions and temporary releases have not disrupted our ConsERV
production schedule.  However, our productions schedule has been
slowed by our ability to purchase raw materials.





Our
historical revenues have not been sufficient to sustain our
operations.  We have incurred net losses since inception and expect to
incur substantial losses in the future.  Our profitability will
require the successful commercialization of our ConsERV products and any future
products we develop. No assurances can be given when this will
occur.





We
believe that $15 million of capital would permit us to refinance our existing
capital structure and satisfy ongoing working capital requirements associated
with our commercialization and development efforts.








The
Company is currently pursuing the following sources of short and long-term
working capital:





1.
              We
      are raising immediate working capital by private sales of equity to
      existing shareholders and/or note holders. The Company plans to raise a
      total of $500,000 by May 31, 2009. We expect these funds, in combination
      with working capital generated from operations, to sustain the Company’s
      operations through August
2009.




34




2.
              We
      are currently holding preliminary discussions with parties who are
      interested in licensing, purchasing the rights to, or establishing a joint
      venture to commercialize, certain applications of our
      technology.





3.
              We
      are seeking growth capital from certain strategic and/or government
      (grant) related sources. In addition to said capital, these sources may,
      pursuant to any agreements that may be entered into in conjunction with
      such funding, assist in the product definition and design, roll-out, and
      channel penetration of our products. As part of this  step we
      will attempt to take advantage of key programs associated with the
      recently enacted American Recovery and Reinvestment Act of
      2009.





Our
ability to continue as a going concern is highly dependent on our ability to
obtain additional sources of cash flow sufficient to fund our working capital
requirements.  Any future financing may result in substantial dilution
to existing shareholders, and future debt financing, if available, may include
restrictive covenants or may require us to grant a lender a security interest in
any of our assets not already subject to an existing security interest. To the
extent that we attempt to raise additional funds through third party
collaborations and/or licensing arrangements, we may be required to relinquish
some rights to our technologies or products currently in various stages of
development, or grant licenses or other rights on terms that are not favorable
to us. Any failure by us to timely procure additional financing or investment
adequate to fund our ongoing operations, including planned product development
initiatives, and commercialization efforts, will have material adverse
consequences on our financial condition, results of operations and cash
flows.  In the event that we are unable to obtain financing or
investment from the sources listed above, the Company will attempt to secure
short term funds by factoring its accounts receivable. In addition, it shall
consider reducing its staff extensively, eliminating all non-essential
expenditures and taking other similar steps in an effort to permit it to operate
while continuing to attempt to secure funds from financing, investment or
licensing. If none of the aforementioned acts produce sufficient capital to
continue operations, the Company may have to cease operations.




Statements of Cash Flows





Cash and
cash equivalents and cash held in escrow as of December 31, 2008
was $26,867 compared to $1,504,232 as of December 31, 2007. Cash is
primarily used to fund our working capital requirements and net operating
losses. At December 31, 2007, cash held in escrow represented proceeds from the
private placement offering, which were released from escrow when the transaction
closed in January 2008.





For the
year ended December 31, 2008, the Company had a decrease in working capital of
$3,467,560, resulting in a working capital deficit of $3,802,009 compared to
$334,449 of working capital deficit as of December 31, 2007.  During
the year ended 2008, we used approximately $1,825,000 of cash to fund our
operations, approximately $100,000 to repay debt, and approximately $19,000 to
purchase equipment.  These uses of cash are partially offset by
approximately $466,000 of proceeds received during 2008 in connection with our
private placement offering.  The remaining decrease in working capital
is primarily due to an increase in current debt of $1,974,000.





Net cash
used in operating activities was approximately $1,825,000 for the year ended
December 31, 2008 compared to approximately $916,000 for the same period in
2007. During the year ended December 31, 2008, we used additional cash to fund
operating losses of approximately $567,000 and working capital
requirements of approximately 342,000 compared to the same period in
2007.





Net cash
used in investing activities was approximately $19,000 for the year ended
December 31, 2008 compared to approximately $9,000 for the same period in 2007.
During the year ended December 31, 2008, we used additional cash to purchase
equipment.





Net cash
provided by financing activities was approximately $1,366,000 for the year ended
December 31, 2008 compared to approximately $1,224,000 for the same period in
2007.  During the year ended December 31, 2008, we received net
proceeds of $1,466,000 from a private placement offering and repaid other debt
of $100,000.  During the year ended December 31, 2007, we received net
proceeds of $1,260,000 from a private placement offering and $53,000 from the
issuance of shares of our common stock, and we repaid other debt of
approximately $75,000.





35




ECONOMY
AND INFLATION





We have
not experienced any significant cancellation in orders due to the downturn
in the economy and only a small number of customer requested delays in
delivery or production of orders in process.





Our
management believes that inflation has not had a material effect on our results
of operations





CONTRACTUAL
OBLIGATIONS





As of
December 31, 2008, we have contractual obligations of $3,186,697 as
indicated below:




Less
      than 1Contractual
      Obligations
                  
                  Total
                  
                  
                  Year
                  
                  
                  1-3
      Years
                  
                  
                  3-5
      YearsLong-term
      debt
                  
                  $
                  2,950,000
                  
                  
                  $
                  2,950,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -Purchase
      Obligations
                  
                  
                  236,697
                  
                  
                  
                  236,697
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  3,186,697
                  
                  
                  $
                  3,186,697
                  
                  
                  $
                  -
                  
                  
                  $
                  -





During
February 2009, two investors converted notes payable with outstanding principal
of $675,000 into shares of the Company’s common stock pursuant to the terms of
the promissory notes.





OFF-BALANCE
SHEET ARRANGEMENTS





We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.





CRITICAL
ACCOUNTING POLICIES





The
preparation of the accompanying financial statements and related disclosures in
conformity with U.S. GAAP requires us to make judgments, assumptions and
estimates that affect the amounts reported in the accompanying financial
statements and the accompanying notes. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. When making these estimates and
assumptions, we consider our historical experience, our knowledge of economic
and market factors and various other factors that we believe to be reasonable
under the circumstances. Actual results could differ from these estimates. 
The following critical accounting policies are significantly affected by
judgments, assumptions and estimates used in the preparation of the financial
statements:





Revenue





Revenues
from product sales are recorded when the products are shipped to the customer,
net of allowances for warranties and returns, which are immaterial based on our
historical experience.





Revenues
from license sales are deferred and recognized over the life of the agreements
on a straight-line basis.





Impairment
of Long-Lived Assets





We review
our long-lived assets, such as property and equipment and patents, for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144) whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable.  We compare the carrying value of long-lived assets to
the expected undiscounted cash flows that the assets will generate over their
remaining useful lives. In calculating the estimated undiscounted cash flows, we
make assumptions that are subject to a high degree of judgment.




36




Stock-Based
Compensation





On
January 1, 2006, we adopted SFAS No. 123(R), which requires the
measurement and recognition of compensation expense for all share-based payment
awards based on estimated fair values. Pre-tax stock-based compensation expense
recognized under SFAS No. 123(R) was approximately $1,184,000 and $359,000
for the years ended December 31, 2008 and 2007, respectively.





We
currently use the Black-Scholes option pricing model to determine the fair value
of stock options and warrants. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable, characteristics not present in
our stock options and warrants. The determination of the fair value of
stock-based payment awards on the date of grant using an option-pricing model is
affected by our stock price as well as assumptions regarding a number of complex
and subjective variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected employee equity
award exercise behaviors, risk-free interest rates, expected forfeiture rates
and expected dividends.





We
estimate the expected term of options and warrants granted based on the
Company’s historical pattern of exercise behavior. We estimate the expected
volatility based on a comparison to a peer company’s historical activity. The
dividend rate is based on the Company’s actual historical dividend experience
and the risk free interest rate is based on the U.S. Treasury yield curve in
effect for the expected term of the option on the grant date.  We
estimate forfeitures at the grant date based on historical experience.If factors change and we
employ different assumptions for estimating stock-based compensation expense in
future periods or if we decide to use a different valuation model, the future
periods may differ significantly from what we have recorded in the current
period and could materially affect our results of operations.




Taxes




The
Company adopted the Financial Accounting Standards Board ("FASB") Interpretation
48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, in January 2008. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS 109 and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The adoption of FIN 48 did not have a material impact on the
Company's financial position and results of operations.




RECENT
ACCOUNTING PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," a
replacement of SFAS No. 141, "Business Combinations." The objective of this
Statement is to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. This Statement
establishes principles and requirements for how the acquirer recognizes and
measures the identifiable assets acquired and liabilities assumed, measures the
goodwill acquired or gain from a bargain purchase, and determines what
information to disclose. The Company can not determine what impact the adoption
of this requirement, which became effective January 1, 2009, will have on
its financial statements with respect to future acquisitions.





In
December 2007, FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements – An amendment of ARB No. 51."  SFAS 160
requires companies with non-controlling interests to disclose such interests
clearly as a portion of equity but separate from the parent's equity. The
non-controlling interest's portion of net income must also be separately
presented in the statement of operations. SFAS 160 is effective for fiscal years
beginning after December 15, 2008. The adoption of this statement is not
expected to have a material effect on the Company's financial position or
results of operations.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force, or EITF), the American Institute of Certified Public
Accountants (“AICPA”), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future financial
statements.




37




ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.





Our
financial statements and the related notes begin on Page F-1, which are included
in this Annual Report on Form 10-K.





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.





ITEM
      9A(T).
            CONTROLS
      AND PROCEDURES.





Disclosure
Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act.  Based on that evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that, at December 31, 2008, such
disclosure controls and procedures were effective.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required disclosure.





Limitations
on the Effectiveness of Controls





Our
disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control system are
met.  Because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.  Our Chief Executive
Officer and Chief Financial Officer have concluded, based on their
evaluationas of
the end of the period covered by thisreport, that our
disclosure controls and procedures were sufficiently effective to provide
reasonable assurance that the objectives of our disclosure control system were
met.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting that occurred
during the fourth fiscal quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





This
Annual Report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
Company’s registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.




ITEM
      9B.
            OTHER
      INFORMATION





None.




38


PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The
following table sets forth the names and ages of all of our directors and
executive officers as of the date of this Annual Report. Also provided herein is
a brief description of the business experience of each director, executive
officer and significant employee during the past five years and an indication of
directorships held by each director in other companies subject to the reporting
requirements under the Federal securities laws. All of the directors will serve
until the next annual meeting of shareholders and until their successors are
elected and qualified, or until their earlier death, retirement, resignation or
removal.  There are no arrangements or understandings between any director
or executive officer and any other person pursuant to which the director or
executive officer was selected.







Name
            Age
            PositionTimothy
      N. Tangredi
            53
            President,
      Chief Executive Officer and Chairman of the Board of
    DirectorsRobert
      W. Brown
            59
            Vice
      President – MarketingScott
      G. Ehrenberg
            55
            Chief
      Technology Officer and SecretaryBrooke
      E. Evans
            33
            Chief
      Financial Officer and TreasurerRobert
      W. Schwartz
            64
            DirectorRaymond
      Kazyaka Sr.
            78
            Director





Directors
and Executive Officers





The
following are the Company’s directors and executive officers:




Timothy N.
Tangredi  has been our Chief Executive Officer since 1996. Mr.
Tangredi joined the Company in 1996, and was appointed a member of our
board of directors in 1997.  In 1999 and 2000, respectively, Mr.
Tangredi initiated and executed the strategic purchases of Analytic Power and
American Fuel Cell Corporation.  From 1979 to 1990, Mr. Tangredi
worked for AT&T, as a member of the Leadership Continuity Program working in
technical marketing, network operations, and project management. Mr. Tangredi
earned his BS from Siena College and MBA from Rensselaer Polytechnic
Institute.  He is a founder and member of the board of directors of
Aegis BioSciences, LLC (“Aegis”).  Aegis, created in 1995, is a
licensee of the Company’s nano-structured intellectual property and materials in
the biomedical and healthcare fields. Mr. Tangredi spends approximately one to
two days per month on Aegis business and is compensated by Aegis for his time
and contribution(s).




Scott G. Ehrenberg,is a
founder of the Company and has been our Chief Technology Officer since
1993 and Secretary since November 7, 2008. He has thirty years of experience
developing along with others new materials and applications.  These
applications range from laser cutting systems, optical inspection technology,
and new organic electronic packages for IBM to new polymer electrolytes for
electrochemical and mass transport devices for the Company.  His
background includes 12 years at IBM plus two previous successful startups in the
fields of electronic packaging and ultrasonic devices: Tessera of San Jose, CA
and Sono-Tek of Milton, NY.  He has 14 issued patents with 6 more
pending along with numerous technical papers and presentations.  Mr.
Ehrenberg received his bachelor of science from Pennsylvania State University in
1976.




