UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





x  ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE


ACT
OF 1934





FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





o  TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE


ACT
OF 1934





FOR
THE TRANSITION PERIOD FROM ______________ TO________________





Commission
file number 0-21864











Vu1
CORPORATION


(Exact
name of registrant as specified in its charter)





California
              84-0672714(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)





557 ROY ST. SUITE 125
SEATTLE, WA 98109


(Address
of principal executive offices)





(888)
985-8881


(Registrant’s
telephone number, including area code)





Securities
registered pursuant to Section 12(b) of the Exchange Act: NONE.





Securities
registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, NO PAR
VALUE





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YesoNox





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





Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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.





Large accelerated filer  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                Smaller
      reporting company x





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





The
aggregate market value of the issuer’s voting stock held by non-affiliates on
June 30, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter was $25,591,118 based on the average of the bid and ask
prices of such stock on that date of $0.55, as reported on the OTC Bulletin
Board.





On March
31, 2009 there were 85,791,892 shares of Registrant’s common stock, no par
value, issued and outstanding.





Documents Incorporated By
Reference:    None





TABLE OF
CONTENTS





PageNumberPART
      IItem
      1.
                Our
      Business
                1Item
      1A
                Risk
      Factors
                5Item
      1B
                Unresolved
      Staff Comments
                11Item
      2.
                Properties
                11Item
      3.
                Legal
      Proceedings
                12Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                12PART
      IIItem
      5.
                Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                13Item
      6.
                Selected
      Financial Data
                15Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                15Item
      7.A
                Quantitative
      and Qualitative Disclosures About Market Risk
                18Item
      8.
                Financial
      Statements and Supplementary Data
                18Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                18Item
      9A(T).
                Controls
      and Procedures
                19Item
      9B.
                Other
      Information
                19PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                20Item
      11.
                Executive
      Compensation
                23Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                27Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                28Item
      14.
                Principal
      Accountant Fees and Services
                29PART
      IVItem
      15.
                Exhibits
      and Financial Statement Supplements
                30Signatures
                
                32











EXPLANATORY
NOTE





Unless
otherwise indicated or the context otherwise requires, all references in this
Annual Report on Form 10-K to “we,” “us,” “our,” and the “Company” are to Vu1
Corporation, Sendio, s.r.o., our Czech subsidiary, and our inactive subsidiary
Telisar Corporation.





CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS





We are
including the following cautionary statement in this Annual Report on Form 10-K
to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements. All statements other than statements of historical fact, including
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions, future results of operations or
financial position, made in this Annual Report on Form 10-K are forward looking.
In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” “will,” “plan,” “target,” variations of such words, and
similar expressions identify forward-looking statements, but are not the
exclusive means of identifying such statements and their absence does not mean
that the statement is not forward-looking.





The
forward-looking statements contained herein involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. Our expectations, beliefs and
projections are expressed in good faith and are believed by management to have a
reasonable basis, including without limitation, management’s examination of
historical operating trends, data contained in our records and other data
available from third parties; however, management’s expectations, beliefs and
projections may not be achieved or accomplished. In addition to other factors
and matters discussed elsewhere herein, the following are important factors
that, in our view, could cause actual results to differ materially from those
discussed in the forward-looking statements:





·
            our
      lack of working capital and lack of
revenues;


·
            the
      availability of capital to us, in the amount and time needed, to fund our
      development programs and operations, and the terms and dilutive effect of
      any such financings;


·
            our
      ability be successful in our product development and testing
      efforts;


·
            our
      ability to obtain commercial development for our planned
      products;


·
            our
      ability to obtain manufacturing capability for our planned products in a
      cost-effective manner and at the times and in the volumes required, while
      maintaining quality assurance;


·
            market
      demand for and acceptance of our planned products, and other factors
      affecting market conditions;


·
            technological
      advances and competitive pressure by our
  competitors;


·
            governmental
      regulations imposed on us in the United States and European Union;
      and


·
            the
      loss of any of our key employees or
consultants.





For a
discussion of these and other factors that may affect our business, results and
prospects, see “ITEM 1. OUR BUSINESS” and “ITEM 1A.  RISK
FACTORS.” Readers are urged to carefully review and consider the various
disclosures made by us in this Report and in our other reports filed with the
Securities and Exchange Commission, and those described from time to time in our
press releases and other communications, which attempt to advise interested
parties of the risks and factors that may affect our business, prospects and
results of operations.  We do not undertake any obligation to update
or revise any forward-looking statements to reflect any future events or
circumstances.





PART
I





ITEM
1. OUR BUSINESS





Overview





Vu1
Corporation is focused on developing, manufacturing and selling mercury free,
energy efficient light bulbs based on our proprietary light-emitting
technology.  We call this technology Electron Stimulated LuminescenceTM
(“ESLTM”). For the past several years, we have primarily focused our efforts on
research and development efforts for our ESL technology. In 2007 we formed
Sendio s.r.o. (“Sendio”) in the Czech Republic as a wholly owned subsidiary for
continued development of the bulb, and to design the manufacturing processes
required for commercialization and manufacturing.  During 2007 and
2008, we continued our development work on the technology and have initiated the
design and implementation of the processes required to manufacture the bulb. Our
efforts are presently focused on our initial planned product, the R30 sized
light bulb. We anticipate that the development efforts will continue in 2009 to
support production that is planned to begin in the latter half of 2009. The
commercial viability of our ESLTM technology will largely depend on these
development results, our ability to manufacture our product at commercially
feasible levels, market acceptance of the product and other
factors.





Peterson
Sullivan, LLP, our independent registered public accounting firm, in their
opinion on our financial statements for the year ended December 31, 2008, raised
substantial doubt about our ability to continue as a going concern due to our
lack of revenues, our net losses and negative cash flows from operations and
other factors.  For further information, see Note 3 to our
Consolidated Financial Statements included in this Annual Report on Form
10-K.





We are a
California corporation, originally incorporated on August 30, 1996 under the
name Telegen Corporation.  On May 22, 2008 we amended our articles of
incorporation to change our name to Vu1 Corporation.  Our shares of
common stock are presently quoted on the OTC Bulletin Board under the symbol
“VUOC”.  We have an accumulated deficit of $58,386,684 as of December
31, 2008.  Our corporate offices are located at 557 Roy Street, Suite
125, Seattle, WA 98109 and our telephone number is 888-985-8881.  Our
web site can be found at www.vu1.com.





Products
Under Development, Our Proprietary Technology and Our Research and Development
Efforts





In 2008,
we focused our development efforts on the application of ESL technology on the
requirements of our initial planned product, an R30 sized light
bulb.  The R30 size bulb is used primarily in lighting fixtures that
are recessed in the ceiling of commercial and residential buildings and are
commonly referred to as “recessed can fixtures”. We are continuing our methods
research and manufacturing proof of concept prototypes and are continuing to
develop the manufacturing processes for an R30 sized light bulb utilizing our
proprietary ESL technology.  The key design features of our planned
light bulb are that it be energy efficient, fully dimmable, illuminates
immediately when switched on and have a color quality that is warm and similar
to incandescent light.  In addition, our light bulb does not contain
mercury, a feature which will ease disposal. We have not yet completed the final
design of our planned product, and we expect there will be adjustments to our
current designs.  We may not be able to successfully develop the full
feature set for our planned light bulb or commercially manufacture our planned
product.





Our
emphasis on the development of our planned product, the additional manufacturing
processes required and commercial manufacturing, distribution, marketing and
branding and the development of sales channels surrounding our light bulb will
command management’s primary attention during fiscal 2009.  It will
also comprise the primary use of our limited financial resources. In 2009, our
success will depend on our ability to develop our planned product that meets
industry standards, obtain commercial manufacturing, generate market awareness
and acceptance of our planned products, protect our technology through patents
and trade secrets, and obtain funding to finance our operations.  If
we are unable, for technological, financial, competitive, or other reasons, to
successfully meet these factors, our business and operations will be materially
adversely affected.


1


The
Lighting Industry





We
believe the primary market for our planned light bulb is the commercial and
residential General Illumination Market, where incandescent, halogen, compact
fluorescent (“CFL”) and Light  Emitting Diode (“LED”) light emitters
are utilized.  In recent years, the industry has shifted to more
energy efficient lighting solutions in an effort to conserve
electricity.  This market shift is being mandated to some degree by
legislation in the U.S. and internationally.  The U.S, has passed
legislation intended to phase out the use of the incandescent light bulb
beginning in 2012, with a full phase out in 2014.  Similar legislation
has been passed by EU Energy Ministers, as well as in Canada, Australia and
Ireland.





Target
Markets





Initially,
Vu1 intends to target the US R30/R40 reflector light bulb market in the United
States.  According to recent reports, the U.S. residential market is
comprised of 500 million recessed can lights with over 140 million bulbs sold
per year (“CFL Market Profile”, U.S. Department of Energy, March 2009 and “A
Review of the Reflector Compact Fluorescent Lamps Technology Procurement
Program: Conclusions and Results” Pacific Northwest National Laboratory, May
2008).





Significant
lighting market drivers are size, shape, cost, brightness, color rendering,
mercury free, dimming capability and energy efficiency.  We are
directing our product development efforts with awareness of these features.
Distribution in this market segment is primarily through distributors (typically
regional) or directly from manufacturers to larger retailers.





Our
Intellectual Property, Patents and Proprietary Rights





We are
developing the necessary documentation, and we have applied for patent
protection on our proprietary light-emitting technology.  We have
filed a total of 10 U.S. patent applications and related international patent
filings, and we expect to apply for additional patent protection on our
technology and our manufacturing processes both domestically and internationally
in the future.  We believe that our technology has unique aspects that
are patentable; however, there can be no assurances that any patent will be
issued or if issued that it will be defensible.





We
protect our intellectual property rights through a combination of trademark,
copyright, trade secret laws and other methods of restricting disclosure, and
requiring our independent consultants, strategic vendors and suppliers to sign
non-disclosure agreements as well as an assignment of inventions agreements when
appropriate.





Regulatory
Issues and Industry Certification





Any
commercial light bulb product that we develop may require certifications from an
independent third party testing laboratory prior to their sale.  We
are currently intending to submit our ESL bulb to independent third party
testing in the second quarter of fiscal 2009. Specifically, we are designing the
bulb to be UL® compliant and intend to submit our bulb for potential
certification. There is presently no Energy Star® certification standard for our
ESL technology and we do not know if one will be developed or if we will qualify
under existing standards.  In addition, we may be subject to other
certifying agencies and other regulatory approvals. The approvals and
certifications required will be determined based upon the market that we
enter.  We are designing our light bulb to meet the standards for
certification from independent third party laboratories, and we intend to submit
an application to the appropriate testing laboratory once we have completed the
necessary development and manufacturing processes required to obtain
certification.  We cannot predict whether we will obtain certification
from an independent third party testing laboratory or any other regulatory
agency.


2


Competition





The
R30/R40 market segment is highly competitive and traditionally dominated by
several large competitors such as General Electric Company, Phillips Electronics
NV, Osram Sylvania, the North American operation of OSRAM GmbH, Germany, Siemens
AG and Ushio Inc.  These entities possess far more substantial
financial, human and other resources than we do.  In the past decade,
other smaller rapidly growing companies have entered this market due to the
outsourcing of manufacturing on a non-exclusive basis by these large
corporations and other market factors. We are aware of the existence of foreign
competition which exports their products into our anticipated market. We intend
to compete based on the feature set of our light bulb technology.





Suppliers





Development
and production of our bulbs will require certain raw materials, including glass,
electronics, coatings, certain chemicals and chemical compounds, plastic, and
packaging.  We have identified key targeted suppliers for these raw
materials, and we have entered into discussions with several of them regarding
supply arrangements.  Currently, we do not have dedicated supply
agreements with all suppliers.  We anticipate that most of our raw
material purchases will not be pursuant to a supply agreement but will be by
purchase order.  In addition, we are continuing to identify
alternative suppliers for our raw material needs.  We believe that we
will be able to obtain the supplies used in our development process from a
number of vendors.





Research
and Development





We have
spent an aggregate of approximately $6.8 million during fiscal 2008 and 2007 in
our development efforts.  In addition, we have acquired manufacturing
equipment for approximately $0.6 million.  See “Products Under
Development, Our Proprietary Technology and Our Research and Development
Efforts” above.





Manufacturing





Our
manufacturing facility is located in the Czech Republic, and is operated through
our wholly-owned subsidiary, Sendio s.r.o.  We are using this facility
to develop our ESL technology and manufacturing processes.  As of
December 31, 2008, we had 52 employees at our Sendio facility.





The
facility is a 75,000 square foot building located in the city of Olomouc in the
Czech Republic.  We currently lease the premises, and in 2008 we
entered into an agreement with the landlord to purchase the
facility.  Before we can complete the purchase, we will need to obtain
adequate financing.  See “Item 2.  Properties” for a
discussion of our current lease and purchase agreement for this
facility.





The
Sendio facility includes two customized production lines which, when all
manufacturing processes are completed, we intend to use for the production of
our R30 size light bulb.  We have estimated the existing production
line to have an annual capacity of up to 6 million bulbs.  In
addition, we have planned future expansion capacity, including two additional
production lines with an estimated 20 million bulb annual capacity per
line.  Before we can initiate manufacturing in this facility, we
anticipate that we will need to obtain and install additional
equipment.





We
currently plan to begin production of our bulbs in the latter half of
2009.  This schedule is subject to many factors outside of our control
including:





·
            unanticipated
      delays and expenses affecting our ongoing development
    efforts;


·
            our
      ability to raise financing to fund operations and planned
      commercialization;


·
            results
      of independent, third-party testing of our
  bulbs;


·
            our
      ability to obtain UL® compliance and other industry
      certification;


·
            the
      availability of raw materials and equipment for
    manufacturing.


3


Environmental
Compliance





We will
be subject to certain environmental requirements and laws in the Czech Republic
that have been identified related to our manufacturing processes.  We
have obtained the necessary permits required for the current development
operations of the facility in the Czech Republic. We may be subject to
additional environmental requirements in the future.





Marketing,
Sales and Distribution





During
2008 we continued our marketing initiatives to determine our initial marketing
strategy and research and to begin branding and corporate positioning
issues.  Our marketing efforts have included market research to
determine market size, competition, product features, consumer attitudes,
pricing, certifications, government agencies, grants, target channels and
retailers, branding and creation of initial marketing collateral. We have also
had strategic meetings with retailers and potential channel and
distribution partners to determine levels of interest in our light bulb and the
underlying technology.  We believe that the results of these meetings
were positive but no agreements have been entered into.





Fourteen
states have enacted Conservation Improvement Programs
(“CIP”).  Through a CIP, electric and natural gas utilities are
required to invest a portion of their state revenues in projects designed to
reduce their customers' consumption of electricity and natural gas, and to
generally improve resource efficiency.  One form of CIP investment is
conducting “give-aways” of energy efficient lighting
products.  Alternatively, some states provide cash rebates to light
bulb manufacturers, stores or directly to the consumer. Vu1 has met with a
number of utilities and utility groups to determine interest in the promotion of
ESL energy efficient bulbs under their CIP.  We believe that the
results of these meetings were positive but no agreements have been entered
into.





In March
2009, we entered into an agreement with Integrated Sales Solutions, Inc. “ISS”
to enhance our capabilities in designing and establishing sales strategy and
distribution channels with retail, electrical utilities, electrical distributors
and government agencies. ISS will also advise and assist in defining logistics,
warehousing, finished good requirements, distribution, packaging, merchandising,
and support for our ESL bulbs, including product training within customer
organizations.  We intend to work closely with ISS to develop programs
aimed at further developing these channels and potential distribution
partnerships.





Based on
the information we have obtained we believe that the technology could prove to
have a viable market, but can give no assurances that any such market will
develop. We believe that initial sales would most likely occur though
independent regional distributors and direct purchases by utility companies and
retailers.  However, we currently do not have any distribution
relationships, and these may never develop.





Employees





As of
December 31, 2008 we had 52 full time employees in the Czech Republic through
our subsidiary Sendio.  In addition, our Chief Executive Officer,
David Grieger was our only full time employee in the United States. Our other
executive officers, Richard Herring, Richard Sellers and Matthew DeVries are
consultants.  Our Chief Marketing Officer, T. Ron Davis, was a
consultant until December 31, 2008, at which time he became an
employee.





We have
routinely used consultants in our U.S. operations and strategic vendors on a
work for hire contract basis. We anticipate that we will begin to hire
additional full time employees in the United States during 2009.




Other Information




From time
to time, our executives will present information about our business and planned
products to investors and other interested parties at various investor
presentations, meetings with potential distributors and channel partners, and in
other forums. We have prepared a powerpoint presentation, dated March 30, 2009,
and our discussions with such interested parties may include this presentation,
or modifications thereof. A copy of the presentation, dated March 30, 2009 is
attached as Exhibit 99.1 to this annual report on 10-K, and will be posted on
our website, www.vu1.com.
Information contained in the presentation dated March 30, 2009 is an overview
and intended to be considered in the context of our SEC filings, including this
annual report on 10-K, and all other publicly disclosed information, including
our risk factor disclosures. We undertake no duty or obligation to update or
revise this information.


4


ITEM
1A.  RISK FACTORS





In
addition to the other information in this Report on Form 10-K, the following
risk factors should be considered carefully in evaluating our business and an
investment in our stock.





Risk
Factors Relating to Our Company and Our Business





We
are a research and development company. We have a limited operating history, we
have generated no revenues since 1998, and it is difficult to evaluate our
business and prospects.





We have
been engaged in the research and development of our energy efficient, mercury
free light bulbs since May 2004, and have incurred significant operating losses
in every fiscal year since our inception in 1996.  We have not
completed the design and manufacture of our product prototype and have not
commenced commercial manufacturing.  We have not generated any
revenues since 1998 and we depend on third-party financing to fund operations.
We have no operating history upon which an investor can evaluate our business
and prospects, and we may never be successful or achieve
profitability.