Robert W. Brown has been Vice
President of Marketing since March 2003. His background includes 28 years of
experience in technical marketing and product management, technology
commercialization, and many aspects of technology business start-up and growth.
He has experience both onshore and internationally with utility and engineering
organizations. From March 1994 to February 2003, as CEO of a subsidiary of
Baymont Technologies Inc. Mr. Brown’s responsibilities included turn around
management and financial restructuring. Mr. Brown received a Technical Diploma
from Southern Alberta Institute of Technology in 1970.





Brooke E. Evans, CPA, was
appointed Chief Financial Officer on October 1, 2008 and Treasurer on November
7, 2008.  In January 2008, Brooke founded and has served as the Chief
Executive Officer of The CFO Alliance, Inc. a firm that provides outsourced
chief financial officer services to small and mid-sized companies on an
as-needed basis.  From April 2007 to December 2007, Brooke served as
the Chief Financial Officer of Power Design, Incorporated, (an electrical
contractor specializing in the new, multi-family construction
industry).  Previously, from November 1999 to April 2007, Brooke was
an auditor with Deloitte & Touche, LLP. While at Deloitte she served clients
in a variety of industries ranging in size from small start-up enterprises to
large multi-national SEC registrants. Brooke graduated from
Florida State University’s College of Business in 1997.




39




Non-Employee
Directors




Raymond Kazyaka Sr. was
appointed to our board of directors in 1995.  Mr. Kazyaka is the
former President (1976-2006) and a co-founder of Wright Malta Corporation, which
was founded in 1972.  Wright Malta, liquidated in 2005, owned and
operated the Malta Test Station, which had performed military product
development for various governmental and commercial
organizations.  Mr. Kazyaka has also served as a consultant to the
Canadian National Defense on facility noise abatement.  Prior to
founding Wright Malta, Mr. Kazyaka worked for General Electric as a rocket
engine design engineer and a manager.  Mr. Kazyaka holds several
patents on rocket engine components and noise abatement systems, and is a senior
member of the American Institute of Aeronautics and Astronautics.  Mr.
Kazyaka graduated from Union College with a degree in Mechanical
Engineering in 1953.





Robert W. Schwartz was
appointed to our board of directors in 2001.Mr. Schwartz founded the
Schwartz-Heslin Group (“SHG”) in 1985 and serves as one of its Managing
Directors. Mr. Schwartz specializes in corporate planning, finance and
development. Prior to starting SHG, he was a founder, President and Chief
Executive Officer of a venture-funded high tech telecommunications company
(Windsource, Inc.). In addition, he was the President and Chief Operating
Officer of an American Stock Exchange listed company (Coradian Corporation). He
was also the Chief Financial Officer of a major manufacturer of outdoor power
equipment (Troy Built Products, Troy, NY).  His earlier experience was
with KPMG as a management consultant and with IBM. Mr. Schwartz received a
Bachelor of Science from Cornell University in 1967 and his Masters Degree in
Business from the University of New York Albany in 1969.





Involvement in Certain Legal
Proceedings





None of
our directors or executive officers has been, during the past five
years:




(i)        involved
in any bankruptcy petition filed by or against such person or any business of
which such person was a general partner or executive officer, either at the time
of the bankruptcy or within two years prior to that time;





(ii)       convicted
of any criminal proceeding or subject to a pending criminal proceeding
(excluding traffic violations and other minor offences);





(iii)      subject
to any order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or temporarily
enjoined, barred, suspended or otherwise limited from involvement in any type of
business, securities, futures, commodities or banking activities;
or





(iv)     
found by a court of competent jurisdiction (in a civil action), the Securities
and Exchange Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has
not been reversed, suspended, or vacated





Director
Independence





Our board
of directors has determined that it currently has two members who
qualify as “independent” as the term is used in Item 407 of Regulation S-K as
promulgated by the SEC and as that term is defined under NASDAQ Rule
4200(a)(15). The independent directors are Raymond Kazyaka Sr. and Robert W.
Schwartz.





Board
Meetings and Committees; Annual Meeting Attendance





Our board
of directors has not adopted any committees to the board of directors. Our board
of directors held eight formal meeting during the most recently completed fiscal
year. Other proceedings of the board of directors were conducted by resolutions
consented to in writing by all the directors and filed with the minutes of the
proceedings of the directors. Such resolutions consented to in writing by the
directors entitled to vote on that resolution at a meeting of the directors are,
according to the corporate laws of the State of New York and our bylaws, as
valid and effective as if they had been passed at a meeting of the directors
duly called and held.




40




At each
annual meeting of shareholders, directors will be elected by the holders of
common stock to succeed those directors whose terms are expiring. Directors will
be elected annually and will serve until successors are duly elected and
qualified or until a director’s earlier death, resignation or removal. Our
bylaws provide that the authorized number of directors may be changed by action
of the majority of the board of directors or by a vote of the shareholders of
our Company. Vacancies in our board of directors may be filled by a majority
vote of the board of directors with such newly appointed director to serve until
the next annual meeting of shareholders, unless sooner removed or replaced. We
currently do not have a policy regarding the attendance of board members at the
annual meeting of shareholders.





Code
of Ethics





We have
adopted a code of ethics that applies to our officers, directors and employees
in accordance with applicable federal securities laws.  We have filed a
copy of our code of ethics as an exhibit to this Annual Report. These
documents may be reviewed by accessing our public filings at the SEC’s web site
at www.sec.gov.  In addition, a copy of the code of ethics will be provided
without charge upon request to us.  We intend to disclose any amendments to
or waivers of certain provisions of our code of ethics in a Current Report on
Form 8-K





Compliance
with Section 16(a) of the Exchange Act




Section
16(a) of the Exchange Act requires our executive officers and directors, and
persons who own more than 10% of any publicly traded class of our equity
securities, to file reports of ownership and changes in ownership of our equity
securities with the SEC. Officers, directors, and greater than ten percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms that they file.





Based
solely on the reports received and on the representations of the reporting
persons, we believe that these persons have complied with all applicable filing
requirements of Section 16(a) of the Exchange Act during fiscal
2008.





ITEM
      11.
            EXECUTIVE
      COMPENSATION





The
following executive compensation disclosure reflects all compensation awarded
to, earned by or paid to the executive officers below for the fiscal years ended
December 31, 2008 and 2007. The following table summarizes all compensation for
fiscal years 2008 and 2007 received by our Chief Executive Officer, and most
highly compensated executive officers in fiscal year 2008.




SUMMARY
COMPENSATION TABLE





Summary
      Compensation TableName
      and principal position
                Year
                Salary
                  ($)
                Bonus
                  ($)
                Stock
      Awards
                  ($)(2)
                Option
      Awards
                  ($)(2)
                Non-Equity
                  Incentive
      Plan
                Non-qualified
      Deferred Compen-
                  sation
      Earnings
                  ($)
                All
      other
                  compensation
                  ($)
                Total
                  ($)(a)
                (b)
                (c)
                (d)
                (e)
                (f)
                (g)
                (h)
                (i)
                (j)Timothy
      N. Tangredi
                  Chief
      Executive Officer, President, Treasurer and Chairman of the Board of
      Directors(1)
                2007
                  
                  2008
                170,000
                  
                  170,000
                -
                  
                  -
                -
                  
                  -
                107,455
                  
                  752,450(3)
                -
                  
                  -
                -
                  
                  -
                -
                  
                  -
                277,455
                  
                  922,450Robert
      W. Brown
                  Secretary
      and Vice President of Marketing
                2007
                  
                  2008
                83,451
                  
                  75,000
                -
                  
                  -
                -
                  
                  -
                13,920
                  
                  23,412
                -
                  
                  -
                -
                  
                  -
                -
                  
                  -
                97,371
                  
                  98,412Scott G. Ehrenberg,
                  Chief
      Technology Officer
                2007
                  2008
                60,000
                  88,000
                -
                -
                  -
                43,523
                  84,337
      (3)
                -
                  -
                -
                  -
                -
                  -
                103,523
                  172,337Patricia
      K. Tangredi (4)
                2007
                  2008
                115,000
                  115,000
                
                
                61,100
                  125,275
                
                
                -
                  -
                176,100
                  240,275




41




(1)  Mr.
Tangredi receives a salary of $170,000 per year, and a bonus in an amount not to
exceed 100% of his salary, which bonus shall be measured by meeting certain
performance goals as determined in the sole discretion of our board of
directors.  In 2008 and 2007, Mr. Tangredi was paid $117,500 and
$65,833, respectively and has accrued unpaid salary of $52,500 for 2008,
$104,167 for 2007, $105,145 for 2006 and $116,166 for 2005 and accrued bonus of
$87,500 for year 2006.





(2) The
amounts included in these columns are the aggregate dollar amounts of
compensation expense recognized by us for financial statement reporting purposes
in accordance with FAS 123R for the fiscal years ended December 31, 2008 and
December 31, 2007, and thus include amounts from option awards granted in and
prior to the indicated year.  For information on the valuation
assumptions used in calculating these dollar amounts, see Note 9 to our audited
financial statements included in this Report for the fiscal years ended December
31, 2008 and December 31, 2007, each as filed with the SEC. These amounts
reflect our accounting expense for these awards and do not correspond to the
actual value that may be recognized by the individuals upon option
exercise.During the fiscal year ended December 31, 2008, there were 666,666
option award forfeitures related to service-based vesting
conditions.





(3)  In
2008 we issued Mr. Tangredi a warrant to purchase 3,000,000 shares of the
Company’s common stock at an exercise price of $.36 per share. The warrant had a
five year term, vested upon issuance, provided for a cashless exercise and
contained standard anti-dilution provisions. In the same year we issued Mr.
Ehrenberg a warrant to purchase 250,000 shares of company’s common stock at the
exercise price of $.30 per share with all other terms and conditions being the
same as those of the Tangredi warrant.





(4) Ms.
Tangredi receives a salary of $115,000 per year. In 2008 and 2007, Ms. Tangredi
was paid $110,000 and $65,833, respectively and accrued unpaid salary of $5,000
for 2008 and $49,167 for 2007.





Narrative
Disclosure to Summary Compensation Table





Employment
Agreements





Officer
Employment Agreement





Timothy N.
Tangredi.  We are party to an employment agreement with Mr.
Tangredi, our President, Chief Executive Officer, and director.  The
employment agreement, as amended and restated on July 29, 2008, sets forth Mr.
Tangredi’s compensation level and eligibility for salary increases, bonuses,
benefits, royalty sharing for newer applications, and option
grants.  Mr. Tangredi’s employment agreement provided for an initial
term of three years with the term extending on the second anniversary thereof
for an additional one year period and on each subsequent anniversary of the
agreement for an additional year period. The agreement sets forth Mr. Tangredi’s
compensation level, conditions for certain option grants, benefits and the
obligations of the Company in the event of termination. Mr. Tangredi’s base
salary is $170,000, plus certain allowances as well as performance related
payments and option issuances.




42




For each
product for which the Company commences commercial sale or licensing during the
term and receives more than $1 million of revenue during any 12 month period,
Mr. Tangredi, in addition to any other compensation which he may receive under
the agreement, shall be granted options to purchase 10,000 shares of the
Company's common stock at an exercise price equal to either (i) the lower of:
(a) $2.50 per share or (b) the fair market value per share of the stock on the
date of grant as determined in good faith by the Compensation Committee of the
Board of Directors, if the Company has not conducted an initial public offering
prior to the date of grant (as hereinafter defined), or (ii) at an exercise
price equal to 75% of the market price of the common stock, if the Company has
completed an initial public offering of its common stock prior to the date of
grant (with the market price to be the average of the closing sale prices during
the five trading days immediately preceding the date of grant of the
option).  Such options, as well as any other options granted to Mr.
Tangredi during the term of his employment, shall be granted under the Company's
then existing stock option plan, shall be immediately exercisable, have a term
of ten years, shall be exercisable for up to three years after termination of
employment (unless termination is for cause, in which event they shall expire on
the date of termination), shall have a "cashless" exercise feature, and shall be
subject to such additional terms and conditions as are then applicable to
options granted under such plan provided they do not conflict with the terms set
forth in the agreement.





In the
event that the fair market value of the Company's common stock (the average of
the closing prices of the common stock for any five consecutive trading days, as
reported by the principal exchange or other stock market on which the commons
stock is then traded) equals or exceeds 200% of the price at which the Company
sells common stock in an initial public offering (the "Target Value") at any
time during the term of the agreement, Mr. Tangredi shall be granted options to
purchase 50,000 shares of common stock at an exercise price equal to 75% of the
Target Value, on terms identical to the options provided for above.