We
need significant additional financing in fiscal 2009.  Our business
may fail if we are unable to obtain financing for our working capital
needs.





Our cash
and cash equivalents of $2,486,609 as of December 31, 2008 are not sufficient to
support our operations through fiscal 2009 and we need additional
financing.  During 2009, we expect to continue to incur operating
losses as we continue development expenditures on our light bulb technology,
pursue product production, and seek to establish marketing and sales and
distribution capabilities.  Our ability to implement our business plan
for 2009 and our future operations will be significantly impaired or delayed if
we are unable to secure financing in the amounts and at the times needed to fund
our working capital.  We may seek to obtain funds through equity or
debt financings, as well as through strategic financial
partners.  Such financing may not be available to us, or may only be
available on financially unattractive terms or in insufficient
amounts.  If we are unable to obtain sufficient cash to continue to
fund operations or if we are unable to locate a strategic partner, we may be
forced to seek protection from creditors under the bankruptcy laws or cease
operations.  Our auditors added an explanatory paragraph to their
opinion on our fiscal 2008 financial statements stating that there was
substantial doubt about our ability to continue as a going concern.





We
have a number of technology issues to resolve before we will be able to
manufacture a commercially viable product.





Although
we have completed initial engineering of our light bulb, further development
work and third-party testing will be necessary before the technology can be
deployed and we can commence production. Specifically, we are continuing to work
on our R30 bulb, including to obtaining acceptable life and output
specifications.  If we are unable to solve current and future
technology issues, we will not be able to manufacture a commercially viable
product. In addition, if we encounter difficulty in solving technology issues,
our research and development costs could increase substantially and our
development and production schedules could be significantly
delayed.





We
have no experience manufacturing our ESL light bulbs on a commercial
basis.





Our
future operating results will depend on our ability to manufacture our products.
To do so, we will have to develop manufacturing processes and the manufacturing
capability that will allow us to produce high volumes of products at
commercially viable yields.  Although we have developed manufacturing
processes, we have no experience in manufacturing our products, on a small-scale
or commercial scale.  We do not know whether the processes we have
developed or our manufacturing capabilities will be capable of supporting
large-scale manufacturing, or whether we will be able to develop the other
processes necessary for large-scale manufacturing of bulbs that meet the
requirements for cost, schedule, quality, engineering, design, production
standards and volume requirements.  Because we have no experience with
manufacturing our products, we may not be able to establish manufacturing
capacity at a reasonable cost, maintain the quality of our products as
production increases, or develop the administrative and operational
infrastructure necessary to support expanded operations. If we fail to develop
or obtain the necessary manufacturing capabilities, or if we fail to achieve
volume production of our products with competitive yields at acceptable costs,
it will significantly alter our business plans and could have a material adverse
effect on our business, prospects, financial condition, and results of
operations.


5


We
have experienced significant delays in executing our business plan, and further
delays will reduce the likelihood that we will be able to manufacture products
or generate sufficient revenue to stay in business.





We have
experienced significant delays in executing our business plan.  These
delays are attributable to a number of factors, including:




·
              unanticipated
      difficulties and increased expenses in developing our
      technology;
 ·
              unanticipated
      difficulties in our manufacturing processes;
and
 ·
              our
      inability to obtain funding in a timely
manner.




In the
future, we may experience delays caused by these and other
factors.  Our business must be viewed in light of the problems,
expenses, complications and delays frequently encountered in connection with the
development of new technologies, products, markets and operations. If we are
unable to anticipate or manage challenges confronting our business in a timely
manner, we may be unable to continue our operations.





We
must fulfill our obligation under the real estate purchase agreement for the
Sendio facility.  If we cannot pay the balance of the purchase price,
we may lose our manufacturing facility.





Under our
purchase agreement for the Sendio manufacturing facility in the Czech Republic,
Sendio is required to make significant payments totaling approximately $9
million by June 30, 2009.  We currently do not have the funds to pay
the balance of the purchase price, and we will need to obtain financing to
fulfill our obligations under the purchase agreement.  If we are
unable to obtain the financing, we will need to negotiate with the landlord to
extend the closing date of the building or extend the lease beyond its current
term of June 30, 2009.  We have initiated discussions with the
landlord to extend the lease or the closing date, but we can give no assurances
that these discussions will lead to an amendment to the existing terms of the
agreement.  Our failure to renegotiate the terms of the agreement
would significantly negatively impact and delay the development of our
manufacturing processes and our plans for manufacturing and production and we
may no longer have facilities available for Sendio’s operations.





We
must successfully develop, introduce, manufacture, market, and sell products and
manage our operating expenses.





To be a
viable business, we must successfully develop commercial applications for our
technology, introduce, manufacture, market, and sell products and manage our
operating expenses. Our products are in development and are subject to the risks
inherent in the development of technology products, including unforeseen delays,
expenses, patent challenges and complications frequently encountered in the
development and commercialization of technology products, the dependence on and
attempts to apply new and rapidly changing technology, and the competitive
environment of the industry. Many of these events are beyond our control, such
as unanticipated development requirements, delays and difficulties with
obtaining third-party certification, delays in submitting documentation for and
being granted patents and manufacturing problems.  Our success also
depends on our ability to maintain high levels of employee utilization, manage
our production costs, sales and marketing costs and general and administrative
expenses, and otherwise execute on our business plan.  We may not be
able to effectively and efficiently manage our development and
growth.  Any inability to do so could increase our expenses and
negatively impact our results of operations.


6


We rely heavily on a few consultants
and employees, the loss of which could have a material adverse effect on our business,
operating results and financial condition.





Our
future success will depend in significant part upon the continued services of
our officers and directors and certain key consultants, and our ability to
attract, assimilate and retain highly qualified technical, managerial and sales
and marketing personnel when needed. Competition for quality personnel is
intense, and there can be no assurance that we can retain our existing key
personnel or that we will be able to attract, assimilate and retain such
employees in the future when needed. The loss of key personnel or the inability
to hire, assimilate or retain qualified personnel in the future could have a
material adverse effect upon our business.





We
rely on outside suppliers to manage certain key business processes, and any
failure to perform will negatively affect our business.





We have
outsourced certain of our key business processes.  In particular, in
2009 we retained Integrated Sales Solutions to help develop our sales, marketing
and distribution strategies and channels.  If any of these service
providers fail to perform or at a satisfactory level, our business development
will be negatively affected and delayed, and our reputation may be
harmed.





We
have incurred historical losses and as a result, may not be able to generate
profits, support our operations, or establish a return on invested
capital.





We
incurred losses in fiscal 2008 of $9,856,071 and have an accumulated deficit of
$58,386,684 as of December 31, 2008. In addition, we expect to increase
infrastructure and operating expenses related to our anticipated growth. We
cannot predict when or whether we will ever generate a profit or otherwise
establish a return on invested capital.  We may never be
profitable.  Our business strategies may not be successful and we may
never generate significant revenues or profitability, in any future fiscal
period or at all.





Our
future operating results are difficult to predict.





Due to
our limited operating history and the significant development and manufacturing
objectives that we must achieve to be successful, our quarterly and annual
operating results are difficult to predict and are expected to vary
significantly from period to period. In addition, the amount and duration of
losses will be extended if we are unable to develop and manufacture our products
in a timely manner. Factors that could inhibit our product and manufacturing
development and future operating results include:





·
            failure
      to solve existing or future technology-related issues in a timely
      manner;


·
            failure
      to obtain sufficient financing when
needed;


·
            failure
      to secure key manufacturing or other strategic partnerships;
      and


·
            competitive
      factors, including the introduction of new products, product enhancements
      and the introduction of new or improved technologies by our competitors,
      the entry of new competitors into the lighting markets and pricing
      pressures.





We
may fail to continue as a going concern, in which event you may lose your entire
investment in our shares.





Our
audited financial statements have been prepared on the assumption that we will
continue as a going concern. Our independent registered public accounting firm
has stated in their report on our 2008 financial statements that our recurring
losses from operations and our difficulties in generating cash flow to meet
our obligations and sustain our current level of operations raise substantial
doubt about our ability to continue as a going concern.


7


We
face currency risks associated with fluctuating foreign currency
valuations.





With our
operations in the Czech Republic through Sendio, Sendio’s accounts, which
currently primarily consist of lease payments, compensation, and other R&D
and administration expenses, are denominated in the Czech Koruna (CZK) and the
EUR.  An increase in the value of the CZK and EUR in relation to the
U.S. dollar would have an adverse effect on our operating
expenses.  In addition, we may engage in business in other counties,
including in the European Union, and our operating results will be subject to
fluctuations in the value of those currencies against the U.S.
dollar.  In addition, the financial statements for our Czech
subsidiary are denominated in the CZK; accordingly, on a consolidated financial
statement reporting basis, these numbers are translated into U.S. dollars and
are affected by currency conversion rates.  As of December 31,
2008, we have not entered into foreign currency contracts or other derivatives
to mitigate the potential impact of foreign currency fluctuations.





Risk
Factors Related to Our Industry





Our
ability to manufacture products will depend on the continuous supply and
availability of raw materials and our business will be susceptible to shortages,
unavailability, or price fluctuations.





The
principal raw materials that we expect to use in manufacturing our light bulbs
include glass, electronic components and other required
materials.  Our business will be adversely affected by any impairment
in the supply of these raw materials or by price increases.  Although
we have identified suppliers for these materials, we do not have supply
agreements in place for raw materials, and we will be subject to risk of
fluctuations in supply and price.  In addition, while we believe that
in many instances there are alternative suppliers for these components,
replacement suppliers may not be available.  If we are unable to
secure sufficient quantities of the materials we will need to manufacture our
light bulbs, if we encounter delays or contractual or other difficulties in our
relationships with suppliers, or if we cannot find replacement suppliers at an
acceptable cost, then the manufacture of our light bulbs may be disrupted, which
would increase our costs, delay our production schedule and have a material
adverse effect on our business.





We
face intense competition.





The
lighting industry is very competitive and we expect this competition to continue
to increase.  The General Illumination Market segment within the
lighting industry is dominated by a number of well-funded multi-national
companies, such as General Electric Company, Phillips Electronics NV, Osram
Sylvania, the North American operation of OSRAM GmbH, Germany, Siemens AG and
Ushio Inc., have established products and are developing new products that
compete with the products we are developing. We may not be able to compete
effectively against these or other competitors, most of whom have substantially
greater financial resources and operating experience than us. Many of our
current and future competitors may have advantages over us,
including:





·
            well
      established products that dominate the
market;


·
            longer
      operating histories;


·
            established
      customer bases;


·
            substantially
      greater financial resources;


·
            well
      established and significantly greater technical, research and development,
      manufacturing, sales and marketing resources, capabilities, and
      experience; and


·
            greater
      name recognition.





Our
current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third-parties that would increase their market dominance and negatively impact
our ability to compete with them. In addition, competitors may be able to adapt
more quickly than we can to new or emerging technologies and changes in customer
needs, or to devote more resources to promoting and selling their products. If
we fail to adapt to market demands and to compete successfully with existing and
new competitors, our results of operations could be materially adversely
affected.





The
market for lighting technology is changing rapidly and there can be no assurance
that we will be able to compete, especially in light of our limited resources.
There can be no assurance that any products that we develop and technologies can
compete successfully on a cost, quality or market acceptance basis with these
other products and technologies.


8


We
depend on our intellectual property.  If we are unable to protect our
intellectual property, we may be unable to compete and our business may
fail.





Our
success and ability to develop our technology and create products and become
competitive depends to a significant degree on our ability to protect our
proprietary technology, particularly any patentable material.  We rely
on a combination of trade secret and other intellectual property law,
nondisclosure agreements and other protective measures to preserve our rights
pertaining to our technology.  In addition, any intellectual property
protection we seek may not preclude competitors from developing products similar
to ours.  In addition, the laws of certain foreign countries do not
protect intellectual property rights to the same extent as do the laws of the
United States.





We do not
have sufficient available resources to defend a lawsuit challenging our
intellectual property rights or to prosecute others who may be infringing our
rights.  Accordingly, even if we have strong intellectual property
rights and patent rights, we may not be able to afford to engage in the
necessary litigation to enforce our rights.





We
compete in industries where competitors pursue patent prosecution worldwide and
patent litigation is customary. At any given time, there may be one or more
patent applications filed or patents that are the subject of litigation, which,
if granted or upheld, could impair our ability to conduct our business without
first obtaining licenses or granting cross-licenses, which may not be available
on commercially reasonable terms, if at all. We have several patent applications
pending in the U.S. and internationally and we expect to file additional patent
application; however, none of these patents may ever be issued.  We do
not perform worldwide patent searches as a matter of custom and, at any given
time, there could be patent applications pending or patents issued that may have
a material adverse effect on our business, financial condition, and results of
operations.





Other
parties may assert intellectual property infringement claims against us, and our
products may infringe upon the intellectual property rights of third parties.
Intellectual property litigation is expensive and time consuming and could
divert management’s attention from our business and could result in the loss of
significant rights. If there is a successful claim of infringement, we may be
required to develop non-infringing technology or enter into royalty or license
agreements which may not be available on acceptable terms, if at all. In
addition, we could be required to cease selling any of our products that
infringe upon the intellectual property rights of others. Successful claims of
intellectual property infringement against us may have a material adverse effect
on our business, financial condition, and results of operations. Even successful
defense and prosecution of patent suits is costly and time
consuming.





We rely
in part on unpatented proprietary technology, and others may independently
develop the same or similar technology or otherwise obtain access to our
unpatented technology. To protect our trade secrets and other proprietary
information, we require employees, consultants, advisors and strategic partners
to enter into confidentiality agreements. These agreements may not provide
meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure
of those trade secrets, know-how or other proprietary information. In
particular, we may not be able to protect our proprietary information as we
conduct discussions with potential strategic partners. If we are unable to
protect the proprietary nature of our technologies, it may have a material
adverse effect on our business, financial condition, and results of
operations.





Any
commercial products we develop will be subject to extensive regulation, which
will be costly.





If our
research and development efforts are successful, any commercial products that we
develop will be subject to extensive regulation, both in the U.S. and
internationally. Compliance with these laws and regulations will be costly and
will incur significant management time. Failure to comply with applicable laws
and regulations could have a material adverse effect on our
business.





If
we fail to obtain or maintain industry certification for our products, our
business will be harmed.





We are
designing our products to be UL® compliant and intend to seek Energy Star®
certification, as well as appropriate certifications in the European Union and
in other countries.  UL® compliance certification is a key standard in
the lighting industry, and if we fail to obtain and maintain this standard we
may not have any market interest for our products.  We may not obtain
this certification or we may be required to make changes to our light bulbs,
which would delay our commercialization efforts and would negatively harm our
business and our results of operations.


9


We
may be materially disadvantaged if we fail to keep pace with technological
changes.





The
lighting industry is characterized by rapid technological change and evolving
industry standards and is highly competitive with respect to timely product
innovation. The introduction of products embodying new technology and the
emergence of new industry standards can render existing products and
technologies obsolete and unmarketable. Our success will depend in part on our
ability to successfully develop commercial applications for our technology,
anticipate and respond to technology developments and changes in industry
standards, and obtain market acceptance on any products we introduce. We may not
be successful in the development of our technology, and we encounter technical
or other serious difficulties in our development or commercialization that would
materially adversely affect our results of operations.





Risks
Relating to our Common Stock





We do not intend to pay
dividends,so any return
on investment must come from appreciation.





We have
never declared or paid any cash dividends on our capital stock and do not intend
to pay dividends in the foreseeable future. We intend to invest all future
earnings, if any, to fund our growth. Therefore, any investment return in our
common stock must come from increases in the fair market value and trading price
of our common stock.





Our
common stock is thinly traded.





The
trading volume of our common stock is thin. Therefore, there may not be a large
number of potential purchasers ready to buy shares whenever a shareholder
desires to sell. The public stock markets generally, and our shares
specifically, are volatile and unpredictable. There can be no assurance that a
shareholder will be able to dispose of his or her shares at the time he or she
desires to do so or at the desired selling price.





We
have the right to issue up to 10,000,000 shares of “blank check” preferred
stock, which may adversely affect the voting power of the holders of other of
our securities and may deter hostile takeovers or delay changes in management
control.





Our
Articles of Incorporation allow us to issue up to 10,000,000 shares of preferred
stock without further stockholder approval and upon such terms and conditions,
and having such rights, preferences, privileges, and restrictions as the board
of directors may determine. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. In addition, the issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire control of, or of discouraging bids for control of our company.
This could limit the price that certain investors might be willing to pay in the
future for shares of common stock. We have no current plans to issue any shares
of preferred stock.





Any
equity-based financings will dilute our stockholders.





We need
to raise additional financing in fiscal 2009.  If we raise funds
through the issuance of equity, equity-related or debt securities, these
securities may have rights, preferences or privileges senior to those of the
rights of the common stock.  The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders.


10


Our
common stock is considered a “penny stock.”





Our
common stock is subject to certain rules and regulations relating to “penny
stock.” A “penny stock” is generally defined as any equity security that has a
price less than $5.00 per share and that is not quoted on a national securities
exchange. Being a penny stock generally means that any broker who wants to trade
in our shares (other than with established clients and certain institutional
investors) must comply with certain “sales practice requirements,” including
delivery to the prospective purchaser of the penny stock a risk disclosure
document describing the penny stock market and the risks associated therewith.
These penny stock rules make it more difficult for broker-dealers to recommend
our common stock, and as a result, our stock holders may have difficulty in
selling their shares in the secondary trading market. This lack of liquidity may
also make it more difficult for us to raise capital in the future through the
sale of equity securities.





We
may be subject to sanctions from the SEC or NASD due to our failure to timely
file periodic reports with the SEC.