In the
event Mr. Tangredi's employment is terminated by the Company without cause or by
Mr. Tangredi for good reason, death or disability, Mr. Tangredi shall be
entitled to the following:





(i) An
amount equal to the sum of (A) the greater of 200% of the base salary then in
effect for Mr. Tangredi or $270,000 plus (B) the cash bonus, if any, awarded to
Mr. Tangredi for the most recent year shall be payable by the Company in full
within 10 days following termination;





(ii) The
Company shall continue to provide Mr. Tangredi the health and life insurance,
car allowance and other benefits set forth in the agreement until two years
following termination of employment, and shall continue to offer any of such
benefits to Mr. Tangredi beyond such two year period to the extent required by
COBRA or similar statute which may then be in effect;





(iii) All
stock options, to the extent they were not exercisable at the time of
termination of employment, shall become exercisable in full; and





(iv)  Any
indebtedness of Mr. Tangredi  to the Company shall thereupon be
cancelled and of no further force and effect, and the Company shall pay to Mr.
Tangredi, within ten days following receipt of a written demand therefore, any
income or other taxes resulting from such cancellation.





In the
event that  Mr. Tangredi elects to terminate employment within one
year following a change in control of the Company, he shall receive, within the
later of ten days following the date on which the change in control occurs or
the date on which he gives notice of his election to terminate employment, a
lump sum payment equal to three times the greater of (i) his then current base
salary plus the cash bonus, if any, awarded to him for the most recent year or
(ii) $350,000 plus said cash bonus.  In addition, he will be entitled
to accelerated vesting of outstanding options and continuing benefits as
described above.





Significant
Employee





Patricia K.
Tangredi.  We are a party to an employment agreement with Ms.
Tangredi. The agreement, provided for an initial term of 3 years beginning on
January 1, 2001, with automatic extensions for subsequent one year
terms,   unless the Company or Ms. Tangredi provides the other
party with written notice of intent not to renew.  The agreement was
subsequently amended and restated on July 29, 2008.  The employment
agreement set forth Ms. Tangredi’s compensation level and eligibility for salary
increases, options, royalty sharing for newer applications, benefits and the
obligations of the Company in the event of termination. A portion of Ms.
Tangredi’s salary has been accrued and carried on the Company’s books since
2002.




43




In the
event Ms. Tangredi's employment is terminated by the Company without cause or by
the Ms. Tangredi for good reason or by reason of death or disability, Ms.
Tangredi shall be entitled to the following:





(i) the
greater of 100% of the base salary then in effect for Employee or $115,000,
which amount shall be payable by the Company in full within 10 days following
termination;





(ii) the
Company shall provide, at its sole cost, Ms. Tangredi  with the
medical benefits for one year following the date of termination. The Company
shall continue to offer such benefits to Ms. Tangredi beyond such one year
period to the extent required by COBRA or any similar statute which may then be
in effect; and





(iii) all
stock options granted to Ms. Tangredi at any time during the course of the term
shall be exercisable in full.





In the
event that Ms. Tangredi elects to terminate her employment within six months
following a change in control of the Company, she shall receive, within the
later of 10 days following the date on which the change in control occurs or the
date on which she give notice of her election to terminate employment, a lump
sum payment equal to the greater of three times her then current base salary or
$235,000.  In addition, she will be entitled to accelerated vesting of
outstanding options and continuing medical benefits as described
above.





Outstanding
Equity Awards





The
following table summarizes outstanding unexercised options, unvested stocks and
equity incentive plan awards held by each of our name executive officers, as of
December 31, 2008.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END




OPTION
      AWARDS
                    
                    STOCK
      AWARDSName
                    Number
      of securities underlying unexercised options (#)
    Exercisable
                    Number
      of securities underlying unexercised options (#)
      Unexercis-able
                    Equity
      Incentive Plan Awards: Number of Securities underlying unexercised
      unearned options (#)
                    Option
      exercise price ($)
                    Option
      expiration date
                    
                    Number
      of shares or units of stock that have not vested (#)
                    Market
      value of shares or units of stock that have not vested ($)
                    Equity
      incentive plan awards: number of unearned shares, units or other rights
      that have not vested (#)
                    Equity
      incentive plan awards: Market or payout value of unearned shares, units or
      other rights that have not vested ($)(a)
                    (b)
                    (c)
                    (d)
                    (e)
                    (f)
                    
                    (g)
                    (h)
                    (i)
                    (j)Timothy
      N. Tangredi (1)
                    825,000
                    0
                    0
                    $.26
                    9/23/2014150,000
                    0
                    0
                    $.10
                    5/10/2015120,000
                    0
                    0
                    $.10
                    10/1/201540,000
                    0
                    0
                    $.30
                    5/2/2016110,000
                    0
                    0
                    $.55
                    11/1/2016140,000
                    0
                    0
                    $.55
                    2/20/2017300,000
                    0
                    0
                    $.21
                    8/10/2017350,000
                    0
                    0
                    $.21
                    1/30/20183,000,000*
                    0
                    0
                    $.36
                    4/18/2013*Warrant
  Robert
      W. Brown (2)
              106,416
              0
              0
              $.26
              9/23/2014120,000
              0
              0
              $.10
              5/10/2015120,000
              0
              0
              $.10
              10/1/201548,333
              24,167
              24,167
              $.55
              11/1/201616,666
              33,334
              33,334
              $.21
              8/18/20170
              200,000
              200,000
              $.30
              8/4/2018Scott
      G. Ehrenberg (3)
              140,000
              0
              0
              $.26
              9/23/2014110,000
              0
              0
              $.10
              5/10/201580,000
              0
              0
              $.10
              10/1/201526,667
              13,333
              13,333
              $.55
              11/1/201680,000
              40,000
              40,000
              $.55
              2/20/201733,334
              16,666
              16,666
              $.21
              8/18/20170
              250,000
              250,000
              $.30
              8/4/2018*250,000
              0
              0
              $.30
              8/4/2013*WarrantBrooke
      E. Evans (4)
              0
              216,667
              216,667
              $.17
              10/1/2018Patricia
      K Tangredi (5)
              395,000
              0
              0
              $.26
              9/23/2014278,058
              0
              0
              $.10
              5/10/2015140,000
              0
              0
              $.10
              10/1/2015125,000
              0
              0
              $.55
              11/1/2016350,000
              0
              0
              $.21
              8/10/2017300,000
              0
              0
              $.21
              1/30/2018250,000
              0
              0
              $.30
              8/4/2018




(1)
              Mr.
      Tangredi receives a salary of $170,000 per year, and a bonus in an amount
      not to exceed 100% of his salary, which bonus shall be measured by meeting
      certain performance goals as determined in the sole discretion of our
      board of directors.  The April 2008 warrant grant to Mr.
      Tangredi was made by the Board of Directors in recognition for Mr.
      Tangredi’s achievement of the following goals: negotiating conversion of
      the convertible notes issued in the Additional Financing, securing a
      release with respect to the consulting agreement with Gray Capital
      Partners, Inc., securing and closing upon the Financing.  Mr.
      Tangredi has accrued unpaid salary of $104,167 for 2007, $105,150 for 2006
      and $116,166 for 2005 and accrued bonus of $87,500 for year 2006. All
      stock options  issued to Mr. Tangredi were issued under the 2000
      Plan.
  (2)
              All
      stock options issued to Mr. Brown were issued under the 2000
      Plan.
  44
  (3)
              All
      stock options issued to Mr. Ehrenberg were issued under the 2000
      Plan.
 
 (4)
              All
      stock options issued to Ms. Evans were issued under the 2000
      Plan.
 
 (5)
              All
      stock options issued to Ms. Tangredi were issued under the 2000
      Plan




Director
Compensation





The
following table sets forth the compensation awarded to, earned by or paid to the
directors during the fiscal year ended December 31, 2008.




DIRECTOR
      COMPENSATIONName
            Fees
      Earned or Paid in Cash
              ($)
            Stock
      Awards
              ($)
            Option
      Awards
              ($)
            Non-Equity
      Incentive Plan Compen-sation
              ($)
            Change
      in Pension Value and Non-qualified Deferred Compensation
      Earnings
              ($)
            All
      Other Compensation
              ($)
            Total
      ($)(a)
            (b)
            (c)
            (d)
            (e)
            (f)
            (g)
            (h)Timothy
      N. Tangredi, Chairman
            -
            -
            20,718
            -
            
            -
            20,718Raymond
      Kazyaka Sr., Director(1)
            -
            -
            20,718
            -
            -
            -
            20,718Robert
      W. Schwartz, Director(2)
            -
            -
            20,718
            -
            -
            -
            20,718





(1)
            At
      fiscal year end December 31, 2008, Mr. Kasyaka had 404,600 option
      awards outstanding and no stock awards
  outstanding.


(2)
            At
      fiscal year end December 31, 2008, Mr. Schwartz  had
      374,600 option awards outstanding and no stock awards
      outstanding.





We do not
have a plan pursuant to which our directors are compensated and directors do not
receive cash compensation for their services on the Board of Directors although
they do receive stock options as determined by the full board of directors.
Raymond Kazyaka Sr. and Robert W. Schwartz were each granted an option on August
18, 2007 to purchase 60,000 shares of common stock at an exercise price of $0.21
per share, vesting immediately upon issuance and exercisable for a period of ten
years.





Our
non-employee directors are currently compensated with the issuance of stock
options, which generally become exercisable upon the date of grant, and which
generally expire on the earlier of ten years from the date of grant or up to
three years after the date that the optionee ceases to serve as a director.
Non-employee directors are also reimbursed for out-of-pocket expenses associated
with attending to the Company’s business.




45




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





Securities
Authorized for Issuance under Equity Compensation Plans





The
following table sets forth information regarding our 2000 Incentive Compensation
Plan (the “2000 Plan”) under which our securities are authorized for issuance as
of December 31, 2008.


Plan
      Category
            
            Number of Securities to
              be Issued Upon
              Exercise
              of
      Outstanding Options,
              Warrants
      and Rights
            Weighted Average
              Exercise
      Price of
              Outstanding
              Options,
              Warrants
      and Rights
            Number of
              Securities
              Remaining
              Available
      for
              Future Issuance
              Under
      Equity
              Compensation
              PlansEquity
      compensation plans approved by security holders:
            
            8,606,557
            .263
            3,767,325Equity
      compensation plans not approved by security holders:
            
            0
            0
            0





Security
Ownership of Certain Beneficial Owners





The
following table sets forth information as of the date of this prospectus as to
each person or group who is known to us to be the beneficial owner of more than
5% of our outstanding voting securities and as to the security and percentage
ownership of each of our executive officers and directors and of all of our
officers and directors as a group.





Beneficial
ownership is determined under the rules of the SEC and generally includes voting
or investment power over securities. The number of shares shown as beneficially
owned in the tables below are calculated pursuant to Rule 13d-3(d)(1) of the
Exchange Act. Under Rule 13d-3(d)(1), shares not outstanding that are subject to
options, warrants, rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number and percentage
owned by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. Except in cases where
community property laws apply or as indicated in the footnotes to this table, we
believe that each shareholder identified in the table possesses sole voting and
investment power over all of the shares of common stock shown as beneficially
owned by the shareholder.





The
address for each of the persons named below is 11552 Prosperous Drive, Odessa,
FL 33556, unless otherwise indicated.





Applicable
percentage ownership in the following table is based on approximately 12,034,030
shares of common stock outstanding as of  January 31, 2009, plus, for
each individual, any securities that individual has the right to acquire within
60 days of January 31, 2009.