From 2003
through December 2006, we were not in compliance with our reporting obligations
under the Securities Exchange Act of 1934, failing to file any required annual,
quarterly and other periodic reports during such time.  We may be
subject to sanctions from the SEC or from the NASD as a result of our delinquent
filings. Any such action may have an adverse effect on us or on the trading of
our common stock.  Although we subsequently filed with the SEC our
annual report on Form 10-K for the year ended December 31, 2005 and our
quarterly reports on Form 10-QSB for each of the quarterly periods during fiscal
2006, we have not filed any of the other delinquent reports.  Since
December 2006, we have been current with our quarterly and annual filings with
the SEC.





ITEM
1B. UNRESOLVED STAFF COMMENTS





Not
Applicable.





ITEM
2. PROPERTIES





We own no
real property.





Corporate
Headquarters – Seattle, Washington





Our
corporate headquarters consisting of approximately 1, 300 square feet, are
located in Seattle, Washington which we leased on a month-to-month basis in
2008.  In February 2009, we entered into a six month lease agreement
for this space for total rent per month of $1,530.  The lease becomes
month to month after the initial six month term unless terminated in accordance
with the terms of the agreement.





Manufacturing
Facility – Olomouc, Czech Republic







On May
28, 2008 Sendio entered into a lease contract for certain facilities located in
the city of Olomouc in the Czech Republic (the “Current Lease”). The lease term
is one year effective from July 1, 2008 and terminates on June 30,
2009.  The rent for the one year term is CZK 10,000,000 (approximately
$624,000 USD), plus mandatory VAT.  The rent is payable monthly in the
amount of CZK 301,655 (approximately $19,000 USD) for July 2008, CZK 376,655
(approximately $24,000 USD) for August 2008, and CZK 455,310 (approximately
$28,000 USD) for each month from September 2008 through June 2009.  On
May 29, 2008 Sendio paid a deposit of CZK 4,000,000 (approximately $250,000 USD)
to the landlord.





The
leased facilities include some remaining tenants.  Sendio’s rent for
July 1, 2008 to December 31, 2008 was reduced by rents paid by these remaining
tenants.  Sendio anticipates that the amount to be paid by these
tenants (and Sendio’s rent reduction) will be approximately CZK 2,268,000
(approximately $134,000 USD) from January 1 through June 30, 2009, but there can
be no assurance that this will be the case. If the existing tenants vacate the
space currently under lease, Sendio would be responsible for any monthly
shortfall that exceeds 50,000 CZK per month subsequent to the tenant vacating
the space.  Sendio is also responsible for certain improvements,
insurance, utilities, maintenance and other costs as described in the Current
Lease.


11




Effective
December 9, 2008, Sendio entered into an agreement (the “Purchase Agreement”) to
purchase the facilities in the Current Lease from the landlord. The purchase
price for the Premises is CZK 179,000,000 (approximately $9.0 million USD) (the
“Purchase Price”) and the closing date anticipated in the Purchase Agreement is
July 1, 2009.  The deposit Sendio paid on May 29, 2008 under the
Current Lease for CZK 4,000,000 is considered an advance on the Purchase Price.
This amount has been recorded as a non-current asset as a “deposit on building
purchase” in the accompanying balance sheet as of December 31, 2008. Sendio is
required to pay the remaining balance of the Purchase Price into an escrow
account in individual installments.  The Purchase Agreement provided
for payments into the escrow account during February, April, May and June
2009.  On March 3, 2009, Sendio and the landlord amended the Purchase
Agreement to revise the payment terms.  Under the amendment, Sendio
paid CZK 1,000,000 (approximately US$45,000) into the escrow account on March
10, 2009.  The balance of the payments into the escrow account are
payable as follows:





1.
            CZK
      15,500,000 by May 16, 2009; and


2.
            CZK
      158,500,000 by June 30, 2009







Effective
December 9, 2008, as additional inducement for the landlord to enter into the
Purchase Agreement, Vu1 entered into a Deed of Guarantee with the landlord under
which it guaranteed up to CZK 13,500,000 (approximately $675,000) of payments by
Sendio under the Purchase Agreement.  The guarantee expires upon full
payment by Sendio of those payments scheduled under the Purchase
Agreement.





ITEM
3. LEGAL PROCEEDINGS





We have
no pending legal proceedings.





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





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


12





PART
II





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





Our
shares of common stock are presently quoted on the OTC Bulletin Board under the
symbol VUOC. Listed below are the high and low sale prices for the shares of our
common stock during the years ended December 31, 2008 and 2007. These quotations
reflect inter-dealer prices, without mark-up, mark-down or commission and may
not represent actual transactions.





High
                    
                    
                    LowFiscal 2007First
      Quarter (ended March 31, 2007)
                    
                    $
                    0.45
                    
                    
                    $
                    0.25Second
      Quarter (ended June 30, 2007)
                    
                    
                    0.50
                    
                    
                    
                    0.25Third
      Quarter (ended September 30, 2007)
                    
                    
                    1.01
                    
                    
                    
                    0.36Fourth
      Quarter (ended December 31, 2007)
                    
                    
                    0.51
                    
                    
                    
                    0.23Fiscal 2008First
      Quarter (ended March 31, 2008)
                    
                    $
                    0.53
                    
                    
                    $
                    0.27Second
      Quarter (ended June 30, 2008)
                    
                    
                    0.60
                    
                    
                    
                    0.29Third
      Quarter (ended September 30, 2008)
                    
                    
                    1.44
                    
                    
                    
                    0.49Fourth
      Quarter (ended December 31, 2008)
                    
                    
                    1.40
                    
                    
                    
                    0.90





As of
December 31, 2008, there were 85,691,892 shares issued and outstanding and
approximately 760 holders of record of our common stock. We believe that a
significant number of beneficial owners of our common stock hold shares in
street name. No dividends have ever been paid to holders of our common stock,
and we do not anticipate paying dividends in the future.





Securities
Authorized for Issuance Under Equity Compensations Plans





On
October 26, 2007, our Board of Directors approved the Vu1 Corporation 2007 Stock
Incentive Plan (the “Plan”).   The stockholders approved the Plan
on May 22, 2008.  A total of 10,000,000 shares of our common stock
were authorized for issuance under the Plan.  The following table
gives information as of December 31, 2008, the end of the most recently
completed fiscal year, about shares of common stock that may be issued upon the
exercise of options, warrants and rights under the Plan.





Equity Compensation Plan InformationPlan 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 plans
                    (excluding securities
                    reflected in column (a))(a)
                  
                  
                  (b)
                  
                  
                  (c)Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Equity
      compensation plans approved by security holders
                  
                  
                  6,071,875
                  
                  
                  $
                  0.74
                  
                  
                  
                  1,724,625Totals
                  
                  
                  6,071,875
                  
                  
                  $
                  0.74
                  
                  
                  
                  1,724,625


13


A
description of the Plan can be found in Note 9 to the financial statements
contained in this report on Form 10-K.





Sales
of Unregistered Securities





The
following provides information regarding sales of equity securities by us during
the fiscal year ended December 31, 2008, which were not registered under the
Securities Act.





In March
2008, we sold an aggregate of 1,416,666 shares of common stock in a private
placement to a group of three accredited investors at a purchase price of $0.30
per share for gross proceeds of $425,000. No commissions were paid in the
private placement. The shares were offered and sold pursuant to the exemption
from registration under Rule 506 of Regulation D under the Securities
Act.





During
the second quarter of 2008, we sold an aggregate of 5,683,462 shares of common
stock in a private placement to accredited investors at a purchase price of
$0.30 per share for gross proceeds of $1,705,139. No commissions were paid in
the private placement. The shares were offered and sold pursuant to the
exemption from registration under Rule 506 of Regulation D under the Securities
Act.




On April
29, 2008 we issued 250,000 shares of common stock to a vendor for services
valued at $85,000 or $0.34 per share based on the closing market price for our
common stock as of that date.  The shares were offered and sold
pursuant to the exemption from registration under Section 4(2) of the Securities
Act.





From
August 27, 2008 to November 15, 2008 we sold 5,888,334 Units at a subscription
price of $0.80 per Unit for net proceeds of $4,705,567 in a private placement to
accredited investors. As part of this private placement, certain officers,
directors and vendors converted unpaid amounts totaling $467,232 into 584,040
Units at a subscription price of $0.80 per Unit. Each Unit consists of two
shares of common stock and a two-year warrant to purchase one share of common
stock at an exercise price of $0.60 per share.  A total of 12,944,747
shares of common stock and two-year warrants to purchase 6,472,374 shares of
common stock were issued.  No commissions were paid in the private
placement. The securities were offered and sold pursuant to the exemption from
registration under Rule 506 of Regulation D and Regulation S under the
Securities Act.





On
November 1, 2008 we issued a two year warrant to purchase 50,000 shares of
common stock at an exercise price of $1.15 per share to a vendor for services.
The warrants were offered and sold pursuant to the exemption from registration
under Section 4(2) of the Securities Act.




We made
the following stock option grants and stock awards for the year ended December
31, 2008 from the Plan.  These option grants were made to employees,
directors and consultants pursuant to the exemption from registration under
Section 4(2) of the Securities Act.




·
            On
      July 24, 2008 we granted ten-year options to purchase 1,000,000 shares of
      common stock to Jeffrey Gannon, our then-chairman of the board, at an
      exercise price of $0.49 per share based on the closing market price as of
      that date.




·
            On
      September 9, 2008 we granted ten-year options to purchase 1,675,000 shares
      of common stock to officers, directors and certain vendors at an exercise
      price of $1.00 based on the closing market price as of that
      date.




·
            On
      September 9, 2008 we granted five-year options to purchase 25,000 shares
      of common stock to a vendor at an exercise price of $1.00 based on the
      closing market price as of that date and issued 30,000 shares of common
      stock to the same vendor valued at $1.00 per share based on the closing
      market price as of that date.




·
            On
      December 31, 2008 we granted ten year options to purchase 1,600,000 shares
      of common stock to David Grieger, our Chief Executive Officer at an
      exercise price of $1.14 per share based on the closing market price as of
      that date and issued 400,000 shares of common stock to Mr. Grieger valued
      at $1.14 per share based on the closing market price as of that
      date.


14


ITEM
6. SELECTED FINANCIAL DATA





Not
Applicable.





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





The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Report. Except for historical information, the following discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See “FORWARD LOOKING STATEMENTS” and “RISK
FACTORS.”





At
December 31, 2008 our independent registered public accounting firm, Peterson
Sullivan, LLP has raised substantial doubt about our ability to continue as a
going concern. See “Note 3” to our Consolidated Financial
Statements.





Overview





We are
focused on developing, manufacturing and selling mercury free, energy efficient
light bulbs based on our proprietary light-emitting technology.  For
the past several years, we have primarily focused our efforts on research and
development efforts for our ESL technology. In 2007 we formed Sendio s.r.o. in
the Czech Republic as a wholly owned subsidiary for continued development of the
bulb, and to design the manufacturing processes required for commercialization
and manufacturing.  During 2007 and 2008, we continued our
development work on the technology and have initiated the design and
implementation of the processes required to manufacture the bulb. Our efforts
are presently focused on our initial planned product, the R30 sized light bulb.
We anticipate that the development efforts will continue in 2009 to support
production that is planned to begin in the latter half of 2009. The commercial
viability of our ESLTM technology will largely depend on these development
results, our ability to manufacture our product at commercially feasible levels,
market acceptance of the product and other factors. During fiscal 2008, we had
no commercial products and no revenues.





Peterson
Sullivan, LLP, our independent registered public accounting firm issued a “going
concern” statement in its report on our financial statements for the fiscal year
ended December 31, 2008, stating that we had a net loss and negative cash flows
from operations in fiscal 2008, and that we have an accumulated
deficit.  Accordingly, those conditions raise substantial doubt about
our ability to continue as a going concern.  Our consolidated
financial statements do not include any adjustments that might result from this
going-concern uncertainty.





Our cash
and cash equivalents as of December 31, 2008 are not sufficient to support our
operations through fiscal 2009 and it will be necessary for us to seek
additional financing.  See “Liquidity and Capital Resources”
below.





Plan
of Operations





Our
efforts are presently focused on our initial planned product, the R30 sized
light bulb. We anticipate that the development efforts will continue in 2009 to
support production that is planned to begin in the latter half of 2009. The
commercial viability of our ESLTM technology will largely depend on these
development results, our ability to manufacture our product at commercially
feasible levels, market acceptance of the product and other factors. During
fiscal 2008, we had no commercial products and no revenues.  We expect
to continue to make significant expenditures developing our planned product and
the related manufacturing processes in fiscal 2009. Our future success and
operating results will depend in large part on the results of these
efforts.


15


We will
need to raise additional capital through debt or equity financings in 2009 to
support our operations. We have entered into an agreement to purchase the
facility presently leased by Sendio in the Czech Republic.  See Item
2, Properties.  We are using this facility to develop our ESL
technology and manufacturing processes.  We will need additional
funding to complete the purchase of this building.





Our
anticipated expenditures related to our operations in fiscal 2009 will primarily
depend on personnel costs and additional equipment needs for continued
development of our light bulb and the manufacturing processes.  In
addition, we anticipate we will incur substantial costs related to the planned
production in the latter half of
2009 related to purchases of raw materials and supplies, marketing, sales
and distribution related costs, and increased administrative costs. An overall
estimate of our capital expenditures is primarily dependant upon the success of
our development and manufacturing results for our prototype, and as such cannot
presently be estimated.  Any additional capital expenditures will be
dependant upon our ability to obtain additional financing.





Sendio
had 52 engineering, technical and administrative employees at December 31, 2008
and the U.S. Operations had a single employee. In January, 2009 we hired two
employees in the U.S. and we anticipate that we may begin to hire additional
employees for U.S. and domestic operations during fiscal 2009, but the number of
employees is not known.





The
number of employees added for either Sendio or in the U.S. operations will be
determined primarily by our ability to successfully develop the technology and
our available funding to hire employees.





Our
anticipated costs in fiscal 2009 for the completion of our light bulb cannot be
reasonably estimated due to the inherent uncertainty of the research and
feasibility of the manufacturing processes. No additional projects are planned,
but there can be no assurances that changes to this plan will not
occur.  There can be no assurances that this development process will
be successful or, if successful, that the technology will find a market and
achieve sales that can sustain our operations without additional
funding.





We have
secured a six month lease during February, 2009 for office space in Seattle, WA
which we leased on a month to month basis during 2008.  The lease
returns to a month to month basis after a six month term.





Results
of Operations for the Fiscal Years ended December 31, 2008 and 2007





No
Revenues





We
recognized no revenues in either of fiscal 2008 or 2007.





Research
and Development Expenses





For the
years ended December 31, 2008 and 2007 we were involved in a single project to
develop and commercialize our proprietary technology.  Research and
development expenses increased approximately $3,021,000 to $4,901,000 for the
year ended December 31, 2008 compared to $1,880,000 for the year ended December
31, 2007. For the years ended December 31, 2008 and 2007, research and
development expenses consisted primarily of rent, salaries and related costs,
plant utility and operating costs, technical consulting expenses and stock
compensation expense.  Rent expense increased approximately $1,021,000
to $1,771,000 in fiscal 2008 compared to $750,000 in fiscal 2007. Included in
rent expense for the fiscal 2008 and 2007 were non-cash charges of approximately
$1,511,000 and $690,000, respectively resulting from the 6,100,000 shares we
issued in 2007 as payment for Sendio’s former facility lease.  Salary
and related costs increased approximately $1,304,000 to $1,562,000 in fiscal
2008 compared to $258,000 in fiscal 2007.  Plant utility and operating
costs increased approximately $523,000 to $756,000 in fiscal 2008 compared to
$233,000 in fiscal 2007. The increases in rent, salaries, and plant utility and
operating costs in fiscal 2008 are primarily due to a full year of operations at
the pilot plant facility at Sendio in 2008 compared to four months of operations
during fiscal 2007. Technical consulting expenses increased approximately
$204,000 to $681,000 in fiscal 2008 compared to $477,000 in fiscal
2007.  Also included in research and development expense is a non-cash
charge for compensation expense of $131,000 for fiscal 2008 and $162,000 for
fiscal 2007 resulting from our issuance of common stock and options to purchase
common stock under our 2007 Stock Incentive Plan.


16


We
anticipate that our development efforts will continue in 2009 to support
production that is planned to begin in the latter half of 2009. If we are unable
to develop a product that is commercially viable with the resources available to
us, we will need to discontinue our current development efforts and either seek
alternative projects or possibly curtail or cease our operations.





General
and Administrative Expenses





General
and administrative expenses for the years ended December 31, 2008 and 2007
consisted of compensation expenses related to stock and options issuances,
consulting expenses, salaries and related costs, professional and legal fees,
insurance, travel, rents, general and corporate related overheads and office
expenses. General and administrative expenses increased by approximately
$3,007,000 to $4,374,000 for the year ended December 31, 2008 compared to
$1,367,000 for the year ended December 31, 2007. The increase is primarily due
to increases in non-cash compensation expenses and increases due to a full year
of operations at the plant facility at Sendio in 2008 compared to four months of
operations during fiscal 2007. In fiscal 2008, non-cash stock compensation
expenses increased $1,377,000 to $2,090,000 in fiscal 2008 compared to $713,000
in fiscal 2007 resulting from the issuance of common stock and options to
purchase common stock. Salary and related costs increased approximately $501,000
to $578,000 in fiscal 2008 compared to $77,000 in fiscal 2007.  Rent
expense increased $120,000 in fiscal 2008 to $205,000 compared to $85,000 in
fiscal 2007.  Included in rent expense for the fiscal 2008 and 2007
were non-cash charges of approximately $168,000 and $77,000, respectively
resulting from the 6,100,000 shares we issued in 2007 as payment for Sendio’s
former facility lease.  The increases in rent and salary expenses in
fiscal 2008 are primarily due to a full year of operations at the pilot plant
facility at Sendio in 2008 compared to four months of operations during fiscal
2007.  Consulting expenses increased $391,000 to $560,000 in fiscal
2008 compared to $169,000 in fiscal 2007.  The increase is due to
increased activity of the consultants used.  Other operating expenses
comprised of travel, legal and general corporate overheads increased $578,000 to
$900,000 in fiscal 2008 compared to $322,000 in fiscal 2007.  The
increase is due to the higher activity level of our operations and the full year
of operations for Sendio in 2008.





Other
Income





Other
income and expense for fiscal 2008 included interest income of $16,144, a
decrease of $18,471 when compared to $34,615 for fiscal 2007.  The
decrease in interest income is due to lower interest rates paid on excess cash
balances in fiscal 2008 when compared to fiscal 2007. Interest expense for
fiscal 2008 was $3,246 with no comparable expense for fiscal
2007.  Other income for fiscal 2007 included a gain from the write off
of certain accounts payable in the amount of $237,545 for which the statute of
limitations had expired.  There is no comparable item for fiscal
2008.





Liquidity
and Capital Resources





Our cash
and cash equivalents of $2,486,609 as of December 31, 2008 are not sufficient to
support our operations through fiscal 2009 and it will be necessary for us to
seek additional financing.





Historically,
we have funded our operations primarily through private placements of shares of
unregistered common stock with accredited individual and institutional
investors.





We will
need to raise working capital to fund our on-going and planned research,
development, manufacturing and other planned operations through one or more debt
or equity financings. In March, 2009 we retained the services of an investment
banker to assist us in our fundraising efforts.  Our efforts to raise
capital may not be successful, and even if we are able to obtain additional
financing, the terms of any such financing may be unfavorable to us and may be
highly dilutive to existing stockholders. Any future debt or equity financings,
when and if made, may not be sufficient to sustain our required levels of
operations. In addition, if necessary, we may explore strategic alternatives,
which may include a merger, asset sale, joint venture or another comparable
transaction. If we are unable to obtain sufficient cash to continue to fund
operations or if we are unable to locate a strategic partner, we may be forced
to seek protection from creditors under the bankruptcy laws or cease operations.
Any inability to obtain additional cash as needed would have a material adverse
effect on our financial position, results of operations and our ability to
continue in existence. Our auditors added an explanatory paragraph to their
opinion on our fiscal 2008 financial statements stating that there was
substantial doubt about our ability to continue as a going
concern.


17


Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.





Critical
Accounting Estimates and Policies





The
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the use of estimates that affect the
reported amounts of assets, liabilities and expenses. We evaluate our estimates
on an ongoing basis and base our estimates on historical experience and on
various assumptions that we believe to be reasonable under the circumstances at
that time.  The discussion below is intended as a brief discussion of
some of the judgments and uncertainties that can impact the application of these
policies and the dollar amounts reported on our financial
statements.  Actual results may differ from these estimates under
different assumptions or conditions. We believe that the following critical
accounting policy affects our more significant estimates used in the preparation
of our financial statements and is important to the understanding of our results
of operations.  This is not a complete list of all of our accounting
policies, and there may be other accounting policies that are significant your
understanding of our company.  For a detailed discussion on the
application of these and our other accounting policies, see Note 2 to our
Consolidated Financial Statements included in this Report.





Share
Based Payments





We
account for share-based compensation expense in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123(R), “Share-Based
Payment” (SFAS 123R). Under SFAS 123R, share-based compensation expense reflects
the fair value of share-based awards measured at the grant date, is recognized
over the relevant service period, and is adjusted each period for anticipated
forfeitures. We estimate the fair value of each share-based award on the date of
grant using the Black-Scholes option valuation model. The Black-Scholes option
valuation model incorporates assumptions as to stock price volatility, the
expected life of options, a risk-free interest rate and dividend
yield.  If we had used different assumptions particularly as to stock
price volatility and the expected life of options, the amount of compensation
expense we recognized would have been different.





ITEM 7A.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not
Applicable.





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
information required by this Item is set forth in our Consolidated Financial
Statements and Notes thereto beginning at page F-1 of this Annual Report on Form
10-K.





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





None


18


ITEM
9A(T). CONTROLS AND PROCEDURES





Disclosure
Control and Procedures





We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is (1) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and (2) accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.





As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal year
covered by this Annual Report on Form 10-K, we have carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective at December 31, 2008.





There
have been no changes in our internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the fourth quarter of fiscal 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





Management’s
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rule
13a-15(f)).  Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of our internal control over financial reporting as
of December 31, 2008, based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission.  Based on our evaluation under the framework in
Internal Control – Integrated Framework, management concluded that our internal
control over financial reporting was effective as of December 31,
2008.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





This
Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this Annual Report on Form
10-K.





/S/    
      David T. Grieger
              
              /S/    Matthew
      DeVriesDavid
      T. Grieger
                Chief
      Executive Officer
              
              Matthew
      DeVries
                Chief
      Financial Officer





THE
FOREGOING MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING SHALL
NOT BE DEEMED TO BE “FILED” WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES
ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY
REFERENCE INTO SUCH FILING.





ITEM
9B.  OTHER INFORMATION





None


19


PART
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Directors
and Executive Officers





The
following table sets forth the names, positions and ages of our executive
officers and directors as of March 24, 2009.





Name
              Age
              TitleDavid
      Grieger
              47
              Chief
      Executive Officer and DirectorDuncan
      Troy
              49
              Director,
      Sendio DirectorRichard
      N. Herring
              70
              Chief
      Technology Officer and DirectorRichard
      G. Sellers
              48
              President,
      Chief Operating Officer and DirectorMark
      Weber
              52
              DirectorCharles
      Hunt
              55
              DirectorT.
      Ron Davis
              60
              Chief
      Marketing OfficerPhilip
      Styles
              54
              Vice
      President of Manufacturing and Director of SendioMatthew
      DeVries
              46
              Chief
      Financial Officer





We
currently have six directors on our Board of Directors. During 2008, Jeffrey
Gannon also served on our Board of Directors; however, on February 25, 2009,
subsequent to the end of the 2008 fiscal year, Mr. Gannon resigned as a
director.  On January 27, 2009, subsequent to the end of the 2008
fiscal year, David Grieger, our Chief Executive Officer, was appointed as a
director.  Our directors serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Our officers
serve at the discretion of the board of directors. There are no arrangements or
understandings among any of our directors or officers. There are no family
relations among any of our directors or officers.





The
principal occupations and brief summary of the background of each of our
directors and executive officers during the past five years is as
follows:





DAVID T.
GRIEGER was appointed as Chief Executive Officer on December 31, 2008 and as a
director on January 27, 2009.  Mr. Grieger was with Russell Investment
Group from 1983 until 2008, where he was Chief Marketing Officer and the
Managing Director of the Russell Indexes business unit from 2004 until
2008.  Russell’s global index family includes the Russell 2000, the
standard for measuring US small capitalization companies. At Russell Indexes,
Mr. Grieger extracted the business from a joint venture, selected the management
team and designed the organizational structure and business
strategy.  In addition, he launched two new product offerings, and led
the international expansion of the business unit. Mr. Grieger was also the
chairman of the Global Marketing Counsel. As Chief Marketing Officer, Mr.
Grieger was responsible for establishing the direction and execution of
marketing throughout Russell’s business around the world, and a member of the
Global Product Review Committee and executive Management Committee.





Prior
responsibilities included Managing Director of Business Development – US
Institutions from 2001 to 2004 and Managing Director – Broker Dealer Services –
US Individual Investors from 1993 to 2001.





DUNCAN
TROY was elected to our board effective February 28, 2004, and has served as our
Chairman of the Board from May 2004 to July, 2008. Mr. Troy was a former Telegen
Advisory Board member and a current director of the following U.K. based
companies, Private Equity III Limited (from September 1996 to date), an
investment vehicle; The Vintage Wine Company Limited (from June 1982 to date), a
wine broker; Lifescan Limited (from January 2003 to date), which offers a range
of screening devices using CT technology for the early detection of disease,
SMSLOTTOME LIMITED (from March 2004). Licensed in the UK by the Betting, Gaming
and Lotteries Act, SMSLOTTOME LIMITED works globally with National Lotteries,
Sports Bodies, Media and Gaming Companies to provide fixed odds and lottery
numbers games by cell phone by providing the technology, hardware, software,
website, technical support, maintenance and multilingual content management
systems. Private Equity VIII Limited (from November 2003) an investment vehicle.
During the past four years he has been actively involved with raising capital
for development companies and is a citizen and resident of the United
Kingdom.


20


RICHARD
N. HERRING was elected to our board effective February 28, 2004, and has served
as our Chief Executive Officer since May 2004 until December 31, 2008. Mr.
Herring was a former Telegen Advisory Board member and has served as the
Executive Director of Engineers Without Borders - USA (“EWB-USA”) from 2002
through 2005.  EWB-USA is a non-profit corporation which attempts to help
disadvantaged communities improve their quality of life through implementation
of environmentally and economically sustainable engineering projects.  From
January 2001 to July 2002 he served as the CEO of 4C Corporation, a non-profit
entity focused on church development.  From April 1998 to August 1999 Mr.
Herring served as the CEO of Spectral Solutions, Inc., a company focused on
cellular telephone enhancement products; Spectral Solutions, Inc. was acquired
by ISCO INT’L and Mr. Herring served as the COO of ISCO INT’L from August 1999
to December 2000.  From January 1995 to December 1997 Mr. Herring served as
the CEO of Earth Watch, Inc., a company focused on remote sensing technology.
Prior to this, Mr. Herring worked at Ball Aerospace for 27 years in increasing
levels of management including President of the Space Systems Division and being
COO of five divisions of the group before spinning Digital Globe out as an
independent company.





RICHARD
G. SELLERS was elected to our board effective February 28, 2004, and has served
as our Chief Operating Officer and Secretary since May 2004.  Mr. Sellers
also serves as our President since July 5, 2007. Mr. Sellers is an investor and
advisor to start-up and turnaround companies combining his engineering,
marketing and operations experience to build positive cash flow and shareholder
equity.  He worked as a consultant for Telegen to assist with their
emergence from bankruptcy from March through October 2000 (His sole compensation
was stock options, which have since expired unexercised).  From 1989 to
2000 he was founder and CEO of ARC Group International, Inc., a company
specializing in international logistics.  In the 1980’s he worked as a test
engineer for Martin Marietta (now Lockheed Martin Corporation) and thereafter
was a founding member of Quadtek, Inc., which pioneered innovative high
temperature video systems in industrial environments. Mr. Sellers currently is
the CEO and founder of a private real estate development company in Seattle,
Washington.  Mr. Sellers is an investor, board member or advisory board
member for several privately held companies in various market
segments.





MARK
WEBER was appointed to our board effective June 15, 2005.  Mr. Weber has
been a marketing consultant, strategic planner and senior business advisor to
financial services companies, technology companies and emerging growth companies
since 1988. Mr. Weber has been involved in raising private capital and launching
start up, emerging growth technology companies and new banks the past 20 years.
He has been the President of Weber Marketing Group since its launch in 1988. WMG
is the 12th largest
marketing agency in Washington State and a national provider of marketing
consulting and branding services to financial services and technology companies
across the U.S. Mr. Weber was a founder and board member of Pacifica Bank from
1998 to 2005, helping raise $15 million to launch the bank. Pacifica Bank was a
SEC registered business bank sold in 2005 to United Bank California (UCBH). Mr.
Weber also served as Chairman of the Compensation Committee at Pacifica from
2002 to 2005. Mr. Weber has served as an advisory board member of several
technology and emerging growth companies between 1990 and 2001. He has been on
the Board of Trustees of the Noemi Fund, a part of Agros International since
2003.





DR.
CHARLES HUNT was appointed to our board of directors on October 17, 2006. Dr.
Hunt holds a B.S.E.E. and M.S.E.E. from the University of Utah and a Ph.D. from
Cornell University. He has been at the University of California at Davis since
1986, where he is presently a Professor with multiple appointments and a
visiting Professor of Electronics in the Faculty of Physics of the University of
Barcelona. Professor Hunt is a Senior Member of the Institute of Electrical and
Electronics Engineers, and is Author or Co-Author of over one hundred and twenty
refereed publications, eight books, and holds twelve patents. From 1997-2004 he
served as Editor of the journal, Solid-State
Electronics.





T. RON
DAVIS has served as our Chief Marketing Officer since November 1,
2007.  Mr. Davis has been the founder and President of Intellect
Marketing Group from 1993 to 2007 where he provided marketing consulting
services to clients ranging from startup operations to Fortune 500
companies.  From 1988 to 1993, Mr. Davis served as the Director of
Fortune 500 Marketing for Microsoft Corporation.


21


PHILIP
STYLES has served as our Vice President of Manufacturing since September,
2007.  Mr. Styles has over 20 years experience in manufacturing
operations. Mr. Styles worked for Sony Corporation for 14 years in various
technical and managerial positions in production engineering and held several
senior management positions in manufacturing, including a recent joint venture
manufacturing operation between LG Electronics and Royal Philips
Electronics.





MATTHEW
DEVRIES is a consultant to us and has served as our Chief Financial Officer
since October 17, 2006. Mr. DeVries has been a financial consultant since 2001,
providing public and privately held corporations financial assistance and has
coordinated audits and supervised the preparation and filing of public
disclosure documents for corporations in his consulting practice. In 2000 and
2001, Mr. DeVries was a senior financial executive for a publicly traded Active
Voice Corporation until its acquisition by Cisco Systems, Inc. Mr. DeVries
served two different terms in 2001- 2002 and 2004 to 2006 as Executive Board
Member and Treasurer of the Parent Cooperative Education Program, a non-profit
corporation based in Edmonds, Washington.





Audit
Committee Financial Expert





Our
entire Board of Directors currently functions as the Audit Committee. We do not
have an “audit committee financial expert” serving on the Board, but we intend
to locate such expert during 2009.





Policy
on Stockholder Nomination of Directors





There
have been no material changes to the procedures by which stockholders may
recommend nominees to our Board of Directors, from those set forth in our annual
report on Form 10-K for the year ended December 31, 2005.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who own more than 10% of our common stock to file
reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the
Securities and Exchange Commission (the “SEC”). Such officers, directors, and
10% stockholders are also required by SEC rules to furnish us with copies of all
Section 16(a) reports they file.





We
believe that our officers, directors, and 10% stockholders complied with their
Section 16(a) filing obligations during the fiscal year ended December 31, 2008
with the following exceptions:





·
            Jeffrey
      Gannon, a director did not file Forms 3 and 4 to report a grant of stock
      options; and





·
            Mark
      Weber, a director did not file Forms 4 to report his purchases of shares
      in our Unit Offering and the gifting of certain stock;
  and





·
            Charles
      Hunt, a director did not file Forms 4 to report a grant of options;
      and





·
            Richard
      Herring, a director did not file Forms 4 on a timely basis to report his
      purchases of shares in our Unit Offering;
and





·
            Richard
      Sellers, a director did not file Forms 4 on a timely basis to report his
      purchases of shares in our Unit
Offering.


22


Code
of Ethics





We have
not yet adopted a Code of Ethics applicable to our principal executive officer,
principal financial and accounting officer or persons performing similar
functions.  The Company intends to do so in fiscal 2009.





ITEM
11. EXECUTIVE COMPENSATION





The
following table provides information about the compensation paid to, earned or
received during the last two fiscal years ended December 31, 2008 and 2007 by
(a) all persons serving as principal executive officer during 2008, and (b)
our two other most highly compensated executive officers whose total
compensation exceeded $100,000 in fiscal 2008, as follows (collectively, the
“Named Executive Officers”):





·
              David
      Grieger, our Chief Executive Officer (principal executive
    officer);·
              Richard
      Herring, our former Chief Executive Officer (former principal executive
      officer) and current Chief Technology Officer;·
              Richard
      Sellers, our President and Chief Operating Officer; and·
              T.
      Ron Davis, our Chief Marketing
Officer.





SUMMARY
COMPENSATION TABLE




Name and Principal
                                                Position
                                              
                                              Year
                                              
                                              Salary
                                                ($)
                                              
                                              
                                              Bonus
                                                ($)
                                              
                                              
                                              Stock
                                                Awards ($)
                                              
                                              
                                              Option
                                                Awards
                                                ($)
                                              
                                              
                                              Non-Equity
                                                Incentive Plan
                                                Compensation
                                                ($)
                                              
                                              
                                              Nonqualified
                                                Deferred
                                                Compensation
                                                Earnings
                                                ($)
                                              
                                              
                                              All
                                                Other
                                                Compensation
                                                ($)
                                              
                                              
                                              Total ($)David
      Grieger Chief Executive Officer,
                                              
                                              2008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              456,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              456,000Principal
      Executive Officer (1)
                                              
                                              2007
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -2008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              308,637
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              90,000
                                              
                                              
                                              
                                              398,637Richard
      Herring Chief Technology Officer (2)
                                              
                                              2007
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              16,675
                                              
                                              
                                              
                                              126,495
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              30,000
                                              
                                              
                                              
                                              173,170Richard
      Sellers
                                              
                                              2008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              258,957
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              163,500
                                              
                                              
                                              
                                              422,457President
      and Chief Operating Officer (3)
                                              
                                              2007
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              103,500
                                              
                                              
                                              
                                              121,188
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              224,6882008
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              234,622
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              166,280
                                              
                                              
                                              
                                              400,902T.
      Ron Davis Chief Marketing Officer (4)
                                              
                                              2007
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              11,500
                                              
                                              
                                              
                                              1,221
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              18,470
                                              
                                              
                                              
                                              31,191





(1)
            On
      December 31, 2008 we issued 400,000 shares of common stock valued at
      $456,000 based on the closing market price of $1.14 as of that date to Mr.
      Grieger upon his appointment as our Chief Executive
  Officer




(2)
            On September 9, 2008
      we issued options to purchase 350,000 shares of common stock, of which
      310,625 vested, with 39,375 expiring unvested. The options have an
      exercise price of $1.00 per share and a market value of $308,637. All
      other compensation of $90,000 is comprised of $56,000 paid in cash. The
      remaining $36,000 was converted into 90,000 shares of common stock and a
      two-year warrant to purchase 45,000 shares of common stock at an exercise
      price of $0.60 per share pursuant to our Unit Offering. On November 16,
      2007 we issued options to purchase 250,000 shares of common stock to Mr.
      Herring for service as a director at an exercise price of $0.38 per share
      and an estimated fair value of $94,650.  On December 17, 2007 we
      issued options to purchase 150,000 shares of common stock for service as
      our Principal Executive Officer at an exercise price of $0.23 per share
      and an estimated fair value of $31,845.  The exercise prices
      reflect the closing market prices on the respective grant
      dates.  The options vested on December 31, 2007 and have a ten
      year life from the date of issuance.  On December 17, 2007, we
      issued 72,500 shares of common stock valued at $16,675 based on the
      closing market price of $0.23 as of that date. The shares of common
      stock were fully-vested upon issuance.  All other compensation
      of $30,000 is comprised entirely of consulting fees paid in
      cash.