46




Common
      StockBeneficially
      OwnedName
      of Beneficial Owner
              
              Number
      of
                Shares
      of
                Common Stock
              
              
              Percentage
      ofClassTimothy
      N. Tangredi (Officer and Chairman) (1)
              
              
              7,095,858
              
              
              
              37.4
              %Robert
      W. Brown (Officer) (2)
              
              
              411,415
              
              
              
              3.3
              %Scott
      G. Ehrenberg(3)  (Officer)
              
              
              826,132
              
              
              
              6.5
              %Brooke
      Evans (Officer) (4)
              
              
              66,666
              
              
              
              0.6
              %Raymond
      Kazyaka Sr. (Director) (5)
              
              
              404,600
              
              
              
              3.3
              %Robert
      W. Schwartz (Director) (6)
              
              
              374,600
              
              
              
              3.0
              %Executive
      officers and directors as a group (7 persons)
              
              
              9,179,271
              
              
              
              43.75
              %Walt
      Robb (7) 300 Troy Road Schenectady, NY 12309
              
              
              1,424,126
              
              
              
              11.6
              %Brian
      A. Kelly 181C Hague Blvd. Glenmont,
    N.Y. 12077
              
              
              2,254,085
              
              
              
              18.73
              %Michael
      Gotomski (8) 1666 Valley View Dr. Winnona,
      MN 55987
              
              
              1,100,465
              
              
              
              8.6
              %Andrew
      Mitchell (9) Furnival Chambers 32 Furnival Street London EC4A
      1JQ UK
              
              
              793,921
              
              
              
              6.2
              %Larry
      Hopfenspirger (10) 2025 Nocollet Ave. S. #203 Minneapolis,
      MN 55404
              
              
              1,587,842
              
              
              
              11.7
              %Louis
      M. Jaffe (11) 1500 S. Ocean Blvd #5201 Boca Raton,
      FL 33432
              
              
              2,460,165
              
              
              
              18.8
              %Lawrence
      D. Isen (12) 4653 Carmel Mtn. Suite 308-402 San Diego,
      CA 92130
              
              
              1,058,562
              
              
              
              8.1
              %Michael
      Frederick Stone (13) 18 Ozone Avenue Venice, CA
90291
              
              
              2,117,123
              
              
              
              15.0
              %Michael
      J.  McGrath (14) 1250 West Division Street Chicago,
      IL 60622
              
              
              1,058,562
              
              
              
              8.1
              %Marisa
      Stadmauer (15) 26 Columbia Turnpike Florham Park, NJ
      07932
              
              
              1,580,260
              
              
              
              11.6
              %Andrew
      Vickery (16) 8 Airport Park Blvd. Latham,
      NY 12110
              
              
              790,130
              
              
              
              6.2
              %Mark
      Nordlich (17) 152 West 575th St. 4th Floor New York,
      NY 10019
              
              
              6,669,908
              
              
              
              36.3
              %Erick
      Richardson (18) 10900 Wilshire Blvd. Suite 500 Los Angeles, CA
      90024
              
              
              1,838,123
              
              
              
              13.6
              %Leonard
      Samuels (19) 1011 Centennial Road Penn Valley,
      PA 19072
              
              
              7,662,028
              
              
              
              38.9
              %Leah
      Kaplan Samuels (20) 1011 Centennial Road Penn Valley,
      PA 19072
              
              
              1,849,432
              
              
              
              13.3
              %




(1)  Includes
5,110,000 shares of common issuable upon exercise of stock options and warrants
and 1,965,858 shares beneficially owned by Mr. Tangredi’s wife, Patricia
Tangredi. 1,838,058 of Ms. Tangredi’s shares are issuable upon the exercise of
stock options.
 
 (2)  Includes
411,415 shares of common stock issuable upon exercise of stock
options.
 
 (3)  Includes
743,333 shares of common stock issuable upon the exercise of stock options and
warrants and 41,400 shares beneficially owned by Mr. Ehrenberg's wife, Linda
Ehrenberg.
 
 (4)   Includes
66,666 shares of common stock issuable upon exercise of stock
options.
 
 (5)  Includes
404,600 shares of common stock issuable upon exercise of stock
options.
 
 (6)  Includes
374,600 shares of common stock issuable upon exercise of stock
options.
 
 (7)  Includes
249,750 common shares issuable upon exercise of certain warrants issued in
connection with the conversion of notes issued in the Additional Financing to
CounterPoint Ventures LLC. The natural person with voting power and investment
power on behalf of CounterPoint Ventures LLC is Walt Robb.
 
 (8)
Includes 18,750 common shares issuable upon exercise of certain warrant issued
in connection with the conversion of notes issued in the Additional
Financing.  Also includes 418,921 shares of common stock issuable upon
conversion of principal and interest due pursuant to the convertible note and
375,000 shares of common stock issuable upon exercise of warrants issued in
connection with the Financing.
 
 (9)
Includes 418,921 shares of common stock issuable upon conversion of convertible
notes and 375,000 shares of common stock issuable upon exercise of warrants
issued in connection with the Financing.
 
 (10)
Includes 837,842 shares of common stock issuable upon conversion of certain
outstanding convertible notes and 750,000 shares of common stock issuable upon
exercise of certain outstanding warrants issued in connection with the
Financing.
 
 (11)
Includes 553,507 shares of common stock issuable upon conversion of convertible
notes and 500,000 shares of common stock issuable upon exercise of certain
outstanding warrants issued in connection with the Financing to Louis M. Jaffe
2004 Intangible Asset Mgmt. TR U/A DTD 5/24/04. Also includes 1,073,334
shares held by the aforementioned trust, 166,667 shares held by the Louis Jaffe
TTEE Irrevocable Trust – Jennifer Jaffe and 166,667 shares held by the Louis
Jaffe TTEE Irrevocable Trust – Lara Jaffe Taylor.  The natural person
with voting power and investment power on behalf each of the aforementioned
trusts is Louis M. Jaffe.
  47
  (12)
Includes 558,562 shares of common stock issuable upon conversion of convertible
notes and 500,000 shares of common stock issuable upon exercise of warrants
issued in connection with the Financing in the name of Market Byte LLC. The
natural person with voting power and investment power on behalf of Market Byte
L.L.C. Defined Benefit & Trust is Lawrence D. Isen.
 
 (13)   Includes
1,117,123 shares of common stock issuable upon conversion of certain outstanding
convertible notes and 1,000,000 shares of common stock issuable upon exercise of
certain outstanding warrants issued in connection with the
Financing.
 
 (14)
Includes 558,562 shares of common stock issuable upon conversion of convertible
notes and 500,000 shares of common stock issuable upon exercise of warrants
issued in connection with the Financing.
 
 (15)
Includes 830,260 shares of common stock issuable upon conversion of convertible
notes and 750,000 shares of common stock issuable upon exercise of warrants
issued in connection with the Financing in the name of MSSRPS, LLC. The natural
person with voting power and investment power on behalf of MSSRPS, LLC is Marisa
Stadmauer.
 
 (16)
Includes 415,130 shares of common stock issuable upon conversion of convertible
notes and 375,000 shares of common stock issuable upon exercise of warrants
issued in connection with the Financing to Next Generation Investment LLC. The
natural person with voting power and investment power on behalf of Next
Generation Investment LLC is Andrew Vickery.
 
 (17)
Includes 3,336,575 shares of common stock issuable upon conversion of
convertible notes and 3,000,000 shares of common stock issuable upon exercise of
warrants issued in connection with the Financing to Platinum Montaur Life
Sciences LLC. The natural person with voting power and investment power on
behalf of Platinum Montaur Life Sciences LLC is Mark Nordlich.
 
 (18)
Includes 553,507 shares of common stock issuable upon conversion of certain
outstanding convertible notes and 500,000 shares of common stock issuable upon
exercise of certain outstanding warrants issued in connection with the Financing
in the name of RP Capital LLC. Erick Richardson and Nimish Patel of Richardson
& Patel LLP own RP Capital LLC.  Also includes 392,308 shares in
the name of Richardson & Patel LLP and warrants to purchase an additional
392,308 shares. Erick Richardson is a partner at Richardson & Patel LLP, our
legal counsel. The natural person with voting and investment control over the
shares held by these entities is Erick Richardson.
 
 (19)
Includes 974,432 shares of common stock issuable upon conversion of certain
outstanding convertible notes and 875,000 shares of common stock issuable upon
exercise of certain outstanding warrants issued in connection with the Financing
held in the name of Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural
persons with voting power and investment power on behalf of Leah Kaplan-Samuels
and Leonard Samuels JTWROS are Leah Kaplan-Samuels and Leonard
Samuels.  Also includes 5,812,596 shares of common stock underlying
the convertible notes and warrants in the Financing issued to shareholder RBC
Dain – Custodian for Leonard Samuels IRA.
 
 (20)
Includes 974,432 shares of common stock issuable upon conversion of certain
outstanding convertible notes and 875,000 shares of common stock issuable upon
exercise of warrants issued in connection with the Financing held in the name of
Leah Kaplan-Samuels and Leonard Samuels JTWROS. The natural persons with voting
power and investment power on behalf of Leah Kaplan-Samuels and Leonard Samuels
JTWROS are Leah Kaplan-Samuels and Leonard Samuels.




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





Timothy N. Tangredi,
the Company’s Chief Executive Officer and Chairman, is a founder and a member of
the board of directors of Aegis BioSciences, LLC (“Aegis”).  Aegis,
created in 1995, is a licensee of the Company’s nano-structured intellectual
property and materials in the biomedical and healthcare fields. Mr. Tangredi
spends approximately one to two days per month on Aegis business and is
compensated by Aegis for his time and contribution(s). We granted Aegis two
exclusive, world-wide licenses, the first in 1995 and the second in 2005.
Pursuant to these licenses, Aegis has the right to use and sell products
containing our polymer technologies in biomedical and health care applications.
The first license was entered into in 1995 and has been amended twice. In 2005,
we agreed to accept $150,000 as payment in full of all royalties and no further
license revenue will be forthcoming. The second license allows Aegis the use of
our intellectual property in the field of health care. A one time payment
of $50,000 was made under this license in 2005. In addition, under the second
license Aegis is to make royalty payments of 1.5% of the net sales price it
receives with respect to any personal hygiene product, surgical drape or
clothing products (the latter when  employed in medical and animal
related fields) and license revenue it receives should Aegis grant a sublicense
to a third party. To date Aegis has sold no such products nor has it received
any licensing fees requiring a royalty payment be made to us. All obligations
for such payments will end on the earlier of June 2, 2015 or upon the aggregate
of all sums paid to us by Aegis under the agreement reaching $1 million.
The term of each respective license runs for the duration of the patented
technology.




48




During
the year ended December 31, 2007, Mr. Tangredi, a shareholder and officer
of the Company loaned the Company an aggregate of $156,500 pursuant to three
loan agreements.  One loan was unsecured, due on demand and did not
accrue interest.  The other two loans were unsecured, due in one and
two months respectively, and accrued interest at 12 percent, increasing by 1
percent for every 30 days the principle balance is outstanding.  Prior
to year end, the Company repaid the loans.




The
Company rents a building on a month to month basis from a related party which is
wholly owned by two shareholders of the Company, one of which is Timothy N.
Tangredi, our Chief Executive Officer. The base monthly rent expense is $3,800
per month.  The Company also pays the taxes, insurance and some repairs on
the building. For the year ending December 31, 2008 and 2007, the Company
recorded $48,792 and $48,792, in rent expense to this related
party.




There are
no material relationships between us and our directors or executive officers
except as previously discussed herein.





Since the
beginning of our last fiscal year, we have not been a participant in any
transaction, or proposed transaction, not disclosed herein in which any related
person had or will have a direct or indirect material interest and in which the
amount involved exceeds the lesser of $120,000 or one percent of our total
assets at year end for the last two completed fiscal years.




ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.





Audit
Fees





The
aggregate audit fees billed for the years ended December 31, 2008 and 2007 were
$94,559 and $39,821 respectively.  Audit services include the audits
of the consolidated financial statements included in the Company’s annual
reports on Form 10-K and reviews of interim financial statements
included  in the Company’s quarterly reports on Form
10-Q.





Audit-Related
Fees





The
aggregate audit-related fees billed during the year ended December 31, 2008 for
services related to the Company’s registration statement were
$17,949.





Tax
Fees





None




All
Other Fees





None




49




Audit
Committee Policies and Procedures





AS of the
date of this Annul Report, the Company does not have an established audit
committee.  The appointment of Pender Newkirk & Company LLP was
approved by the Board of Directors as the principal auditors for the Company.
There are no board members that are considered to have significant financial
experience.  When independent directors with the appropriate financial
background join the board, the board plans to establish a audit committee, which
will then adopt an appropriate charter and pre-approval policies and procedures
in connection with services to be rendered by the independent
auditors.







PART
IV





ITEM
15.                      EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.





(1)
Consolidated Financial Statements.


See Table
of Contents to Consolidated Financial Statements.





(2)
Financial Statement Schedules.


See Table
of Contents to Consolidated Financial Statements.





(3)
Exhibits


See
below.