23


(3)
            On
      September 9, 2008 we issued options to purchase 300,000 shares of common
      stock, of which 260,625 were vested as of December 31, 2008 with 39,375
      expiring unvested. The options have an exercise price of $1.00 per share
      and a market value of $258,957. All other compensation of $163,500 is
      comprised of unpaid fees which were converted into 408,750 shares of
      common stock and a two-year warrant to purchase 204,375 shares of common
      stock at an exercise price of $0.60 per share pursuant to our Unit
      Offering. On November 16, 2007 we issued options to purchase 250,000
      shares of common stock to Mr. Sellers for service as a director at an
      exercise price of $0.38 per share and an estimated fair value of
      $94,650.  On December 17, 2007 we issued options to purchase
      125,000 shares of common stock for service as our President and Chief
      Operating Officer at an exercise price of $0.23 per share and an estimated
      fair value of $26,538.  The exercise prices reflect the closing
      market prices on the respective grant dates.  The options vested
      on December 31, 2007 and have a ten year life from the date of
      issuance.  On December 17, 2007, we issued 450,000 shares of
      common stock valued at $103,500 based on the closing market price of $0.23
      as of that date. The shares of common stock were fully-vested upon
      issuance.




(4)
            On
      September 9, 2008 we issued we issued options to purchase 225,000 shares
      of common stock, of which 205,313 were vested as of December 31, 2008,
      with 19,688 expiring unvested. The options have an exercise price of $1.00
      per share and a market value of $203,999.    On
      December 17, 2007 we issued we issued options to purchase options to
      purchase 150,000 shares of common stock with an exercise price of $0.23
      per share and a market value of $31,845, of which $30,624 vested in 2008
      and $1,221 vested in 2007. On December 17, 2007 we issued 50,000 shares of
      common stock valued at $11,500 based on the closing market price of $0.23
      as of that date.  All other compensation is comprised of fees
      paid in cash.





Narrative
Disclosure to Summary Compensation Table





We have
an employment agreement in place with our Chief Executive Officer, David
Grieger.





The
employment agreement specifies the payment of an annual salary of $240,000
beginning January 2, 2009 has an initial term of 2 years, unless terminated
earlier in accordance with the agreement.  In addition, the Company
granted to Mr. Grieger the following equity compensation:





·
            400,000
      shares of common stock, fully
vested


·
            a
      ten-year option to purchase 600,000 shares of Company common stock at an
      exercise price of $1.14 vesting in equal monthly amounts for one year from
      the date of grant, and


·
            a
      ten-year option to purchase 1,000,000 shares of common stock at an
      exercise price of $1.14 per share vesting in equal monthly amounts
      beginning January 1, 2010 through December 31,
  2010.





All of
the grants above were made from the 2007 Stock Compensation Plan and pursuant to
the Company’s standard form of stock option agreement.  Mr. Grieger is
eligible for bonus compensation payable in options to purchase common stock in
an amount equal to 100% of his base salary.





Mr.
Grieger’s employment agreement calls for the payment of six months’ annual
salary in the event Mr. Grieger is terminated other than for cause or within 90
days of a change of control, as defined in the Employment
Agreement.  In addition, Mr Grieger is entitled to the standard
benefits offered to our executives and vacation of 20 days per
year.


24


None of
the other Named Executive Officers have employment agreements.  Other
than Mr. Grieger, the other Named Executive Officers are not employees of the
company but are consultants.  Mr. Davis became an employee on January
1, 2009.





We did
not pay salary or bonus to our Named Executive Officers in 2008 and we have
compensated them solely through the grant of stock options, stock awards and
consulting fees.





We do not
have agreements with any of our other Named Executive Officers providing for
payments, whether from resignation, retirement or other termination of
employment, resulting from a change of control.





Outstanding
Equity Awards at Fiscal Year-End





Option Awards
                          
                          
                          Stock AwardsName
                          
                          Number of
                            Securities
                            Underlying
                            Unexercised
                            Options (#)
                            Exciseable
                          
                          
                          Number of
                            Securities
                            Underlying
                            Unexercised
                            Options (#)
                            Unexerciseable
                          
                          
                          Equity IncentivePlan
                            Awards:Number of
                            SecuritiesUnderlying
                            Unexercised Unearned
                            Options(#)
                          
                          
                          Option
                            ExercisePrice
                            ($)
                          
                          
                          Option
                            ExpirationDate
                          
                          
                          Number of
                            Shares or
                            Units ofStock
                            ThatHave Not
                            Vested (#)
                          
                          
                          MarketValue
                            ofShares or
                            Units ofStock
                            ThatHave Not
                            Vested ($)
                          
                          
                          Equity IncentivePlan
                            Awards:Number of
                            Unearned Shares,
                            Units or OtherRights
                            That HaveNot Vested (#)
                          
                          
                          Equity IncentivePlan
                            Awards:Market or
                            PayoutValue of
                            UnearnedShares, Units
                            orOther Rights That
                            Have Not Vested($)David
      Grieger
                          
                          
                          
                          
                          
                          1,600,000
                          
                          
                          
                          
                          
                          $
                          1.14
                          
                          
                          12/30/2018
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Richard
      Herring
                          
                          
                          250,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.38
                          
                          
                          11/15/2017
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Richard
      Herring
                          
                          
                          150,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.23
                          
                          
                          12/16/2017
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Richard
      Herring
                          
                          
                          310,625
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          1.00
                          
                          
                          9/8/2018
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Richard
      Sellers
                          
                          
                          250,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.38
                          
                          
                          11/15/2017
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Richard
      Sellers
                          
                          
                          125,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.23
                          
                          
                          12/16/2017
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Richard
      Sellers
                          
                          
                          260,625
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          1.00
                          
                          
                          9/8/2018
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —T.
      Ron Davis
                          
                          
                          150,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.23
                          
                          
                          12/16/2012
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —T.
      Ron Davis
                          
                          
                          205,313
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          1.00
                          
                          
                          9/8/2018
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Philip
      Styles
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          30,000
                          
                          
                          $
                          34,200Matthew
      DeVries
                          
                          
                          50,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          0.23
                          
                          
                          12/16/2012
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Matthew
      DeVries
                          
                          
                          180,313
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          $
                          1.00
                          
                          
                          9/8/2018
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —





Compensation
of Directors





The
following table summarizes data concerning the compensation of our directors for
the fiscal year ended December 31, 2008.





DIRECTOR
COMPENSATION





Name
                              
                              Fees Earnedor
                                Paid inCash
                                ($)
                              
                              
                              StockAwards
                                ($)
                              
                              
                              OptionAwards
                                ($)
                              
                              
                              Non-Equity
                                Incentive Plan
                                Compensation
                                ($)
                              
                              
                              Nonqualified
                                Deferred
                                Compensation
                                Earnings($)
                              
                              
                              All Other
                                Compensation
                                ($)
                              
                              
                              Total($)Jeffrey
      Gannon (1)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              316,554
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              316,554Duncan
      Troy (2)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              149,040
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              149,040Mark
      Weber (3)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              149,040
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              12,100
                              
                              
                              
                              161,140Charles Hunt (4)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              238,464
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              214,058
                              
                              
                              
                              452,522





(1)
            On
      February 25, 2009, subsequent to the end of the 2008 fiscal year, Mr.
      Gannon resigned as a director.  On July 24, 2008, we issued
      options to purchase 1,000,000 shares of common stock to Mr. Gannon for
      service as a director and as the chairman of our board at an exercise
      price of $0.49 per share and an estimated fair value of
      $446,900.  The exercise price reflects the market price on the
      date of issuance.  A total of 500,000 options vested on the date
      of issuance, with the remaining 500,000 vesting on the one year
      anniversary date of the option grant and have a ten year life from the
      date of issuance.  Upon his resignation in fiscal 2009, the
      500,000 unvested options were
forfeited.


25


(2)
            On
      September 9, 2008 we issued options to purchase 150,000 shares of common
      stock to Mr. Troy for service as a director at an exercise price of $1.00
      per share and an estimated fair value of $149,040.  The exercise
      price reflects the closing market prices on the date of
      issuance.  The options vested on grant and have a ten year life
      from the date of issuance.





(3)
            On
      September 9, 2008 we issued options to purchase 150,000 shares of common
      stock to Mr. Weber for service as a director at an exercise price of $1.00
      per share and an estimated fair value of $149,040.  The exercise
      price reflects the closing market prices on the date of
      issuance.  The options vested on grant and have a ten year life
      from the date of issuance.  All other compensation is comprised
      of unpaid fees and expenses of $12,100 which was converted into 30,250
      shares of common stock and a two-year warrant to purchase 15,125 shares of
      common stock at an exercise price of $0.60 per share pursuant to our Unit
      Offering.





(4)
            On
      September 9, 2008 we issued options to purchase 150,000 shares of common
      stock to Mr. Hunt for service as a director.  Also on September
      9, 2008 we issued options to purchase 150,000 shares of common stock for
      technical consulting services provided, of which 90,000 vested at December
      31, 2008, with 60,000 expiring unvested. The options have an exercise
      price of $1.00 per share, a market value of $238,464 and a ten year life
      from the date of issuance. All other compensation of $214,058 is comprised
      of consulting fees paid in cash for technical consulting related to the
      development of our product.





Narrative
Disclosure to Director Compensation Table





The Board
does not receive cash for service on the Board of Directors.  There
are no standard arrangements for compensation for the directors.





All
compensation for Directors Herring and Sellers has been previously disclosed in
the “Summary Compensation Table,” above.





On
January 27, 2009, subsequent to the end of the 2008 fiscal year, David Grieger,
our Chief Executive Officer, was appointed as a director.  Mr. Grieger
did not receive any compensation in 2008 for service as a
director.  See “Summary Compensation Table” above for Mr. Grieger’s
compensation as Chief Executive Officer.





On
February 25, 2009, subsequent to the end of the 2008 fiscal year, Mr. Gannon
resigned as a director.


26


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





The table
below sets forth certain information regarding the beneficial ownership of our
common stock as of March 27, 2009, based on information available to us by the
following persons or groups:





·
            each
      person who is known by us to own more than 5% of the outstanding common
      stock;


·
            each
      of our directors;


·
            the
      Named Executive Officers; and


·
            all
      of our executive officers and directors, as a
  group.





Name and Address of Beneficial Owner
                                          
                                          Amount and Nature of
                                            Beneficial Owner (1)
                                          
                                          
                                          Percentof
                                            ClassPolymer
      Holdings, Ltd.
                                          
                                          
                                          12,444,231
                                          
                                          
                                          
                                          14.5
                                          %Broomhill
      RoadStonehaven,
      UK AB39 2NHRichard
      G. Sellers
                                          
                                          
                                          10,005,495
                                          (2)
                                          
                                          
                                          11.7
                                          %CTP
      Products, B.V.
                                          
                                          
                                          6,918,820
                                          (3)
                                          
                                          
                                          8.1
                                          %Veendam,
      Stolberweg 197, 9641The
      NetherlandsSAM
      Advisors, LLC
                                          
                                          
                                          4,366,082
                                          
                                          
                                          
                                          5.1
                                          %111
      Broadway, Suite 808New
      York, NY  10006David
      Grieger
                                          
                                          
                                          3,581,929
                                          (4)
                                          
                                          
                                          4.2
                                          %Duncan
      Troy
                                          
                                          
                                          2,922,663
                                          (5)
                                          
                                          
                                          3.4
                                          %Richard
      Herring
                                          
                                          
                                          2,420,625
                                          (6)
                                          
                                          
                                          2.8
                                          %Mark
      W. Weber
                                          
                                          
                                          1,818,241
                                          (7)
                                          
                                          
                                          2.1
                                          %Charles
      Hunt
                                          
                                          
                                          1,165,000
                                          (8)
                                          
                                          
                                          1.4
                                          %T.
      Ron Davis
                                          
                                          
                                          545,113
                                          (9)
                                          
                                          
                                          *All
      directors and officers as a group (9 persons)
                                          
                                          
                                          23,139,379
                                          (10)
                                          
                                          
                                          27.0
                                          %







*
              Less
      than one percent.(1)
              Beneficial
      ownership is determined in accordance with the rules of the SEC and
      generally includes voting or investment power with respect to the shares.
      A person is also deemed to be a beneficial owner of any securities of
      which the person has the right to acquire beneficial ownership within 60
      days. Unless otherwise indicated in the footnotes to this table and
      subject to community property laws where applicable, we believe that the
      each of the stockholders named in this table has sole voting and
      investment power with respect to the shares shown as beneficially owned by
      him. To our knowledge, there are no voting arrangements among our
      stockholders.





(2)
            Includes
      a fully-vested option to purchase 250,000 shares of common stock at an
      exercise price of $0.38 per share, a fully-vested option to purchase
      125,000 shares of common stock at an exercise price of $0.23 per share, a
      fully vested option to purchase 260,625 shares of common stock at an
      exercise price of $1.00 per share and a warrant to purchase 204,375 shares
      of common stock at an exercise price of $0.60 per
  share.


27


(3)
            Includes
      warrants to purchase 272,540 shares of common stock at an exercise price
      of $0.60 per share.





(4)
            Includes
      unvested options to purchase 1,600,000 shares of common stock at an
      exercise price of $1.14 per share.





(5)
            Includes
      a fully-vested option to purchase 300,000 shares of common stock at an
      exercise price of $0.38 per share, a fully-vested option to purchase
      150,000 shares of common stock at an exercise price of $1.00 per share and
      933,334 shares of common stock held by Private Equity III Ltd., an
      investment entity of which Mr. Troy is the holder of 12.5% of the issued
      share capital and a Director.





(6)
            Includes
      a fully-vested option to purchase 250,000 shares of common stock at an
      exercise price of $0.38 per share, a fully-vested option to purchase
      150,000 shares of common stock at an exercise price of $0.23 per share,
      fully vested options to purchase 310,625 shares of common stock at an
      exercise price of $1.00 per share and a warrant to purchase 107,500 shares
      of common stock at an exercise price of $0.60 per
  share.





(7)
            Includes
      a fully-vested option to purchase 250,000 shares of common stock at an
      exercise price of $0.38 per share, a fully vested option to purchase
      150,000 shares of common stock at $1.00 per share, a warrant to purchase
      15,125 shares of common stock at an exercise price of $0.60 per share and
      157,866 shares of common stock held by Weber Marketing Group, Inc., a
      corporation wholly owned by Mr.
Weber.





(8)
            Includes
      a fully-vested option to purchase 250,000 shares of common stock at an
      exercise price of $0.38 per share, a fully-vested option to purchase
      125,000 shares of common stock at an exercise price of $0.23 per share and
      fully vested options to purchase 240,000 shares of common stock at an
      exercise price of $1.00 per share.





(9)
            Includes
      a fully-vested option to purchase 50,000 shares of common stock at an
      exercise price of $0.23 per share and fully vested options to purchase
      180,313 shares of common stock at an exercise price of $1.00 per
      share.





(10)
            Includes
      a fully-vested option to purchase 150,000 shares of common stock at an
      exercise price of $0.23 per share, fully vested options to purchase
      205,313 shares of common stock at an exercise price of $1.00 per share and
      warrants to purchase 46,600 shares of common stock at an exercise price of
      $0.60 per share.





(11)
            Consists
      of David Grieger, Duncan Troy, Richard Herring, Richard Sellers, Mark
      Weber, Charles Hunt, Matthew DeVries, T. Ron Davis and Philip
      Styles.





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





The
following is a summary description of all transactions during fiscal 2008, and
any currently proposed transactions, between us and any of our
related-parties.  All ongoing and any future related-party
transactions have been and will be made or entered into on terms that are no
less favorable to us than those that may be obtained from an unaffiliated third
party.  In addition, any future related-party transactions must be
approved by a majority of the disinterested members of our board of
directors.  If a related person proposes to enter into such a
transaction with us, such proposed transaction must be reported to us,
preferably in advance.


28


Related
Party Transactions





During
the second quarter of 2008, Richard Sellers and Mark Weber purchased shares of
our common stock on the same terms as third parties in a private placement as
described in Note 9.





On
September 9, 2008 Richard Sellers and Richard Herring converted a total of
$199,500 of unpaid compensation into Units under our Unit Private Placement as
described more fully in Note 9.





On
November 15, 2008 Mark Weber, a member of our Board of Directors, converted a
total of $12,100 of unpaid expenses into Units under our Unit Private Placement
as described more fully in Note 9.





During
fiscal 2008, we paid consulting fees to the following persons for their service
to us as officers, directors or consultants:





●
            We
      paid $54,000 in consulting fees to Richard Herring, our prior Chief
      Executive Officer and a member of our Board of Directors, for his service
      as Chief Executive Officer;


●
            We
      paid $214,058 in consulting fees to Charles Hunt, a member of our Board of
      Directors, for research and development services provided to
      us;


●
            We
      paid $166,280 in consulting fees to Intellect Marketing, Inc., a company
      wholly owned by Mr. Davis, our Chief Marketing Officer, for service as our
      Chief Marketing Officer; and


●
            We
      paid $105,145 in consulting fees to Matthew DeVries, our Chief Financial
      Officer, for service as our Chief Financial
  Officer.





Except as
otherwise disclosed herein, none of our directors, executive officers, greater
than five percent stockholders, or any associate or affiliate thereof had any
material interest, direct or indirect, in any transaction with us during the
fiscal year ended December 31, 2008.





Director
Independence





As of
December 31, 2008, three members of our Board of Directors, Jeffrey Gannon, Mark
Weber and Duncan Troy were “independent” within the meaning of the listing
standards of The NASDAQ Stock Market.  Subsequent to the end of the
2008 fiscal year, Mr. Gannon resigned as a director and as of March 24, 2009,
only Messrs. Weber and Troy are considered independent.





Our Board
of Directors does not have a separate audit committee, but the entire Board
performs the duties of the audit committee.  Directors David Grieger,
Richard Herring, Richard Sellers and Charles Hunt do not qualify as independent
directors within the meaning of the listing standards of The NASDAQ Stock
Market.





We do not
have a nominating committee of our Board of Directors.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Fees
Paid to Peterson Sullivan, LLP for Fiscal 2008 and 2007





The
following is a summary of the aggregate fees billed to us by Peterson Sullivan
LLP, our current independent registered public accounting firm, for the fiscal
years ended December 31, 2008 and 2007:





Fiscal 2008
                
                
                Fiscal 2007Audit
      Fees
                
                $
                37,375
                
                
                $
                38,752Audit
      Related Fees
                
                
                —
                
                
                
                —Tax
      Fees
                
                
                —
                
                
                
                —All
      Other Fees
                
                
                —
                
                
                
                —TOTAL
      Fees
                
                $
                37,375
                
                
                $
                38,752


29


Policy
for Approval of Audit and Permitted Non-Audit Services





Our Board
of Directors, which serves as our audit committee, reviews the scope and extent
of all audit and non-audit services to be provided by the independent auditors,
including any engagement letters, and reviews and pre-approves all fees to be
charged for such services. During 2008 and 2007, our independent auditors did
not provide any non-audit services to us.  The Board of Directors may
establish additional or other procedures for the approval of audit and non-audit
services that our independent auditors perform. In pre-approving services to be
provided by the independent auditors, the Board of Directors considers whether
such services are consistent with applicable rules regarding auditor
independence.




PART
IV





ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





Documents
filed as part of this Report are as follows:





1.           Financial Statements:
The following consolidated financial statements, related notes and report of
independent registered public accounting firm are incorporated by reference into
Item 8 of Part II of this Annual Report on Form 10-K for the fiscal year
ended December 31, 2008:





Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
    2007
                F-3Consolidated
      Statements of Operations and Comprehensive Loss for the Years Ended
      December 31, 2008 and December 31, 2007
                F-4Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008
      and December 31, 2007
                F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      December 31, 2007
                F-6Notes
      to the Consolidated Financial Statements
                F-7





2.           Financial Statement
Schedules: All schedules have been omitted because they are not
applicable or not required, or the required information is included in the
financial statements or notes thereto.





3.           Exhibits.





Exhibit
                        No.
                      
                      Description3.1A
                      (1)
                      Amended
      and Restated Articles of Incorporation of Vu1 Corporation dated June 30,
      20003.1B
                      (1)
                      Certificate
      of Amendment of Articles of Incorporation dated May 19,
    20083.1C
                      (1)
                      Certificate
      of Amendment of Articles of Incorporation dated August 25,
      20083.2A
                      (2)
                      Bylaws
      of Vu1 Corporation3.2B
                      (3)
                      Certificate
      of Amendment of Bylaws effective August 6, 199710.1
                      (4)
                      Vu1
      Corporation 2007 Stock Incentive Plan10.2
                      (5)
                      Form
      of Vu1 Corporation Stock Option Agreement10.3
                      (6)
                      Form
      of Common Stock Purchase Warrant for Unit offering in
  200810.4
                      (7)
                      Lease
      Contract between Sendio s.r.o. and Milan Gottwald, dated May 28,
      200810.5A
                      (8)
                      Purchase
      Agreement between Sendio s.r.o. and Milan Gottwald, dated November 25,
      200810.5B
                      (9)
                      Business
      Agreement, as an annex to the Purchase Agreement, between Sendio, s.r.o
      and Milan Gottwald, dated March 3,
2009


30





10.6
                (8)
                Deed
      of Guarantee between Vu1 Corporation and Milan Gottwald, dated November
      24, 200810.7
                (10)
                Executive
      Employment Agreement between Vu1 Corporation and David T. Grieger, dated
      December 31, 200821.1
                **
                List
      of Subsidiaries31.1
                **
                Rule
      13a-14(a)/15d-14(a) Certification of David Grieger31.2
                **
                Rule
      13a-14(a)/15d-14(a) Certification of Matthew DeVries32.1
                **
                Certification
      of David Grieger, CEO, and Matthew DeVries, CFO, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 200299.1
                **
                Powerpoint
      Presentation dated March 30,
2009.





**
            Filed
      herewith





(1)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Current Report on Form 8-K filed on September 15,
  2008.


(2)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Quarterly Report on Form 10-QSB as filed with the Commission on November
      12, 1996.


(3)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Annual Report on Form 10-K filed on April 15,
  1998.


(4)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Quarterly Report on Form 10-QSB as filed with the Commission on November
      14, 2007.


(5)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Current Report on Form 8-K filed on November 21,
  2007.


(6)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Current Report on Form 8-K filed on September 3,
  2008.


(7)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Current Report on Form 8-K filed on June 3,
  2008.


(8)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Current Report on Form 8-K filed on December 15,
  2008.


(9)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Current Report on Form 8-K filed on March 6,
  2009.


(10)
            Previously
      filed as an exhibit to, and incorporated herein by reference from, our
      Current Report on Form 8-K filed on January 7,
  2009.


31


SIGNATURES





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




VU1
      CORPORATIONDate: March
      31, 2009
                By:
                /s/
                David T. GriegerDavid
      T. Grieger
                  Chief
      Executive Officer





In
accordance with the Securities Exchange Act of 1934, this Report on Form 10-K
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.





Signature
                        Capacities
                        Date/s/
      David T. Grieger
                        Chief
      Executive Officer and Director
                        March
      31, 2009David
      T. Grieger
                        (
      Principal Executive
      Officer )/s/
      Duncan Troy
                        Director
                        March
      31, 2009Duncan
      Troy/s/
      Richard N. Herring
                        Chief
      Technology Officer and Director
                        March
      31, 2009Richard
      N. Herring/s/
      Richard G. Sellers
                        Chief
      Operating Officer, President and Director
                        March
      31, 2009Richard
      G. Sellers/s/
      Matthew DeVries
                        Chief
      Financial Officer
                        March
      31, 2009Matthew
      DeVries
                        (
      Principal Financial
      Officer and
                          Principal Accounting
      Officer )/s/
      Mark Weber
                        Director
                        March
      31, 2009Mark
      Weber/s/
      Charles Hunt
                        Director
                        March
      31, 2009Charles
      Hunt


32





VU1
CORPORATION AND SUBSIDIARIES


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
    2007
                F-3Consolidated
      Statements of Operations and Comprehensive Loss for the Years Ended
      December 31, 2008 and December 31, 2007
                F-4Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008
      and December 31, 2007
                F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      December 31, 2007
                F-6Notes
      to the Consolidated Financial Statements
                F-7




F-1


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors
 Vu1
Corporation
 Seattle,
Washington
 
 We have
audited the accompanying consolidated balance sheets of Vu1 Corporation and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash
flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Vu1 Corporation and
Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern.  As discussed in Note 3
to the consolidated financial statements, the Company incurred a net loss of
$9,856,071, and it had negative cash flows from operations of $4,636,469 in
2008.  In addition, the Company had an accumulated deficit of
$58,386,684 at December 31, 2008.  These factors raise
substantial doubt about the Company's ability to continue as a going
concern.  Management's plans regarding those matters are also
described in Note 3.  The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
 
 /S/
PETERSON SULLIVAN LLP
 
 March 28,
2009
 Seattle,
Washington
  F-2





Vu1
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





DECEMBER 31,
                      
                      
                      DECEMBER 31,2008
                      
                      
                      2007ASSETSCurrent
      assetsCash
                      
                      $
                      2,486,609
                      
                      
                      $
                      1,014,512Tax
      refund receivable
                      
                      
                      32,672
                      
                      
                      
                      505,826Prepaid
      expenses
                      
                      
                      17,669
                      
                      
                      
                      1,593,820Total
      current assets
                      
                      
                      2,536,950
                      
                      
                      
                      3,114,158Non-current
      assetsEquipment,
      net of accumulated depreciation of $49,744 and $2,135,
      respectively
                      
                      
                      240,742
                      
                      
                      
                      6,311Construction
      in process
                      
                      
                      399,859
                      
                      
                      
                      203,698Deposit
      on building purchase
                      
                      
                      212,800
                      
                      
                      
                      -Total
      assets
                      
                      $
                      3,390,351
                      
                      
                      $
                      3,324,167LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      412,534
                      
                      
                      $
                      467,802Accrued
      payroll
                      
                      
                      161,130
                      
                      
                      
                      156,864Loan
      payable, current portion
                      
                      
                      3,444
                      
                      
                      
                      -Capital
      lease obligation, current portion
                      
                      
                      4,465
                      
                      
                      
                      -Total
      current liabilities
                      
                      
                      581,573
                      
                      
                      
                      624,666Loan
      payable, net of current portion
                      
                      
                      6,557
                      
                      
                      
                      -Capital
      lease obligation, net of current portion
                      
                      
                      18,173
                      
                      
                      
                      -Total
      liabilities
                      
                      
                      606,303
                      
                      
                      
                      624,666Stockholders'
      equityPreferred
      stock, $1.00 par value; 10,000,000 shares authorized; no shares issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, no par value; 200,000,000 shares authorized; 85,691,892 and
      64,663,517 shares issued and outstanding, respectively
                      
                      
                      61,165,545
                      
                      
                      
                      51,177,740Stock
      and warrant subscription receivable
                      
                      
                      (131,800
                      )
                      
                      
                      -Accumulated
      deficit
                      
                      
                      (58,386,684
                      )
                      
                      
                      (48,530,613
                      )Accumulated
      other comprehensive income
                      
                      
                      136,987
                      
                      
                      
                      52,374Total
      stockholders' equity
                      
                      
                      2,784,048
                      
                      
                      
                      2,699,501Total
      liabilities and stockholders' equity
                      
                      $
                      3,390,351
                      
                      
                      $
                      3,324,167





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




F-3




Vu1
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE LOSS





Years
      ended December 31,2008
                          
                          
                          2007Operating
      expensesResearch
      and development
                          
                          $
                          4,900,877
                          
                          
                          $
                          1,879,822General
      and administrative
                          
                          
                          4,374,390
                          
                          
                          
                          1,367,031Marketing
                          
                          
                          593,702
                          
                          
                          
                          133,687Total
      operating expenses
                          
                          
                          9,868,969
                          
                          
                          
                          3,380,540Loss
      from operations
                          
                          
                          (9,868,969
                          )
                          
                          
                          (3,380,540
                          )Other
      incomeInterest
      income
                          
                          
                          16,144
                          
                          
                          
                          34,615Interest
      expense
                          
                          
                          (3,246
                          )
                          
                          
                          -Gain
      from extinguishment of accounts payable
                          
                          
                          -
                          
                          
                          
                          237,545Total
      other income
                          
                          
                          12,898
                          
                          
                          
                          272,160Loss
      before provision for income taxes
                          
                          
                          (9,856,071
                          )
                          
                          
                          (3,108,380
                          )Provision
      for income taxes
                          
                          
                          -
                          
                          
                          
                          -Net
      loss
                          
                          $
                          (9,856,071
                          )
                          
                          $
                          (3,108,380
                          )Other
      comprehensive income:Foreign
      currency translation adjustments
                          
                          
                          84,613
                          
                          
                          
                          52,374Comprehensive
      loss
                          
                          $
                          (9,771,458
                          )
                          
                          $
                          (3,056,006
                          )Basic
      and diluted:Loss
      per share
                          
                          $
                          (0.14
                          )
                          
                          $
                          (0.06
                          )Weighted
      average shares outstanding
                          
                          
                          71,798,254
                          
                          
                          
                          53,107,809





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


F-4





Vu1 CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDER'S EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2008





AccumulatedOtherCommon
      Stock
                  
                  
                  Subscription
                  
                  
                  Accumulated
                  
                  
                  ComprehensiveShares
                  
                  
                  Amount
                  
                  
                  Receivable
                  
                  
                  Deficit
                  
                  
                  Income
                  
                  
                  TotalBalance
      December 31, 2006
                  
                  
                  47,430,683
                  
                  
                  
                  45,377,975
                  
                  
                  
                  -
                  
                  
                  
                  (45,422,233
                  )
                  
                  
                  -
                  
                  
                  
                  (44,258
                  )Issuances
      of common stock for:Cash
                  
                  
                  9,333,334
                  
                  
                  
                  2,625,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,625,000Services
                  
                  
                  1,799,500
                  
                  
                  
                  320,275
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  320,275Prepayment
      of lease
                  
                  
                  6,100,000
                  
                  
                  
                  2,275,354
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,275,354Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  579,136
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  579,136Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,108,380
                  )
                  
                  
                  -
                  
                  
                  
                  (3,108,380
                  )Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  52,374
                  
                  
                  
                  52,374Balance
      December 31, 2007
                  
                  
                  64,663,517
                  
                  
                  
                  51,177,740
                  
                  
                  
                  -
                  
                  
                  
                  (48,530,613
                  )
                  
                  
                  52,374
                  
                  
                  
                  2,699,501Issuances
      of common stock for:Cash
                  
                  
                  7,100,128
                  
                  
                  
                  2,130,039
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,130,039Services
                  
                  
                  680,000
                  
                  
                  
                  633,038
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  633,038Issuances
      of units of common stock and warrants for:Cash
                  
                  
                  11,776,667
                  
                  
                  
                  4,705,567
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,705,567Services
                  
                  
                  1,168,080
                  
                  
                  
                  467,232
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  467,232Subscription
      receivable
                  
                  
                  329,500
                  
                  
                  
                  131,800
                  
                  
                  
                  (131,800
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of warrant for services
                  
                  
                  -
                  
                  
                  
                  41,621
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41,621Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  1,878,508
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,878,508Forfeited
      grants of common stock
                  
                  
                  (26,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,856,071
                  )
                  
                  
                  -
                  
                  
                  
                  (9,856,071
                  )Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  84,613
                  
                  
                  
                  84,613Balance
      December 31, 2008
                  
                  
                  85,691,892
                  
                  
                  $
                  61,165,545
                  
                  
                  $
                  (131,800
                  )
                  
                  $
                  (58,386,684
                  )
                  
                  $
                  136,987
                  
                  
                  $
                  2,784,048





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


F-5





Vu1
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years
      ended December 31,2008
                              
                              
                              2007Cash
      flows from operating activities:Net
      loss
                              
                              $
                              (9,856,071
                              )
                              
                              $
                              (3,108,380
                              )Adjustments
      to reconcile net loss tonet cash flows
      from operating activities:Depreciation
                              
                              
                              52,404
                              
                              
                              
                              1,220Issuance
      of common stock for services
                              
                              
                              633,038
                              
                              
                              
                              320,275Amortization
      of prepaid expenses arising from common stock issued for
    rent
                              
                              
                              1,678,739
                              
                              
                              
                              761,973Issuance
      of warrant for services
                              
                              
                              41,621
                              
                              
                              
                              -Issuance
      of units of stock and warrants for services
                              
                              
                              467,232
                              
                              
                              
                              -Share-based
      compensation
                              
                              
                              1,878,508
                              
                              
                              
                              579,136Gain
      on extinguishment of accounts payable
                              
                              
                              -
                              
                              
                              
                              (237,545
                              )Changes
      in assets and liabilities:Tax
      refund receivable
                              
                              
                              503,532
                              
                              
                              
                              (494,236
                              )Prepaid
      expenses
                              
                              
                              3,083
                              
                              
                              
                              (8,820
                              )Accounts
      payable
                              
                              
                              (50,317
                              )
                              
                              
                              353,790Accrued
      payroll
                              
                              
                              11,762
                              
                              
                              
                              156,864Net
      cash flows from operating activities
                              
                              
                              (4,636,469
                              )
                              
                              
                              (1,675,723
                              )Cash
      flows from investing activities:Purchases
      of equipment
                              
                              
                              (242,047
                              )
                              
                              
                              (2,350
                              )Purchases
      of construction in process
                              
                              
                              (269,298
                              )
                              
                              
                              (199,031
                              )Deposit
      on building purchase
                              
                              
                              (236,640
                              )
                              
                              
                              -Net
      cash flows from investing activities
                              
                              
                              (747,985
                              )
                              
                              
                              (201,381
                              )Cash
      flows from financing activities:Proceeds
      from sales of common stock
                              
                              
                              2,130,039
                              
                              
                              
                              2,625,000Proceeds
      from sales of units of common stock and warrants, net of subscription
      receivable
                              
                              
                              4,705,567
                              
                              
                              
                              -Proceeds
      from note payable
                              
                              
                              12,953
                              
                              
                              
                              -Payments
      on note payable
                              
                              
                              (1,832
                              )
                              
                              
                              -Payments
      on capital lease obligation
                              
                              
                              (2,325
                              )
                              
                              
                              -Net
      cash flows from financing activities
                              
                              
                              6,844,402
                              
                              
                              
                              2,625,000Effect
      of exchange rate changes on cash
                              
                              
                              12,149
                              
                              
                              
                              (23,179
                              )Net
      change in cash and cash equivalents
                              
                              
                              1,472,097
                              
                              
                              
                              724,717Cash
      and cash equivalents, beginning of year
                              
                              
                              1,014,512
                              
                              
                              
                              289,795Cash
      and cash equivalents, end of year
                              
                              $
                              2,486,609
                              
                              
                              $
                              1,014,512Cash
      paid for interest
                              
                              $
                              3,246
                              
                              
                              $
                              -Supplemental
      disclosure of non-cash financing and investing activitiesCapital
      lease obligation
                              
                              $
                              27,770
                              
                              
                              $
                              -Stock
      issued for prepayment of lease
                              
                              
                              -
                              
                              
                              
                              2,275,354





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


F-6


Vu1
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 - BUSINESS AND ORGANIZATION





All
references in these consolidated financial statements to “we,” “us,” “our,” and
the “Company” are to Vu1 Corporation, Sendio, s.r.o., our Czech subsidiary, and
our inactive subsidiary Telisar Corporation unless otherwise noted or indicated
by its context.