50




No.
            Exhibit3.1
            Certificate
      of Incorporation of The Dais Corporation filed April 8,
      1993*3.2
            Certificate
      of Amendment of the Certificate of Incorporation of The Dais Corporation
      filed February 21, 1997*3.3
            Certificate
      of Amendment of the Certificate of Incorporation of The Dais Corporation
      filed June 25, 1998*3.4
            Certificate
      of Amendment of the Certificate of Incorporation of Dais Analytic
      Corporation filed December 13, 1999*3.5
            Certificate
      of Amendment of the Certificate of Incorporation of Dais Analytic
      Corporation filed September 26, 2000*3.6
            Certificate
      of Amendment of the Certificate of Incorporation of Dais Analytic
      Corporation filed September 28, 2000*3.7
            Certificate
      of Amendment of the Certificate of Incorporation of Dais Analytic
      Corporation filed August 28, 2007*3.8
            Certificate
      of Amendment of the Certificate of Incorporation of Dais Analytic
      Corporation filed March 20, 2008*3.9
            Bylaws
      of The Dais Corporation*4.1
            Form
      of Non-Qualified Stock Option Agreement*4.2
            Form
      of Non-Qualified Option Agreement*4.3
            Form
      of Warrant (Daily Financing)*4.4
            Form
      of Warrant (Financing)*4.5
            Form
      of Warrant (Robb Trust Note and Additional
    Financing)*4.6
            Form
      of Placement Agent Warrant (Financing)*4.7
            Form
      of 9% Secured Convertible Note (Financing)*4.8
            Form
      of Note (Robb Trust Note)*4.9
            Form
      of Amendment to Note (Robb Trust Note)*4.10
            Form
      of Warrant (Note Conversion)**4.11
            Form
      of Warrant (Gostomski and Weston)**10.1
            2000
      Equity Compensation Plan*10.2
            Form
      of Employee Non-Disclosure and Non-Compete
  Agreement*10.3
            Amended
      and Restated Employment Agreement between Dais Analytic Corporation and
      Timothy N. Tangredi dated July 29, 2008*10.4
            Amended
      and Restated Employment Agreement between Dais Analytic Corporation and
      Patricia K. Tangredi dated July 29, 2008*10.5
            Commercial
      Lease Agreement between Ethos Business Venture LLC and Dais Analytic
      Corporation dated March 18, 2005*10.6
            First
      Amendment of Lease Agreement between Ethos Business Venture LLC and Dais
      Analytic Corporation dated November 15, 2005*10.7
            Form
      of Subscription Agreement (Daily Financing)*10.8
            Form
      of Subscription Agreement (Financing)*10.9
            Form
      of Registration Rights Agreement (Financing)*10.10
            Form
      of Secured Patent Agreement (Financing)*10.11
            Placement
      Agent Agreement between Dais Analytic Corporation and  Legend
      Merchant Group, Inc., dated October 5, 2007*14.1
            Code
      of Ethics31.1
            Certification
      of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley
      Act of 200231.2
            Certification
      of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley
      Act of 200232.1
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*
            Incorporated
      by reference to the exhibits included with the Registration Statement on
      Form S-1, File No. 333-152940, as filed August 11,
    2008.**
            Incorporated
      by reference to the exhibits included with the Current Report on Form 8-K,
      as filed March 13, 2009.




51




SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




DAIS
ANALYTIC CORPORATION




Dated:
      March 31, 2009
            By:
            /s/
      Timothy N. TangrediTimothy
      N. TangrediChairman
      of the BoardChief
      Executive Officer and Director(Principal
      Executive Officer)Dated:
      March 31, 2008
            By:
            /s/
      Brooke E. EvansBrooke
      E. EvansChief
      Financial Officer and Treasurer(Principal
      Financial and Accounting Officer)





Signatures
            
            Title
            
            Date/s/
      Timothy N. Tangredi
            
            
            Chairman
      of the Board,
            
            March
      31, 2009Timothy
      N. Tangredi
            
            
            Chief
      Executive Officer and Director/s/
      Robert W. Schwartz
            
            
            Director
            
            March
      31, 2009Robert
      W. Schwartz/s/
      Raymond Kazyaka Sr.
            
            
            Director
            
            March
      31, 2009Raymond
      Kazyaka Sr.





52





Financial
Statements
  Dais
Analytic Corporation
 
 Years
Ended December 31, 2008 and 2007
 Report
of Independent Registered Public Accounting Firm
            
 
 
 Dais
Analytic Corporation
  Financial
Statements
 
 Years
Ended December 31, 2008 and 2007
 
  Contents
  Report
      of Independent Registered Public Accounting Firm
                F-1Financial
      Statements:Balance
      Sheets
                F-2Statements
      of Operations
                F-3Statements
      of Changes in Stockholders’ Deficit
                F-4Statements
      of Cash Flows
                F-5Notes
      to Financial Statements
                F-7
 
 
  Report of
Independent Registered Public Accounting Firm
 
  Board of
Directors
 Dais
Analytic Corporation
 Odessa,
Florida
 
 We have
audited the accompanying balance sheets of Dais Analytic Corporation as of
December 31, 2008 and 2007 and the related statements of operations, changes in
stockholders' deficit, and cash flows for the years then ended.  These
financial statements are the responsibility of the management of Dais Analytic
Corporation. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The company is not
required at this time, to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for
our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dais Analytic Corporation as of
December 31, 2008 and 2007 and the results of its operations and its cash flows
for the years then ended 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 2, the Company
incurred a net loss of $5,979,446 during the year ended December 31, 2008, has
an accumulated deficit of $28,776,769, has negative working capital of
$3,802,009, and a stockholders’ deficit of $4,697,436 at December 31,
2008.  These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
  /s/
Pender Newkirk & Company LLP
 Pender
Newkirk & Company LLP
 Certified
Public Accountants
 Tampa,
Florida
 March 23,
2009
  F-1
  Dais
Analytic Corporation
  Balance
Sheets
  December 31,2008
                    
                    
                    2007AssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    26,867
                    
                    
                    $
                    504,232Cash
      in escrow
                    
                    
                    -
                    
                    
                    
                    1,000,000Accounts
      receivable
                    
                    
                    188,970
                    
                    
                    
                    6,750Other
      receivables
                    
                    
                    -
                    
                    
                    
                    12,178Inventory
                    
                    
                    147,128
                    
                    
                    
                    73,629Loan
      costs, net of accumulated amortization
                    
                    
                    1,004
                    
                    
                    
                    86,760Prepaid
      expenses and other current assets
                    
                    
                    31,181
                    
                    
                    
                    11,739Total
      current assets
                    
                    
                    395,150
                    
                    
                    
                    1,695,288Property
      and equipment, net of accumulated depreciation of
      $307,286 and$298,765 at December
      31, 2008 and 2007, respectively
                    
                    
                    26,933
                    
                    
                    
                    16,600Other
      assets:Deposits
                    
                    
                    2,280
                    
                    
                    
                    2,280Patents,
      net of accumulated amortization of $96,389 and $87,127 atDecember
      31, 2008 and 2007, respectively
                    
                    
                    44,129
                    
                    
                    
                    51,796Total
      other assets
                    
                    
                    46,409
                    
                    
                    
                    54,076$
                    468,492
                    
                    
                    $
                    1,765,964Liabilities
      and Stockholders’ DeficitCurrent
      liabilities:Accounts
      payable, including related party payables of $105,925
      and $91,320 at December 31, 2008 and 2007,
      respectively
                    
                    $
                    380,022
                    
                    
                    $
                    456,341Accrued
      compensation and related benefits
                    
                    
                    -
                    
                    
                    
                    6,041Accrued
      compensation and related benefits, related party
                    
                    
                    1,147,389
                    
                    
                    
                    1,089,472Current
      portion of deferred revenue
                    
                    
                    84,145
                    
                    
                    
                    84,145Current
      portion of notes payable, net of unamortized discount of $23,171and $2,379,131 at December 31, 2008 and 2007,
      respectively
                    
                    
                    2,245,488
                    
                    
                    
                    271,493Accrued
      expenses, other
                    
                    
                    340,115
                    
                    
                    
                    122,245Total
      current liabilities
                    
                    
                    4,197,159
                    
                    
                    
                    2,029,737Long-term
      liabilities:Long-term
      portion of notes payable, net of unamortized discount of
      $6,965
                    
                    
                    675,000
                    
                    
                    
                    -Deferred
      revenue, net of current portion
                    
                    
                    293,769
                    
                    
                    
                    377,914Total
      long-term liabilities
                    
                    
                    968,769
                    
                    
                    
                    377,914Stockholders’
      deficit:Series
      A preferred stock; $.01 par value; 10,000,000 shares authorized;0
      shares issued and outstandingCommon
      stock; $.01 par value; 100,000,000 and 50,000,000 sharesauthorized; 12,162,398 and 8,742,797 shares issued and 11,905,185
      and 8,505,584 shares outstanding at December 31, 2008 and 2007,
      respectively
                    
                    
                    121,624
                    
                    
                    
                    87,428Capital
      in excess of par value
                    
                    
                    25,253,196
                    
                    
                    
                    23,389,320Prepaid
      services paid for with common stock
                    
                    
                    (23,375
                    )
                    
                    
                    -Deferred
      non-cash offering costs
                    
                    
                    -
                    
                    
                    
                    (55,000
                    )Accumulated
      deficit
                    
                    
                    (28,776,769
                    )
                    
                    
                    (22,797,323
                    )(3,425,324
                    )
                    
                    
                    624,425Treasury
      stock at cost, 257,213 and 237,213 shares at December 31,2008 and
      2007, respectively
                    
                    
                    (1,272,112
                    )
                    
                    
                    (1,266,112
                    )Total
      stockholders’ deficit
                    
                    
                    (4,697,436
                    )
                    
                    
                    (641,687
                    )$
                    468,492
                    
                    
                    $
                    1,765,964
  The Accompanying notes are an
integral part of the financial statements
  F-2
  Dais
Analytic Corporation
  Statements
of Operations
 
 Year Ended December 31,2008
                  
                  
                  2007Revenue:Sales
                  
                  $
                  931,289
                  
                  
                  $
                  786,016License
      fees
                  
                  
                  84,144
                  
                  
                  
                  84,144Interest
      income
                  
                  
                  19,658
                  
                  
                  
                  -1,035,091
                  
                  
                  
                  870,160Expenses:Cost
      of goods sold
                  
                  
                  796,217
                  
                  
                  
                  637,032Selling,
      general and administrative
                  
                  
                  2,935,552
                  
                  
                  
                  1,871,030Interest
      expense
                  
                  
                  3,282,768
                  
                  
                  
                  596,0837,014,537
                  
                  
                  
                  3,104,145Loss
      before provision for income taxes
                  
                  
                  (5,979,446
                  )
                  
                  
                  (2,233,985
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -Net
      loss
                  
                  $
                  (5,979,446
                  )
                  
                  $
                  (2,233,985
                  )Net
      loss per common share, basic and fully diluted
                  
                  $
                  (0.57
                  )
                  
                  $
                  (0.44
                  )Weighted
      average number of common shares outstanding
                  
                  
                  10,522,511
                  
                  
                  
                  5,062,725
 The accompanying notes are an
integral part of the financial statements.
  F-3
  Dais
Analytic Corporation
  Statements
of Changes in Stockholders’ Deficit
 
 Years
Ended December 31, 2008 and 2007
 
 Series
      A
                Preferred
      Stock
              
              
              Common
      Stock
              
              
              Capital
      in
                Excess
      of
              
              
              Accumulated
              
              
              Deferred
                Non-Cash
      Offering
              
              
              Prepaid
      Services Paid for with Common
              
              
              Treasury
              
              
              Stockholders’Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Par
      Value
              
              
              Deficit
              
              
              Costs
              
              
              Stock
              
              
              Stock
              
              
              DeficitBalance
      December 31, 2006
              
              
              305,097
              
              
              $
              3,051
              
              
              
              2,603,565
              
              
              $
              26,036
              
              
              $
              19,142,447
              
              
              $
              (20,563,338
              )
              
              $
              (55,000
              )
              
              
              -
              
              
              $
              (1,266,112
              )
              
              $
              (2,712,916
              )Issuance
      of common stock
              
              
              
              
              
              
              
              
              
              
              90,909
              
              
              
              909
              
              
              
              49,091
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              50,000Issuance
      of common stock for exercise
                of options
              
              
              -
              
              
              
              -
              
              
              
              60,000
              
              
              
              600
              
              
              
              2,400
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,000Issuance
      of common stock for services
              
              
              -
              
              
              
              -
              
              
              
              230,000
              
              
              
              2,300
              
              
              
              214,700
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              217,000Issuance
      of common stock forconversion of notes payable
      andrelated accrued
      interest
              
              
              -
              
              
              
              -
              
              
              
              3,220,318
              
              
              
              32,203
              
              
              
              849,328
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              881,531Issuance
      of options and warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              358,863
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              358,863Value
      of beneficial conversionfeature for  the
      conversion ofnotes payable
      and  relatedaccrued interest
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,576,891
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,576,891Issuance
      of common stock forconversion  of preferred
      stock
              
              
              (305,097
              )
              
              
              (3,051
              )
              
              
              2,500,000
              
              
              
              25,000
              
              
              
              (21,949
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of warrants with convertible Debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,311,669
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,311,669Issuance
      of common stock foraccrued interest
              
              
              -
              
              
              
              -
              
              
              
              38,005
              
              
              
              380
              
              
              
              9,120
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9,500Offering
      costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (103,240
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (103,240
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,233,985
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,233,985
              )Balance,
      December 31, 2007
              
              
              -
              
              
              
              -
              
              
              
              8,742,797
              
              
              
              87,428
              
              
              
              23,389,320
              
              
              
              (22,797,323
              )
              
              
              (55,000
              )
              
              
              -
              
              
              
              (1,266,112
              )
              
              
              (641,687
              )Issuance
      of common stock for
                conversion  of notes
      payable and
                related accrued
      interest
              
              
              -
              
              
              
              -
              
              
              
              439,293
              
              
              
              4,393
              
              
              
              104,147
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              108,540Beneficial
      conversion feature
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              266,814
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              266,814Issuance
      of warrants with convertible
                debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              298,005
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              298,005Offering
      costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (17,340
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (17,340
              )Issuance
      of common stock and
                warrants  for offering
      costs
              
              
              -
              
              
              
              -
              
              
              
              392,308
              
              
              
              3,923
              
              
              
              (3,923
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Write
      off of non-cash offering costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              55,000
              
              
              
              -
              
              
              
              (6,000
              )
              
              
              49,000Issuance
      of common stock for
                services, net of
      amortization
                of $27,625
              
              
              -
              
              
              
              -
              
              
              
              148,000
              
              
              
              1,480
              
              
              
              56,880
              
              
              
              -
              
              
              
              -
              
              
              $
              (23,375
              )
              
              
              -
              
              
              
              34,985Stock-based
      compensation expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,183,693
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,183,693Issuance
      of common stock
              
              
              -
              
              
              
              -
              
              
              
              2,440,000
              
              
              
              24,400
              
              
              
              (24,400
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,979,446
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,979,446
              )Balance,
      December 31, 2008
              
              
              -
              
              
              $
              -
              
              
              
              12,162,398
              
              
              $
              121,624
              
              
              $
              25,253,196
              
              
              $
              (28,776,769
              )
              
              $
              -
              
              
              $
              (23,375
              )
              
              $
              (1,272,112
              )
              
              $
              (4,697,436
              )
 
 The accompanying notes are an
integral part of the financial statements.
  F-4
  Dais
Analytic Corporation
  Statements
of Cash Flows
 
 Year Ended December 31,2008
                
                
                2007Operating
      activitiesNet
      loss
                
                $
                (5,979,446
                )
                
                $
                (2,233,985
                )Adjustments
      to reconcile net loss to net cash usedby
      operating activities:Depreciation
      and amortization
                
                
                16,187
                
                
                
                12,788Amortization
      of deferred loan costs
                
                
                102,416
                
                
                
                23,540Amortization
      of convertible note discount
                
                
                1,525,598
                
                
                
                40,821Beneficial
      conversion feature
                
                
                1,388,216
                
                
                
                468,608Write-off
      of deferred non-cash offering costs
                
                
                49,000
                
                
                
                -Common
      stock issued for services
                
                
                34,985
                
                
                
                217,000Stock-based
      compensation expense
                
                
                1,183,693
                
                
                
                358,863(Increase)
      decrease in:Accounts
      receivable
                
                
                (182,220
                )
                
                
                104,722Inventory
                
                
                (73,499
                )
                
                
                (10,951
                )Prepaid
      expenses and other current assets
                
                
                (7,263
                )
                
                
                (20,170
                )Increase
      (decrease) in:Accounts
      payable and accrued expenses
                
                
                150,091
                
                
                
                37,757Accrued
      compensation and related benefits
                
                
                51,876
                
                
                
                169,468Deferred
      revenue
                
                
                (84,144
                )
                
                
                (84,143
                )Total
      adjustments
                
                
                4,154,936
                
                
                
                1,318,303Net
      cash used by operating activities
                
                
                (1,824,510
                )
                
                
                (915,682
                )Investing
      activitiesPurchase
      of property and equipment
                
                
                (18,855
                )
                
                
                (9,210
                )Financing
      activitiesProceeds
      from issuance of notes payable
                
                
                500,000
                
                
                
                1,800,000Proceeds
      received from escrow
                
                
                1,000,000
                
                
                
                -Payments
      on notes payable
                
                
                (100,000
                )
                
                
                (425,000
                )Payments
      for offering costs
                
                
                (34,000
                )
                
                
                (190,000
                )Proceeds
      from advance from related party
                
                
                -
                
                
                
                156,000Repayments
      of advance from related party
                
                
                -
                
                
                
                (169,675
                )Issuance
      of common stock for cash
                
                
                -
                
                
                
                53,000Net
      cash provided by financing activities
                
                
                1,366,000
                
                
                
                1,224,325Net
      (decrease) increase in cash and cash equivalents
                
                
                (477,365
                )
                
                
                299,433Cash
      and cash equivalents, beginning of period
                
                
                504,232
                
                
                
                204,799Cash
      and cash equivalents, end of period
                
                $
                26,867
                
                
                $
                504,232Supplemental
      disclosures of cash flow informationand noncash investing and
      financing activities:Cash
      paid during the year for interest
                
                $
                10,100
                
                
                $
                38,479
  The accompanying notes are an
integral part of the financial statements.
  F-5
 Dais
Analytic Corporation
  Statements
of Cash Flows
 Supplemental
disclosures of cash flow information
 and noncash investing and financing
activities:
 
 During
      the year ended December 31, 2008, the Company issued 439,293 shares of
      common stock in conversion of $100,000 of notes payable and $8,540 of
      accrued interest.
 
 During
      the year ended December 31, 2008 the Company issued 540,308 shares of
      common stock valued at $229,991 as payment for
  services.
 
 During
      the year ended December 31, 2008, the Company issued convertible notes
      payable with a beneficial conversion feature of $245,106 and a discount
      equivalent to the relative fair value of the accompanying warrants of
      $254,894.
 
 During
      the year ended December 31, 2007, the Company issued 3,220,318 shares of
      common stock in conversion of $840,547 of notes payable and $40,984 of
      accrued interest.  The Company also recorded the value of the
      associated beneficial conversion feature of $438,560 as interest
      expense.
 
 During
      the year ended December 31, 2007, the Company issued 230,000 shares of
      common stock for services valued at
$217,000.
 
 During
      the year ended December 31, 2007, the Company issued 38,005 shares of
      common stock for $9,500 of accrued
interest.
 
 During
      the year ended December 31, 2007, the Company issued $1,000,000 of
      convertible notes payable for which the proceeds were held in escrow at
      December 31, 2007.
 
 During
      the year ended December 31, 2007, the Company issued convertible notes
      payable with a beneficial conversion feature of $1,138,331 and a discount
      equivalent to the relative fair value of the accompanying warrants of
      $1,311,669.
 
 During
      the year ended December 31, 2007, the Company exchanged 305,097 preferred
      stock shares for 2,500,000 common stock
shares.
  The accompanying notes are an
integral part of the financial statements.
  F-6
  Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  1.
              Background
      Information
 
 Dais
Analytic Corporation (the “Company”), a New York corporation, has developed and
is commercializing applications using its nano-structure polymer technology. The
first commercial product is an energy recovery ventilator (ERV) (cores and
systems) for use in commercial Heating, Ventilating, and Air Conditioning (HVAC)
applications. In addition to direct sales, the Company licenses its
nano-structured polymer technology to strategic partners in the aforementioned
application and is in various stages of development with regard to other
applications employing its base technologies. The Company was incorporated in
April of 1993 with its corporate headquarters located in Odessa,
Florida.
 
 The
Company is dependent on third parties to manufacture the key components needed
for our nano-structured based materials and value added products made with these
materials. Accordingly, a supplier’s failure to supply components in a timely
manner, or to supply components that meet our quality, quantity and cost
requirements or our technical specifications, or the inability to obtain
alternative sources of these components on a timely basis or on terms acceptable
to us, would create delays in production of our products or increase our unit
costs of production.  Certain of the components contain proprietary
products of our suppliers, or the processes used by our suppliers to manufacture
these components are proprietary. If we are required to replace any of our
suppliers, while we should be able to obtain comparable components from
alternative suppliers at comparable costs, this would create a delay in
production.
 
 For the
years ended December 31, 2008 and 2007, four and three customers accounted for
approximately 64 and 65 percent of the Company’s total revenue,
respectively.  At December 31, 2008 and 2007 amounts due from these
customers was approximately 56.7% and 0.0% of total accounts receivable,
respectively.  No other customer accounted for 10 percent or more of
the Company’s total revenue.
 
 
 2.
              Going
      Concern
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  For the year ended December 31,
2008, the Company incurred a net loss of $5,979,446.  As of December
31, 2008, the Company has an accumulated deficit of $28,776,769, negative
working capital of $3,802,009 and a stockholders’ deficit of
$4,697,436.  In view of these matters, there is substantial doubt that
the Company will continue as a going
  F-7
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
 2.
              Going
      Concern (continued)
 
 concern.  The
recoverability of recorded property and equipment, intangible assets, and other
asset amounts shown in the accompanying financial statements is dependent upon
the Company’s ability to continue as a going concern and to achieve a level of
profitability.  The Company is currently pursuing the following
sources of short and long-term working capital:
 
 1.
              We
      are raising short-term working capital by private sales of equity to
      existing shareholders and/or note holders. The Company plans to raise a
      total of $500,000 by May 31, 2009. We expect these funds, in combination
      with working capital generated from operations, to sustain the Company’s
      operations through August 2009.
 
 2.
              We
      are currently holding preliminary discussions with parties who are
      interested in licensing, purchasing the rights to, or establishing a joint
      venture to commercialize, certain applications of our
      technology.
 
 3.
              We
      are seeking growth capital from certain strategic and/or government
      (grant) related sources. In addition to said capital, these sources may,
      pursuant to any agreements that may be developed in conjunction with such
      funding, assist in the product definition and design, roll-out, and
      channel penetration of our products. As part of this  step we
      will attempt to take advantage of key programs associated with the
      recently enacted American Recovery and Reinvestment Act of
      2009.
 
 The
Company’s ability to continue as a going concern is highly dependent on our
ability to obtain additional sources of cash flow sufficient to fund our working
capital requirements.   However, there can be no assurance that
the Company will be successful in its efforts to secure such cash
flow.  Any failure by us to timely procure additional financing or
investment adequate to fund our ongoing operations, including planned product
development initiatives and commercialization efforts, will have material
adverse consequences on our financial condition, results of operations and cash
flows.
 
 Between
December 11, 2008 and January 21, 2009, all amounts due under the financing
arrangement discussed in Note 5 matured and became due and payable in
full.  Certain investors with outstanding principal balances of
approximately $450,000 at December 31, 2008, have notified the Company that they
are asserting their rights to receive payment of the principal and interest
pursuant to the terms of the convertible notes.
 
 Effective
March 1, 2009, the Company reduced employee salaries by approximately 30 percent
and temporarily released certain hourly employees for the month of March
2009.  Some of these hourly employees have since returned to work and
others will rejoin our workforce in April 2009.  Management and the
Board of Directors will monitor salary and staffing levels on a regular basis
and determine when it is appropriate to restore them to normal
levels.
  The
financial statements of the Company do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
 
 
 3.
              Significant
      Accounting Policies
 
 The
significant accounting policies followed are:
 
 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 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.  Actual results could differ from those
      estimates.
 
 
 F-8
  Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  3.
              Significant
      Accounting Policies (continued)
 
 The
      Company's financial instruments include cash, accounts receivable,
      accounts payable, accrued liabilities and notes payable. The carrying
      amounts of these financial instruments approximate their fair value, due
      to the short-term nature of these items and the use of market interest
      rates.
 
 All
      cash, other than held in escrow, is maintained with a major financial
      institution in the United States. Deposits with this bank may exceed the
      amount of insurance provided on such
deposits.
 
 Cash
      held in escrow at December 31, 2007 consists of convertible note proceeds
      associated with a closing that occurred on that date. These funds were
      held in escrow pending the receipt of the signed secured convertible
      promissory notes, and were released from escrow on January 3,
      2008.
 