We are
focused on developing, manufacturing and selling a line of mercury free, energy
efficient light bulbs based on our proprietary light-emitting technology. For
the past several years, we have primarily focused on research and development
efforts for our technology.





In
September 2007, we formed Sendio, s.r.o. (“Sendio”) in the Czech Republic as a
wholly-owned subsidiary for the purpose of operating a pilot manufacturing
facility.





We have
one inactive subsidiary, Telisar Corporation, a California corporation and
majority-owned subsidiary. No minority interest is presented for the minority
stockholders of Telisar due to its accumulated losses on a stand alone basis.
During 2008, Telegen Display Corporation and Telegen Communications Corporation
were dissolved on April 22, 2008 in the state of California. Telegen Display
Laboratories, Inc. was dissolved on July 29, 2008.  The three
dissolved subsidiaries have no operations for all periods
presented.





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation





The
consolidated financial statements include the accounts of Vu1 and all of its
wholly-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.





Translating Financial
Statements





The
functional currency of Sendio is the Czech Koruna (CZK).  The accounts
of Sendio contained in the accompanying consolidated balance sheets as of
December 31, 2008 and 2007 have been translated into United States dollars at
the exchange rate prevailing as of those dates. Translation adjustments are
included in “Accumulated Other Comprehensive Loss,” a separate component of
stockholders’ equity. The accounts of Sendio in the accompanying consolidated
statements of operations for the years ended December 31, 2008 and 2007 have
been translated using the average exchange rates prevailing for the respective
periods.  Sendio recorded an aggregate of $13,580 and $9,280 of
foreign currency transaction gain as an offset to general and administrative
expense in the accompanying statements of operations for the years ended
December 31, 2008 and 2007, respectively.





Use of
Estimates





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, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.





Cash and Cash
Equivalents





For
purposes of the statements of cash flows, we consider all investments purchased
with original maturities of three months or less to be cash equivalents. At
December 31, 2008 and 2007, we had cash of $1,986,609 and $914,512 respectively,
in excess of federally insured limits in effect as of those
dates.


F-7


Equipment





Equipment
is comprised of equipment used in the testing and development of the
manufacturing process of our light bulbs and is stated at cost. We provide for
depreciation using the straight-line method over the estimated useful life of
three to fifteen years. Expenditures for maintenance and repairs are charged to
operations as incurred while renewals and betterments are capitalized. Gains or
losses on the sale of equipment are reflected in the statements of
operations.  Net book value of assets in the U.S. and Czech Republic
at December 31, 2008 was $16,642 and $224,100, respectively.  All
equipment at December 31, 2007 was in the U.S.




Construction in
process




Construction
in process is comprised of assets to be used in the operations in the Czech
Republic not in service as of December 31, 2008 and 2007.  These
assets, when placed in service will be reclassified to equipment and depreciated
over their estimated useful lives.




Income
Taxes




We
recognize the amount of income taxes payable or refundable for the current year
and recognize deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement amounts
of certain assets and liabilities and their respective tax bases. Deferred tax
assets and deferred tax liabilities are measured using enacted tax rates
expected to apply to taxable income in the years those temporary differences are
expected to be recovered or settled. A valuation allowance is required when it
is less likely than not that we will be able to realize all or a portion of our
deferred tax assets.





We
account for unrecognized tax benefits in accordance with FASB Interpretation No.
48 Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN
48).  See Note 10 for further discussion.





Long-Lived
Assets





Long-lived
assets are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount that the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.  Management reviewed
the assets during the fourth quarter of 2008 and determined no impairment was
deemed necessary.





Fair Value of Financial
Instruments





The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, tax refund receivable, accounts payable and accrued payroll
approximate fair value due to the immediate or short-term maturities of these
financial instruments.  The carrying amounts of the loan payable and
capitalized lease obligation approximate fair value due to their interest rates
approximating a market rate for Sendio.





Revenue
Recognition





Revenues
are recognized when (a) persuasive evidence of an arrangement exists, (b)
delivery has occurred and no significant obligations remain, (c) the fee is
fixed or determinable and (d) collection is determined to be probable. We have
not recognized any revenues in the accompanying financial
statements.


F-8


Research and Development
Costs





For
financial reporting purposes, all costs of research and development activities
performed internally or on a contract basis are expensed as incurred. For the
years ended December 31, 2008 and 2007, research and development expenses were
comprised primarily of technical consulting expenses, legal expenses for the
development and protection of intellectual property and travel.  For
the year ended December 31, 2008 and for the period from October 1, 2007 to
December 31, 2007, research and development also included the relevant costs of
the operations of Sendio.  Also included in research and development
for the year ended December 31, 2008 and 2007 were non-cash stock compensation
charges of $131,490 and $161,936, respectively for the issuance of shares of
common stock and options to consultants and employees.





Share Based
Payments





We
account for share-based compensation expense in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123(R), “Share-Based
Payment” (SFAS 123R). Under SFAS 123R, share-based compensation expense reflects
the fair value of share-based awards measured at the grant date, is recognized
over the relevant service period, and is adjusted each period for anticipated
forfeitures. We estimate the fair value of each share-based award on the date of
grant using the Black-Scholes option valuation model. The Black-Scholes option
valuation model incorporates assumptions as to stock price volatility, the
expected life of options, a risk-free interest rate and dividend
yield.  On October 26, 2007 our Board of Directors approved the Vu1
Corporation 2007 Stock Incentive Plan (“Stock Incentive Plan”).  A
total of 10,000,000 shares of our common stock were authorized for issuance
under the plan.  The Plan was approved by our stockholders on May 22,
2008.





Comprehensive
Income





We
utilize SFAS No. 130, “Reporting Comprehensive Income.” This statement
establishes standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Examples of items to
be included in comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities. Other comprehensive income presented in the
accompanying consolidated financial statements consists of foreign currency
translation adjustments.





Loss Per
Share





We
calculate loss per share in accordance with SFAS No. 128, “Earnings per Share.”
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of shares of common stock
outstanding, excluding unvested stock. Diluted loss per share is computed
similar to basic loss per share except that the denominator is increased to
include the number of additional shares of common stock that would have been
outstanding if the potential common shares, including unvested stock, had been
issued and if the additional common shares were dilutive.





The
following potentially dilutive common shares are excluded from the computation
of diluted net loss per share for all periods presented because the effect is
anti-dilutive:





Years ended December 31,2008
                    
                    
                    2007Warrants
                    
                    
                    6,522,374Stock
      options
                    
                    
                    6,071,875
                    
                    
                    
                    1,950,000Unvested
      stock
                    
                    
                    190,750
                    
                    
                    
                    407,000Total
      potentially dilutive securities
                    
                    
                    12,784,999
                    
                    
                    
                    2,357,000


F-9


Recently Issued Accounting
Pronouncements





Recently Enacted Accounting
Standards - In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 was effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position (FSP FAS) No. 157-2 which
extended the effective date for certain nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008.  The
adoption of the portions of SFAS No. 157 that were not postponed by FSP FAS No.
157-2 did not have an effect on our consolidated financial statements. We do not
expect the adoption of the postponed portions of SFAS No. 157 to have a
material impact on our consolidated financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 141(R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements, consolidated net income shall be adjusted to include the net income
attributed to the non-controlling interest and consolidated comprehensive income
shall be adjusted to include the comprehensive income attributed to the
non-controlling interest. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. SFAS
No. 141(R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. SFAS No. 141(R) and SFAS No. 160 are not expected to
have a material impact on our results of operations or financial
position.




In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets(FSB FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other generally accepted accounting principles. FSP FAS
142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. We do not expect the adoption of FSP
FAS 142-3 to have a material impact on our consolidated financial
statements.




In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP.  The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process.  The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP.  The
adoption of FASB 162 is not expected to have a material impact on our financial
statements.




In
October 2008, the FASB issued FSP FAS 157-3 Determining Fair Value of a
Financial Asset in a Market That Is Not Active (FSP FAS 157-3). FSP FAS
157-3 clarified the application of SFAS No. 157 in an inactive market. It
demonstrated how the fair value of a financial asset is determined when the
market for that financial asset is inactive. FSP FAS 157-3 was effective upon
issuance, including prior periods for which financial statements had not been
issued. The adoption of FSP FAS 157-3 is not expected to have a material impact
on our financial statements.




In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and
FIN 46(R)-8 amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and FIN
46(R), FASB Interpretation No.
46 (R),




Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51, to
require public entities to provide additional disclosures about transfers of
financial assets and their involvement with variable interest entities. FSP FAS
140-4 and FIN 46(R)-8 is effective for the first interim or annual reporting
period ending after December 15, 2008. The adoption of FSP FAS 140-4 and FIN
46(R)-8 is not expected to have a material impact on our financial
statements.


F-10





NOTE 3 - GOING CONCERN
MATTERS





The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States which contemplate
our continuation as a going concern. During the year ended December 31, 2008, we
incurred a net loss of $9,856,071 and we had negative cash flows from operations
of $4,636,469. In addition, we had an accumulated deficit of $58,386,684 at
December 31, 2008. These factors raise substantial doubt about our ability to
continue as a going concern.





Recovery
of our assets is dependent upon future events, the outcome of which is
indeterminable. Our attainment of profitable operations is dependent upon
obtaining adequate debt and equity financing and achieving a level of sales
adequate to support our cost structure. In addition, realization of a
significant portion of the assets in the accompanying balance sheet is dependent
upon our ability to meet our financing requirements and the success of our plans
to sell our product. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should we be
unable to continue in existence.





We plan
to raise additional equity or debt financing and continue to develop and market
our product. If we are unsuccessful in raising additional capital, we may be
forced to curtail or even cease our operations.





NOTE
4 – TAX REFUND RECEIVABLE





Tax
refund receivable represents the 19% value added tax receivable from the
government of the Czech Republic.  No allowance for doubtful accounts
has been provided as we believe the amounts are fully collectible.





NOTE
5 - RELATED PARTY TRANSACTIONS





During
the second quarter of 2008, Richard Sellers and Mark Weber purchased shares of
our common stock on the same terms as third parties in a private placement as
described in Note 9.





On
September 9, 2008 Richard Sellers and Richard Herring converted a total of
$199,500 of unpaid compensation into Units under our Unit Private Placement as
described more fully in Note 9.





On
November 15, 2008 Mark Weber, a member of our Board of Directors, converted a
total of $12,100 of unpaid expenses into Units under our Unit Private Placement
as described more fully in Note 9.





On
January 4, 2007, Mark Weber, a member of our Board of Directors, purchased
400,000 shares of common stock at a price of $0.125 per share for gross proceeds
to us of $50,000.  The price was the same as that paid by third
parties in the offering.





During
the year ended December 31, 2007, we paid an aggregate of $35,340 to Weber
Marketing, Inc. for certain marketing services provided to us.  Weber
Marketing is 100% owned by Mark Weber, a member of our Board of
Directors.





During
the year ended December 31, 2007, Richard Sellers, an officer and a member of
our Board of Directors, purchased 1,846,543 shares of common stock at a price of
$0.30 per share for gross proceeds of $553,960 and 400,000 shares of common
stock at a price of $0.125 per share for gross proceeds of $50,000 pursuant to
private placements of our common stock.  The prices were the same as
that paid by third parties in the offerings.


F-11


NOTE
6 - COMMITMENTS AND CONTINGENCIES




On May
28, 2008 Sendio entered into a lease contract for certain facilities located in
the city of Olomouc in the Czech Republic (the “Current Lease”).  We
intend to utilize the facilities to continue to develop manufacturing processes
for manufacturing of our energy efficient, mercury free light
bulbs.  The lease term is one year effective from July 1, 2008 and
terminates on June 30, 2009.  The rent for the one year term is CZK
10,000,000 (approximately $624,000 USD), plus mandatory VAT.  The rent
is payable monthly in the amount of CZK 301,655 (approximately $19,000 USD) for
July 2008, CZK 376,655 (approximately $24,000 USD) for August 2008, and CZK
455,310 (approximately $28,000 USD) for each month from September 2008 through
June 2009.  On May 29, 2008 Sendio paid a deposit of CZK 4,000,000
(approximately $250,000 USD) to the landlord.




The rent
for July 1, 2008 to December 31, 2008 has been reduced by rents paid by the
remaining tenants.  Sendio anticipates that the amount to be paid by
existing tenants approximates CZK 2,268,000 (approximately $134,000 USD) from
January 1 through June 30, 2009, but there can be no assurance that this will be
the case. If the existing tenants vacate the space currently under lease, Sendio
would be responsible for any monthly shortfall that exceeds 50,000 CZK per month
subsequent to the tenant vacating the space.  Sendio is also
responsible for certain improvements, insurance, utilities, maintenance and
other costs as described in the Current Lease.





Effective
December 9, 2008 Sendio entered into an agreement (the “Purchase Agreement”) to
purchase the facilities in the Current Lease from the landlord. The purchase
price for the Premises is CZK 179,000,000 (approximately $9.0 million USD) (the
“Purchase Price”) and the closing date anticipated in the Purchase Agreement is
July 1, 2009.  The deposit Sendio paid on May 29, 2008 under the
Current Lease for CZK 4,000,000 was considered an advance on the Purchase Price.
This amount has been recorded as a non-current asset as a deposit on building
purchase in the accompanying balance sheet as of December 31, 2008. The
remaining balance of the Purchase Price is payable by means of an escrow
account, with payments to be made to the escrow account in individual
installments as follows:





1.
            CZK
      11,000,000 by February 28, 2009;


2.
            CZK
      2,500,000 by April 30, 2009;


3.
            CZK
      3,000,000 by May 5, 2009; and


4.
            CZK
      158,500,000 by June 30, 2009




Also
effective December 9, 2008, as additional inducement for the landlord to enter
into the Purchase Agreement, Vu1 entered into a Deed of Guarantee with the
landlord under which it guaranteed up to CZK 13,500,000 (approximately $675,000)
of payments by Sendio under the Purchase Agreement.  The guarantee
expires upon full payment by Sendio of those payments scheduled under the
Purchase Agreement through April 30, 2009 (i.e. those payments listed in 1-2
above).  On March 3, 2009 we amended the payment terms under the
Purchase Agreement.  See Note 12.




On
October 31, 2007, Sendio entered into a non-residential premises lease agreement
with Multidisplay, s.r.o. (“Multidisplay”) for certain facilities located in the
Czech Republic (the “Prior Lease”). At its option, Sendio had the right to
extend the Prior Lease beyond its original expiration date by providing written
notice to Multidisplay no later than April 30, 2008. Sendio did not exercise its
right to extend the lease and the lease terminated as of June 30, 2008 according
to its terms.




We issued
6,100,000 shares of common stock in 2007 as payment in full of all amounts owing
for rent under the Prior Lease through June 30, 2008.  The shares were
valued at $2,275,354, representing the amount of the rent liability as of the
date of the lease and initially recorded in 2007 as a prepaid expense. The value
of the shares was recorded as rent expense over the term of the
lease.


F-12




In
addition, we lease space for our corporate headquarters on a month to month
basis.




Total
rent expense was $1,980,227 and $839,185 for the years ended December 31, 2008
and 2007, respectively.





Effective
April 29, 2008, we entered into a six-month non-exclusive Financial Advisory and
Investment Banking Agreement with an investment banker.  Under the
terms of the agreement, we issued 250,000 shares of common stock valued at
$85,000 or $0.34 per share based on the closing market price of our common stock
on the date of issuance. This amount was recorded as general and administrative
expenses on the date of issuance.  For investors introduced to us by
the investment banker and who participate in a private placement with us, we
were required to pay to the investment banker a cash fee equal to 10% of the
gross proceeds we receive from such investors and a two year warrant to purchase
our common stock equal to 20% of the shares issued to such
investors.  No proceeds were received under this agreement and it
terminated with no further liability to us.





NOTE
7 – LOAN PAYABLE





On May
15, 2008 Sendio entered into a three-year note payable for the purchase of a
vehicle.  The note bears interest at a rate of 24.5% and is payable in
36 equal monthly installments of principal and interest of approximately $575
plus mandatory VAT and insurance.  The note is secured by the
vehicle.





NOTE
8 – CAPITAL LEASE OBLIGATION





On May
30, 2008 Sendio entered into a five-year lease agreement for the purchase of
certain equipment.  The capital lease obligation bears interest at a
rate of 7.7% and requires payments of principal and interest of approximately
$630 plus mandatory VAT and insurance over the 60-month term of the lease. The
assets acquired under the capital lease obligation are being depreciated over
the five-year term of the lease.





NOTE
9 - STOCKHOLDERS’ EQUITY





Preferred
Stock





On
September 10, 2008, we filed an amendment to our Amended and Restated Articles
of Incorporation with the State of California Secretary of State to increase the
number of authorized shares of our no par value common stock from 100,000,000 to
200,000,000. At December 31, 2008 and 2007, we had 85,691,892 and 64,663,517
shares of common stock outstanding, respectively. Our Amended and Restated
Articles of Incorporation allows us to issue up to 10,000,000 shares of
preferred stock without further stockholder approval and upon such terms and
conditions, and having such rights, preferences, privileges, and restrictions as
the Board of Directors may determine.  No preferred shares are
currently issued and outstanding.





Common Stock
Issuances





During
the year ended December 31, 2008, we completed the following:





·
            In
      the first six months of 2008, we sold an aggregate of 7,100,128 shares of
      common stock at a price of $0.30 per share for net proceeds of $2,130,039
      in our Stock Private Placement, including $75,000 from Mark Weber, a
      member of our Board of Directors and $150,000 from Richard Sellers, an
      officer and a member of our Board of
Directors.





·
            On
      April 29, 2008 we issued 250,000 shares of common stock valued at $85,000
      or $0.34 per share based on the closing market price of our common stock
      on the date of issuance pursuant to the Financial Advisory and Investment
      Banking Agreement discussed in Note
6.





·
            From
      August 27, 2008 to November 15, 2008 we sold 5,888,334 Units at a
      subscription price of $0.80 per Unit for net proceeds of $4,705,567 in our
      Unit Private Placement.  Each Unit consists of two shares of
      common stock and a two-year warrant to purchase one share of common stock
      at an exercise price of $0.60 per share.  A total of 11,776,667
      shares of common stock and two-year warrants to purchase 5,888,334 shares
      of common stock were issued.  The net proceeds were allocated
      based on the relative fair values of the common stock and the warrants on
      the dates of issuance.  The allocated fair value of the warrants
      was $1,357,941 and the balance of the proceeds of $3,347,626 was allocated
      to the common stock.


F-13


·
            On
      September 9, 2008 the Board of Directors approved the conversion of
      $211,600 of unpaid compensation and expenses due to our officers and
      directors into Units in our private placement on the same terms as third
      party investors, at a rate of $0.80 per Unit.  Mr. Sellers, our
      President and Chief Operating Officer, converted $163,500 into 204,375
      Units and we issued 408,750 shares of common stock and a two-year warrant
      to purchase 204,375 shares of common stock.  Mr. Herring, our
      Chief Executive Officer, converted $36,000 into 45,000 Units and we issued
      90,000 shares of common stock and a two-year warrant to purchase 45,000
      shares of common stock.  Mark Weber, a director converted
      $12,100 of unpaid expenses into 15,125 Units and we issued 30,250 shares
      of common stock and a two-year warrant to purchase 15,125 shares of common
      stock. In addition, unpaid amounts due to two vendors totalling $255,632
      were converted into 319,540 units and we issued 639,080 shares of common
      stock and a two-year warrant to purchase 319,540 shares of common stock.
      The total amount converted of $467,232 was allocated based on the relative
      fair values of the common stock and the warrants on the date of
      issuance.  The allocated fair value of the warrants was $134,888
      and the balance of $332,344 was allocated to the common
    stock.




The fair
value of the warrants issued in our Unit Private Placement was calculated using
the Black-Scholes Option Pricing Model with the following
assumptions:





Closing
      market price of common stock
                        $1.00
      to $1.40Estimated
      volatility
                        144.5%
      to 168.7%Risk
      free interest rate
                        1.45%
      to 2.31%Expected
      dividend rate
                        -Expected
      life
                        2
      years





During
the year ended December 31, 2007, we completed the following:





·
            From
      January to March, 2007 we sold an aggregate of 1,000,000 shares of common
      stock to a group of three investors at a price of $0.125 per share for
      gross proceeds of $125,000.  The price was the same as that paid
      by third parties in the offering.





·
            From
      June to September, 2007 we sold an aggregate of 8,333,334 shares of common
      stock to a group of twenty accredited investors at a purchase price of
      $0.30 per share for gross proceeds of $2,500,000 in a private
      placement.





·
            On
      November 1, 2007 we issued 6,100,000 shares to CTP Products B.V. valued at
      $2,275,354 representing the amount of the rent liability under the
      Premises lease as described in Note
6.





Warrant
Issuance





On
November 1, 2008 we issued a two year warrant to purchase 50,000 shares of
common stock at an exercise price of $1.15 per share to a vendor for
services.  The estimated fair value of $41,621 was recorded as general
and administrative expense on the date of issuance and was calculated using the
Black Scholes option pricing model with the assumptions for volatility of
152.8%, risk free interest rate of 1.45% and a two year life.





Stock and Stock Options
Issued Pursuant to the 2007 Stock Incentive Plan





On
October 26, 2007 our Board of Directors approved our 2007 Stock Incentive
Plan.  A total of 10,000,000 shares of our common stock were
authorized for issuance under the plan. The Stock Incentive Plan allows us to
grant stock or stock option awards to our employees, directors, officers,
consultants, agents, advisors and independent contractors and subsidiaries, for
up to an aggregate of 10,000,000 shares of  common
stock.  The Stock Incentive Plan is administered by our Board of
Directors and Compensation Committee, who can determine the size and type of
award granted, purchase price, vesting schedule and expiration date of any stock
or options grant.  All grants of shares and the shares underlying
options are for restricted common stock.


F-14


A summary
of activity related to grants of common stock under the 2007 Stock Incentive
Plan as of December 31, 2008 is presented below.





Number of
                                            Shares
                                          
                                          
                                          Grant
      date fair valueOutstanding,
      January 1, 2007
                                          
                                          
                                          -
                                          
                                          
                                          -Granted
                                          
                                          
                                          1,799,500
                                          
                                          
                                          $0.23Outstanding,
      December 31, 2007
                                          
                                          
                                          1,799,500
                                          
                                          
                                          $0.23Granted
                                          
                                          
                                          430,000
                                          
                                          
                                          $1.00
      to $1.14Forfeited
                                          
                                          
                                          (26,000
                                          )
                                          
                                          $0.23Outstanding,
      December 31, 2008
                                          
                                          
                                          2,203,500
                                          
                                          
                                          $0.23
      to $1.14Vested,
      December 31, 2008
                                          
                                          
                                          2,012,750
                                          
                                          
                                          $0.23
      to $1.14


.


A summary
of the status of our nonvested stock grants as of December 31, 2008 and changes
during the year ended December 31, 2008 is presented below.





Nonvested Stock Grants
                    
                    Number of
                      Shares
                    
                    
                    Weighted Average
                      Grant Date Fair
                      ValueNonvested
      at December 31, 2007
                    
                    
                    407,500
                    
                    
                    $
                    0.23Granted
                    
                    
                    430,000
                    
                    
                    
                    1.13Forfeited
                    
                    
                    (26,000
                    )
                    
                    
                    0.23Vested
                    
                    
                    (620,750
                    )
                    
                    
                    0.85Nonvested
      at December 31, 2008
                    
                    
                    190,750
                    
                    
                    $
                    0.23





We
recognized compensation expense related to the vested portion of these share
grants with a fair value of $548,038 and $320,275 for the years ended December
31, 2008 and 2007, respectively. These amounts were recognized as research and
development expense, general and administrative expense or marketing expense
based on the specific recipient of the award for the year ended December 31,
2008 and 2007, respectively.  As of December 31, 2008 a total of
190,750 shares of common stock with a fair value of $25,592 are
unvested.  The cost is expected to be recognized over a weighted
average period of 0.8 years. All grants were valued at the closing market price
of our common stock as of the date of grant.





A summary
of activity related to stock options under the 2007 Stock Incentive Plan as of
December 31, 2008 is presented below.


F-15





Number of
                                    Shares
                                  
                                  
                                  Exercise price range
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise
                                    Price
                                  
                                  
                                  Weighted
                                    Average
                                    Remaining
                                    Contractual
                                    Term (Years)
                                  
                                  
                                  Aggregate
                                    Intrinsic ValueOutstanding
      January 1, 2007
                                  
                                  
                                  -
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Granted
                                  
                                  
                                  1,950,000
                                  
                                  
                                  $0.23
      to $0.38
                                  
                                  
                                  $
                                  0.33Outstanding,
      January 1, 2008
                                  
                                  
                                  1,950,000
                                  
                                  
                                  $0.23
      to $0.38
                                  
                                  
                                  $
                                  0.33
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Granted
                                  
                                  
                                  4,300,000
                                  
                                  
                                  $0.49
      to $1.14
                                  
                                  
                                  $
                                  0.93
                                  
                                  
                                  
                                  
                                  
                                  
                                  -Forfeited
                                  
                                  
                                  (178,125
                                  )
                                  
                                  $1.00
                                  
                                  
                                  $
                                  1.00Outstanding,
      December 31, 2008
                                  
                                  
                                  6,071,875
                                  
                                  
                                  $0.23
      to $1.14
                                  
                                  
                                  $
                                  0.74
                                  
                                  
                                  
                                  9.3
                                  
                                  
                                  $
                                  2,442,563Exercisable,
      December 31, 2008
                                  
                                  
                                  3,971,875
                                  
                                  
                                  $0.23
      to $1.00
                                  
                                  
                                  $
                                  0.61
                                  
                                  
                                  
                                  8.9
                                  
                                  
                                  $
                                  2,117,563





The
aggregate intrinsic value of the stock options fluctuates in relation to the
market price of our common stock as reflected on the OTC Bulletin
Board.





The range
of exercise prices for options outstanding and options exercisable under the
2007 Stock Incentive Plan at December 31, 2008 are as follows:





Range of Exercise Prices
                      
                      Weighted Average
                        RemainingContractual
                        Life of Options
                        Outstanding
                        (in years)
                      
                      
                      Options Outstanding
                      
                      
                      Options ExerciseableNumber of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise Price
                      
                      
                      Number of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise Price$0.23-
      $0.49
                      
                      
                      8.7
                      
                      
                      
                      2,950,000
                      
                      
                      $
                      0.38
                      
                      
                      
                      2,450,000
                      
                      
                      $
                      0.36$1.00
      - $1.14
                      
                      
                      9.8
                      
                      
                      
                      3,121,875
                      
                      
                      $
                      1.07
                      
                      
                      
                      1,521,875
                      
                      
                      $
                      1.00








A summary
of the status of our nonvested options as of December 31, 2008 and changes
during the year ended December 31, 2007 is presented below.





Nonvested options
                    
                    Number of
                      Shares
                      Underlying
                      Options
                    
                    
                    Weighted Average
                      Grant Date Fair
                      ValueNonvested
      at December 31, 2007
                    
                    
                    240,789
                    
                    
                    $
                    0.23Granted
                    
                    
                    4,300,000
                    
                    
                    
                    0.93Forfeited
      or expired
                    
                    
                    (178,125
                    )
                    
                    
                    1.00Vested
                    
                    
                    (2,262,664
                    )
                    
                    
                    0.81Nonvested
      at December 31, 2008
                    
                    
                    2,100,000
                    
                    
                    $
                    0.99





We
recognized compensation expense of $1,878,508 and $579,136 related to the vested
portion of these options based on their estimated grant date fair value as
research and development expense, general and administrative expense or
marketing expense based on the specific recipient of the award for the years
ended December 31, 2008 and 2007, respectively.  The estimated fair
value of the options on the date of grant was calculated using the Black Scholes
option pricing model and the following assumptions.


F-16





Years ended December 31,2008
                    
                    2007Closing
      market price of common stock
                    
                    $0.49
      to $1.14
                    
                    $0.23
      - $0.38Estimated
      volatility
                    
                    101.7%
      to 168.7%
                    
                    154%
      - 180%Risk
      free interest rate
                    
                    2.25%
      to 4.03%
                    
                    4.15%Expected
      dividend rate
                    
                    -
                    
                    -Expected
      life
                    
                    5-10
      years
                    
                    5 -
      10 years





As of
December 31, 2008 there was a total of $1,842,986 of unrecognized compensation
expense related to the nonvested options which is expected to be recognized over
a weighted average period of 1 year.





As of
December 31, 2008 the 2007 Stock Incentive Plan has 1,724,625 shares available
for future grants of stock or options.





NOTE
10 - INCOME TAXES





The
net deferred tax asset is comprised of the following:





December
      31,2008
                      
                      
                      2007Net
      operating loss carryforwards
                      
                      $
                      17,663,738
                      
                      
                      $
                      15,768,279Share-based
      compensation
                      
                      
                      849,750
                      
                      
                      
                      294,735Other
                      
                      
                      (19,864
                      )
                      
                      
                      (25,275
                      )Valuation
      allowance
                      
                      
                      (18,493,624
                      )
                      
                      
                      (16,037,739
                      )Deferred
      Income Tax Asset
                      
                      $
                      -
                      
                      
                      $
                      -




Loss
before income taxes is comprised of:





For
      the Years Ended December 31,2008
                  
                  
                  2007US
      Operations
                  
                  $
                  4,416,458
                  
                  
                  $
                  1,727,820Czech
      Republic Operations
                  
                  
                  5,439,613
                  
                  
                  
                  1,380,580$
                  9,856,071
                  
                  
                  $
                  3,108,400





The
provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the years ended December 31, 2008 and
2007 as follows:


F-17





For the Years Ended December 31,2008
                        
                        
                        2007Net
      loss
                        
                        $
                        9,856,071
                        
                        
                        $
                        3,108,400Tax
      at federal statutory rate (34%)
                        
                        $
                        (3,351,064
                        )
                        
                        $
                        (1,056,849
                        )Effect
      of lower foreign tax rate
                        
                        
                        815,942
                        
                        
                        
                        207,084Permanent
      differences
                        
                        
                        79,237
                        
                        
                        
                        3,703Change
      in valuation allowance
                        
                        
                        2,455,885
                        
                        
                        
                        846,062Provision
      for Income Taxes
                        
                        $
                        -
                        
                        
                        $
                        -








As of
December 31, 2008, we had net operating loss carryforwards for U.S. and Czech
Republic federal income tax reporting purposes which if unused, will expire in
the following years:





US
                        
                        
                        Czech RepublicYear
                        
                        Amount
                        
                        
                        Amount2012
                        
                        $
                        -
                        
                        
                        $
                        1,387,4252013
                        
                        
                        
                        
                        
                        
                        5,296,5912018
                        
                        
                        27,080,269
                        
                        
                        
                        -2019
                        
                        
                        1,745,867
                        
                        
                        
                        -2020
                        
                        
                        6,137,725
                        
                        
                        
                        -2021
                        
                        
                        5,251,175
                        
                        
                        
                        -2022
                        
                        
                        1,751,322
                        
                        
                        
                        -2023
                        
                        
                        1,729,930
                        
                        
                        
                        -2024
                        
                        
                        328,048
                        
                        
                        
                        -2025
                        
                        
                        191,893
                        
                        
                        
                        -2026
                        
                        
                        465,173
                        
                        
                        
                        -2027
                        
                        
                        760,272
                        
                        
                        
                        -2028
                        
                        
                        2,775,311$
                        48,216,985
                        
                        
                        $
                        6,684,016





The
utilization of U.S. net operating loss carryforwards may be limited due to the
ownership change under the provisions of Internal Revenue Code Section 382. The
fiscal years 2005 to 2008 remain open to examination to U.S. Federal authorities
and other jurisdictions in the U.S. where we operate. Sendio has paid no income
taxes since its inception and its fiscal years for 2007 and 2008 remain open to
examination by Czech tax authorities.





NOTE
11 – GAIN FROM EXTINGUISHMENT OF ACCOUNTS PAYABLE





In 2007,
we recorded a gain from the extinguishment of certain accounts payable at less
than their recorded value due to the expiration of the statute of limitations in
the jurisdictions in which these liabilities were incurred.





NOTE
12 - SUBSEQUENT EVENTS





On
January 2, 2009 we made the following grants to an employee under the 2007 Stock
Compensation Plan based on the closing market price as of that date of $1.10 per
share:





·
            We
      issued 100,000 shares of common stock valued at $110,000.  The
      shares will vest based upon the achievement of certain performance
      milestones.


F-18


·
            We
      granted five-year options to purchase 150,000 shares of common stock
      valued at $132,707 which was calculated using the Black Scholes method and
      the following assumptions: volatility of 113.6%, risk free interest rate
      of 1.72% and an estimated life of five
years.





On
January 27, 2009 we issued a two-year warrant to a vendor to purchase 25,000
shares of common stock at an exercise price of $1.00 per share based on the
closing market price as of that date.  The warrants vest monthly over
the period of service from January to May, 2009.  The value of the
warrants of $15,876 was calculated using the Black Scholes method and the
following assumptions: volatility of 127.3%, risk free interest rate of 0.87%
and an estimated life of two years.





On March
17, 2009 we issued a three-year warrant to a vendor to purchase 150,000 shares
of common stock at an exercise price of $0.75 per share based on the closing
market price as of that date.  A total of 75,000 warrants vest over
the one year life of the agreement, with the remaining warrants vesting upon the
achievement of certain performance milestones. The value of the warrants of
$79,163 was calculated using the Black Scholes method and the following
assumptions: volatility of 119.0%, risk free interest rate of 1.45% and an
estimated life of three years.





Subsequent
to December 31, 2008 we collected net proceeds of $131,800 pursuant to
subscription agreements for 164,750 Units under our Unit Offering as discussed
in Note 9.  A total of 329,500 shares of common stock and two-year
warrants to purchase 164,750 shares of common stock at an exercise price of
$0.60 per share were issued.





As
discussed in Note 6 on March 3, 2009 Sendio and the landlord of the building
premises in the Czech Republic amended the Purchase Agreement revising the
payment terms under the Purchase Agreement.  Under the amendment,
Sendio paid CZK 1,000,000 (approximately US$45,000) into the escrow account on
March 10, 2009.  The balance of the escrow payment due on February 28
and the escrow payments due on April 30 and May 5, 2009, totaling CZK 15,500,000
have been deferred until May 16, 2009.





In March,
2009 we signed an exclusive investment banking agreement with an investment
banker to assist us with our fundraising efforts.  During the term of
the agreement, upon the closing of a transaction, we will pay the investment
bank financing fees ranging from 5% to 7% of the value of the transaction as
defined in the agreement.  In addition, upon the closing of any sale
of equity securities, we will be required to issue the investment bank warrants
to purchase our common stock ranging from 2% to 4% of the amount raised on terms
equal to the offering price or on terms equal to those sold to
investors.  In addition, the investment bank will be entitled to a fee
of 3.5% of any gross proceeds raised by us under certain circumstances as
defined in the agreement.


F-19