 Accounts
      receivable consist primarily of receivables from the sale of our ERV
      products. The Company regularly reviews accounts receivable for any bad
      debts based on an analysis of the Company's collection experience,
      customer credit worthiness, and current economic trends. Based on
      management's review of accounts receivable, no allowance for doubtful
      accounts is considered necessary at December 31, 2008 and
      2007.
 
 Direct
      loan costs incurred with the issuance of notes payable are deferred and
      amortized to interest expense over the life of the related notes
      payable.  For the years ended December 31, 2008 and 2007, the
      Company recorded amortization of direct loan costs of $102,416 and
      $23,540, respectively.
 
 Inventory
      consists of raw materials and work-in-process and is stated at the lower
      of cost, determined by first-in, first-out method, or
      market.  Market is determined based on the net realizable value,
      with appropriate consideration given to obsolescence, excessive levels,
      deterioration and other factors.  At December 31, 2008 and 2007,
      the Company had $2,043 and $0 of in-process inventory,
      respectively.
  F-9
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  3.
              Significant
      Accounting Policies (continued)
 
 Property
      and equipment are recorded at cost. Depreciation is calculated using
      accelerated methods over the estimated useful lives of the assets ranging
      from 5 to 7 years. Depreciation expense was approximately $8,500 and
      $3,500 for the years ended December 31, 2008 and 2007, respectively. Gains
      and losses upon disposition are reflected in the statement of operations
      in the period of disposition. Maintenance and repair expenditures are
      charged to expense as incurred.
 
 Patents
      are amortized over their estimated useful or economic lives of 15 years.
      Patent amortization expense was approximately $9,300 for each of the years
      ended December 31, 2008 and 2007.  Total patent amortization
      expense for the next five years is estimated to be approximately $9,000
      per year.
 
 Long-lived
      assets are reviewed for impairment whenever events or changes in
      circumstances indicate that the book value of the asset may not be
      recoverable. The Company periodically evaluates whether events and
      circumstances have occurred that indicate possible impairment. When
      impairment indicators exist, the Company uses market quotes, if available
      or an estimate of the future undiscounted net cash flows of the related
      asset or asset group over the remaining life in measuring whether or not
      the asset values are recoverable. There have been no significant
      impairments of long-lived assets during the two-year period ended
      December 31, 2008.
 
 Expenditures
      for research, development, and engineering of products are expensed as
      incurred. For the years ended December 31, 2008 and 2007, the Company
      incurred research and development costs of approximately $36,000 and
      $9,000, respectively.
 
 Stock
      issuance costs are recorded as a reduction of the related proceeds through
      a charge to stockholders’ equity.
 
 The
      Company records common stock issuances when all of the legal requirements
      for the issuance of such common stock have been
  satisfied.
 
 Sales
      are recorded when products are shipped to the customer. No products or
      parts are delivered with any contingencies except for
    defects.
  F-10
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  3.
              Significant
      Accounting Policies (continued)
 
 Amounts
      collected on behalf of governmental authorities for sales taxes and other
      similar taxes are reported on a net
basis.
 
 Revenue
      derived from the sale of licenses is deferred and recognized as revenue on
      a straight-line basis over the life of the license, or until the license
      arrangement is terminated.  The Company recognized revenue of
      approximately $84,100 from license agreements for each of the years ended
      December 31, 2008 and 2007.
 
 As of
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" and the Securities and Exchange Commission Staff Bulletin
No. 107 (collectively "SFAS 123(R)") which requires the Company to
value and record, as compensation expense, stock awards granted to employees and
non-employees under a fair value based method. Prior to January 1, 2006,
the Company accounted for stock awards granted to employees under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Prior to the adoption of SFAS 123(R), compensation expense
was not required for stock-based awards granted to the Company's employees
because all stock-based awards granted had an intrinsic value of $0 at the date
of the grant.
 
 SFAS 123(R)
applies to new awards and to awards modified, repurchased or canceled after
January 1, 2006. The Company utilizes the modified prospective application
method for stock-based awards granted prior to January 1, 2006, which
requires the Company to record compensation expense beginning January 1,
2006 for the unvested portion of those awards. This compensation expense is
charged to the statement of operations with a corresponding credit to capital in
excess of par value and is generally recognized utilizing the straight-line
method.  The Company uses the Black-Scholes option pricing model to
value its stock-based awards and calculate stock-based compensation
expense.
 
 The
Company accounts for income taxes under SFAS No. 109, (SFAS 109) “Accounting for
Income Taxes,” which requires recognition of deferred tax assets and liabilities
to reflect tax consequences of differences between the tax bases of assets and
liabilities and their reported amounts in the accompanying financial statements.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of
 
 F-11
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  3.
              Significant
      Accounting Policies (continued)
 
 available
evidence, both positive and negative, if it is more likely than not that the
deferred tax assets will not be realized in accordance with criteria of SFAS
109. The Company evaluates tax positions that have been taken or are expected to
be taken in its tax returns, and records a liability for uncertain tax positions
in accordance with FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB No. 109.” FIN 48
contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS 109.  The adoption of
FIN 48 on January 1, 2008 had no effect on the Company’s financial position
or results of operations.
 
 Basic and
diluted earnings per share are computed based on the weighted-average common
shares and common share equivalents outstanding during the
period.  Common share equivalents consist of stock options and
warrants.  Weighted average common share equivalents of
25,722,521 and 13,612,844 were excluded from the computation of diluted
earnings per share for the years ended December 31, 2008 and 2007,
respectively, because their effect is anti-dilutive.
 
 In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No.
160, Non-controlling Interests in Consolidated Financial Statements – An
amendment of ARB No. 51, which requires companies with non-controlling interests
to disclose such interests clearly as a portion of equity but separate from the
parent's equity. The non-controlling interest's portion of net income must also
be separately presented in the statement of operations. The Company does not
expect the adoption of this statement, which became effective January 1,
2009, to have a material effect on its consolidated financial
statements.
 
 Also in
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," a
replacement of SFAS No. 141, "Business Combinations." The objective of this
statement is to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. This Statement
establishes principles and requirements for how the acquirer recognizes and
measures the identifiable assets acquired and liabilities assumed, measures the
goodwill acquired or gain from a bargain purchase, and determines what
information to disclose. The Company can not determine what impact the adoption
of this requirement, which became effective January 1, 2009, will have on
its consolidated financial statements with respect to future
acquisitions.
 
 F-12
  Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  3.
              Significant
      Accounting Policies (continued)
 
 Other
recent accounting pronouncements issued by the FASB (including its EITF), the
AICPA, and the SEC did not or are not believed by management to have a material
impact on the Company's present or future financial statements.
 
 
 4.
              Property
      and Equipment
 
 Property
and equipment consist of the following:
 
 2008
              
              
              2007Furniture
      and fixtures
              
              $
              33,530
              
              
              $
              33,530Computer
      equipment
              
              
              106,260
              
              
              
              105,114Office
      and lab equipment
              
              
              194,429
              
              
              
              176,721334,219
              
              
              
              315,365Less
      accumulated depreciation
              
              
              307,286
              
              
              
              298,765$
              26,933
              
              
              $
              16,600
  5.
              Notes
      Payable
 
 Notes
payable consist of the following:
  2008
                  
                  
                  2007Convertible
      notes payable; interest at 9.0%; maturing from December 2008 to October
      2009; collateralized by the Company's patents and patent applications, net
      of unamortized discount and beneficial conversion feature of $30,136 and
      $2,379,131 at 2008 and 2007, respectively
                  
                  $
                  2,919,864
                  
                  
                  $
                  70,869Note
      payable; interest at 12% per annum;  due January 20
      2008
                  
                  
                  -
                  
                  
                  
                  200,000Note
      payable; related party
                  
                  
                  624
                  
                  
                  
                  6242,920,488
                  
                  
                  
                  271,493Less
      amounts currently due
                  
                  
                  2,245,488
                  
                  
                  
                  271,493$
                  675,000
                  
                  
                  $
                  0
  F-13
  Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  5.
              Notes
      Payable (continued)
 
 Convertible
Notes
 During
December 2007 and January 2008, the Company issued convertible promissory notes
(the “Convertible Notes”) and warrants to purchase common stock in exchange for
proceeds totaling $2,950,000.  The Convertible Notes bear interest at
nine percent per annum and have stated maturity dates from December 2008 to
January 2009. The Convertible Notes are repayable in cash or convertible into
shares of the Company’s stock at a rate of one share per $0.20 of outstanding
principal and interest.  Warrants to purchase 14,750,000 shares of the
Company’s common stock accompanying the Convertible Notes are, subject to
certain limitations, exercisable at $0.25 per share, vest immediately, and
expire between December 2012 and January 2013.
 
 The
Convertible Notes contain an embedded conversion feature.  We
accounted for this conversion feature and the detachable warrants in accordance
with EITF Issue No. 98-5, “Accounting for Securities with Beneficial Conversion
Feature or Contingently Adjustable Conversion Ratio,” and EITF 00-27,
“Application of Issue No. 98-5 to Certain Convertible
Instruments.”  In accordance with these standards, the Company
allocated the proceeds from issuance of the convertible notes to the beneficial
conversion feature and the warrants based on their relative fair
values.  The Company considered EITF 00-19 and concluded that the
warrants should be recorded as a component of permanent equity.
 
 To
recognize the fair value of the warrants, the Company discounted the notes and
increased additional paid in capital. The fair value of the beneficial
conversion feature of $1,383,437 and discount of $1,566,563 are amortized to
interest expense over the term of the Convertible Notes. For the years ended
December 31, 2008 and 2007, the Company recognized interest expense from the
amortization of the beneficial conversion feature and discount of $2,848,995 and
$70,869, respectively.
 
 The
following table presents a reconciliation of the proceeds received from the
financing to the carrying value of the Convertible Notes:
 
 2008
              
              
              2007Principal
      balance of convertible notes
              
              $
              2,950,000
              
              
              $
              2,450,000Relative
      fair value of the warrants
              
              
              (1,566,563
              )
              
              
              (1,311,669
              )Beneficial
      conversion feature
              
              
              (1,383,437
              )
              
              
              (1,138,331
              )Amortization
      of the discount
              
              
              1,566,419
              
              
              
              40,821Amortization
      of beneficial conversion feature
              
              
              1,353,445
              
              
              
              30,048Carrying
      value at December 31st
              
              $
              2,919,864
              
              
              $
              70,869
 
 F-14
 
  Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  5.
              Notes
      Payable (continued)
 
 Between
December 11, 2008 and January 21, 2009, all amounts due under the Convertible
Notes matured and became due and payable in full.  The Company has not
repaid any of the amounts due under the respective Convertible
Notes.  Certain investors with outstanding principal balances of
approximately $450,000 at December 31, 2008, have notified the Company that they
are asserting their rights to receive payment of the principal and interest
pursuant to the terms of the Convertible Notes.  The Company is
currently proposing that the Convertible Note holders either (i) convert their
notes into shares at this time in exchange for additional warrants or (ii)
extend the maturity of the Convertible Notes and continue to accrue
interest.  In December 2008 three investors extended their Convertible
Notes to September 2009.  From January through March 2009, two
investors extended their Convertible Notes to October 2009 and two investors
converted the principal balance of $675,000 plus accrued interest on their
Convertible Notes to shares of common stock.  The Convertible notes
that were converted into shares of common stock are classified as long-term in
the accompanying balance sheet.  As of December 31, 2008, the total
outstanding principal due on the Convertible Notes that have been extended or
converted was $1,000,000.
 
 Accrued
interest on the notes was $268,453 and $6,152 at December 31, 2008 and 2007,
respectively.
 
 Additional
Financing
 During
the years ended December 31, 2008 and December 31, 2007, the Company converted
$108,540 and $840,547 of convertible notes payable, together with accrued
interest, into 439,293 and 3,258,323 shares of common stock, respectively, at
conversion rates of approximately $0.25 to $0.275 per share. The debenture
holders accepted these shares in full consideration for the outstanding
convertible notes. For the years ended December 31, 2008 and December 31, 2007,
the Company recognized interest expense of $64,819 and $438,560, respectively,
for the beneficial conversion features of these induced conversions in
accordance with SFAS No. 84, "Induced Conversions of Convertible
Debt."
 
 
 6.
              Related
      Party Transactions
 
 The
Company rents a building that is owned by two stockholders of the Company, one
of which is the Chief Executive Officer.  Rent expense for this
building is $3,800 per month.  The Company recognized rent expense of
$48,792 in each of years ended December 31, 2008 and 2007.  At
December 31, 2008 and 2007, $105,925 and $91,320, respectively, were included in
accounts payable for amounts owed to these stockholders.
 
 F-15
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  6.
              Related
      Party Transactions (continued)
 
 The
Company also has accrued compensation due to the Chief Executive Officer and one
other employee for deferred salaries earned and unpaid as of December 31, 2008
and 2007 of $1,147,389 and $1,089,472, respectively.
 
 The
Company regularly grants equity awards to management and the Board of Directors
as compensation for their services under the compensation plan described in Note
9.  In addition, during the year ended December 31, 2008, the Company
granted the Chief Executive Officer a fully vested warrant to purchase 3,000,000
shares of the Company’s common stock.  The fair value of this warrant
of approximately $687,000 is included in selling, general and administrative
expenses for the year ended December 31, 2008.
  7.
              Authorized
      Shares
 
 During
the year ended December 31, 2008, the Company’s board of directors approved a
proposal to amend the Articles of Incorporation to increase the number of
authorized shares of common stock from 50,000,000 to 100,000,000
shares.
 
 8.
              Preferred
      Stock
 
 The
Company's Board of Directors has authorized 10,000,000 million shares of
preferred stock with a par value of $.01 to be issued in series with terms and
conditions to be determined by the Board of Directors. The Company has
designated 400,000 shares of Series A convertible preferred stock; 1,000,000
shares of Series B convertible preferred stock; 500,000 shares of Series C
convertible preferred stock; and 1,100,000 shares of Series D convertible
preferred stock. The Series A through D convertible preferred stock rank senior
to the common stock as to dividends and liquidation. Each share of Series A
through D convertible preferred stock is convertible into one share of common
stock, except in specified circumstances as defined by the Company's Certificate
of Incorporation, and is automatically converted into common stock upon the
occurrence of an initial public offering that meets certain criteria. During the
year ended December 31, 2007, the preferred stock holders converted all of the
outstanding preferred stock into 2,500,000 shares of common stock. No dividend
or distribution may be paid on any shares of the Company's common stock unless
an equivalent dividend or distribution is paid on the Series A through D
convertible preferred stock.
 
 F-16
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  9.
              Stock
      Options and Warrants
 
 The
stockholders of the Company approved the 2000 Equity Compensation Plan (the
“Equity Plan”) that provides for the granting of options to qualified employees
of the Company, independent contractors, consultants, directors and other
individuals.  The Company’s Board of Directors has approved and made
available an aggregate 11,093,882 shares of common stock to be issued pursuant
to the Equity Plan.
 
 The
Company also grants warrants, which are not included in the Equity Plan, to
employees, consultants and other service providers in lieu of cash
compensation.
 
 Stock-based
awards become exercisable at such times and in such installments as set by the
Board of Directors.  Awards for prior service are immediately vested
and awards for future service are vested in equal increments, generally over a
two to three year period. Option awards are exercisable for a period of 10 years
from the date of grant.  Warrant awards are exercisable for a period
of 5 years from the date of grant.
 
 The
Company recorded approximately $1,184,000 and $359,000 of stock-based
compensation expense for the years ended December 31, 2008 and 2007,
respectively, related to awards issued under the Equity Plan and other warrant
issuances. These amounts are included in selling, general and administrative
expenses.
 
 A summary
of activity related to the Equity Plan and warrant issuances during the year
ended December 31, 2008, is presented below:
 
 Shares
                
                
                Weighted
                  Average
                  Exercise
      Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
      (in years)
                
                
                Aggregate
                  Intrinsic
      Value
                  ($000)Outstanding
      at December 31, 2007
                
                
                19,069,081
                
                
                $
                0.26Granted
                
                
                10,692,475
                
                
                $
                0.27Exercised
                
                
                -
                
                
                
                -Forfeited
      or expired
                
                
                (687,000
                )
                
                $
                0.30Outstanding
      at December 31, 2008
                
                
                29,074,556
                
                
                $
                0.27
                
                
                
                4.24
                
                
                $
                38,394Exercisable
      at December 31, 2008
                
                
                27,797,993
                
                
                $
                0.26
                
                
                
                3.86
                
                
                $
                35,727
  F-17
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
  9.
              Stock
      Options and Warrants (continued)
 
 Assumptions
used to determine the grant-date fair value of stock-based awards during the
years ended December 31, 2008 and 2007 are as follows:
 
 2008
              
              2007Dividend
      rate
              
              0%
              
              0%Risk
      free interest rate
              
              2.64%  –
      3.98%
              
              3.32%
      - 5.13%Term
              
              5 –
      10 years
              
              5 –
      10 yearsVolatility
              
              80%  –
      114%
              
              71%
      – 90%Forfeiture
      rate
              
              22%
              
              0%
 
 The
risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of grant with a term equal to the expected life. The expected dividend rate
is based upon the Company’s history of dividends. The expected term of the
awards represents the period of time the awards are expected to be outstanding.
Expected volatility is based on a peer company’s actual historical volatility
and forfeitures are estimated based on actual historical
experience.
 
 The
weighted-average grant-date fair values of stock-based awards granted or issued
during the years ended December 31, 2008 and 2007 were $0.27 and $0.26,
respectively.
 
 Unrecognized
compensation costs related to non-vested stock-based compensation arrangements
were approximately $473,000 and $272,000 as of December 31, 2008 and 2007,
respectively; these costs will be recognized over a weighted average period of
1.07 years and 3.0 years, respectively.
 
 The
following table summarizes non-vested stock-based awards:
 
 WeightedAverageGrant-DateNon-vested
      Stock Options and Warrants
              
              Shares
              
              
              Fair
      ValueNon-vested
      at January 1, 2008
              
              
              1,036,198
              
              
              $
              0.26Granted
              
              
              10,692,475
              
              
              $
              0.27Vested
              
              
              (9,765,110
              )
              
              $
              0.25Forfeited
              
              
              (687,000
              )
              
              $
              0.30Non-vested
      at December 31, 2008
              
              
              1,276,563
              
              
              $
              0.37
 
 F-18
  Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
 
 10.
              Deferred
      Revenue
 
 The
Company entered into a licensing agreement during the year ended December 31,
2003 and received an initial fee of $770,000.  This fee is deferred
and recognized on a straight-line basis over the life of the license agreement
of 10 years.  In addition, the Company received royalties of $100,000
in each of the first three years of the agreement.  The Company
recognized revenue of approximately $77,000 for this agreement during each of
the years ended December 31, 2008 and 2007.
 
 The
Company entered into a licensing agreement with a biomedical entity during the
year ended December 31, 2005 and received an initial license fee of
$50,000.  This fee is deferred and recognized on a straight-line basis
over the life of the license agreement of 7 years. The Company recognized
revenue of approximately $7,100 for this agreement during each of the years
ended December 31, 2008 and 2007.
 
 
 11.
              Commitments
      and Contingencies
 
 The
Company has employment agreements with some of its key employees and
executives.  These agreements provide for minimum levels of
compensation during current and future years.  In addition, these
agreements call for grants of stock options and for payments upon termination of
the agreements.
 
 The
Company entered into a consulting agreement dated September 1, 2005 with a
financial consulting company (“Consulting Company”) by which the Consulting
Company agreed to assist the Company in the procurement of equity and debt
financing.  In exchange for these services, two of the shareholders of
the Company assigned outstanding convertible notes due to them from the Company,
valued at $627,723, to the Consulting Company. The Company accounted for this
transaction as a capital contribution by the stockholders for the forgiveness of
their notes. In turn, the Consulting Company received an option to purchase
shares of the Company’s stock. On December 23, 2005, the Company terminated the
Consulting Agreement for lack of performance by the Consulting Company. During
the year ended December 31, 2008, the Consulting Company assigned its rights to
the vested portion of the option with a fair value of $244,000 to a third-party
and released the Company from liability. The third party exercised this option
into 2,440,000 shares of the Company’s common stock in June 2008. The Company
has no further obligations of any nature to the Consulting Company.
 
 F-19
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
 
 11.
              Commitments
      and Contingencies (continued)
 
 In May of
2006, the United States Patent Office (“USPTO”) informed the Company that an
interference proceeding had been initiated between the Company’s patent number
US 6,413,298 and a pending patent application assigned to another corporation. A
final ruling by the USPTO in favor of the Company was issued in September
2008.
 
 The
Company entered into an agreement with the holders of the Convertible Notes to
file a registration statement within a defined timeframe (the “Registration
Agreement”).  The Company will incur penalties and damages of up to
approximately $236,000 if it does not file an effective registration statement
pursuant to the terms of the Registration Agreement.  On November 12,
2008, the Company filed an effective registration statement for 14,750,000 of
the 29,500,000 shares underlying the Convertible Notes and related
warrants.  As of December 31, 2008 and 2007, the Company has recorded
a liability of $41,000 and $73,500 for the Registration Agreement.
 
 In June
2008, the Company hired a consultant to assist in evaluating possible
environmental credit opportunities.  A portion of any such credits
obtained, or revenue generated from the sale thereof, is payable by the Company
to the consultant.
  12.
              Income
      Taxes
 
 There is
no current or deferred income tax expense or benefit to continuing operations
for the years ended December 31, 2008 and 2007.
 
 The
provision for income taxes is different from that which would be obtained by
applying the statutory federal income tax rate to income before income taxes.
The items causing this difference are as follows:
 
 2008
                      
                      
                      2007Tax
      benefit at U.S. statutory rate
                      
                      $
                      (2,033,100
                      )
                      
                      $
                      (760,000
                      )State
      income tax benefit, net of federal benefit
                      
                      
                      (217,100
                      )
                      
                      
                      (52,100
                      )Effect
      of non-deductible expenses
                      
                      
                      3,000
                      
                      
                      
                      23,800SFAS
      No. 123(R) expense
                      
                      
                      403,000
                      
                      
                      
                      98,400Non-deductible
      interest
                      
                      
                      -
                      
                      
                      
                      149,100Other
      adjustments
                      
                      
                      1,383,000
                      
                      
                      
                      -Change
      in valuation allowance
                      
                      
                      461,200
                      
                      
                      
                      540,800$
                      0
                      
                      
                      $
                      0
  F-20
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
 12.
              Income
      Taxes (continued)
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are as follows:
 
 2008
                    
                    
                    2007Deferred
      tax assets (liabilities), current:Bonus
      payable
                    
                    $
                    108,300
                    
                    
                    $
                    108,300Accrued
      deferred compensation payable
                    
                    
                    323,500
                    
                    
                    
                    303,900Other
                    
                    
                    49,100
                    
                    
                    
                    5,000Deferred
      license revenue
                    
                    
                    31,700
                    
                    
                    
                    31,700Valuation
      allowance
                    
                    
                    (512,600
                    )
                    
                    
                    (448,900
                    )$
                    0
                    
                    
                    $
                    0Deferred
      tax assets (liabilities), noncurrent:Deferred
      license revenue
                    
                    $
                    110,600
                    
                    
                    $
                    142,200Property
      and equipment
                    
                    
                    3,400
                    
                    
                    
                    3,400Net
      operating loss
                    
                    
                    6,600,100
                    
                    
                    
                    6,171,000Valuation
      allowance
                    
                    
                    (6,714,100
                    )
                    
                    
                    (6,316,600
                    )$
                    0
                    
                    
                    $
                    0
 
 As of
December 31, 2008 and 2007, the Company had federal and state net operating loss
carry-forwards totaling approximately $19,000,000 and $16,400,000, respectively,
which begin expiring in 2012. The Company has established a valuation allowance
to fully reserve all deferred tax assets at December 31, 2008 and 2007 because
it is more likely than not that the Company will not be able to utilize these
assets.
 
 As of
December 31, 2008, the Company has not performed an IRC Section 382 study to
determine the amount, if any, of its net operating losses that may be limited as
a result of the ownership change percentages during 2008. However, the Company
will complete the study prior to the utilization of any of its recorded net
operating losses.
 F-21
 
 Dais
Analytic Corporation
  Notes to
Financial Statements
 
 Years
Ended December 31, 2008 and 2007
 13.
              Subsequent
      Event
 
 On March
9, 2009, the Company entered into subscription agreements with two investors
pursuant to which the investors purchased 676,923 shares of Company’s Common
Stock and a five year warrant to purchase an additional 338,462 shares of Common
Stock at an exercise price of $.26 per share. The aggregate gross proceeds
received by Company for these sales were $176,000.  If the market
price of the Company’s stock is $1.50 per share for ten consecutive trading days
the Company may require that the warrants be exercised or they will
automatically terminate.
 
  F-22